Everything you need to know about the functions of financial manager.
The functions of financial manager are:-
1. Estimating the Requirements of Funds 2. Determining the Capital Structure 3. Deciding the Sources of Funds 4. Investing Funds 5. Distributing Surplus 6. Managing Cash 7. Ensuring Financial Control 8. Financial Analysis
9. Capital Budgeting 10. Corporate Taxation 11. Acquisitions and Mergers 12. Fixed Asset Management 13. Cost Volume Profit Analysis or CVP Analysis 14. Project Planning and Evaluation 15. Working Capital Management 16. Dividend Policies.
Functions of Financial Manager: Estimating the Requirement of Funds, Determining the Capital Structure and a Few Others
Functions of Financial Manager – In a Large Organisation: Estimating the Requirement of Funds, Determining the Capital, Deciding the Sources of Funds and a Few Others
The important functions of a financial manager may be presented thus, especially in a large organisation:
Function # 1. Estimating the Requirement of Funds:
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The requirement of funds in the short term as well as long term need to be identified well in advance. Adequate funds must flow into business when required. While making an estimate, the present and future requirements of business must be kept in mind. The finance manager must keep the future contingencies—any unexpected events demanding more money than originally envisaged—also in the background while preparing the financial forecast. Adequate care should be taken to see that the business does not get impacted negatively due to fluctuations (more money than required or shortage of money when needed) in the flow of money into business.
Function # 2. Determining the Capital Structure:
Once the finance manager is able to identify the funds required, the next step is to find out the sources of raising money. That is, the type of securities to be issued and the relative proportion between them. Keeping the degree of risk and the kind of returns expected, the finance manager must strike a happy balance between debt (funds from creditors) and equity (funds from owners).
Function # 3. Deciding the Sources of Funds:
Funds can be raised from various sources—shareholders, debenture holders, financial institutions and public deposits. The relevant question is about striking a balance between equity and debt. If funds are raised from owners repeatedly, the firm will have a bloated equity.
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Earnings get diluted when the equity grows to unmanageable proportions (e.g. Steel Authority of India Limited Rs. 4130.4 crore equity) the fixed interest charges would eat away the earnings of a company if it relies on debt capital excessively. The finance manager, therefore, needs to carefully evaluate all factors that impact the long run profit potential and decide on the best possible mix that maximizes shareholders’ wealth.
Function # 4. Investing Funds:
The funds raised from various sources must be put to excellent use. How much should be earmarked for long term assets and how much should be kept aside to meet short term working capital needs is something that needs to be worked out by every finance manager carefully.
Various investment proposals should be put to close examination following cost benefit analysis, capital budgeting techniques, opportunity cost analysis etc. Profitability should not be the sole guiding factor here. How safe the investment would be and how quickly the company is able to recover the money invested, sometimes, require serious attention.
Function # 5. Distributing Surplus:
Any surplus generated through funds invested over a period of time need to be utilized carefully. A portion could be distributed to shareholders in the form of dividends. Practice and tradition should (normally) guide decisions regarding how much to be placed in the hands of shareholders. In case of a growing company, retained earnings help in undertaking expansion plans fairly easily and quickly.
Function # 6. Managing Cash:
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To meet running expenses and to liquidate current liabilities, every firm is expected to keep sufficient cash on hand and also at bank. If businesses run out of cash every now and then, liquidity problems crop up. They may be forced to borrow at exorbitant, prohibitive rates. The creditworthiness of the firm suffers.
Of course in the name of ensuring liquidity a firm should not pile up cash in its boxes. Idle cash lying unused would depress earnings figures. If the same money is put on viable projects, the firm’s overall earnings potential would improve. So, it is a question of striking a fine balance between how much cash is required—keeping the fluctuating requirements (for cash from time to time) of business in mind.
Function # 7. Ensuring Financial Control:
Appropriate control measures such as budgetary control, ratio analysis, break- even point analysis, cost and profit control etc. could be pressed into service to ensure control over-performance. The intent here is to maximize return on investment—to see that everything is on track and funds are put to good use.
It is the duty of every finance manager to raise funds at an appropriate time. The funds should be readily available whenever required. They must be put to proper use. Each competing proposal must be put to close examination before committing funds. Profitability should not be sole guiding factor. Safety and liquidity issues also need to be carefully looked into. It is the duty of the finance manager to achieve right balance between risk and return while evaluating competing investment proposals and committing funds.
Functions of Financial Manager – Primary Functions and Subsidiary Functions
The functions / scope of financial manager are divided in two parts viz primary / executive functions and subsidiary functions.
A. Primary / Executive Functions:
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1. Determining Financial Needs:
The most important function of the financial manager is to ensure the availability of adequate financing. Financial needs have to be assessed for different purposes. Money may be required for initial promotional expenses, fixed capital and working capital needs. Promotional expenditure includes expenditure incurred in the process of company formation.
Fixed asset needs depend upon the nature of the business enterprise-whether it is a manufacturing, non-manufacturing or merchandising enterprise. Current asset needs depend upon the size of the working capital required by an enterprise.
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2. Determining Sources of Funds:
The financial manager has to decide the sources of funds. He may issue different types of securities. He may borrow funds from a number of financial institutions and the public.
When a firm is new and small and little known in financial circles, the financial manager faces a great challenge in raising funds. Even when he has a choice in selecting the sources of funds, that choice should be exercised with great care and caution.
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The financial manager has to interpret different financial statements. He has to use a large number of ratios to analyze the financial status and activities of his firm. He is required to measure its liquidity, determine its profitability, and assess overall performance in financial terms.
This is often a challenging task, because he must understand the importance of each one of the aspects of the firm, and he should be crystal clear in his mind about the purposes for which liquidity, profitability and performance are to be measured.
The financial manager has to establish capital structure and ensure the maximum rate of return on investment. The ratio between equity and other liabilities carrying fixed charges has to be defined. In the process, he has to consider the operating and financial leverages of his firm.
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The operating leverage exists because of operating expenses, while the financial leverage exists because of the amount of debt involved in the firm’s capital structure. The financial manager should have adequate knowledge of the different empirical studies on the optimum capital structure and find out whether and to what extent he can apply their findings to the advantage of the firm.
5. Cost-Volume-Profit Analysis:
This is popularly known as the “CVP relationship”. For this purpose, fixed costs, variable costs and semi-variable costs have to be analyzed. Fixed costs are more or less constant for varying sales volumes. Variable costs vary according to the sales volume. Semi-variable costs are either fixed or variable in the short run.
The financial manager has to ensure that the income of the firm will cover its variable costs. Moreover, a firm will have to generate an adequate income to cover its fixed costs as well.
The financial manager has to find out the break-even point that is, the point at which the total costs is matched by total sales or total revenue. He has to try to shift the activity of the firm as far as possible from the breakeven point to ensure the company’s survival against seasonal functions.
6. Profit Planning and Control:
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Profit planning is an important responsibility of the financial manager. Profit is the surplus which accrues to a firm after its total expenses are deducted from its total revenue.
It is necessary to determine profits properly for the measure of the economic viability of a business. The revenue may be from sales or it may be operating revenue, or income from other sources.
The expenditure may include manufacturing costs, trading costs, selling costs, general administrative costs and finance costs. Profit planning and control is a dual function which enables a management to determine the costs it has incurred, and revenues it has earned during a particular period and provides shareholders and potential investors with information about the earning strength of the corporation.
Profit planning and Control directly influence the declaration of dividend, creation of surpluses, taxation etc. Break-even analysis and cost volume profits are some of the tools used in profit planning and control.
Fixed assets are land, building, machinery and equipment, furniture and intangibles as patents, copyrights, goodwill, etc. The acquisition of fixed assets involves capital expenditure decisions and long-term commitment of funds. These fixed assets are justified to the extent of their utility and/or their productive capacity.
Long-term commitment of funds, the decisions governing their purchase, replacement, etc. should be taken with great care and caution. Often, these fixed assets are financed by issuing stock, debentures, long-term borrowings and deposits from the public. When it is not worthwhile to purchase fixed assets, the financial manager may lease them and use the assets on a rental basis.
8. Project Planning and Evaluation:
A substantial portion of the initial capital is the long-term assets of a firm. The error of judgment in project planning and evaluation should be minimized. Decisions are taken on the basis of feasibility and project reports containing economic, commercial, technical, financial and organizational aspects.
The essentiality of a project is ensured by a technical analysis. The economic and commercial analysis studies the demand position for the product. The economy of price, the choice of technology and the availability of the factors favoring a particular industrial site are all considerations which merit attention in a technical analysis.
The financial analysis is perhaps the most important and includes a forecast of the cash inflows and the total outlay which will keep down the cost of capital and maximize the rate of return on investment.
Capital budgeting decisions are most crucial for these have long-term implications. These relate to a judicious allocation of capital. Current funds have to be invested in long-term activities in anticipation of an expected flow of future benefits spread over a long period of time.
Capital budgeting forecasts returns on proposed long-term investments and compares the profitability of different investments and their cost of capital. It results in capital expenditure investments. The various proposals are ranked on the basis of such criteria as urgency, liquidity, profitability and risk sensitivity.
The financial analyzer should be thoroughly familiar with such financial techniques as pay back, internal rate of return, discounted cash flow and net present value among others because risk increases when investment is stretched over a long period of time.
10. Working Capital Management:
Working capital refers to that part of firm’s capital which is required for financing short term or current assets such as cash, receivables and inventories. It is essential to maintain proper level of these assets. Financial manager is required to determine the quantum of such assets.
Dividend policies constitute a crucial area of financial management. While owners are interested in getting the highest dividend from a corporation, the Board of Directors may be interested in maintaining its financial health by retaining the surplus to be used when contingencies, if any arise. A firm may try to improve its internal financing so that it may avail itself the benefits of future expansion.
However, the interests of a firm and its stockholders are complementary, for the financial management is interested in maximizing the value of the firm and the real interest of the stockholders always lies in the maximization of this value of the firm; and this is the ultimate goal of financial management.
The dividend policy, of a firm depends on a number of financial considerations, the most critical among them being profitability. Thus, there are different dividend policy patterns which a firm may choose to adopt, depending upon their suitability for the firm and its stockholders’ group.
Firms may expand externally through co-operative arrangements, by acquiring other concerns or by entering into mergers. Acquisitions consist of either the purchase or lease of a smaller firm by a bigger organization.
Mergers may be accomplished with a minimum cash outlay, though these involve major problems of valuation and control. The process of valuing a firm and its securities is difficult, complex and prone to errors. The financial manager should, therefore, go through the valuation process very carefully.
B. Subsidiaries Functions:
The subsidiary functions of financial management are as follows:
i. Liquidity Function
ii. Profitability Function
iii. Evaluation of Financial Performance
iv. Co-ordination with other departments
These said functions focus on Cash Management, Maximization of profit (Profitability), of financial performance and Coordination with other Departments.
Functions of Financial Manager – Important Functions: Planning the Financial Needs, Acquisition of Funds, Investment of Funds, Dividend Decision ands a Few Others
At present Financial Management is not restricted to raising and allocating funds. It also includes the study of financial institutions like stock exchange, capital markets, etc.
Some of the important functions performed by a Financial Manager are:
1. Planning the Financial Needs:
The first task of a financial executive is to determine the finance needs of the concern. The funds are needed to meet fixed assets and working capital needs. The requirement of fixed assets is related to the type of industry. The working capital needs depend upon the scale of operation. It is the job of a financial executive to plan the financial needs of a concern in terms of, for what purpose the finance is required, how much of finance is required and when exactly they are required.
2. Acquisition of Funds:
After making the finance forecasting and planning, the next step will be to acquire funds. The finance executive must find out the various sources available for acquiring funds. These sources may be long-term or short-term. The various long-term sources are issue of shares, debentures, long-term loans from financial institutions, etc. The various short-term sources are bank credit i.e., short-term loans, cash credit, overdraft facilities, discounting of bills of exchange, trade credit, factoring, lease finance, etc.
3. Investment of Funds:
Investment decision refers to planning the deployment of available capital for the purpose of maximization the long-term profitability of the firm. It is the firm’s decision to invest its current funds most efficiently in long-term activities in anticipation of flow of future benefits over a series of year. Capital budgeting decisions are the most crucial and critical business decisions because the success or failure of a concern based on these decisions.
4. Dividend Decision:
Dividend is the portion of earning, which is the distribution of a part of or a certain percentage of profit among the shareholders. Dividend policy is the determination of the division of earnings between payments to shareholders and retained earnings. Every firm needs to have a clear dividend policy. Formulation of a proper dividend policy is one of major financial decision taken by the finance executive.
5. Working Capital Management:
Working capital refers to the excess of current assets over current liabilities. In other words, it is net current assets or net working capital. Working capital is essential to maintain the smooth running of business. No business can survive without adequate amount of working capital. Proper management of working capital is an important area of financial management.
6. Analysis and Interpretation of Financial Statement:
Every firm has to prepare financial statements periodically. These financial statements need to be accurate. Analysis and interpretation of financial statements reveals aspects like the short-term, long-term solvency and profitability of a concern etc. The analysis and interpretation of financial statements is one of the important tasks of a financial executive. He is expected to know the short-term, long-term solvency arid profitability of the concern and other such aspects of a concern.
7. Profit Planning and Control:
Profit planning and control is an important responsibility of financial management. The profit planning and control also influence the declaration of dividends, creation of reserves, replacement of assets, redemption of debts, future productions, future expansions., etc. If the profits of a concern are not planned and controlled, it results in uncertainty of the future of the firm.
Functions of a Financial Manager- Financial Planning, Financing Decision, Investment Decision, Dividend Policy Decision, Financial Control and Incidental Functions
Financial management performs several important functions in a business institution. Financial management normally takes three important decisions. These are Investment Decision, Financing Decision, and Dividend Policy decision. Besides these decisions, it is also responsible for financial planning and controlling the funds.
Therefore, according to the modern specialists, financial management functions can be divided into two parts- (a) Managerial Finance Functions, and (b) Routine Functions.
Managerial Finance Functions need efficient planning, controlling and performance evaluation.
Routine Functions do not require much managerial skills but they are required for the performance of managerial functions. These are clerical functions and normally performed at lower levels. These functions can be of (i) recurring or (ii) Non-recurring nature.
Recurring finance functions include those financial activities which are performed regularly for efficient business operations.
Non-recurring finance functions are performed only sometimes e.g., financial planning at the time of promotion of company, valuation of assets at the time of amalgamation, arrangement of funds in absence of liquidity of funds, etc.
On the whole, the main functions of a financial manager are as follows:
1. Financial Planning
2. Financing Decision
3. Investment Decision
4. Dividend Policy Decision
5. Financial Control
6. Incidental Functions
Function # 1. Financial Planning:
The foremost function of a financial manager is to prepare financial plan for the business. Financial planning means the determination of the need of required funds, the period and the proportion of these funds for the achievement of organisational objectives. The plan should be prepared from long-term viewpoint so that necessary funds required for the expansion programmes of the firm, and renewal of plant and machinery, could be arranged and the available funds could be properly used.
In order to prepare financial plan, proper co-ordination in cash inflows and cash outflows is essential. While preparing financial plan, first of all short-term and long-term objectives are determined. Necessary funds required for the organisation and the period of requirement are estimated.
After it, capital structure is formed. It explains which sources will be employed and in what proportion the funds will be collected. To implement the financial plan, financial policies and processes are determined. While preparing financial plan, financial manager should take into account the nature of business, economic circumstances, management attitude towards risk, future expansion programmes, profitability of business, etc.
Function # 2. Financing Decision:
Second important function of financial management is to collect funds from different sources for the fulfilment of business needs. This decision is a part of capital structure. Capital structure determines from which sources necessary capital will be procured so that returns for the shareholders could be maximised.
In other words, it determines the ratio of debt and equity capital in the total funds required. There should be proper balance between debt and equity because any change in them would affect the value of firm. The capital structure which utilises debt securities adequately is called optimum capital structure.
In case of optimum capital structure, market value of the securities of firm is maximum and cost of capital is minimum. Ordinarily, debt is considered a cheaper source of capital. To raise equity capital, prospectus is issued and services of underwriters are used.
Function # 3. Investment Decision:
Investment decisions are concerned with the selection of assets in which the investments will be made by the company. Here, it is important to note that all investment decisions are not taken by the financial manager himself but are taken in participation with the marketing, production and other departments.
Financial manager arranges funds for the assets to be used in these departments, and analyses cost and benefits accruing from these assets so that corporate objectives could be achieved. It is the responsibility of financial manager to see that short-term and long-term funds are rationally invested in the firm. In feet, financing decisions of the firm are affected by investment decisions.
The assets acquired for business can be divided into two parts:
(i) Long-term or fixed assets which are used for earning over a longer period.
(ii) Short-term or current assets which can be converted into cash within an accounting period.
The mutual ratio between fixed and current assets affects the quantum of risk of firm. This risk affects the cost of different sources of finance. Thus, investment decisions are mainly of two types—capital budgeting decisions and working capital decisions. Sometimes, financial manager also takes special investment decisions. These are called non-recurring decisions. These decisions facilitate mergers, reorganisations and liquidation.
Capital budgeting decisions are quite significant for firms because they are concerned with such assets or projects which result in profits to the business over a long period.
Under these decisions, financial manager has to decide as to which of the different available alternatives the best to invest in is fixed assets. For this purpose, expected profit accruing from that asset is evaluated by using different techniques.
Efficient management of working capital is also quite important for the business because it affects profitability and liquidity of the firm. For the efficient management of working capital, financial manager must maintain adequate balance in liquidity and profitability. Profitability and liquidity have inverse relationship.
If business does not have adequate working capital, risk will increase due to non-payment of short-time liabilities in time and if current assets are more than required, it will reduce profitability and liquidity will increase. This is called working capital management. For efficient and effective management of working capital, inventory, receivables and cash are required to be managed properly.
Function # 4. Dividend Policy Decision:
Determination of dividend policy is the responsibility of financial management.
Income of the firm can be used in two ways:
(i) To distribute it as dividend to the shareholders, and
(ii) To retain it in business in the form of accumulated profits.
Hence, in the determination of dividend policy it is decided what part of profits be distributed as dividends and what part be retained in the business. This decision is based on preferences of shareholders and investment avenues available to the firm. Market price of shares is affected by dividend policy. Thus, dividend decision is related to financing decision because dividend decision decides funds available from business earnings.
Function # 5. Financial Control:
Financial control is a main constituent of financial management. Financial control helps prevent deviations from the objectives. For the purposes of financial control budgetary control and cost control methods are employed. In the financial control, standards of financial performance are determined first.
Actual performance is compared with the predetermined standards and deviations are calculated. Then, the reasons for these deviations are ascertained and they are removed. If the deviations are the result of deficiencies in policies, programmes and procedures, the policies, etc. are corrected.
Function # 6. Incidental Functions:
These functions are of routine nature. Many of these functions are complimentary to other managerial functions of financial management.
(i) Safety of securities, insurance of assets and other valuable documents.
(ii) Administration of pension and welfare plans.
(iii) Maintenance of records, preparation of reports and evaluation of financial performance.
(iv) To look after cash receipts and payments.
(v) To administer internal audit.
(vi) To establish public financial relations.
(vii) To open bank accounts and arrange for the deposit of finances.
Functions of a Financial Manager- 13 Frequently Used Functions: Determining Financial Needs, Determining the Sources of Funds, Financial Analysis and a Few Others
The traditional role of the financial manager was, accurate record keeping, preparation of reports on the company’s status, performance and managing cash, so that the firm could pay its bills on time. In this role, the financial managers were called only when their speciality was needed – that is, especially for obtaining additional funds. Over the years, the role of the financial manager has changed considerably.
Business has become larger and more complex, so the financial manager is involved, with the total amount of capital employed by the firm, allocation of funds to different projects and with the evaluation and measurement of the result of each allocation.
1. Determining Financial Needs:
Financial needs may be different from firm to firm, depending on the nature and size of business units. Finance is required for preliminary expenses, working capital requirements, purchase of long term assets, expansion, merger, dividend payment, etc. So to ensure the availability of sufficient funds, as and when needed by the enterprise, is one of the most important duties of the financial manager.
2. Determining the Sources of Funds:
A firm can raise funds by the issue of shares, debentures, bonds, etc. Or it can take loans and financial assistance from financial institutions or from lenders of credit. Preference shares are entitled to dividend at a fixed rate. Similarly debentures are also entitled to a fixed interest. However, equity shares are entitled to a variable dividend, based on the profits earned by the company. Loans from financial institutions or suppliers of credit, are with certain terms and conditions, regarding interest and repayment.
Moreover, a growing firm may find it difficult to raise funds, compared to an established firm. So the financial manager has to determine the sources of funds, from the available alternatives, taking into account the terms and conditions attached to it.
3. Financial Analysis:
The financial statements, summaries the performance of the business firm for one year. But it has to be analysed, interpreted, compared, with the performance of similar firms, in the same line of business activity, or with the industry wise average, to get a clear picture and to take corrective action wherever needed. Ratio analysis, Cash flow and Fund flow statements, Common size statements, Comparative balance sheet, etc., are the financial tools used for analysis and interpretation of financial statements.
4. Optimum Capital Structure:
Capital Structure is framed with the ultimate aim of maximising the wealth of the shareholders. A firm’s capital consists of equity shares, preference shares, and debentures. Equity shareholders are the owners of residue, because. They have no right to claim dividend and repayment of capital. But they will get voting rights in all matters affecting the company’s interest and they are entitled to variable dividend, on the basis of profits earned by the company.
The preference shareholders are entitled to fixed dividend and repayment of capital. But they have voting rights only for matters affecting their interest. Debenture holders are treated as debtors, with a claim for fixed interest, repayment of capital and with no voting rights. Therefore when the financial manager will frame the capital structure, he has to select the appropriate mix, considering the controlling rights and dividend or interest commitments.
Moreover the capital structure should be capable of adjusting, according to the changing circumstances. So framing an optimum capital structure is another important function of the financial manager.
5. Profit Planning and Control:
Profit is the yardstick for measuring the success of the company. It is the surplus over the expenses of the firm. Thus the financial manager must try to control the expenses and thereby increase the profit. Thus profit planning and control is also an important function of the financial manager.
6. Capital Budgeting:
Investments in long term assets are known as capital budgeting decisions. These decisions are crucial for the firm, because huge investments are made, in anticipation of future returns, spread over a number of years. Moreover, these decisions are irreversible and it can be revoked only at a loss.
Therefore, the financial manager should rank the proposals, on the basis of urgency, liquidity, profitability and risk. Various methods of evaluation, namely Pay Back method, Accounting Rate of Return, Net Present Value, Internal Rate of Return, etc., are used to decide the investment decision.
7. Working Capital Management:
The term working capital, refers to capital required for day to day operations of a business enterprise, particularly to complete the operating cycles. Cash, bills receivable, stock and debtors are the main components of working capital. Allowing credit to a customer may increase sales, but at the same time, the debtors or bills receivables will also increase. So the financial manager should analyse properly, the cost and risk attached to each transaction in the working capital management.
8. Dividend Policies:
The available profits can be either retained by the firm, or it can be distributed to the shareholders. In India, it is compulsory that dividend must be paid in cash. Moreover once declared, it has to be paid within 42 days. So dividend payment definitely affects the cash
position of the firm. Another option is to go for bonus shares, but it will increase the authorised capital, with dilution of more controlling power to outsiders.
Retained Profits can be utilised for the working capital requirements, or long term investments of the firm. Dividend paid, or bonus issue by the company has a significant impact on the market values of the shares. Therefore the financial manager has to decide about the dividend policy, based on the above mentioned aspects.
9. Corporate Taxation:
Like dividend payment, corporate tax payable on the profits earned by the company, affects the cash position of the firm. But the Income Tax Act allows tax planning, with various allowances, deductions, concessions, etc., to reduce the tax payments. So the financial manager has to apply his skills in this area, to take an appropriate decision.
10. Acquisitions and Mergers:
The liberalization move initiated by the government, paved the way for acquisitions, mergers, technology transfers, equity participation, etc., with the Indian firms and the multinationals. But before deciding about an important decision like this, which has long term consequences, the financial manager has to evaluate the efficiency of the managers, firm, departments, etc., to find out whether it will be worthwhile or not.
Moreover, the purchase consideration, method of payment, etc., has to be calculated. Thus the financial manager has to use his skill, knowledge, and the available financial tools to take an appropriate decision.
11. Fixed Assets Management:
Fixed assets are for long term use. The special features of these decisions are, they are irreversible, involved huge investments, the returns spread over a number of years, etc.
Moreover, these assets are to be maintained over a number of years. So they are exposed to changes in value, maintenance required, calculating the working life, whether to use for single shift or double shift, method of charging depreciation, repairs, renewals, etc. are also important for the firm. Therefore, the financial manager has to safeguard the interests of the firm involved in the fixed assets management.
12. Cost Volume Profit Analysis or CVP Analysis:
Controlling the fixed, variable, semi variable expenses and the volume of production to regulate profit, is also an important function of the financial manager. For this, various expenses and the volume of production needs to be analysed to take necessary action whenever required.
Fixed expenses are more or less constant for varying sales volumes, (For example- rent, salary to staff etc.), but variable expenses vary according to sales volume. (For example- material or labour cost related to production) and for semi variable expenses, one portion will be fixed and the rest will vary according to production, usage, etc. (For example- the telephone bill is divided into two, rent for every month is a fixed sum and the total bill will vary according to the number of calls made).
So the financial manager must try to control the fixed, variable and the semi variable expenses according to the production, in order to increase the profits.
13. Project Planning and Evaluation:
The firm also invests funds for different projects. It may be for modernisation, for new products or markets, new marketing techniques, new advertising campaign, project for environment protection, social welfare scheme for employees, etc. The financial manager has to minimise the error of judgement in project planning and evaluation. He has to consider the feasibility of the project, investment required, cost of capital, rate of return, choice of technology, etc., before approving the project.
These are the functional areas of financial management or decisions in financial management.
Estimating the capital requirements for the firm and how to raise the funds, are two major areas of financial decision making. Moreover, it is also important that the required funds be raised at a reasonable cost and at the proper time. Thus, it is necessary for the firm to have proper financial planning.
But in order to formulate appropriate plans, the financial manager must know his company’s actual position, because the financial plans must be suitable for the firm. Moreover, it is a continues, process and corrective action has to be taken whenever required, on the basis of the experience gained.
Financial planning is essentially concerned with the economical procurement and profitable use of funds. It helps in avoiding wastage, by providing policies and procedures whenever needed. At the same time, it provides for a closer co-ordination between different functions and departments of the firm, for its smooth operation. Financial planning helps the company to prepare for the future.
A firm cannot depend upon past experience, for the establishment of its objectives, policies and procedures, because past experience cannot be relied upon, in dealing with ever changing future conditions.
Future trends need to be predicted for effective planning. This helps the firm take maximum advantage of future changes and at the same time, unprofitable projects can be eliminated. Moreover, with a clearly developed financial plan for the firm, the top management is relieved from the pains of giving time to time instructions.
Otherwise, the lower level employees may develop their own policies and procedures, which may result in loss of time, goodwill, confusion and wastage of financial resources. It is thus essential that each financial plan should be carefully planned. Therefore the objectives of the firm should be made clear to the financial manager, so that he can formulate the best plan for his firm.
Functions of a Financial Manager- 2 Categories of Functions: Executive Functions and Routine Functions
At present the important functions of Financial Manager may be put into two categories:
(A) Executive functions, and
(B) Routine functions.
A. Executive Functions:
Finance function, according to modern approach to Financial Management, includes three types of decisions— Investment, Financing and Dividend. Making reasonable forecast of financial requirements and arranging the sources for the supply of funds, making effective and maximum use of funds provided by the investors, increasing the value of ‘equity’ of owners of the business.
The objectives of financial management for which the following functions are carried out:
1. Financial Forecasting:
Financial forecasting is the primary function of financial management because it is the foundation stone of financial planning. In the case of new enterprises such forecasts are initially made by the promoters. However, in the case of going concern financial requirements in respect of every project are being forecast by financial executives only. Such financial forecasting needs the applications of various statistical, mathematical and accounting techniques.
2. Financial Planning:
After making financial forecast, financial planning is done under which three distinct sub-activities –
(i) Formulation of financial objectives,
(ii) Framing the financial policies, and
(iii) Developing financial procedures are being performed.
Both short-term and long-term plans are prepared with respect to each of the above sub-activities.
3. Financing Decisions:
Financing decisions, basically a finance function also happens to be important function of Financial Manager or Financial Management. This function involves the determination of financial sources, comparative study of their cost of capital, examining the impact on shareholders’ equity, etc.
4. Financial Negotiations:
It is also the function of financial management to contact all the possible suppliers of funds (i.e., sources from which capital is to be raised) and to finalise the contract through negotiations/talks or other methods. In this process a number of statutory provisions, rules and assumptions are to be executed in action. A number of financial institutions, bankers, underwriters, etc., are to be consulted for reaching an agreement.
5. Investment Decisions:
Decisions regarding investing the available funds in several assets are also treated as functions of financial management. It is the function of financial management to determine the volume of investments in fixed assets (long-term investments) and volume of investments in current assets (short-term investments).
Financial manager has to take appropriate and proper decision in this regard. At the same time, providing depreciation on fixed assets, arranging for their replacements and determining the optimum level of investments in current assets are also the functions of financial managements.
6. Management of Income:
This function is also an important function of Financial Management. Management of income comprises correct measurement of income, distribution of income in correct proportion and following the appropriate dividend policy.
7. Management of Cash Flows:
Proper flow of cash in a business is an essential condition for the survival of any business. Thus, it is the function of financial management to frame and adopt a fair policy regarding the cash flows (both inflows and outflows) and to manage properly the situation of cash surpluses/deficiencies.
8. Appraisal of Financial Performance:
It is equally the function of financial management to analyse and evaluate the financial performance of the business concern after a definite interval and to communicate the results to op management. A number of tools and techniques may be used for such analysis and appraisal.
9. To Make Efforts for Increasing the Productivity of the Capital:
Financial manager has to make all possible efforts to enhance the productivity of the capital by discovering the new opportunities of investments.
10. To Advise the Top Management:
Whenever the top management faces any financial problem, financial management has to advise for best solution. Financial Management can also advise in respect of proper diagnosis of the problem, alternative solutions to the problems and selection of the best solutions.
B. Routine Functions:
This class of financial management’s function consists of those daily activities which are being performed by lower-level employees. Such activities/functions have a distinct and separate importance, because top authorities take financial decisions with the help of such functions.
Normally, the following functions are included in this category:
(i) Record keeping,
(ii) Preparation of various financial statements,
(iii) Arranging the cash balance as per requirement,
(iv) Managing the credit, and
(v) Safety of significant financial documents.
Functions of a Financial Manager – 18 Common Functions
Finance manager is a person who heads the department of finance. He forms important activities in connection with each of the general functions of management. He groups activities in such a way that areas of responsibility and accountability are clearly defined. His focus is on profitability of the firm. The profit centre is a technique by which activities are decentralised for the development of strategic control point.
The determination of the nature and extent of staffing is aided by financial budget programme. Planning involves heavy reliance on financial tools and analysis. Control requires the use of the techniques of financial ratios and standards. Briefly, an informed and enlightened use of financial information is necessary for the purpose of coordinating the activities of an enterprise.
Every business, irrespective of its size, should, therefore, have a financial manager who has to take key decisions on the allocation and use of money by various departments. Specifically, the finance manager should anticipate financial needs; acquire financial resources and allocate funds to various departments of the business.
If the financial manager handles each of these tasks well, his firm is on the road to good financial health. Since the financial manager is an integral part of the top management, he should shape his decisions and recommendations to contribute to the overall progress of the business. It is his primary objective, to maximise the value of the firm to its stockholders.
Functions of Finance Manager:
The following are some of the important functions of the financial manager:
1. He should anticipate and estimate the total financial requirements of the firm (Preparing sound financial plan).
2. He has to select the right sources of funds at right time and at right cost. (Balancing the own capital (EQUITY) and borrowed capital (DEBT) for the best advantage of the firm).
3. He has to allocate the available funds in the profitable avenues. (Judicious Fund Allocation).
4. He has, to maintain liquidity position of the firm at the peak. (Synchronising the finance inflow and outflow for better liquidity).
5. He should analyse financial performance and plan for its growth. (Continuous financial appraisal activity).
6. He has to administrate the activities of working capital management.
7. He has to protect the interest of creditors, shareholders and the employees.
8. He has to concentrate more on fulfilling the social obligation of a business unit.
Function # 1. Estimation of the Financial Requirements:
The requirement of finance to a business concern in continuous. It is needed in all the stages of business cycle namely, initial growth, saturation and declining stage. Funds are needed to establish the industry both for meeting capital expenditure and revenue expenditure. Total estimation of funds for these assets are the first assignment of the subject financial management.
Funds are also needed at the growth stage for expansion and to increase the production to meet the demand of consumers. The requirement of finance arises even at the stage of saturation. It is needed for diversifying the product, so that, a firm can continuously stay on in the saturation stage. If the firm becomes sick, to rejuvenate the activities of such business concern rescheduling, repackage of financial services are needed. Hence, it is the first task of finance manager.
Function # 2. Selection of the Right Sources of Funds:
After estimating the total funds of business concern, it is the second important step of the finance manager to select the right type of sources of funds at the right time at right cost. Each financial instrument is associated with different types of costs.
Equity has the cost of dividend or expectation of the shareholders, debenture or borrowings has the cost of interest, preference share has the cost of dividend. Careful selection has to be made out of the available alternative sources of funds.
Function # 3. Allocation of Funds:
After mobilising the total funds of a firm, it is the responsibility of finance manager to distribute the funds to capital expenditure and revenue expenditure. The evaluation of different proposals of project must be made before making a final decision on investment. Each investment must yield fair amount of returns, so that it should contribute to the goal of ‘Wealth Maximisation’.
Function # 4. Analysis and Interpretation of Financial Performance:
It is another important task of finance manager. He is expected to watch the performance of each portfolio that can be measured in terms of profitability and returns on the investments. Ratio analysis and comparison of actual with standard helps the finance manager to have maximum control over the entire operations of the business unit.
Function # 5. Analysis of Cost-Volume-Profit:
It is another important tool of the financial management that helps the management to evaluate different proposals of investments. Make or Buy decision, Deletion and Continuation of a product line decision can be made by adopting CVP/BEP analysis. This helps the management to achieve long term objective of a firm.
Function # 6. Capital Budgeting:
It is a technique through which a finance manager evaluates the investment proposals. In how many years the original investment can be recovered? What percentage of returns a business should run? Are the issues that are handled by him? Payback period, ARR, IRR, NPV are some of the modern techniques, very popular in capital budgeting. These techniques are adopted by finance manager according to the need and situation to attain financial objectives of the enterprise.
Function # 7. Working Capital Management:
Working capital is rightly an adjunct of fixed capital investment. It is a financial lubricant which keeps business operations going. It is the lifeblood of a firm. Cash account receivables (Drs) and inventory are the components of working capital. They rotate in a sequence (cash to stock to sale to cash or account receivable). Cash is the central reservoir of a firm and ensures liquidity. Accounts receivables and inventory form the principal utility of production and sales; they also represent liquid funds in the ultimate analysis.
The finance manager should weigh the advantage of customer trade credit, such as increase in volume of sales, against limitations of costs and risks involved therein. He should match the inventory level to sales and reduces the stay of inventory during the production. This helps the management to meet the demand of the market on time. Timely supply of goods ensures good name and reputation to the firm. Even a small lapse on the part of maintaining working capital results in “liquidity” crunch and failure of business.
Function # 8. Profit Planning and Control:
Profit planning and control is yet another important function of financial management. Profit planning guides the management in attaining the corporate goals. Profit is surplus of income over the expenditure.
It may be earned through sales, or through operating revenue or by reducing the cost of operations. Cost reduction technique adopted by a firm directly contributes the size of the profit. It is the only measure through which company prosperity is known to the investors, assures an increasing percentage of dividends -and renew the confidence of the investors in future activities. Now the competition in business is severe. Hence the profit through increased sales and reducing the costs are the basic objective of the corporation. Break – even analysis and CVP analysis are the important tools of financial management, adopted to measure the level of profit earned by the company.
Function # 9. Fair Returns to the Investors:
Returns are the divisible profits available to the investors. Equity holders normally expect fair amount of profit and capital appreciation for their investment. Unless and until this is fulfilled by a company, the confidence of the investors will be at stake. It is also a social and economic obligation on the part of the company to protect the interest of the investors.
This encourages the public to increase their savings to invest the same on securities. In the long run it helps the nation to build strong capital formation and increases industrial activities. It also contributes to the growing activities. Hence a business firm must assure regular income to the shareholders.
Function # 10. Maintaining Liquidity and Wealth Maximisation:
This is considered to be the prime objective of a business firm. Liquidity of a firm increases the borrowing capacity. Expansion and diversification activities can be comfortably executed. Increased liquidity builds the firm’s ability to meet short-term obligations, towards creditors or bankers.
Once the flow of funds is assured continuously, flexibility in the planning for investments can be introduced, in turn the overall profitability of the firm can be maximised. This helps the firm to meet all types of obligation to the target group like investors, creditors, employees, management, government and society. Thus “Wealth Maximisation” takes place in the form of growth of capital over the years.