What Is the Purpose of Finance?

Finance involves borrowing & lending, investing, raising capital, and selling & trading securities. The purpose of these pursuits is to allow companies and individuals to fund certain activities or projects today, to be repaid in the future based on income streams generated from those activities. Without finance, people would not be able to afford to buy homes (entirely in cash), and companies would not be able to grow and expand as they can today. Finance, therefore, allows for the more efficient allocation of capital resources. 

Below are the main purpose of Finance:

Investment Decision

One of the most important finance functions is to intelligently allocate capital to long term assets. This activity is also known as capital budgeting. It is important to allocate capital in those long term assets so as to get maximum yield in future. Following are the two aspects of investment decision

  1. Evaluation of new investment in terms of profitability
  2. Comparison of cut off rate against new investment and prevailing investment.

Since the future is uncertain therefore there are difficulties in calculation of expected return. Along with uncertainty comes the risk factor which has to be taken into consideration. This risk factor plays a very significant role in calculating the expected return of the prospective investment. Therefore while considering investment proposal it is important to take into consideration both expected return and the risk involved.

Investment decision not only involves allocating capital to long term assets but also involves decisions of using funds which are obtained by selling those assets which become less profitable and less productive. It is a wise decision to decompose depreciated assets which are not adding value and utilize those funds in securing other beneficial assets. An opportunity cost of capital needs to be calculating while dissolving such assets. The correct cut off rate is calculated by using this opportunity cost of the required rate of return (RRR)

Financial Functions

Financial Decision

Financial decision is yet another important function which a financial manger must perform. It is important to make wise decisions about when, where and how should a business acquire funds. Funds can be acquired through many ways and channels. Broadly speaking a correct ratio of an equity and debt has to be maintained. This mix of equity capital and debt is known as a firm’s capital structure.

A firm tends to benefit most when the market value of a company’s share maximizes this not only is a sign of growth for the firm but also maximizes shareholders wealth. On the other hand the use of debt affects the risk and return of a shareholder. It is more risky though it may increase the return on equity funds.

A sound financial structure is said to be one which aims at maximizing shareholders return with minimum risk. In such a scenario the market value of the firm will maximize and hence an optimum capital structure would be achieved. Other than equity and debt there are several other tools which are used in deciding a firm capital structure.

Dividend Decision

Earning profit or a positive return is a common aim of all the businesses. But the key function a financial manger performs in case of profitability is to decide whether to distribute all the profits to the shareholder or retain all the profits or distribute part of the profits to the shareholder and retain the other half in the business.

It’s the financial manager’s responsibility to decide a optimum dividend policy which maximizes the market value of the firm. Hence an optimum dividend payout ratio is calculated. It is a common practice to pay regular dividends in case of profitability Another way is to issue bonus shares to existing shareholders.

Liquidity Decision

It is very important to maintain a liquidity position of a firm to avoid insolvency. Firm’s profitability, liquidity and risk all are associated with the investment in current assets.

In order to maintain a tradeoff between profitability and liquidity it is important to invest sufficient funds in current assets. But since current assets do not earn anything for business therefore a proper calculation must be done before investing in current assets.

Current assets should properly be valued and disposed of from time to time once they become non profitable. Currents assets must be used in times of liquidity problems and times of insolvency.

 

How Much Do Finance Jobs Pay?

Finance jobs can vary a lot in pay. Among the most common positions:

  • A personal financial advisor‘s median annual compensation is $94,170, according to the latest U.S. Bureau of Labor Statistics (BLS) statistics.
  • The median pay for budget analysts—the professionals who examine how a company or organization spends money—is a solid $79,940 annually.23 A job as a treasury analyst pays $60,730 a year on average, according to Payscale.24 However, corporate treasurers, who have more experience, make an average salary of $118,704.25
  • Financial analysts make a median of $81,410, though salaries can run in the six figures at major Wall Street firms.26
  • Accountants and auditors‘ median pay clocks in at $77,250.23 According to Payscale, the average salary for CPAs ranges from $50,000 to $126,000 per year.27
  • Financial managers—who create financial reports, direct investment activities, and develop plans for the long-term financial goals of their organization—have a median pay of $131,710 per year, reflecting the fact that theirs is a fairly senior position.26
  • Securities, commodities, and financial services sales agents—brokers and financial advisors who connect buyers and sellers in financial markets—make a median of $62,910 per year.28 However, their compensation is often commission-based, and so a salaried figure may not fully reflect their earnings.

According to an Indeed.com survey, Chief Finance Officers (CFOs) have the highest salaried jobs in finance. As of mid-2022, CFOs earned an average of $123,265 before bonuses.29

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