Financing is one of the most important functions of any enterprise. For carrying out any operation, finance is required. Thus, finance must be raised, allocated and controlled for the effective execution of any function. Finance function is superimposed on all other functions. That is, all the other functions in a business enterprise depend on the financing, and the success or failure of the firm, as such, depends on how effectively the finance function is undertaken.
Financing is an essential but distinct segment of the overall managerial function. It is closely related to various managerial functions such as production, personnel and distribution. The finance function comprises of determining and raising the necessary funds from appropriate sources, and their proper allocation and control with the aim of attaining the enterprise objective of wealth maximization. The wealth or the value of the firm is at the maximum when the return or profit is also at maximum. But with the increase in return, the risk also increases.
Financing function aims at reaching a trade-off between risk and return, and between profitability and liquidity, with the ultimate objective of maximizing the value of the firm. Some experts have defined financing as the task of providing the funds required by an enterprise on the terms most favorable to it, in light of the objectives of the business.
Money management, accounting, control and advisory are the four main functions of financing. Money management aims at ensuring that a sufficient amount of money is raised from appropriate sources at the right time and is invested in suitable projects which would increase the net returns and the value of the firm. Thus, money management consists of the raising of required funds, investing of funds and management of working capital.
Financial accounting consists of recording all business transactions and the preparation of final accounts, concerning the profit and loss accounts and the balance sheet. The profit and loss account shows the net results- either the profit earned or the loss suffered over a period. The balance sheet shows the financial position of the firm on a given time.