Functions of Financial Management and Role

Functions of Financial Management and Role of Financial Management

1. DR KUMAR J ASSOCIATE PROFESSOR DEPARTMENT OF COMMERCE FACULTY OF SCIENCE AND HUMANITIES SRM IST RAMAPURAM CAMPUS FINANCIAL MANAGEMENT FUNCTION OF FINANCIAL MANAGEMENT AND ROLE OF FINANCE MANAGER

2. Functions of Financial Management 1.Estimating Financial needs An important function of the finance manage is to provide adequate and timely fiancé. Finance maybe needed for different purposes. A form may need money for purchase of fixed assets or investment on current assets. Therefore it is necessary to estimate the fixed as well as working capital requirements in advance. 2. Indenfification of Sources of Funds In order to meet varied financial needs, financial management has to identify the various sources of finance. The sources of long term as will as short term finance , their cost and other terms have to be ascertained. Many sources are available for raising fund. Equity shares, preference shares, institutional loans, debentures are the popular sources of long term funds. The company may also use retained earnings for financings its needs . Cash credit and bank overdraft are important sources of short term funds .

3. . Developing an optimum capital structure Capital structure decision is very important. It involves deciding the proportion of debt and equity as the sources of finance. Use of debt helps to increase the earnings of shareholder. But excessive debt increases the risk and reduces the market value of shares. Therefore the function of financial management is to design and develop an optimum capital structure which maximizes the value of the firm or minimizes the cost of capital. 4.Capital Budgeting Capital expenditure decision relates to effective utilization of capital. They commit funds in long term -asset and influence the firm’s wealth, determine its size and affect its risks. Hence there decisions are crucial. Capital budgeting is a process by which investment proposals are evaluated. It helps to assess the profitability of projects or investment.

4. 5.Working Capital Management Working capital refers to the funds required for financing the day-to-day operations. The firm should have sufficient liquidity to meet its current obligation. The function of financial management is to endure adequacy of working capital. Working capita management includes cash management, receivables management, and inventory management. 6. Dividend Policy An important function of financial management is to formulate the dividend policy of the company. Shareholders may prefer high dividends . But retention of profits strengthens the internal generation of funds. For firms with profitable opportunities, retention is ideal. On the other hand , for declining firms, distribution of profits as dividends is desirable. The finance manager has to decide the proportion of earnings to eb paid out as dividends taking these factors into consideration.

5. 7.Mergers and Acquisitions (M&A) Acquisition refers to the purchase of a business. Mergers is a process by which one company is merged into the other, Mergers and Acquisitions are rare or episodic events in the life of a company. But, they are of great importance from the point of view of financial management. These events involve commitment of huge funds for long periods and influence the prospects and profitability significantly. 8.Financial Analysis Analysis of financial performance isa an integral part of financial management. It helps in the assessment of strength and weaknesses of the of the company in respect of liquidity, solvency, profitability, operating efficiency etc. It is also useful in analysing the capital structure , its effect on earnings of shareholders, and the dividend behaviour of a company. Financial analysis is very useful in financial planning and control

6. 9. Cost Volume Profit Analysis Cost, volume and profit are closely related. In fact, profit depends on the efficient management of costs which in turn, depend on the volume of output. Analysis of the relationship is known as Cost, volume and profit analysis. It divides the cost into fixed and variable. The Cost, volume and profit is a very significant function of financial management. It is quite useful in financial decision making. 10. Financial control Financial control is the control function of financial management. It objects is to measure that the performance is according plans. Financial control involves application of control devices such as return on investment, budgetary control and Break Even analysis, ratio analysis etc.

7. Role of a Financial Manager in Financial Management Financial activities of a firm is one of the most important and complex activities of a firm. Therefore in order to take care of these activities a financial manager performs all the requisite financial activities. A financial manger is a person who takes care of all the important financial functions of an organization. The person in charge should maintain a far sightedness in order to ensure that the funds are utilized in the most efficient manner. His actions directly affect the Profitability, growth and goodwill of the firm. 1.Forecasting Financial Requirements The first function of finance manager is to forecast the required funds in the firm. Certain funds are required for long purposes. i,e investment in fixed assets etc. A careful estimate of such funds, and of the exact timing, when such funds are required must be made. Also an assessment has to be made regarding requirements of working capital which involves estimating the amount of funds blocked in various current assets and the amount of funds likely to be generated for short period through current liabilities.

8. 2.Financing Decision Once the requirement of funds has been estimated, the finance manager has to take decision regarding various sources from where these funds would he raised. A proper mix of various sources has to he worked out. Each source of funds involves different issues for consideration. In this context, the finance manager has to carefully look into the existing capital structure and see how the various proposals of raising funds will affect it. He has to maintain a proper balance' between long term funds and short term funds. He has to ensure that he raises sufficient long term funds in order to finance fixed assets and other long term investments and to provide for the permanent needs of working capital. 3.Raising of Funds In order to meet the obligation of the business it is important to have enough cash and liquidity. A firm can raise funds by the way of equity and debt. It is the responsibility of a financial manager to decide the ratio between debt and equity. It is important to maintain a good balance between equity and debt.

9. 4.Allocation of Funds Once the funds are raised through different channels the next important function is to allocate the funds. The funds should be allocated in such a manner that they are optimally used. In order to allocate funds in the best possible manner the following point must be considered The size of the firm and its growth capability Status of assets whether they are long-term or short-term Mode by which the funds are raised These financial decisions directly and indirectly influence other managerial activities. Hence formation of a good asset mix and proper allocation of funds is one of the most important activity

10. 5.Investment Decision After having procured the funds from different sources, the finance manager has to take investment decisions. Investment decisions relate to selection of assets in which funds are to he invested by the firm. Investment alternatives art numerous. Resources are scarce and limited, They have to rationed . and discretely used. Investment decisions• allocate and ration the resources among the competing investment alternatives or opportunities. The effort is to find out the projects, which are acceptable. The investment decisions result in purchase of assets. Assets can be classified under two broad categories: Long term investment decisions — Long term assets. Short term investment decisions Short term assets

11. 6.Profit Planning Profit earning is one of the prime functions of any business organization. Profit earning is important for survival and sustenance of any organization. Profit planning refers to proper usage of the profit generated by the firm. Profit arises due to many factors such as pricing, industry competition, state of the economy, mechanism of demand and supply, cost and output. A healthy mix of variable and fixed factors of production can lead to an increase in the profitability of the firm. Fixed costs are incurred by the use of fixed factors of production such as land and machinery. In order to maintain a tandem it is important to continuously value the depreciation cost of fixed cost of production. An opportunity cost must be calculated in order to replace those factors of production which has gone thrown wear and tear. If this is not noted then these fixed cost can cause huge fluctuations in profit.

12. 7.Understanding Capital Markets Shares of a company are traded on stock exchange and there is a continuous sale and purchase of securities. Hence a clear understanding of capital market is an important function of a financial manager. When securities are traded on stock market there involves a huge amount of risk involved. Therefore a financial manger understands and calculates the risk involved in this trading of shares and debentures. Its on the discretion of a financial manager as to how to distribute the profits. Many investors do not like the firm to distribute the profits amongst share holders as dividend instead invest in the business itself to enhance growth. The practices of a financial manager directly impact the operation in capital market.

13. 8.Evaluating financial performance Management control systems are often based upon financial analysis. One prominent example is the ROI (Return on Investment) system of divisional control. The finance manager has to constantly review the financial performance of the various units of the organization. The ROI chart is extremely useful in this regard. Analysis of the financial performance helps the management for assessing how the funds have been utilized in various divisions and what can he done to in improve it.

14. 9.Financial negotiation A major portion of the time of the Finance manager is utilized in carrying negotiations with the financial institutions, banks and public depositors. has to furnish a lot of information to these institutions and persons and have to ensure that raising of funds is within the statutes like Companies Act etc. Negotiations for outside financing often require specialized skills   10.Deciding overall objectives The finance manager needs to be guided by mane objectives. As a head or finance department,. The finance manager, therefore has to determine the overall goals of -finance department. The goals help in of planning and decision making .

15. Financial Planning Financial planning indicates a firms growth, performance , investments and requirements of funds during a given period of time, usually three to five years. It involves the preparation of projected or proforma profit and loss account , balance sheet and funds flow statements. A financial plan should be formulated in the light of present as well as future developments. The requirements for purchasing fixed assets and working capital needs should first be estimated. The needs for funds in the future for financing expansion and diversification should also be taken into consideration. A decision about the type of securities to be issued is also an important aspect of financial planning.

16. A financial plan is a statement estimating the amount of capital and determining its composition. The quantum of funds needed will depend upon the asset’s requirements of the business. The time at which funds will be needed should he carefully decided so that finances arc raised at a time when these are needed. The next aspect of a financial plan is to determine the pattern of financing. There are a number of ways for raising funds. The selection of various securities should be done carefully

17. Objectives of Financial Planning A financial plan has the following main objectives: Adequate Funds. A financial plan would ensure the availability of sufficient funds to achieve enterprise goals. 2.Balancing of Costs and Risks . There should be a balancing of costs and risks so as to protect the investors. 3.Flexibility . A financial plan should ensure flexibility so as to adjust as per the requirements. It should be adjustable as per the changing conditions.

18. 4 . Simplicity . The financial structure should not be complicated by issuing a variety of securities. The number of securities should he less so that it is easily understood. 5.Long—term View . A financial plan should take a long—term view. The needs for funds in the near future and over a longer period should he considered while selecting the pattern of financing. 6.Liquidity .The liquidity of funds should always he kept in mind while preparing a financial plan. During periods of depression, it is the liquidity which can keep a concern going.

19. 7.Optimum use . A financial plan should ensure sufficient funds for genuine needs. Neither the plans should suffer due to shortage of funds nor there should be wasteful use of them. The funds should he put to their optimum use. 8.Economy . The cost of raising the funds should be minimum. It should not impose disproportionate burden on the company. It can been ensured by a proper debt—equity mix .