Finance plays a very important role in any business activities, whether public or private sector. Its management is the pillar upon which all economic activities stand. No business can survive or be sustained without finance.
In this first unit of this course, we will you will be introduce the nature of finance in a buy & sell enterprise, define finance; explain the role and field of finance.
At the end of this unit, you should be able to:
- discuss the nature of finance
- define finance
- Identify the role finance.
3.0 MAIN CONTENT
3.1 Nature of Finance
Finance may be defined as the provision of money at the time it is required. Every person responsible for finance, whether it is for a corporate organization or private household, money is confronted with prospects of inflow receipts on the one hand, and outflow payments on the other. The inflows are expected to be arranged in such a way that fund (money) is always available to make necessary payments as they arise.
3.1.1 Finance Defined
Oyekanmi (2003) defined finance “as money affairs or money matters”. All forms of money or near money e.g. debt, cash equity certificates would be implied. In certain usage, however, not only are liquid funds subsumed in the term finance, but all forms of assets, which are capable of being expressed in monetary terms.
On the other hand, Anao (1993) defined finance as money affairs or money matters. All forms of money or near-money such as debt, cash equity, certificates of deposits would be implied. In certain usage, however, not only are liquid funds subsumed in the term finance, but all forms of assets, which are capable of being expressed in money terms.
According to Hornby (2001), finance is the money need or needed to support an activity, project, programme etc. and or the management of money.
3.2 Brief Evolution of Finance
Finance evolved from economics as its branch in the early part of the 20th century; but later became a separate discipline. It graduated in response to the complexity of business from sole proprietorship to corporate organisation. Finance was initially concerned mainly with the keeping of records of receipts and payments; dealings simply on bonds, debentures, banks. Nowadays, it has extended the ‘coast’ to various aspect or aspects of company survival, introduction of new technologies in operation, the application of computers and its closeness to economy.
SELF ASSESSMENT EXERCISE 1
- Define finance.
3.3 Field of Finance
The field of finance originally covered mainly:
- Instruments of finance (e.g. bonds, debentures etc.)
- Institutions / intermediaries (e.g. banks, finance coys etc.)
- Capital markets (e.g. exchange etc.)
The finance is related to economics as every individual, organizations and government operate within the economy. So understanding economic setting is paramount to you.
You need the knowledge and alertness of each level of economic activity and the related consequences. It is associated with accounting as both are interested in cash flows and accounting and financial data necessary for taking basic decisions.
3.4 Role of Finance
Without money (finance), an enterprise cannot function; hence, understanding the role of finance and its ability to measure the progress of a business is essential for effective management.
Finance can be likened to a lubricant. Too little of it (finance) can make a business grind to a halt; while too much of it may lead the business having to grapple with all types of projects not minding their usefulness.
3.5 Common Denominator of Finance
Money is the common denominator for the full range of activities performed in the business.
Yes, there are other factors which are common to business like man-hours, which are all the same length but don’t have the same value in term of quantity of work done or skill and expertise displayed.
Money also presents its problems, particularly when inflation sets in, resulting in changes in the purchasing power of a unit of currency.
This notwithstanding, for the moment, this fact has not affected its role as a common denominator, so long as it remains the medium in which business is conducted.
3.6 Inter-relationship and Transaction
Money is the medium of exchange in business; the other two elements are production/operation and marketing. All these three must be held in balance to enable optimum utilization of the resources of the enterprise.
SOURCE: Jones, G.L. (1976) Financial Measurement for Managers According to Jones (1976), the initial investment of cash (money) in figure 1 above, is shown to provide the means whereby the entrepreneur or promoter of the business enterprise can purchase those assets which enable the business to have premises, equipment, transport and other items required before the activities of the organization can take-off
- The investment must also be sufficient to allow management to pay the running expenses of the business, such as wages, rent etc. and purchase the first quantities of goods or other basic commodities which are required before any income can be earned.
- It is essential to realize that in most cases, money is paid out for these items before the receipt of cash can be expected.
- Having acquired the assets and the materials needed to commence business, and paid the running costs for the first period of activity, goods and services become available to the potential customers, who in turn, purchase them and thus provide the cash to pay for further commodities and running costs.
- Because the cash received from sales should be greater than the cash paid out for materials and running expenses, a reservoir of cash is built up from which funds can be drawn to pay the providers of the initial capital a return on their money in the form of interest or dividends.
SELF ASSESSMENT EXERCISE 2
Describe the role of Finance in an enterprise.
3.7 Funds Flow
The working cycle described in figure 1 above demonstrates the way funds flow through business. There are a number of linked transactions.
Note: First, that every time funds flow in a business, there is a source of funds and a use of funds. That is, each transaction has two aspects:
- The generation or supply of funds
- The utilization of these funds.
The nature as well as the vital role played by finance in any business enterprise has been discussed and illustrated in this unit.
In this unit, we have discussed the nature of evolution, field and role of Finance. Also, we have introduced finance as a common denominator in business and attempted to explain its interrelationship in business transaction and illustrated the flow of funds in business cycle.
6.0 TUTOR-MARKED ASSIGNMENT
- Identify the role of Finance in a business enterprise.
- Discuss the nature of Finance in a business organisation