Finance is the soul and blood of any business and no firm can survive without finance. It concerns itself with the management of monetary affairs of the firm—how money can be raised on the best terms available and how the procured money can be devoted to the best uses. Hence the nature of finance relates to the process of arrangement and application of funds.
The nature of finance is discussed below:
1. Cost-Oriented:
Utilization of finance requires payment of fees, rent or any such cost to the provider of finance. Business raises funds and in exchange it has to pay a cost to suppliers of the funds. If the finance is arranged by issuing shares the firm pays dividend in return or capital payment in the form of bonus shares the firm pays dividend in return or capital payment in the form of bonus shares.
Moreover the supplier of funds earns some capital gain through sale of shares where the firm helps the shareholders get the gain by raising value of the business. If the fund is arranged through loan then an interest is paid to the supplier of the fund. So finance is always cost oriented.
2. Value Based:
Economic application of finance helps to earn profit which ultimately creates value for the firm. Finance administers economic activities, enhances efficiency of the business operation, and thus ensures creation of surplus.
So it deals with the broad spectrum of business activities that are directed to increase the value of the firm. How the fund can be arranged with least cost consideration and how that can be applied with best uses determines the extent of value generated by a firm. Hence finance is value-oriented.
3. Goal Oriented:
Successful financial planning ensures achievement of the desired goal for an organization. We know that the goal of a firm constitutes the focus of the activities which depend on the nature of the business the firm operates in. Finance helps the firm reach that goal irrespective of the nature of business. It guides and regulates all activities so that the firm can achieve its ultimate goal.
It has a deep impact on the organization, society as well as the economy. The financing decision of a firm creates impact on investors, employees, debtors, creditors, government and all the members of an economy. Business activities are not mutually exclusive and so their dependence on each other is measured in terms of finance. Decisions relating to any activity influence others and in this way finance builds an interrelationship among business, society and economy.
5. Pervasive:
Finance is all-pervasive. It is necessary for all types of organizations whether profit seeking or non-profit seeking. For profit seeking firm’s value maximization is the main goal while for non-profit seeking firms cost minimization and survival get prime importance. Both these goals are evaluated in financial terms. Firms, whether profit seeking or non-profit seeking, require financial support, because financial viability is the central theme of every firm.
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