Finance and Accounting: Concepts & Theories

Accounting & Finance is the language of business. This subject allows you to better understand how business decisions are made and financed.

Managers in all sectors are required to take account of the financial impact of their decisions, and be able to understand and interpret accounting information, financial reports, and systems in the accounting and financial environment.

The Role of Finance in Business

The Finance department is central to decision making and the primary user of accounting information. It’s primary functions include:

• Raising funds
• Allocating funds between competing needs
• Manging investment performance
• Aligning uses of finance with mission statement and strategy.
• Holding users of funds accountable.

Here we will learn to:

• Critically analyse and interpret the key financial statements of an organisation.
• Interpret budgeting and performance appraisal techniques used for managerial planning and control of an organisation.
• Critique the appropriateness of the main capital investment appraisal techniques for decision making.
• Advise on the potential suitability of available sources of funds to finance a business.

The investment process involves obtaining funds, evaluating available investment opportunities and making a selection, structuring the terms of the investment, implementing the deal and monitor progress, achieving returns and exiting from the investment.

Related: Capital Structure & Sources of Funds: Concepts, Theories and Examples

Finance Decisions of Successful Entrepreneurs

Here are key finance functions that successful entrepreneurs use wisely, along with relevant examples:

1. Capital Mobilization (Raising Funds)

Dhirubhai Ambani was a pioneer in raising capital from the public. Unlike many entrepreneurs of his time who relied on private funding or banks, Ambani democratized wealth creation by encouraging public participation in the stock market.

When Reliance Industries’ IPO came out in the 1970s, instead of limiting shares to a few industrialists, he encouraged small investors to buy shares. This helped him mobilize huge amounts of capital, which was used for expansion into petrochemicals, refining, and other sectors, fueling Reliance’s rapid growth.

2. Efficient Working Capital Management

Smart entrepreneurs focus intensely on optimizing working capital. They manage receivables and payables smartly to maintain liquidity, ensuring that the business doesn’t face cash crunch even during expansion.

Stringent credit control on receivables and extended credit terms from suppliers helped Reliance Industries in operating without taking excessive debt and allow faster growth, especially when expanding its polyester and textile businesses.

3. Reinvestment of Profits for Growth

Reliance Industries’ initial strategy was aggressive reinvestment in technology, infrastructure, and backward integration. Dhirubhai Ambani invested heavily in setting up the largest refinery and petrochemical complexes in India, which gave Reliance cost leadership and competitive advantage.

Instead of distributing large dividends in the early stages, Dhirubhai Ambani focused on reinvesting most of the profits back into the business to fund further expansion.