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Functions of financial management
- 2. “Financial management is the activity concerned with planning, raising, controlling and administering of funds used in the business.” – Guthman and Dougal “Financial management is the operational activity of a business that is responsible for obtaining and effectively utilizing the funds necessary for efficient operations.”- Massie Financial Management is an organizational activity that is concerned with the management of financial resources. CFO/Financial Managers are responsible for the financial health of an organization.
- 3. Finance Decision Investment Decision Management Investment Return/ Dividend Decision
- 4. Functions Estimate Required Capital Determine Capital Structure Evaluate and Select Sources of Funds Allocate and Control Funds Distribute Profits or Surplus Monitoring Financial Activities
- 5. Estimate Required Capital Forecast the amount of required capital Determine short term and long term requirement of the business Preparation of financial planning for present and future
- 6. Different sources of fund Involves the analysis of short term and long term debt equity Determine Capital Structure Objective: Maximize shareholders wealth with a cost of capital
- 7. Choosing the best option which will provide greater earning possibility in less cost Possible choices for raising additional funds: Evaluate and Select Sources of Funds Loans from banks and other financial institutions Issue of company shares and debenture (bonds/vouchers) Public deposit
- 8. Amount of funds and allocation of funds Allocate and Control Funds Different investment Tools Portfolio Analysis Net Present Value Average Rate of Return Internal Rate of Return
- 9. Distribute profits/surplus or retain for future use Distribute Profits or Surplus
- 10. Monitoring, controlling and overseeing of financial activities and business position Monitoring Financial Activities Ratio Analysis Controlling and monitoring financial activity can use several techniques such as: Forecasting of Financials Cost Analysis Control and Profit Distribution Techniques
Editor's Notes
- We are going to discuss the simple structural business financial management function.
- Financial Management is a very important business activity in managing company’s financial resources FM as defined by experts such as Guthman and Dougal and Massie FM is also - About providing funds in the most objective and favorable way for the business - All about cash - Acquiring of funds and their effective usage Either the CFO or Financial Managers are the main person involved in financial management. They produce financial reports, direct investment activities, and develop strategies and plans for the long-term financial goals of their organization
- Investment Decision – it is the most important part of company’s FM decision. The selection of assets in which funds will be invested by a firm. Finance Decision - involves identifying sources of financing, determining the duration and cost of financing Management Investment Return/Dividend Decision – it is relating to dividend policy. And after gaining profit he will distribute the profit to the designated stakeholders or distribute some portion and retain the remaining
- These are some core functions in the process of financial management. We are going to discuss each functions in the following slides.
- As we have discussed, it is the duty of the CFO or Financial Manager to oversee and manage the company’s financial stability The first function is to Estimate Required Capital, it is the FM duty to forecast the amount of required capital. FM should also determine short term and long term requirement of the business. Preparation of financial planning should also be done.
- After determining the required capital, type and proportion of different sources of fund has to be decided. Objective……..It mainly involves the exploration of short and long term debt equity. Debt equity is the measure of the relative contribution of the creditors and shareholders or owners in the capital employed in business.
- In this process the Financial Manager will have to assess and select on which funds will be raised. Choosing the best option which will profit at less cost. Possible choices for raising funds.
- Determine the necessary amount of funds in each of financial area and allocate the funds accordingly. The capital should be invested in a wisely manner so that there is less possibility of losing funds or experience loses. To avoid loses, different tools can be used to name a few.
- At the end of the accounting period, profit of business should be done. Then, net profits has to be decided. The decision can be two ways. Give profits in the form of dividends . Dividend is a sum of money paid regularly (typically annually) by a company to its shareholders out of its profits. The company has also the option to retain the profits for purposes like expansion, diversification and innovation of the business.
- Financial Managers are not only in charge of the financial planning, procure fund and utilize the fund. They should also closely monitor and remain alert at all time with regards to the financial activity and business position of the company.