IMPORTANCE OF FINANCE


Before the industrial revolution finance was not considered so important for business organizations. Because methods of productions were very simple, labor was more important than capital and finance at that time. So these things didn’t create any problems.


But after industrial revolution, when methods of productions were introduced the finance got much importance.


Nowadays finance is considered as the life blood of every business and achieved the most important place in today’s business. The business whether large scale or small scale required finance for its operations. Money is a universal lubricant for any enterprise, man and machine work.


The factors due to which finance is important are the following:


1. Importance for Business:


Finance is considered as the life blood of every business because the success of each business depends mostly upon finance. Many business firms fail or bankrupt because of inadequacy of finance. Without efficient financial planning no one business can achieve the desired goals. At the most we need money for the payment of different things. It is only concerned with cash, when we simply define it. If we have sufficient funds then we can keep the man and machine working. Therefore we can say that the promotion of any business organization depends upon the determination and condition of adequate finance.


2. Importance for Distribution of Economic activities:


According to a saying: “To have money to make money”.


For making more money we get the more prfit. For getting more and more return we should have sufficient funds. It means that without having money, cash or expected resource of finance one cannot think of getting or to earn money. It is a clear form of the fact that finance is essential for achieving the main objective i.e. profit of the firm.


Finance is very much important for the distribution side of economic activities e.g. distribution in Production, distribution, exchange and consumption. For production of any commodity we need funds for the distribution in FOP i.e. Land, Labor, Capital and entrepreneur. For payment to these FOP’s we need funds.


The need of the finance arise from the fact that considerable time passes, before the value of goods is realized by the producer, who must earn on production work with borrowed money. The so many funds required for the business and for meeting such needs in time can not be provided by a single producer. Therefore he is compelled by either to form partnership or to obtain funds from banks or other sources.


3. Administration function:


The importance of Finance can be judged by from the fact that finance not only play the role in distribution of economic activities but also play a very important role in administrative side. In this modern and developed age of business, finance has become one of the most important administrative functions. If the financial position of the business is good then it can be easily administered.


4. Controlling function:


The financial manager plays an important role in controlling the financial affairs of the company. The whole success of the business depends upon the function of the financial manager. His duties include Budgeting, raising funds in capital market, selecting and evaluating investment projects etc.


5. Deciding upon the needs and sources of outside financing:


The financial administration can easily estimate upon the needs and sources of outside financing through forecasting. There are two sources of outside financing:


· The loans from the Banks.


· The sale of additional stock.


The financial manager after estimating the financial needs, borrow the short term, medium term and long term loans from commercial banks or financial institutions. Sometimes hey sell additional stock for this purpose.


6. Checking upon the financial performance:


The finance is given much more attention by checking the financial performance of the business. The most important thing to observe the cash inflows and cash outflows in order to see that the proceedings are according to the forecasting. If the results are different, then changes are required in the existing policies and new financial plans are to be made. The financial manager checks the means and efforts of outside financing, periodical profit and loss account. He follows such policies which ensure the satisfactory financial performance of the enterprise.


7. Soul of Business:


All organizations and business concern without finance are like a human body without soul. It means that