Functions of Financial Management

By | April 6, 2018

Functions of financial management can be divided into eight areas. A business manager has to concentrate on the following areas of the finance function:

1. Estimating Financial Requirements: The first task of any financial manager is to determine short-term and long-term financial requirement of his/her business. For this purpose, the financial manager will prepare a financial plan for the present as well as future. The amount required for purchasing fixed assets as well as the needs of funds for the working capital has to be adequately estimated. The estimation of the amount needed should be based on the 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 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 on the quantum of funds required it should be determined which type of security should be built. Financing fixed securities through long-term debts may be wise. Long-term funds should be employed to finance working capital also. The decision about various sources of funds should be linked to cost of raising funds. If the cost of raising 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, commercial 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 deciding on capital expenditures. While spending on various assets, the principles of safety, profitability, and liquidity should not be ignored.

5. Proper Cash Management: Cash management is an essential task of a 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, the Short-term arrangement with the banks. The cash management should be such that neither there is a shortage of it nor it is idle. Any lack of cash will damage the creditworthiness of the enterprise. The idle money with the business means that it is not used correctly. Through Cash Flow Statement one can find out various sources and applications of cash.

6. Implementing Financial Controls: An efficient system of financial management necessitates the use of multiple control devices. The financial control device used are;

  1. Return Investment
  2. Ratio analysis
  3. Break-even analysis
  4. Cost control
  5. Cost and internal audit.

7. The use of various control techniques: This will help the financial manager in evaluating the performance in multiple 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. Judicious use of surpluses is essential for the expansion and diversification plans and also protecting the interest of the shareholders.
The plowing 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.