Importance of Finance

The importance of finance is increasing day by day. In early days, finance manager's job was simply to raise the money needs to purchase require plant, machinery, equipments and inventories but that situation no longer exist and now days decision is more coordinated and finance manager have direct relation with control process. Thus, we have found following importance of finance.
a) To make Investment Decision: Finance is important for decision regarding the investment in long term assets like land, building, furniture, machines, human resource etc. For example, when to buy, which assets to buy and whether to replace old one with new one etc and these decision are made by finance manager through capital budgeting technique.


b) To make Capital Structure Decision: Another important of finance is to make capital structure decision and it is the ratio of debt and equity capital. For example, how much debt and equity should use so that company can maximize shareholder's wealth. Finance manager should use optimal capital structure, which is the composition of 60% equity and 40% debt.

c) To make Dividend Decision: The firm should make decision of dividend distribution and finance manager should develop appropriate dividend policy  to satisfy share holders.  For example, firm makes Rs 50000000 net profit and finance manager should decide how much to retain the amount and  how much to give dividend.

d) To make  Working Capital Management Decision: Working capital is the ratio of current assets and current liabilities and finance manager should decide how much of current assets to firm keep so that there will not be over liquidity and under liquidity.

e) To achieve certain Goal: Finance is important to achieve certain goal and most firm have the goal of wealth maximization.