What is Finance and the Managerial Finance? Define the Managerial Finance functions.

What is Finance?

Finance can be defined as the science and art of managing money. Finance is a field that deals with the allocation of assets and liabilities over time under conditions of certainty and uncertainty. 

Finance can also be defined as the science of money management. A key point in finance is the time value of money, which states that purchasing power of one unit of currency, can vary over time. Finance aims to price assets based on their risk level and their expected rate of return. 

Finance can be broken into three different sub-categories: public finance, corporate finance and personal finance.

At the personal level, finance is concerned with individuals’ decisions about how much of their earnings they spend, how much they save, and how they invest their savings. 

In a business context, finance involves the same types of decisions: how firms raise money from investors, how firms invest money in an attempt to earn a profit, and how they decide whether to reinvest profits in the business or distribute them back to investors.

Financial management:   
Financial management is that managerial activity which is concerned with the planning and controlling of the firm’s financial resources.

Functions of Finance:
1. Financial Planning
2. Identification of sources
3. Selection of Sources
4. Raising the Funds
5. Investment of Funds
6. Protection of Funds
7. Distribution of Profits
8. Managing Fund
9. Forecasting Cash flow
10. Forecasting Future Profits
11. Managing Assets
12. Cost Control
13. Pricing

What is Managerial Finance?

Managerial finance is the branch of finance that concerns itself with the managerial significance of finance techniques. It is focused on assessment rather than technique. Managerial finance is concerned with the duties of the financial manager working in a business.

The difference between a managerial and a technical approach can be seen in the questions one might ask of annual reports. The concern of a technical approach is primarily measurement. It asks: is money being assigned to the right categories? Were generally accepted accounting principles (GAAP) followed?

Managerial finance functions

• The size and importance of the managerial finance function depends on the size of the firm.
• In small firms, the finance function is generally performed by the accounting department.
• As a firm grows, the finance function typically evolves into a separate department linked directly to the company president or CEO through the chief financial officer (CFO)

Relationship to Economy:

• The field of finance is closely related to economics.
• Financial managers must understand the economic framework and be alert to the consequences of varying levels of economic activity and changes in economic policy.
• They must also be able to use economic theories as guidelines for efficient business operation.
• Marginal cost–benefit analysis is the economic principle that states that financial decisions should be made and actions taken only when the added benefits exceed the added costs

Relationship to Accounting:

• The firm’s finance and accounting activities are closely-related and generally overlap.
• In small firms accountants often carry out the finance function, and in large firms financial analysts often help compile accounting information.
• One major difference in perspective and emphasis between finance and accounting is that accountants generally use the accrual method while in finance, the focus is on cash flows.
• Whether a firm earns a profit or experiences a loss, it must have a sufficient flow of cash to meet its obligations as they come due.

Finance and accounting also differ with respect to decision-making:

• Accountants devote most of their attention to the collection and presentation of financial data.
• Financial managers evaluate the accounting statements, develop additional data, and make decisions on the basis of their assessment of the associated returns and risks.

Managerial functions /Decisions taken by financial manager:
1. Investment  decision:
(a) Capital budgeting:
(b) Working capital management:
2. Financing decision:
3. Dividend decision:

Reference:
Principles of Managerial Finance, Book by Lawrence J Gitman
Wikipedia