The document outlines the key functions of financial management, emphasizing the role of finance managers in estimating financial needs, identifying sources of funds, and developing capital structures. It covers essential aspects such as capital budgeting, working capital management, dividend policy, and financial analysis among others, detailing the importance of effective financial planning and decision-making within organizations. Overall, it highlights the complexity of financial activities and the crucial decisions a finance manager must make to ensure optimal utilization of resources.

1. DR KUMAR J
ASSOCIATE PROFESSOR
DEPARTMENT OF COMMERCE
FACULTY OF SCIENCE AND HUMANITIES
SRM IST RAMAPURAM CAMPUS
FINANCIAL MANAGEMENT
FUNCTION OF FINANCIAL MANAGEMENT AND
ROLE OF FINANCE MANAGER

2. Functions of Financial Management
1.Estimating Financial needs
An important function of the finance manage is to provide adequate and
timely fiancé. Finance maybe needed for different purposes. A form may need
money for purchase of fixed assets or investment on current assets. Therefore it
is necessary to estimate the fixed as well as working capital requirements in
advance.
2.Indenfification of Sources of Funds
In order to meet varied financial needs, financial management has to
identify the various sources of finance. The sources of long term as will as short
term finance , their cost and other terms have to be ascertained.
Many sources are available for raising fund. Equity shares, preference
shares, institutional loans, debentures are the popular sources of long term

3. .Developing an optimum capital structure
Capital structure decision is very important. It involves deciding the
proportion of debt and equity as the sources of finance. Use of debt helps to
increase the earnings of shareholder. But excessive debt increases the risk and
reduces the market value of shares. Therefore the function of financial
management is to design and develop an optimum capital structure which
maximizes the value of the firm or minimizes the cost of capital.
4.Capital Budgeting
Capital expenditure decision relates to effective utilization of capital. They
commit funds in long term -asset and influence the firm’s wealth, determine its
size and affect its risks. Hence there decisions are crucial. Capital budgeting is
a process by which investment proposals are evaluated. It helps to assess the
profitability of projects or investment.

4. 5.Working Capital Management
Working capital refers to the funds required for financing the day-to-day
operations. The firm should have sufficient liquidity to meet its current obligation.
The function of financial management is to endure adequacy of working capital.
Working capita management includes cash management, receivables management,
and inventory management.
6. Dividend Policy
An important function of financial management is to formulate the dividend
policy of the company. Shareholders may prefer high dividends . But retention of
profits strengthens the internal generation of funds. For firms with profitable
opportunities, retention is ideal. On the other hand , for declining firms,
distribution of profits as dividends is desirable. The finance manager has to decide
the proportion of earnings to eb paid out as dividends taking these factors into
consideration.

5. 7.Mergers and Acquisitions (M&A)
Acquisition refers to the purchase of a business. Mergers is a process by which
one company is merged into the other, Mergers and Acquisitions are rare or
episodic events in the life of a company. But, they are of great importance from
the point of view of financial management. These events involve commitment of
huge funds for long periods and influence the prospects and profitability
significantly.
8.Financial Analysis
Analysis of financial performance isa an integral part of financial
management. It helps in the assessment of strength and weaknesses of the of the
company in respect of liquidity, solvency, profitability, operating efficiency etc. It
is also useful in analysing the capital structure , its effect on earnings of
shareholders, and the dividend behaviour of a company. Financial analysis is very
useful in financial planning and control

6. 9. Cost Volume Profit Analysis
Cost, volume and profit are closely related. In fact, profit depends on the efficient
management of costs which in turn, depend on the volume of output. Analysis of
the relationship is known as Cost, volume and profit analysis. It divides the cost
into fixed and variable. The Cost, volume and profit is a very significant function
of financial management. It is quite useful in financial decision making.
10. Financial control
Financial control is the control function of financial management. It
objects is to measure that the performance is according plans. Financial control
involves application of control devices such as return on investment, budgetary
control and Break Even analysis, ratio analysis etc.

7. Role of a Financial Manager in Financial Management
Financial activities of a firm is one of the most important and complex activities of a
firm. Therefore in order to take care of these activities a financial manager performs all the
requisite financial activities.
A financial manger is a person who takes care of all the important financial functions of an
organization. The person in charge should maintain a far sightedness in order to ensure that
the funds are utilized in the most efficient manner. His actions directly affect the
Profitability, growth and goodwill of the firm.
1.Forecasting Financial Requirements
The first function of finance manager is to forecast the required funds in the firm. Certain
funds are required for long purposes. i,e investment in fixed assets etc. A careful estimate of
such funds, and of the exact timing, when such funds are required must be made. Also an
assessment has to be made regarding requirements of working capital which involves

8. 2.Financing Decision
Once the requirement of funds has been estimated, the finance manager has to take
decision regarding various sources from where these funds would he raised. A proper
mix of various sources has to he worked out. Each source of funds involves different
issues for consideration. In this context, the finance manager has to carefully look
into the existing capital structure and see how the various proposals of raising funds
will affect it. He has to maintain a proper balance' between long term funds and short
term funds. He has to ensure that he raises sufficient long term funds in order
to finance fixed assets and other long term investments and to provide for the
permanent needs of working capital.
3.Raising of Funds
In order to meet the obligation of the business it is important to have enough cash
and liquidity. A firm can raise funds by the way of equity and debt. It is the
responsibility of a financial manager to decide the ratio between debt and equity. It is

9. 4.Allocation of Funds
Once the funds are raised through different channels the next important
function is to allocate the funds. The funds should be allocated in such a manner
that they are optimally used. In order to allocate funds in the best possible
manner the following point must be considered
The size of the firm and its growth capability
Status of assets whether they are long-term or short-term
Mode by which the funds are raised
These financial decisions directly and indirectly influence other managerial
activities. Hence formation of a good asset mix and proper allocation of funds is
one of the most important activity

10. 5.Investment Decision
After having procured the funds from different sources, the finance manager has to
take investment decisions. Investment decisions relate to selection of assets in which
funds are to he invested by the firm. Investment alternatives art numerous. Resources are
scarce and limited, They have to rationed . and discretely used. Investment decisions•
allocate and ration the resources among the competing investment alternatives or
opportunities. The effort is to find out the projects, which are acceptable.
The investment decisions result in purchase of assets. Assets can be classified under
two broad categories:
Long term investment decisions — Long term assets.
Short term investment decisions Short term assets

11. 6.Profit Planning
Profit earning is one of the prime functions of any business organization. Profit
earning is important for survival and sustenance of any organization. Profit planning
refers to proper usage of the profit generated by the firm.
Profit arises due to many factors such as pricing, industry competition, state of the
economy, mechanism of demand and supply, cost and output. A healthy mix of
variable and fixed factors of production can lead to an increase in the profitability of
the firm.
Fixed costs are incurred by the use of fixed factors of production such as land and
machinery. In order to maintain a tandem it is important to continuously value the
depreciation cost of fixed cost of production. An opportunity cost must be calculated
in order to replace those factors of production which has gone thrown wear and tear. If
this is not noted then these fixed cost can cause huge fluctuations in profit.

12. 7.Understanding Capital Markets
Shares of a company are traded on stock exchange and there is a continuous sale and
purchase of securities. Hence a clear understanding of capital market is an important
function of a financial manager. When securities are traded on stock market there
involves a huge amount of risk involved. Therefore a financial manger understands and
calculates the risk involved in this trading of shares and debentures.
Its on the discretion of a financial manager as to how to distribute the profits. Many
investors do not like the firm to distribute the profits amongst share holders as dividend
instead invest in the business itself to enhance growth. The practices of a financial
manager directly impact the operation in capital market.

13. 8.Evaluating financial performance
Management control systems are often based upon financial
analysis. One prominent example is the ROI (Return on
Investment) system of divisional control. The finance manager
has to constantly review the financial performance of the
various units of the organization. The ROI chart is extremely
useful in this regard. Analysis of the financial performance
helps the management for assessing how the funds have been

14. 9.Financial negotiation
A major portion of the time of the Finance manager is utilized in carrying
negotiations with the financial institutions, banks and public depositors. has to
furnish a lot of information to these institutions and persons and have to ensure that
raising of funds is within the statutes like Companies Act etc. Negotiations for
outside financing often require specialized skills
10.Deciding overall objectives
The finance manager needs to be guided by mane objectives. As a head or finance
department,. The finance manager, therefore has to determine the overall goals of -
finance department. The goals help in of planning and decision making.

15. Financial Planning
Financial planning indicates a firms growth, performance , investments and
requirements of funds during a given period of time, usually three to five years.
It involves the preparation of projected or proforma profit and loss account ,
balance sheet and funds flow statements.
A financial plan should be formulated in the light of present as well as future
developments. The requirements for purchasing fixed assets and working capital
needs should first be estimated. The needs for funds in the future for financing
expansion and diversification should also be taken into consideration. A
decision about the type of securities to be issued is also an important aspect of
financial planning.

16. A financial plan is a statement estimating the amount of
capital and determining its composition. The quantum of funds
needed will depend upon the asset’s requirements of the
business. The time at which funds will be needed should he
carefully decided so that finances arc raised at a time when
these are needed.
The next aspect of a financial plan is to determine the pattern
of financing. There are a number of ways for raising funds. The

17. Objectives of Financial Planning
A financial plan has the following main objectives:
1. Adequate Funds. A financial plan would ensure the availability
of sufficient funds to achieve enterprise goals.
2.Balancing of Costs and Risks. There should be a balancing of
costs and risks so as to protect the investors.
3.Flexibility. A financial plan should ensure flexibility so as to adjust
as per the requirements. It should be adjustable as per the changing
conditions.

18. 4. Simplicity. The financial structure should not be complicated
by issuing a variety of securities. The number of securities
should he less so that it is easily understood.
5.Long—term View. A financial plan should take a long—term
view. The needs for funds in the near future and over a longer
period should he considered while selecting the pattern of
financing.
6.Liquidity.The liquidity of funds should always he kept in
mind while preparing a financial plan. During periods of
depression, it is the liquidity which can keep a concern going.

19. 7.Optimum use. A financial plan should ensure sufficient
funds for genuine needs. Neither the plans should suffer
due to shortage of funds nor there should be wasteful use
of them. The funds should he put to their optimum use.
8.Economy. The cost of raising the funds should be
minimum. It should not impose disproportionate burden
on the company. It can been ensured by a proper
debt—equity mix.