What is the brief meaning of the Term “Finance” and “Financial Management”?

Finance is the lifeblood of business. Without adequate finance, no business can survive and without efficient finance management, no business can prosper and grow. Finance is required for establishing developing and operating the business efficiently. The success of the business depends upon the supply of finance and its efficient management.

Finance is called the science of money. It is not the only an act of making money available, but its administration and control so that it could be properly utilized. The world “Financial Management” is the composition of two words ie. "Financial‟ and "Management‟. Financial means procuring or raising of money supply (funds) and allocating (using) those resources (funds) on the basis of monetary requirements of the business.

The word "Management‟ means planning, organizing, coordinating and controlling human activities with reference to finance function for achieving goals/ objectives of the organization. Besides raising and utilization of funds, finance also includes distribution of funds in the form of a dividend to shareholders and retention of profit for growth and developments.

Hence, three key areas of finance are:

Raising of funds:

Based on the total requirements of capital/funds for use in fixed assets, current assets as well as intangible assets like goodwill, patent, trademark, brand, etc.

the crucial decision is:

• When to raise (time).
• Sources from which to raise.
• How much (quantum of money).
• In which form (debt or equity), and.
• Cost of raising funds.

Investment  of  funds:

Funds raised the need to he allocated/ invested in:

Fixed assets: 

also known as capital assets or capital budgeting decision. These decisions are based upon cost and return analysis through various techniques.

Current assets:

also known in working capital management. These are assets for the day to day running the business like cash, receivables, inventory, short-form investments, etc.

The decision about an investment of funds are taken keeping in view two important aspects ie:

• Profitability, and.
• Liquidity.

Distribution of funds:

Profit earned need to be distributed in the form of a dividend. Higher the rates of dividend, the higher would be the price of shares in the market. Another crucial decision under it would be the quantum of profit to be retained. The retained profit is cost-free money to the organization.