Inorman - Managing The Finance Function

Managing Finance Function
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 Financial Management means planning, organizing, directing and

controlling the financial activities such as procurement and utilization of
funds of the enterprise.
 It means applying general management principles to financial resources
of the enterprise.
 The manager must understand the finance function as because without
adequate funds it will be difficult, if not impossible to proceed with the
production of products or services, the distribution of output, research
and development, and others.
Objectives of Financial Management
1. To ensure regular and adequate supply of funds to the concern.

2. To ensure adequate returns to the shareholders which will depend upon
the earning capacity, market price of the share, expectations of the
shareholders.
3. To ensure optimum funds utilization. Once the funds are procured, they
should be utilized in maximum possible way at least cost.
4. To ensure safety on investment, i.e, funds should be invested in safe
ventures so that adequate rate of return can be achieved.
5. To plan a sound capital structure-There should be sound and fair
composition of capital so that a balance is maintained between debt and
equity capital.
Functions of Financial Management

1. Estimation of capital requirements
 A finance manager must make estimation with regards to capital
requirements of the company.
 This will depend upon expected costs and profits and future
programs and policies of a concern.
 Estimations have to be made in an adequate manner which
increases earning capacity of enterprise.
2. Determination of capital composition
 Once the estimation has been made, the capital structure have to
be decided.
 This involves short- term and long- term debt equity analysis.
 This will depend upon the proportion of equity capital a company
is possessing and additional funds which have to be raised from
outside parties.
3. Choice of sources of funds

 For additional funds to be procured, a company has many choices
like-
a. Issue of shares and debentures
b. Loans to be taken from banks and financial institutions
c. Public deposits to be drawn like in form of bonds.
 Choice of factor will depend on relative merits and demerits of each
source and period of financing.
4. Investment of funds
 The finance manager has to decide to allocate funds into profitable
ventures so that there is safety on investment and regular returns
is possible.
5. Disposal of surplus
 The net profits decision have to be made by the finance manager.
This can be done in two ways:
a. Dividend declaration - It includes identifying the rate of
dividends and other benefits like bonus.
b. Retained profits - The volume has to be decided which will
depend upon expansional, innovational, diversification plans
of the company.
6. Management of cash
 Finance manager has to make decisions with regards to cash
management.
 Cash is required for many purposes like payment of wages and
salaries, payment of electricity and water bills, payment to
creditors, meeting current liabilities, maintainance of enough
stock, purchase of raw materials, etc.
7. Financial controls
 The finance manager has not only to plan, procure and utilize the
funds but he also has to exercise control over finances.
 This can be done through many techniques like ratio analysis,
financial forecasting, cost and profit control, etc.
Finance Functions
A. Investment Decision
 One of the most important finance functions is to intelligently allocate

capital to long term assets. This activity is also known as capital
budgeting.
 It is important to allocate capital in those long-term assets so as to get

maximum yield in future.
 Investment decision not only involves allocating capital to long term
assets but also involves decisions of using funds which are obtained by
selling those assets which become less profitable and less productive.
 Two aspects of investment decision
o Evaluation of new investment in terms of profitability
o Comparison of cut off rate against new investment and prevailing
investment
B. Financial Decision
 is important to make wise decisions about when, where and how should
a business acquire funds.
 Funds can be acquired through many ways and channels. The miix of
equity capital and debt is known as a firm’s capital structure.
 A sound financial structure is said to be one which aims at maximizing

shareholders return with minimum risk.
C. Dividend Decision
 the key function a financial manger performs in case of profitability

is to decide whether to distribute all the profits to the shareholder
or retain all the profits or distribute part of the profits to the
shareholder and retain the other half in the business.
 It’s the financial manager’s responsibility to decide a optimum
dividend policy which maximizes the market value of the firm.
 It is a common practice to pay regular dividends in case of
profitability Another way is to issue bonus shares to existing
shareholders.
D. Liquidity Decision
 It is very important to maintain a liquidity position of a firm to

avoid insolvency.
 Firm’s profitability, liquidity and risk all are associated with the
investment in current assets.
 In order to maintain a tradeoff between profitability and liquidity it

is important to invest sufficient funds in current assets.
 Since current assets do not earn anything for business therefore a

proper calculation must be done before investing in current assets.
Role of a Financial Manager

Financial Manger
 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.
Main functions of a Financial Manager
1. Raising of Funds
 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 important to maintain a good balance between equity and

debt.
2. Allocation of Funds
 Once the funds are raised through different channels the next
important function is to allocate the funds. T
 he 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
a. The size of the firm and its growth capability

b. Status of assets whether they are long-term or short-term
c. Mode by which the funds are raised
3. 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.
4. Understanding Capital Markets
 Shares of a company are traded on stock exchange and there is a

continuous sale and purchase of securities.
 When securities are traded on stock market there involves a huge

amount of risk involved.
 A financial manger understands and calculates the risk involved in

this trading of shares and debentures.
 The practices of a financial manager directly impact the operation
in capital market.

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Inorman - Managing The Finance Function

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Managing Finance Function

 Financial Management means planning, organizing, directing and

Objectives of Financial Management

1. To ensure regular and adequate supply of funds to the concern.

Functions of Financial Management

3. Choice of sources of funds

 One of the most important finance functions is to intelligently allocate

 It is important to allocate capital in those long-term assets so as to get

 A sound financial structure is said to be one which aims at maximizing

 the key function a financial manger performs in case of profitability

 It is very important to maintain a liquidity position of a firm to

 In order to maintain a tradeoff between profitability and liquidity it

 Since current assets do not earn anything for business therefore a

Role of a Financial Manager

 a person who takes care of all the important financial functions of an

Main functions of a Financial Manager

 It is important to maintain a good balance between equity and

 he funds should be allocated in such a manner that they are

 In order to allocate funds in the best possible manner the following

a. The size of the firm and its growth capability

 Profit earning is one of the prime functions of any business

 Profit earning is important for survival and sustenance of any

 Profit planning refers to proper usage of the profit generated by the

4. Understanding Capital Markets

 Shares of a company are traded on stock exchange and there is a

 When securities are traded on stock market there involves a huge

 A financial manger understands and calculates the risk involved in

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