What are the main functions of financial management or, manager?

What are the main functions of financial management or, manager?

A Financial manager organizes and manages an organization’s or an individual’s financial portfolio. They also make financial reports, supervise investments and help with cash management. So, a financial manager is a person or persons that manage the monetary affairs of an individual or related individuals or indeed an entity or business to maximize monetary success or turn around poor financial situations.

Functions of financial management or manager

Until around the first half of the 1900s, financial managers primarily raised funds and managed their firm’s cash positions and that was pretty much it. In the 1950s, the increasing acceptance of present value concepts encouraged financial managers to expand their responsibilities and to become concerned with the concepts encouraged financial managers to expand their responsibilities and to do become concerned with the selection of capital investment projects. In the modern day, the financial management plays a dynamic role in the development of company. The functions of financial managers are as follows:

  1. Performing financial analysis and planning: The concern of financial analysis and planning is whit
    • Transforming financial data into a form that can be used to monitor financial condition.
    • Evaluation the need for increased (reduced) productive capacity and (iii) determining the additional evaluating the need for increased (reduced) productive capacity and
    • Determining the additional/reduced financing required. Although this activity relies heavily on accrual-base financial statements, its underlying objective is to assess cash flows and develop plans to ensure adequate cash flows to support achievement of the firm’s goals.
  2. Identification of sources: After financial planning, the main function of financial managers is to identify the possible sources of fund. In this case, the financial manager has to consider various sources like owner’s capital, retained earnings, loan from banks, friends and other financial institutions etc. He must identify those source from which funds can be raised with simple terms and conditions, and minimum cost.
  3. Raising of funds: After identification of sources of funds, that function of financial manager is to raise necessary funds by analyzing the terms and conditions of various sources. In this case, the financial manager must consider the cost of fund and the benefit expected form investment of the fund. The financial manager must identify the amount of funds available form each source and the periods when they will be needed. Then the manager should take steps to confirm that the funds will actually be handy and committed to the firm.
  4. Investment of fund: The finance manager has to decide to allocate funds into profitable ventures. So that they are safety on investment and regular returns is possible.
  5. Distribution of profit: The net profits decision has to be made by the financial manager. This can be done in two ways.
    a. Dividend declaration: It cover identifying the rate of dividends and other benefits similar bonus.
    b. Retained profit: The volume has to be decided which will depend upon expantsional, innovational, diversification plans of the company.
  6. Protection of Capital: Because of uncertain future, investment decisions involve risk. An investor will expect higher return form an investment if risk is high. For a less high-risk investment, the forecast return will be lower. Such risk should not be taken which reduced capital. To protect capital, the financial manager has to trade off risk and return.
  7. Managing fund: In the management of funds, the financial manager acts as a specialized staff officer to the president of the company. The manager is liable for having enough funds for the firm to dealing its business and to pay its bills. The management of funds has both fluidity and profitability future. If the firm’s funds are inadequate, the firm may default on the payment of bills, interest on its debt, or repayment of the principal when a loan is due. If the firm doesn’t carefully choose its financing methods, it may excessive interest cost with a subsequent decline in profits.
  8. Financial controls: The financial manager has not to plan, procure and utilize the funds but he also has to exercise control over finances. This can be done through many technics like ratio analysis, financial forecasting, price and profit control, etc.
  9. Forecasting cash flows: Successful day-to-day operations require the firm to be able to pay its bills promptly. This is hugely a matter of match cash inflows vs outflows. The firms must be able to forecast the sources and timing of inflows form customers and use them to pay creditors and suppliers.
  10. Forecasting profits: The financial manager is usually responsible for gathering and analyzing the relevant data making forecasts of profit levels. To estimate profits form future sales, the firm must be aware of current costs, likely increases in costs. And likely changes in the ability of the firm to sell its products at established or planned selling prices. In the same way, before funds are committed to new projects, the expected profits must be determined and evaluated.
  11. Managing assets: Assets are the resources by which the firms is able to conduct business. A firm’s assets must be carefully managed and a number of decisions must be made concerning their use. The role of asset management deposes to the decision making the role of the financial manager. The decision making role cross liquidity and profitability lines. Converting idle equipment to cash improves liquidity. Reducing costs improves profitability.
  12. Pricing: Some of the most important decisions made by a firm involve the prices established for products, product line, and services. The philosophy and approach to pricing policy are critical elements in the company’s marketing effort, image, and sales level. The financial manager can supply important information about costs, changes in costs at varying level of production. And the profit margins needed to carry on the business successfully. In effect, finance provides tools to analyze profit requirements in pricing decisions and contributes to the formulation of pricing policies.

Block and Hirt divided the functions of the financial manager into two categories. (i) Daily activities, and (ii) less routine or occasional activities. The daily activities of financial manager include credit management, inventory control, and the receipt and disbursement of funds. Less routine activities encompass the sale of stocks and bonds and the induction of capital budgeting and dividend model.

As indicated in figure 1-4, all these functions are carried out while balancing the profitability and risk components of the firm.

functions-of-financial-management-1

The adequate risk-return trade-off must be destined to maximize the market price of the firm for its shareholders. The risk-return decision will power not only the operational side of the business (capital versus labor or Product A Vs Product B). But also the financing mix (Stocks vs bonds versus retained earnings).

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