Financial Manager is the executive who manages the financial matters of a business. Financial managers have the responsibility of overseeing the finances of major companies, agencies and everything in between. Along with their teams, they coordinate accounting and produce financial reports, cash-flow statements and profit projections. To comply with various laws and regulations, they must pay attention to detail. Aside from working with numbers, financial managers must also help other members of their organization understand their complex reports, which require significant communication skills.
Estimating the Amount of Capital Required
This is the foremost function of the financial manager. Business firms require capital for:
(i) Purchase of fixed assets
(ii) Meeting working capital requirements, and
(iii) Modernization and expansion of business.
The financial manager makes estimates of funds required for both short-term and long-term.
Determining Capital Structure
Once the requirement of capital funds has been determined, a decision regarding the kind and proportion of various sources of funds has to be taken. For this, financial manager has to determine the proper mix of equity and debt and short-term and long-term debt ratio. This is done to achieve minimum cost of capital and maximize shareholders wealth.
Choice of Sources of Funds
Before the actual procurement of funds, the finance manager has to decide the sources from which the funds are to be raised. The management can raise finance from various sources like equity shareholders, preference shareholders, debenture holders, and banks and other financial institutions, public deposits, etc.
Procurement of Funds
The financial manager takes steps to procure the funds required for the business. It might require negotiation with creditors and financial institutions, issue of prospectus, etc. The procurement of funds is dependent not only upon cost of raising funds but also on other factors like general market conditions, choice of investors, government policy, etc.
Utilization of Funds
The funds procured by the financial manager are to be prudently invested in various assets so as to maximize the return on investment: While taking investment decisions, management should be guided by three important principles, viz., safety, profitability, and liquidity.
Disposal of Profits or Surplus
The financial manager has to decide how much to retain for ploughing back and how much to distribute as dividend to shareholders out of the profits of the company. The factors which influence these decisions include the trend of earnings of the company, the trend of the market price of its shares, the requirements of funds for self- financing the future programs and so on.
Management of Cash
Management of cash and other current assets is an important task of financial manager. It involves forecasting the cash inflows and outflows to ensure that there is neither shortage nor surplus of cash with the firm. Sufficient funds must be available for purchase of materials, payment of wages and meeting day-to-day expenses.
Evaluation of financial performance is also an important function of financial manager. The overall measure of evaluation is Return on Investment (ROI). The other techniques of financial control and evaluation include budgetary control, cost control, internal audit, break-even analysis and ratio analysis. The financial manager must lay emphasis on financial planning as well.
Scope and Functions of Financial Management:
The scope of financial management includes three groups. First; relating to finance and cash, second rising of fund and their administration, third; along with the activities of rising funds, these are part and parcel of total management, Isra Salomon felt that in view of funds utilisation third group has wider scope.
It can be said that all activities done by a finance officer are under the purview of financial management. But the activities of these officers change from firm to firm, it become difficult to say the scope of finance.
Financial management plays two main roles:
- Participating in funds utilization and controlling productivity.
- Identifying the requirements of funds and selecting the sources for those funds. Liquidity, profitability and management are the functions of financial management. Let us know very briefly about them.
Liquidity can be ascertained through the three important considerations.
i) Forecasting of cash flow:
Cash inflows and outflows should be equalized for the purpose of liquidity.
ii) Rising of funds:
Finance manager should try to identify the requirements and increase of funds.
iii) Managing the flow of internal funds:
Liquidity at higher degree can be maintained by keeping accounts in many banks. Then there will be no need to depend on external loans.
While ascertaining the profitability the following aspects should be taken into consideration:
i) Cost of control:
For the purpose of controlling costs, various activities of the firm should be analyzed through proper cost accounting system.
Pricing policy has great importance in deciding sales level in company’s marketing. Pricing policy should be evolved in such a way that the image of the firm should not be affected.
iii) Forecasting of future profits:
Often estimated profits should be ascertained and assessed to strengthen the firm and to ascertain the profit levels.
iv) Measuring the cost of capital:
Each fund source has different cost of capital. As the profit of the firm is directly related to cost of capital, each cost of capital should be measured.
It is the duty of the financial manager to keep the sources of the assets in maintaining the business. Asset management plays an important role in financial management. Besides, the financial manager should see that the required sources are available for smooth running of the firm without any interruptions.
A business may fail without financial failures. Financial failures also lead to business failure. Because of this peculiar condition the responsibility of financial management increased. It can be divided into the management of long run funds and short run funds.
Long run management of funds relates to the development and extensive plans. Short run management of funds relates to the total business cycle activities. It is also the responsibility of financial management to coordinate different activities in the business. Thus, for the success of any firm or organization financial management is said to be a must.