Financial management is the managerial activity which is concerned with planning and controlling of the firm’s financial resources. In other words, it is concerned with acquiring, financing and managing assets to accomplish the overall goal of a business enterprise, mainly to maximize the shareholder's wealth.
Some experts have mentioned financial management as the science of money management. There are two basic aspects of financial management, viz, procurement of funds and effective use of these funds to achieve business objectives.
Financial management is closely related to accounting. In most firms, both areas are the responsibility of the CFO. But the accountant’s main function is to collect and present financial data of the past, present and future operations of the organization. Financial managers use financial statements and other information prepared by accountants to make financial decisions.
Financial managers focus on cash flows, the inflows and outflows of cash. They plan and monitor the firm’s cash flows to ensure that cash is available when needed. The finance managers use this data for financial decision making.
What is the Role of a Finance Manager in an organization?
Proper financial management is key to successful business operations. Without proper administration of finance, no business enterprise can reach its full potentials for growth and success. Here is the importance of an efficient Finance Manager in an organization. The finance manager of an organization plays an important role in achieving the Company’s goals, policies and financial success. His responsibilities include:
- Financial analysis and planning: Determining the proper amount of funds to employ in the firm, ie, designing the size of the firm and its rate of growth. The financial manager must decide how much money is needed and when, how best to use the available funds, and how to get the required financing. It is the responsibility of a finance manager in an organization to lead the finance team to achieve the organization goals like:
- Achieving higher growth rate
- Attaining a larger market share
- Gaining leadership in the market in terms of products and technology
- Promoting employee welfare
- Increasing customer satisfaction
- Improving community life, supporting education and research etc.
- Investment decisions: Decision about efficient allocation of funds to specific assets. These decisions relate to the selection of assets in which funds will be invested by a firm. Funds procured from different sources have to be invested in various kind of assets. The investment of funds in a project has to be made after careful assessment of the various projects through capital budgeting. A part of long-term funds also to be kept for financing the working capital requirements. Asset management policies are to be laid down regarding various items of current assets. Proper Inventory policy should be determined by the production manager along with finance manager keeping in view the requirement of production and the future price estimates of raw materials and availability of funds.
- Financing and capital structure decisions: Raising funds on favourable terms, i.e., determining the composition of the liabilities. These decisions relate to acquiring optimum finance to meet financial objectives and seeing that fixed and working capital is effectively managed. The finance manager needs to possess a good knowledge of the sources of the available funds and their costs and needs to ensure that the Company has a sound capital structure i.e., the proper balance between equity capital and debt. Financing decisions also call for good knowledge of evaluation of Risk. For Example, Excessive debt carried a high risk for an organization’s equity because of the priority rights of the lenders. A major area of risk related decisions is in overseas trading, where an organization is vulnerable to currency fluctuations and the finance manager must be well aware of the various protective procedures such as hedging.
- Dividend decisions: These decisions relate to the determination of how much and how frequently cash can be paid out of the profits of an organization as income for its owners or shareholders. The dividend decision has two elements:
- The amount to be paid out of the business income and the amount to be retained to support the growth of the organization.
- Determination of a proper dividend policy is important as the level and regular growth of dividends represent a significant factor in determining a profit-making Company’s market value ie, the value placed on its shares by the stock market.
- Management of financial resources such as working capital: Some of the tasks involved in financial Management are:
- Taking care not to overinvest in fixed assets
- Balancing cash outflow with cash inflows
- Ensuring that there is a sufficient level of short-term working capital
- Setting sales revenue targets that will deliver the growth
- Increasing gross profit by the correct pricing for products or services
- Controlling the level of general and administrative expenses finding more cost-efficient ways of running the day to day business operations
- Tax planning that will minimize taxes the business has to pay
- Risk Management: The Finance Manager, in a bid to maximize shareholders’ wealth should strive to maximize returns in relation to the given risk, he should seek courses of actions that avoid unnecessary risks. To ensure maximum return, fund flowing in and out of the firm should be constantly monitored to assure that they are safeguarded and properly utilized.
Today, the role of a finance manager is no longer confined to accounting, financial reporting and risk management. It is about being a strategic business partner of a CEO of the Company. Below are the some of the functions performed by a finance manager.
- Managing Mergers & Acquisitions
- Profitability analysis (By customer/ product)
- Pricing analysis
- Decisions about outsourcing
- Overseeing the IT function
- Overseeing the HR function
- Regulatory Compliance
- Risk Management
For its day to the day decision-making process, financial management also draws on other related disciplines such as marketing, production and quantitative methods apart from accounting. For instance, the finance managers should consider the impact of new product development and marketing area since their plans will require capital outflows and have an impact on the projected cash flows. Likewise, changes in the production process may require capital expenditures which the financial managers must evaluate and finance. The Finance Manager is concerned with maintaining the solvency of the organization by providing the cashflows necessary to satisfy its obligations and acquiring and financing the assets needed to achieve the goals of the organization.
Mr. Pradeep Sai