Functional Areas of Financial Management¶
1. Determining Financial Needs¶
A finance manager is responsible for meeting the financial needs of the enterprise. To achieve this, they should accurately determine the financial requirements of the organization. These funds are necessary to cover promotional expenses, fixed assets, and working capital needs. The specific requirements for fixed assets vary depending on the industry type. A manufacturing concern typically requires more investment in fixed assets compared to a trading concern. Working capital needs are influenced by the scale of operations; larger operations generally require higher working capital. An incorrect assessment of financial needs can jeopardize the survival of the organization.
2. Selecting the Sources of Funds¶
Various sources are available for raising funds, such as issuing share capital, debentures, seeking long-term funds from financial institutions, or obtaining cash credit or overdraft facilities from commercial banks to meet working capital needs. A finance manager must exercise caution when approaching different sources, as the terms and conditions can vary significantly. The choice of a suitable source of funds can have a significant impact on the organization's profitability, and it should be made carefully.
3. Financial Analysis and Interpretation¶
Financial analysis and interpretation of financial statements are essential tasks for a finance manager. They need to assess profitability, liquidity position, and both short-term and long-term financial stability. This involves calculating various financial ratios and interpreting their implications. Financial analysis and interpretation have become crucial areas of financial management.
4. Cost-Volume-Profit Analysis¶
Cost-volume-profit analysis is a valuable tool for profit planning. It addresses questions related to cost and volume behavior, break-even points, and profit planning. Understanding the cost-volume-profit relationship requires an understanding of how costs behave. Costs can be categorized as fixed, variable, or semi-variable. Fixed costs remain constant regardless of changes in production.
5. Capital Budgeting¶
Capital budgeting involves making investment decisions in capital expenditures. It pertains to expenditures whose benefits are expected to be received over a period exceeding one year. These expenditures are incurred to acquire or improve fixed assets, with benefits expected over several years. Capital budgeting decisions are critical for any organization, as unsound investment decisions can have severe consequences.
6. Working Capital Management¶
Working capital is essential for the day-to-day operations of a business and is often referred to as the lifeblood of an organization. It encompasses the financing of short-term or current assets, including cash, receivables, and inventories. Maintaining an appropriate level of these assets is crucial. Cash is required to meet daily needs and purchase inventory, among other purposes.
7. Profit Planning and Control¶
Profit planning and control are key responsibilities of financial managers. Profit maximization is typically an important objective for businesses. Profit serves as a tool for evaluating management performance and is influenced by revenue and expenditure. Revenue can come from various sources, including sales and investments, while expenditures may include manufacturing costs, trading expenses, administrative expenses, and financial costs.
8. Dividend Policy¶
Dividends are the rewards for shareholders who invest in a company's shares. Shareholders seek to maximize returns on their investments, while management often aims to retain profits for further financing and growth. Balancing these conflicting aims is essential for the interests of both shareholders and the company. Companies should distribute a reasonable amount as dividends to shareholders while retaining the rest for growth and sustainability.
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