Finance Functions - Definition, Types, Business Examples (2024)

Finance Functions Definition

The finance function refers to practices and activities directed to manage business finances. The functions are oriented toward acquiring and managing financial resources to generate profit. The financial resources and information optimized by these functions contribute to the productivity of other business functions, planning, and decision-making activities.

Finance is the lifeblood of any business; without proper financial resources, no business can run smoothly; the finance processes can be related to planning, execution, control, and maintenance of financial resources. Moreover, its scope is ever increasing; it widens as the company grows because larger companies have the resources to support the increase in functions.

• The finance function in business refers to the functions intended to acquire and manage financial resources to generate profit.
• It produces relevant financial resources and information contributing to the productivity of other business functions, planning, and decision-making activities.
• The four major types of financial decisions are investment, liquidity, financial, and dividend decisions.

Types of Finance Functions

There are different classifications for finance functions, and it varies with organization types. The finance department functions like bookkeeping, budgeting, forecasting, and management of taxes, and the finance manager functions like financial report preparations contribute to the overall financial wellbeing of an entity. Let’s look into some of the popular classifications.

Investment decision

The investment decision function revolves around capital budgeting decisions. Capital budgeting in an organizationinvolves the analysis of investment opportunities, specifically long-term projects, and associated cash flows, to determine the profit potential. They revolve around making a sound investment that must ripe sufficient and sometimes maximum returns for the business in the long run. Hence these decisions are challenging and complex. Payback Period, Net Present Value (NPV) Method, Internal Rate of Return (IRR), and Profitability Index (PI) are the popular methods to carry out capital budgeting.

Financing decision

Expertise in forming financing decisions leads to optimized capital structure, enhanced performance, and growth. Financing functions deal with acquiring capital (like when and how) for the various functioning of the entity, like whether to use equity capital or debt to finance business events. The debt and equity mix of an entity are called its capital structure. The financing decisions always focus on maintaining good capital structure ratios.

Dividend decision

Companies share profits with their shareholders in the form of dividends. There are different types of shares, shareholder's dividends, and dividend policies. Furthermore, a company's dividend policy influences the company's market value and stock prices. Hence dividend decision, including the division of net income between dividends and retained earnings, is an important function.

Liquidity decision

Liquidity decision generally revolves around working capital decisions and management. Therefore, the priority is managing current assets to follow the going concern concept. The lack of liquidity results in issues like financial crisis and insolvencies. At the same time, a lot of liquidity can also lead to more danger. Hence, it is important to have the right mix of current assets and current liabilities.

Examples

Example 1

Let’s look into a finance function scenario and the application of technological evolutions like business intelligence into the functions of an organization.

Tax deadline extensions are usually beneficial to financial functions. They want deadline extensions due to the impact created by finance functions following legacy systems, heterogeneous information sources, manual-intensive tasks, etc. Finance and accounting teams must view data as a prime factor in improving these operations. Organizations may exploit data efficiently. It is possible by integrating human expertise with big data, artificial intelligence (AI), machine learning (ML), blockchain, and cognitive computing.

Techniques like automation and artificial intelligence can reform finance functions. Robotic Process Automation (RPA) contributes to efficiencies and creates value for the organization. Incorporating a business intelligence process to develop a digital tax function that provides benefits like real-time reporting can improve the output of financial functions. RPA and intelligent workflows can optimize the tax accounting process, AI data mining can identify potential tax fraud or errors, and a unified view of tax data can boost the time spent on analysis and review.

Example 2

Generally, finance processes focus on cost control, operating budgets, and internal auditing activities in small organizations. But for large organizations and MNCs, the process is complex; for example, they engage in profit repatriation policies of their companies’ subsidiaries, and capital budgeting decisions and valuation must reflect divisional differences and the complications introduced by currency tax and country risks. In addition, incentive systems need to measure and reward managers operating in various economic and financial settings. Finally, global exposure presents new challenges, and some companies recruit finance professionals specifically to rotate globally.

Frequently Asked Questions (FAQs)

Recommended Articles

This has been a Guide to Finance Functions. We explain its different types in business, finance department, and finance manager functions. you can learn more from the following articles -

• Corporate Finance
• Structured Finance
• Personal Finance