The Definition of Finance in Business

Written by kyra sheahan
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The Definition of Finance in Business
Business finance departments are in charge of managing a company's money. (finance image by Christopher Hall from Fotolia.com)

In the business world, finance is the corporate pocketbook. Without money, there could not be business start-ups, investments, sustainability or organizational growth. Finance departments typically consist of some key players. The Chief Financial Officer (CFO) is the overseer of financial and accounting areas. Beneath him are Comptrollers, Treasurers, Financial Analysts and Accountants. Together, these individuals create a financial framework for businesses to operate on, and oversee the various aspects of money management.

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Financial Planning

One of the functions of finance in business is to spearhead the company's planning projects. Financial planning, according to Valencia Community College in Orlando, Florida, is the process of coming up with ideas, strategies and projections with regard to how a business will spend and receive money. Financial planning is usually done with the objective of profitability.

One common financial planning tool is budgeting. Creating a budget requires the finance department to identify how much money the business will have to work with for a specific period of time.

Resource Allocation

According to the University of Minnesota's Academic Health Center, resource allocation is one of the responsibilities of a business's finance department, and is defined as the process of distributing financial resources among various areas within an organisation. In business, these areas may be different departments, teams or projects. Resource allocation identifies where the business's money is going, which is important in order to keep the financial and accounting books straight.

Financial Decisions

The finance department has a great deal of influence over business decisions. Since it serves as the corporate checkbook, decision makers look to financial personnel to get advice, feedback and direction about purchases, investments, employee recruitment efforts and projects that the company wants to participate in. When it comes time for decisions to be made, the finance department will usually look at hard, quantitative data to give logical and feasible suggestions.

Compliance

Finance departments keep their companies in compliance with money management methods and tax responsibilities. They keep track of expenses, perform audits to ensure that no illegal activity is occurring (such as embezzlement), advise companies about investments that could potentially offset tax liabilities and make sure that any applicable state or federal regulations are being met.

Managing Risk

Companies are often on the lookout for potential business risks, and finance departments are particularly concerned with risks that threaten an organisation's viability. As such, business finance departments are involved in risk management operations to identify financial risks and find ways to avoid or minimise them to keep the company safe. According to the Wharton School at the University of Pennsylvania, it is important for finance to prepare for known and unknown risks. Preparing for unknown risks means projecting worst-case scenarios and building a response plan from them.

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