Finance is one of the sensitive areas in the business that determines the growth and expansion of the business. It is important to understand the importance of finance function in your business. The financial manager should be able to explain importance of finance function.
Importance of finance function
Enhance investment decision
This is the essential finance function which deals with the allocation of funds to short and long-term investment. It is referred to as capital budgeting. It helps in putting capital into the long-term business assets to get the highest return in future. Coming up with investment decision requires assessment of new investment in terms profitability and decision of using funds.
Guide in the financial decision
It is critical for every business to make the smart decision about where, when and how a business should acquire capital. Funds to run the business may be gained in different ways and channels which should be identified when making a financial decision. A reasoned financial structure always focuses on promoting highest shareholders return with little risk. In this context, market value of the business will increase and thereby an adequate capital structure may be achieved.
Enhance dividend decision
Every business targets to make a profit or positive returns. When the company makes a profit some of it or all the profit is shared among the shareholders as dividends although it is entirely decided by the financial manager as this is his/her key function. A dividend policy is followed to increase the market value of the firm and as result dividend payout ratio is computed for all shareholders.
Financial decision promotes the sustainability of liquidity in an organization to prevent the inability to pay the existing debts. Business liquidity, profit margins, and risk are all linked to the investment in the current assets. For the firm to able to sustain a tradeoff among profitability and liquidity, it is significant to invest adequate capital in current assets. However, current assets need to be well valued and disposed of regularly when they are not profitable. Also, they should be used during liquidity problems and periods of insolvency.
In conclusion, finance function is important for every business to grow and expand.