Functions of Financial Management
Functions of financial management can be broadly divided into two groups.
- Executive functions of financial management, and
- Routine functions of financial management.
This division of functions of financial management is depicted below.
Image Credits © Sameer Akrani.
Executive Functions of Financial Management
The executive functions of financial management are depicted & listed below.
Eight executive functions of financial management (FM) are:-
- Estimating capital requirements : The company must estimate its capital requirements (needs) very carefully. This must be done at the promotion stage. The company must estimate its fixed capital needs and working capital need. If not, the company will become over-capitalized or under-capitalized.
- Determining capital structure : Capital structure is the ratio between owned capital and borrowed capital. There must be a balance between owned capital and borrowed capital. If the company has too much owned capital, then the shareholders will get fewer dividends. Whereas, if the company has too much of borrowed capital, it has to pay a lot of interest. It also has to repay the borrowed capital after some time. So the finance managers must prepare a balanced capital structure.
- Estimating cash flow : Cash flow refers to the cash which comes in and the cash which goes out of the business. The cash comes in mostly from sales. The cash goes out for business expenses. So, the finance manager must estimate the future sales of the business. This is called Sales forecasting. He also has to estimate the future business expenses.
- Investment Decisions : The business gets cash, mainly from sales. It also gets cash from other sources. It gets long-term cash from equity shares, debentures, term loans from financial institutions, etc. It gets short-term loans from banks, fixed deposits, dealer deposits, etc. The finance manager must invest the cash properly. Long-term cash must be used for purchasing fixed assets. Short-term cash must be used as a working capital.
- Allocation of surplus : Surplus means profits earned by the company. When the company has a surplus, it has three options, viz.,
- It can pay dividend to shareholders.
- It can save the surplus. That is, it can have retained earnings.
- It can give bonus to the employees.
- Deciding Additional finance : Sometimes, a company needs additional finance for modernisation, expansion, diversification, etc. The finance manager has to decide on following questions.
- When the additional finance will be needed?
- For how long will this finance be needed?
- From which sources to collect this finance?
- How to repay this finance?
- Negotiating for additional finance : The finance manager has to negotiate for additional finance. That is, he has to speak to many bank managers. He has to persuade and convince them to give loans to his company. There are two types of loans, viz., short-term loans and long-term loans. It is easy to get short-term loans from banks. However, it is very difficult to get long-term loans.
- Checking the financial performance : The finance manager has to check the financial performance of the company. This is a very important finance function. It must be done regularly. This will improve the financial performance of the company. Investors will invest their money in the company only if the financial performance is good. The finance manager must compare the financial performance of the company with the established standards. He must find ways for improving the financial performance of the company.
Routine Functions of Financial Management
The routine functions are also called as incidental functions.
Routine functions are clerical functions. They help to perform the Executive functions of financial management.
The routine functions of financial management are briefly listed below.
Six routine functions of financial management (FM) are:-
- Supervision of cash receipts and payments.
- Safeguarding of cash balances.
- Safeguarding of securities, insurance policies and other valuable papers.
- Taking proper care of mechanical details of financing.
- Record keeping and reporting.
- Credit Management.