Financial Management Function
Functions of Financial Management
A Manager has to concentrate on the following areas of the finance function.
1. Estimating Financial Requirements: The first task of the financial manager is to
estimate short term and long-term financial requirement of his business. For this purpose,
he will prepare a financial plan for present as well as future. The amount required for
purchasing fixed assets as well as the needs of funds for working capital has to be
Financial management
Financing decision Investment Decision Dividend Decision
Risk and Return Relationship
To achieve the goal of Profit Maximization ascertained. The estimation should be based on the sound financial principles so that neither there are inadequate or excess funds with the concern. The inadequacy will affect the working of the concern and excess funds may tempt a management to indulge in extravagant spending.
2. Deciding Capital Structure: The capital structure refers to the kind and proportion of
the different securities for raising funds. After deciding about the quantum of funds
required it should be decided which type of security should be raised. It may be wise to
finance fixed securities through long term debts. Long-term funds should be employed to
finance working capital also. Decision about various sources of funds should be linked to
cost of raising funds. If cost of rising funds is high, then such sources may not be useful.
A decision about the kind of the securities to be employed and the proportion in which
these should be used is an important decision which influences the short term and the
long term planning of the enterprise.
3. Selecting a Source of Finance: After preparing a capital structure, an appropriate source
of finance is selected. Various sources from which finance may be raised, includes share
capital, debentures, financial deposits etc. If finance is needed for short periods then
banks, public’s deposits, financial institutions may be appropriate. If long-term finance is
required the share capital, debentures may be useful.
4. Selecting a Pattern of Investment: When fund have been procured then a decision about
investment pattern is to be taken. The selection of investment pattern is related to the use
of the funds. A decision has to be taken as to which assets are to be purchased? The fund
will have to be spent first. Fixed asset and the appropriate portion will be retained for the
working capital. The decision making techniques such as capital Budgeting, opportunity
cost analysis may be applied in making decision about capital expenditures. While
spending in various assets, the principles of safety, profitability, and liquidity should not
be ignored.
5. Proper Cash Management: Cash management is an important task of financial
manager. He has to assess the various cash needs at different times and then make
arrangements for arranging cash. Cash may be required to make payments to creditors,
purchasing raw material, meet wage bills, and meet day to day expenses. The sources of
cash may be Cash sales, Collection of debts, Short-term arrangement with the banks. The
cash management should be such that neither there is shortage of it and nor it is idle. Any
shortage of cash will damage the creditworthiness of the enterprise. The idle cash with
the business mean that it is nit properly used. Through Cash Flow Statement one is able
to find out various sources and applications of cash.
6. Implementing Financial Controls: An efficient system of financial management
necessitates the use of various control devices. Financial control device generally used
are;
a. Return Investment
b. Ratio analysis
8
c. Break even analysis
d. Cost control
e. Cost and internal audit.
7. The use of various control techniques: This will help the financial manager in
evaluating the performance in various Areas and take corrective measures whenever
needed.
8. Proper use of Surpluses: The utilization of profits or surpluses as also an important
factor in financial management. A judicious use of surpluses is essential for the
expansion and diversification plans and also protecting the interest of the shareholders.
The ploughing back of profit is the best policy of further financing. A balance should be
struck in using the funds for paying dividends and retaining earnings for financing
expansion plans.
A Manager has to concentrate on the following areas of the finance function.
1. Estimating Financial Requirements: The first task of the financial manager is to
estimate short term and long-term financial requirement of his business. For this purpose,
he will prepare a financial plan for present as well as future. The amount required for
purchasing fixed assets as well as the needs of funds for working capital has to be
Financial management
Financing decision Investment Decision Dividend Decision
Risk and Return Relationship
To achieve the goal of Profit Maximization ascertained. The estimation should be based on the sound financial principles so that neither there are inadequate or excess funds with the concern. The inadequacy will affect the working of the concern and excess funds may tempt a management to indulge in extravagant spending.
2. Deciding Capital Structure: The capital structure refers to the kind and proportion of
the different securities for raising funds. After deciding about the quantum of funds
required it should be decided which type of security should be raised. It may be wise to
finance fixed securities through long term debts. Long-term funds should be employed to
finance working capital also. Decision about various sources of funds should be linked to
cost of raising funds. If cost of rising funds is high, then such sources may not be useful.
A decision about the kind of the securities to be employed and the proportion in which
these should be used is an important decision which influences the short term and the
long term planning of the enterprise.
3. Selecting a Source of Finance: After preparing a capital structure, an appropriate source
of finance is selected. Various sources from which finance may be raised, includes share
capital, debentures, financial deposits etc. If finance is needed for short periods then
banks, public’s deposits, financial institutions may be appropriate. If long-term finance is
required the share capital, debentures may be useful.
4. Selecting a Pattern of Investment: When fund have been procured then a decision about
investment pattern is to be taken. The selection of investment pattern is related to the use
of the funds. A decision has to be taken as to which assets are to be purchased? The fund
will have to be spent first. Fixed asset and the appropriate portion will be retained for the
working capital. The decision making techniques such as capital Budgeting, opportunity
cost analysis may be applied in making decision about capital expenditures. While
spending in various assets, the principles of safety, profitability, and liquidity should not
be ignored.
5. Proper Cash Management: Cash management is an important task of financial
manager. He has to assess the various cash needs at different times and then make
arrangements for arranging cash. Cash may be required to make payments to creditors,
purchasing raw material, meet wage bills, and meet day to day expenses. The sources of
cash may be Cash sales, Collection of debts, Short-term arrangement with the banks. The
cash management should be such that neither there is shortage of it and nor it is idle. Any
shortage of cash will damage the creditworthiness of the enterprise. The idle cash with
the business mean that it is nit properly used. Through Cash Flow Statement one is able
to find out various sources and applications of cash.
6. Implementing Financial Controls: An efficient system of financial management
necessitates the use of various control devices. Financial control device generally used
are;
a. Return Investment
b. Ratio analysis
8
c. Break even analysis
d. Cost control
e. Cost and internal audit.
7. The use of various control techniques: This will help the financial manager in
evaluating the performance in various Areas and take corrective measures whenever
needed.
8. Proper use of Surpluses: The utilization of profits or surpluses as also an important
factor in financial management. A judicious use of surpluses is essential for the
expansion and diversification plans and also protecting the interest of the shareholders.
The ploughing back of profit is the best policy of further financing. A balance should be
struck in using the funds for paying dividends and retaining earnings for financing
expansion plans.
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