Monday, 6 April 2020

Financial Management : 11 Important functions in Business


financial management



Do you know how financial management helps you in the business, among other business functions?

In this article, we try to discuss what is financial management, who can become a finance manager or CFO of a company and what exactly they do in the business. 

Financial Management

Financial Management is the specialized function of the management of planning, organizing, directing and controlling the financial activities of the business organization.

Finance is the lifeblood of business. It focuses on money and its flow. Financial management is an administration function to manage the entire business activities of finance. 

These activities may include investment decision making, financing decision, dividend decisions making and tax management.

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Why we need Financial Management in Business.

 We know one thing that the promoters incorporate a company to earn a profit or to create wealth. This responsibility may be assigned to the finance manager of the company. 

It is the function to strive to balance between the potential risk and return of the business. The main objective of financial management in business is to maximize wealth. This objective is a broader one than a profit creation. 

So, ultimately the finance manager or the finance management function needs to do all the effort to maximize the Earning Per Share of the shareholders in the market. 

Who will be Appointed as finance manager of the company?

The financial manager must be a qualified person with a good academic record and expertise in the finance and accounting domain.

 

Persons with the below qualifications and ample experience in the finance function can be appointed as finance manager.


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How Finance management Relate to other functions of the business

 

financial management
Relation of Finance Management with other Business Functions



1. Production

The production process transforms the raw material to the final product. Recently, production management is known as Operations Management.   
Finance Management holds a key position in the functioning of the manufacturing of a business, especially for an uninterrupted production process. This process required many types of short term and long term investments. 
Fixed Assets and working capital required for the smooth functioning of the manufacturing department. Finance Management reviews all these activities.

2. Purchase Function

What is the involvement of finance management in the purchase function?

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Purchasing is a process of procurement of items to support the production or distribution function. 

The finance department has to find the working capital to fund the purchase orders, arranging trade finance with banks and timely remittance to the supplier. 

Finance management will excise control to avoid excessive stock of raw material and finished goods.

3. Sales

The sales department will make available the products to customers. The finance department has to ensure its cash outflow to manage the overall business activity of the business. They have to analyze the debtors, maximum period of debt and amount of debt offered to customers and its collection etc,

4. HR and Administration

HR and Administration functions deal with the activities like finding the right employees, employee relationship, training and compensation etc. The HR department may plan the salary and other benefits to employees and it will pay when they get approval from the finance department. Finance management will verify the proposal whether the company can afford to pay these financial benefits during a particular period. 

The Finance Department also works to arrange the fund to pay the salaries in time.

The office of financial management is touching all the departments and functions of the organization.

 The Main Functions of the Finance Management


  • Assessment of required finance for the Company
  • Decide the source of Finance
  • Decide the Capital Structure
  • Working capital and Fixed Asset Management 
  • Break-even Analysis
  •  Analysis of finance and business
  • Revenue planning 
  • Capital Budgeting
  • Corporate Tax Managemen
  • Dividend Distribution and Policies
  • Acquisition and mergers

1. Assessment of Required finance for the Company

The finance department has to assess the required capital to conduct the operation of the business. It included the short term,m capital and long term capital.  Financial management may do this process for starting a new project, introducing a new product to market etc.

2. Decide the Source of Finance 

Finance management has to decide the sources from where the fund can be obtained. Different sources are available in the market. They are 

  1. Shares
  2. Debentures
  3. Securities
  4. Bank loan etc

 All the sources have advantages and disadvantages. The finance manager has to analyse these merits and demerits carefully and select the appropriate sources of funds.

3. Decide the Capital Structure of the Company

Finance management has the responsibility to define the capital structure of the company. Capital structure is a mixture of debt and equity to finance the business operation. 

Debt contains debentures, bond, loan etc. Equity includes equity shares, preference shares, retained earnings.

 

The purpose of deciding the optimum capital structure is to maximize the return to the owners of the company.

 

4. Working capital and Fixed Asset Management

(i) Working Capital Management

The business always ensures liquidity. Thus responsibility is entrusted with finance management. Working capital is the excess of current assets over current liabilities 

 WC = CA-CL

Current Asset combines the cash in hand, cash at bank, Receivables etc., and Current Liabilities include the short term liabilities, bank overdraft, Payables etc,

If the company could not manage the working capital efficiently, the day-to-day operations of all departments may undermine. So the finance department will work to overcome these circumstances.

 (ii) Fixed Asset Management 

The fixed asset should be managed in a way to ensure the maximum return from it. It has to record proper appreciation or depreciation in the books. Finance management also responsible for the protection of the fixed assets from the upcoming risk associated with the business. 

Fixed asset include Land, building, machinery etc

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 5. Break-even Analysis

Break-even point is a point at which the total cost equals the total revenue. It is also known as Cost -Volume -Profit Analysis. The finance executives will try to analyse the relationship between the cost, volume and profit. 

It will help the finance managers to find the optimum level volume and the required volume to generate the profit.

6. Analysis of the business

Finance department or finance manager has to analyse many reports of the business like Income Statement, Balance sheet, Cash flow and Fund Flow statements, Statement of Retained Earnings and Statement to changes in the equity.

They need to investigate these statements by using tools like ratio analysis, common size balance sheet etc.

7. Revenue planning 

Planning the revenue for a particular period is the responsibility of the finance manager. As planning for the future profit, there must be a control system to ensure the attainment of planned revenue. This planning and control will help the management to see how the business will perform in the coming days.

8. Capital Budgeting 

Capital Budgeting is the process of deciding whether the proposed project is accepted or rejected by considering the profitability of different investments and cost of capital. There are many techniques to use in the process of capital budgeting like IRR, Pay Back, Net Present Value etc.

9. Corporate Tax Management 

The finance manager has to decide the tax planning policies and its management. It has a clear impact on the profitability of the business.

10. Dividend Distribution and Policies

The growth and future expansion of a company depend on wise dividend policy of the firm. The finance manager is responsible for the dividend policy. It always focuses on the maximization of wealth. 

Finance management should make a dividend policy by considering the financial status of the company and the interest of the shareholders.  

11. Acquisition and Mergers

As part of the growth plan, the company may decide to merge or acquire another firm. 

 

The acquisition means the big company buys a small company. In this case, the small company will not be in existence. All the assets and liabilities will be taken over by the bigger acquiring company.

The merger is the process of combining two companies into one. After the merger, the new company may have a new management structure. It usually will not pay any consideration in between the companies, but the owners right may reduce.

Conclusion

As all the systems face challenges and evolution, the discipline of financial management also accommodates development. The recent approach to financial management is to find solutions to the core financial problems faced by businesses. As per the contemporary approach, the functions of the financial management is to obtain wise investment decisions, decisions relating to financing the firm, the solution for dividend and retained earning policy. 


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