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Financial management

Functions or Role of Financial Managers All decisions involving management of funds come under the purview of the finance manager;

  1. Fund requirement estimation

The finance manager has to carefully estimate the requirement of funds.

The purpose of funds and timing of funds should be determined, using techniques like Budgetary control and long range planning.

This calls for forecasting all physical activities of the organisation and translating them into monetary terms

  1. Capital structure

The finance manager has to ensure all branches and units of the firm for maintain better capital structure

The finance decisions should be taken to provide proper balance between owned and borrowed funds.

  1. Cash management decisions

The manager should ensure all factors in order to control cash inflows and outflows’

There should take better policies for maintaining cash smoothly

  1. Capital budgeting

Funds procured should be utilised effectively. The finance manager should prescribe the asset management policies, for fixed assets and current assets

  1. Performance evaluation

Financial analysis helps in assessing how effectively the funds have been utilised and in identified methods of improvements. so he has to evaluate financial performance of a firm,

There are various tools of financial analysis like budgetary control, ratio analysis, cash flow and fund flow analysis etc.

  1. Market impact analysis

The finance manager has to monitor the stock exchange quotations and behaviour of share prices. This involves analysis of major trends in the stock market and judging their impact on the share price of the firm

Functional Areas of Financial Management

  1. Determining Financial Needs:

A finance manager is supposed to meet financial needs of the enterprise. For this purpose, he should determine financial needs of the concern. Funds are needed to meet promotional expenses, fixed and working capital needs. The requirement of fixed assets is related to the type of industry. A manufacturing concern will require more investments in fixed assets than a trading concern. The working capital needs depend upon the scale of operations, larger the scale of operations, the higher will be the needs for working capital. A wrong assessment of financial needs may jeopardies the survival of a concern.

  1. Selecting the Sources of Funds:

A number of sources may be available for raising funds. A concern may resort to issue of share capital and debentures. Financial institutions may be requested to provide long-term funds. The working capital needs may be met by getting cash credit or overdraft facilities from commercial banks. A finance manager has to be very careful and cautious in approaching different sources. The terms and conditions of banks may not be favourable to the concern. A small concern may find difficulties in raising funds for want of adequate securities or due to its reputation. The selection of a suitable source of funds will influence the profitability of the concern. This selection should be made with great caution.

  1. Financial Analysis and Interpretation:

The analysis and interpretation of financial statements is an important task of a finance manager. He is expected to know about the profitability, liquidity position, short-term and long-term financial position of the concern. For this purpose, a number of ratios have to be calculated. The interpretation of various ratios is also essential to reach certain conclusions. Financial analysis and interpretation has become an important area of financial Management

  1. Cost-Volume-Profit Analysis:

Cost-volume-profit analysis is an important tool of profit planning. It answers questions like, what is the behaviour of cost and volume? At what point of production a firm will be able to recover its costs? How much a firm should produce to earn a desired profit? To understand cost-volume-profit relationship, one should know the behaviour of costs. The costs may be subdivided as: fixed costs, variable costs and semi-variable costs. Fixed costs remain constant irrespective of changes in production.

  1. Capital Budgeting:

Capital budgeting is the process of making investment decisions in capital expenditures. It is an expenditure the benefits of which are expected to be received over a period of time exceeding one year. It is an expenditure incurred for acquiring or improving the fixed assets, the benefits of which are expected to be received over a number of years in future. Capital budgeting decisions are vital to any organization. An unsound investment decision may prove to be fatal for the very existence of the concern.

  1. Working Capital Management:

Working capital is the life blood and nerve centre of a business. Just as circulation of blood is essential in the human body for maintaining life, working capital is essential to maintain the smooth running of business. No business can run successfully without an adequate amount of working capital. Working capital refers to that part of the firm’s capital which is required for financing short-term or current assets such as cash, receivables and inventories. It is essential to maintain a proper level of these assets. Finance manager is required to determine the quantum of such assets. Cash is required to meet day-to-day needs and purchase inventories etc.

  1. Profit Planning and Control:

Profit planning and control is an important responsibility of the financial manager. Profit maximization is, generally, considered to be an important objective of a business. Profit is also used as a tool for evaluating the performance of management. Profit is determined by the volume of revenue and expenditure. Revenue may accrue from sales, investments in outside securities or income from other sources. The expenditures may include manufacturing costs, trading expenses, office and administrative expenses, selling and distribution expenses and financial costs.

  1. Dividend Policy:

Dividend is the reward of the shareholders for investments made by them in the shares of the company. The investors are interested in earning the maximum return on their investments whereas management wants to retain profits for further financing. These contradictory aims will have to be reconciled and in the interests of shareholders and the company. The company should distribute a reasonable amount as dividends to its members and

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