Financial management is the key to handling financial resources correctly and efficiently. The functions of financial management provide the capability of the right amount of funds being available when needed for a business. These functions range from the procurement of funds and utilization properly and effectively. The way financial management works concerns and impacts the working of the entire organization. If you are looking for a consolidated list of functions of financial management, continue reading below:
10 Functions of Financial Management
Functions of Financial Management discussed below:
1. Calculate the Requirement of Capital
As a financial manager, the first function of financial management is to estimate the overall capital the business needs to fulfill its mission and objectives. The capital required depends on several factors, like the size of the business, expected profits, programs, and policies of the company. The predictions have to be made in a way to meet the overall growth target of the company, while also keeping a contingency plan in place. The capital requirement calculation may involve both short-term and long-term capital requirements for the company.
2. Determine the Capital Structure
Once the required capital is estimated, the structure has to be determined. The structure involves both short-term and long-term equity. It will also determine how much of the capital must be possessed by the company, and how much has to be raised from outside sources, through VCs(Venture Capitals) or IPOs(Initial Public offerings), etc.
3. Decide the Sources of Funds
The next of the functions of financial management is to decide where the capital will come from. The company may decide to take loans from banks and/or approach investors for capital in return for equity and/or provide an IPO so that it can raise money from the public in return for shares. The source of funds is decided and prioritized depending on the advantages and disadvantages of each source, their impact on the objective and mission of the company, and the period of financing.
4. Investment of Funds
Another important function of financial management is to decide how to allocate funds to profitable ventures. The financial manager has to calculate the risk and probable returns for each time of investment. The investment methods will also have to be decided such that there is less loss of funds and have maximum optimization of profits. To achieve this information, the financial manager might use different tools such as portfolio analysis, internal rate of return, net present value, etc.
Recommended: Scope of Financial Management
5. Surplus Funds Disposal
After the required investment and expenditure, the financial manager has to decide what percentage of the surplus profits need to go to the investors or be funded back to the business to enhance its working. Therefore, the surplus funds may be in the form of retained profits or dividend declaration.
In the case of retained profits, the financial manager has to determine the percentage of the funds disposed of after taking into consideration all the costs involved in innovation, expansion, and diversification of the business.
In the case of dividend declaration, the financial manager has to decide the best rate of dividends and other benefits such as bonuses.
6. Cash Flow Management
The financial manager of the company, as a part of one of the functions of financial management, has to decide about how the cash flows within the company. The cash may be required for several in-company expenses such as salaries and wages to employees, payment of office rent, water and electricity bills, maintenance of current stock, raw materials procurement for daily production, etc. In a nutshell, there has to be adequate liquidity of the funds, so that they can be accessed whenever required by the company.
7. Exert Controls on Finances
Till now, the functions of financial management have dealt with procurement and management of funds. However, it also concerns controlling the finance within the scope of the business. The controls can be in the form of financial forecasting, cost analysis, ratio analysis and distribution of profits methods, etc. This data can help the financial manager in making decisions concerning the money in the company, in the future.
Recommended: Objectives of Financial Management
8. Acquisitions and Mergers
One of how a business can expand is through mergers and acquisitions. The acquisition means purchasing existing or new companies that fall within the mission and objective of the buyer company. A merger happens when two existing businesses come together to create a new business. As one of the functions of financial management, the manager has to aid in this decision of merger and acquisition by going through complex financial analysis and securities of each company.
9. Planning of Tax
One of the responsibilities of the financial manager is to reduce the amount of tax a business pays, legally. The manager must identify proper schemes of investment and must do so that can help the company save on taxes on returns. The financial manager will also be responsible for protecting the assets of the companies that are already being utilized for a specific task, project, or business.
10. Work on Capital Budgeting
One important function of financial management is to create food for long-term decision-making for the company. This process is called capital budgeting. The manager is involved in complex decision-making in this process, and they might have to figure out opportunities and challenges throughout that can impact the business in any way.
Finances are the lifeline for any company. Unless there is proper management, a business can’t run no matter how profit-worthy product/service it may be involved in. A financial manager plays a key role in deciding and implementing responsible use of money by the company.
Frequently Asked Questions
What is financial management?
It is a process of planning, organization, direction, and control of financial activities and decisions of an enterprise.
Who is a financial manager?
They are responsible for implementing all the functions of financial management.
Why do businesses need capital?
They may need capital for purchasing assets, meeting the requirements of working capital, and/or expanding the business.
What is a Return on Investment (ROI)?
It is a measure of the profitability or loss of an investment after a specific period. The ROI drives many financial decisions inside the company.
What are assets and liabilities in business?
Assets are items that are providing or may provide economic benefit for your business in the future. Liability is what an enterprise owes and will require the company to expend funds towards this.