Finance For Beginners - Nature Scope and Purposes of Finance

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The type of financing required in an enterprise depends essentially on many factors including the type of project work to be financed, the existing legal framework, state of the economy, cost implication, to mention but just a few of them. Anyafo, 1998:6 identified three main components of finance. These are:

• The private sector which focuses on the financial affairs of the private sector of the economy.

• The public sector finance which deals with the financial operations of the public authorities (public finance).

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• International finance which deals with all aggregate financial activities taking place across the frontiers of the nation.

From these classifications, one can easily conclude that the scope of finance is diverse as it touches on the financial activities of both individuals, firms, corporate bodies and government institutions. However, the main purposes may be examined through the following perspectives:

• It greatly helps in determining the extent to which funds are required in an entity. As a primary purpose, finance seeks to determine the extent to which funds are required in an organization. This is done by properly assessing the financial requirement of the particular project to be financed in order to determine the minimum and / or maximum amount so required.

• Again, a good knowledge of finance will help an organization to source her funds at the possible minimum cost (that is cost minimization). The procurement of fund should be done bearing the cost implication in mind. This means that an efficient source of fund is the one that should be made without too much financial pressure on the firm through interest charges, administration costs and others. Thus, the financial manager is expected to elect those resources whose aggregate cost effects is the least.

• Furthermore, finance aids in the investment of funds in order to ensure maximum benefits (that is the theory of profit maximization). Finance gives consideration to the available investment outlets and settle for that which holds more promises of maximizing business returns. In other words, such an investment should be able to cover the cost of borrowing and administration such that a reasonable margin of profit will still be left for the owners of the enterprise as their just rewards for participating in investment activities.

(Egunwu, 2004:4)

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