Functions of Financial Management | Finance

financeFunctions of Financial Management| Finance

Financial is oftenly  called  business finance and corporate finance. The primary function of financial management is to obtain funds for business and making profitable use of that fund. In today’s world, financial management is not only the acquisition of funds but also concerns in other areas and plays an important role in collection , management ,utilization of funds.

Function of financial management can be divided into two categories:

  • Executive Finance Functions
  • Routine/Clerical/Incidental finance functions

1)Executive Finance Functions:

The finance manager takes important financial  decisions by his experience,expertise,capability and qualifications.The decision taken will have long term financial implications in the present as well as future of the firm.Some of the important executive functions of financial management are as follows:

1.Investment Decision/Capital Budgeting Decision:

This involves the decision of allocation of capital or commitment of fund to long term asset which would yield benefits in the future.One of its main task is measuring the prospective profitability of new investment.The investment decision determines the total amount of assets held by the firm,the composition of these assets ,and the business risk complexion of the firm as perceived by the supplier of capital.The essence of investment decision is that return from the investment would exceed the firms required rate of return on capital.

2.Financing Decision:

This is the second important function to be performed by financial manager.He/She must decide when,where and how to acquire funds to meet the firm’s investment needs.The firm must maintain an optimal mix of equity and debt capital,also known as capital structure. The firm’s capital structure is said to be optimum when market value of shares is maximized.

3.Dividend Decision:

The financial manager should make a sound dividend policy that determines whether the firm should distribute dividend or not. If the firm should distribute dividend , then how much should be distributed. Since, the optimal dividend policy maximizes the value of the firm,it is one of the important aspects of decision making.

4.Liquidity Decision:

Liquidity is defined as the ability of a firm to make its short term obligations. The management of current assets affects the liquidity of the firm. Hence, current assets should be managed  efficiently for safeguarding the firm against the danger of illiquidity and insolvency.

There is always conflict between profitability and liquidity while managing current assets. If a firm does invest sufficient funds in current assets ,it may become illiquid whereas it would lose profitability as idle current assets would not earn anything. Therefore, the finance manager should estimate the firm’s needs for current assets and make sure that funds would be made available when needed.

5.Financial Forecasting:

Financial Forecasting includes the estimation of financial requirement and development of finance structure .The finance manager should ensure adequate availability of cash for the smooth operation of the firm. Therefore, forecasting should also be made regarding the technical changes ,situation of capital market ,funds necessary for investment ,returns from proposed investment projects ,and the demand for the firm’s product.

6.Analysis and appraisal of financial performance:

The financial manager should perform various financial analysis in order to appraise the finance performance of the business such as ratio analysis,funds flow analysis ,break-even analysis ,trend analysis,etc.

7.Advising to the top level Management:

The another important function of finance manager is to advise the top level management about the financial position of the firm.He should provide advice on some crucial financial problems by giving the comparative study of different financial alternatives.

8.Procurement of fund:

The finance manager should try to find out the sources of fund and procure them.He should decide how much fund should be raise d from different sources through detailed financial planning .

9.Allocation of fund to All parts of Organization :

It includes the proper allocation of funds to the different departments in accordance with their need.

10.Pricing:

Pricing is a crucial part of decision making .If the goods and services were priced lower priced ,then the firm would find difficulty in covering its operating cost. The firm would lose competitive strength if priced excessively. Hence, the finance manager should evaluate the impact of pricing policy on profitability.This helps to determine the price of the firm’s product in a reasonable way.

11.Control:

The finance manager should have the centralized control over the firm’s activities .For this , he should interact with other executives. This ensures the efficient  operation of the firm.

 

2)Routine Functions:

This includes those functions which are performed by lower-level employee.These functions help management to take important decisions.These functions include:

  • Supervision of cash flows and protection of cash balance .
  • Protection and safety of financial documents
  • Recording,keeping and reporting.
  • Preservation of accounting document.
  • Preparing financial statements.
  • Management of credit.
  • Disbursement and collectionof credit .
  • Making incentive schemes such as insurance and pension.
  • Management of payroll,tax-related matters,inventory,fixed assets ,computer operators,etc.

 

 

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