1.0 INTRODUCTION
Training in finance has served as a stepping-stone to a number of
the top corporate positions in the country. Many students approaching the field
of finance for the first time might wonder what career
opportunities exist. For
those who develop the necessary skills and training, job positions in the field
include corporate financial officer, banker, stockbroker, financial analysts,
portfolio manager etc. This note centers on the origin of finance, finance as a
discipline and the functions of finance.
2.0 OBJECTIVES
By the end of this note, you should be able to:
·
discuss the evolution of finance
·
discuss finance as a discipline
·
explain the functions of finance.
3.0 MAIN CONTENT
3.1 Evolution of Finance
At the turn of the century, finance, though closely linked with economics,
emerged as a separate field from economics. The major focus of this study
reflected the developments of finance, namely, the building of giant Industrial
Corporation by Rockfeller, Carnegic, Du Pont, and others. As a student of
finance, you would spend much time learning about the financial instruments
that were instrumental to mergers and acquisitions.
With the development and implementation of antitrust, corporate consolidations
became less important, and more patterns of growth were emphasized. Attention
shifted to stocks and bonds and other securities used for raising capital. The
role of the investment, banker or intermediary in a security offering also
received much attention. No doubt, the great bull market of the 1920s
contributed to the emphasis in raising capital.
In the 1930s, the shock of depression ushered in an era of
conservatism, and attention shifted to such topics as preservation of capital, maintenance
of liquidity, reorganization of financially troubled corporations, and the
bankruptcy process. The Federal Government assumed a much larger role in
regulating business through the Securities Act of 1933 and the Securities
Exchange Act of 1934. A by-product of this regulation was the development of
published data related to corporate performance. The groundwork was laid for
the sophisticated analysis of corporate information that would take place in
later decades.
The 1940s and early 1950s offered new knowledge in the study or practice
of corporate finance. However, in the mid-50s a major shift in finance took
place. Up to that time, the study procedures of finance had been descriptive or
definitional in nature. Furthermore, the orientation had been from the
viewpoint of a third party or an outsider. All these changed in the mid-50s as
a more analytical, decision-oriented approach began to evolve.
The first area of study to generate the newfound enthusiasm for decision-related
analysis was capital budgeting. The financial manager was presented with
analytical techniques for allocating resources among the various assets of the
firm. The enthusiasm spread to other decision making areas of the firm such as
cash and inventory management, capital structure formulation, and dividend
policy. The emphasis shifted from that of the outside looking in to that of the
financial manager forced to make tough day-to-day decisions affecting the
performance of the firm.
3.2 Finance as a
Discipline
The focus of this course is on the financial management of
business; however, the field of finance has broader perspective. Simply
defined, finance is a body of facts, principles and theories dealing with the raising
and using of money by individuals, businesses and governments. It covers
essential areas of financial planning and financial institutions as well as
managerial finances.
The individual’s financial problem is how to maximize his or her
wellbeing by appropriately using the available resources. Finance deals with how
individual divide their income between consumption and investment; how they
choose between consumption and investment; how they choose from among available
investment opportunities; and how they raise money to provide for increased
consumption or investment.
Like an individual, business also face the problem of allocating resources
and raising money. Management must determine which investment to make and how
to finance those investments. Just as the individual seeks to maximize his
happiness, the firm seeks to maximize the wealth of its owners (Stockholders).
Finance also encompasses the study of financial market and
institutions, and the activities of government, with emphasis on those aspects
relating to financial decisions of individuals and companies. Limitation and opportunities
provided by an institutional environment is crucial to decision-making process
of individuals and firms. In addition, financial institutions and government
have financial problems comparable to those of individuals and firms. The study
of these problems is an important aspect in finance.
3.3 Functions of Finance
Functions of finance
to individuals and departments in an organization depend on the size of the
company. The larger the company, the greater the degree of specialization of
task, and the greater the proliferation of positions and departments. A smaller
firm would consolidate many departments into fewer departments.
Generally, the major
finance-related functions in a firm include:
1. Financing and Investment: This includes supervising firm’s cash
and other liquid (holding) assets, raising additional functions when needed,
and investing funds in projects.
2. Accounting and
Control: This include maintaining financial records, controlling financial
activities, identifying deviations from planned and efficient performance and
managing payroll, tax matters, inventories, fixed assets, and computer
operations.
3. Forecasting and Long-term Planning: This involves forecasting
cost, technological changes, capital market conditions, funds needed for
investment, demand for the firm’s product, and using forecast and historical
data to plan future operations.
4. Pricing: This entails determining the impact of pricing policies on
profitability.
5. Other functions: This includes credit and collections, insurance and incentive
planning.
4.0 CONCLUSION
The talents required of financial managers are rapidly expanding
and there is an increasing demand for financial officers. These greater demands
placed on financial executives emerged from two factors. First, financial
analytic techniques and financial securities have become significantly more
complex. Second, more companies now have operations or raise capital overseas.
This note also discussed functions of finance.
5.0 SUMMARY
In this note, you
have been introduced to the origin of finance and finance as a discipline. The
functional aspects of finance were also discussed. You were told that the
finance function includes a wide variety of responsibilities, including
budgeting, vesting funds, accounting, product pricing and forecasting. Finance
embraces many sub areas such as personal finance and financial institution
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