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Functions of Financial Management
- Estimation of capital requirements: A finance manager has to make estimation with regards to capital requirements of the company. This will depend upon expected costs and profits and future programmes and policies of a concern. Estimations have to be made in an adequate manner which increases earning capacity of enterprise.
- Determination of capital composition: Once the estimation have 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.
- 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.
- 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.
- 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.
- 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.
- 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.
Relationship of Finance with Other Discipline In these other discipline, we can include production and its department, marketing and its department and personnel and its department. Relationship shows balanced behavior of officers of finance department and other department's officers. They should concentrate on one target of company and many other things, they should know for creating good relation. Relationship of finance with other discipline can be explained in following way: Relationship of Finance with Production Production department’s main duty is to produce the goods. For producing goods, it needs raw material, labor and other expenses. For paying all expenses, production department needs money and fund which will be fulfilled by finance department. Finance department checks the budget of production department and allow funds for production department. With this view, we can understand that production department is dependent on finance department’s decision. Now, if production department performs his duty honestly and products are produced and sold on time, it will be helpful for increasesale and profitability and it will again recycle the fund with high profit in finance department. So, we can say both are dependent on each other. Both are players of business team. Both should be adopt co- operative view for each other. After this, business team can succeed in business. Relationship of Finance with Marketing Marketing department’s main duty is to sell maximum goods and satisfy the consumers. Its product’s input cost will decrease if all products are sold by marketers of company. For developing the product, promotion activities and distribution activities of marketing department need some money for paying salesmen, advertising budget and other promotional expenses. For this marketing department makes his marketing budget and it is cleared by finance department, but sometime finance department will not all specific marketing expenses but marketing department need that type of expenses for promotion of sales. This will create confliction. Good relations will be helpful for both departments. If both department does meeting and show behavior like good relative, the problem can easily solve.
Understanding markets and changing environment of business Role of Finance Managers in Competitive Environment In the wake of fierce global competitiveness, path-breaking technological advancement, increasing regulatory requirements following spate of reporting scandals, changes in business models, growing internationalization of business and sensitivity to financial markets, Indian Corporate to survive and thrive and compete globally will have to redefine tectonically the role of their finance managers so that their focus is less on traditional finance jobs like transaction processing, budgeting and capital raising and instead more on strategy making and managing risks and ensuring greater transparency in corporate reporting. Today’s and tomorrow’s finance managers are expected not only to confine themselves to financial planning, capital raising, managing assets and monitoring with new perspectives, new approaches and new skills but also to assume the role of strategic partner and participate actively in the front-end of strategic thinking, building and reviewing business portfolio, managing risks, and act as an agent among various constituencies within and outside the organization. As a business partner of the firm, finance honcho gravid with competencies to understand nuances of environmental developments, security markets, portfolio management and cost of capital, on the one hand and deeper insights into what is happening in the company on the other, has to act as a lynchpin of the firm and aid the corporate management in undertaking perspicacious industry and competitive analysis, winnowing the firm’s competencies, conceptualizing the firm’s future, determining how it intends to position itself and what it aspires in the changed milieu, setting long-term objectives for maximizing value, evolving suitable business portfolio, and evolving managing performance of new businesses and products. At Electrolux-Kelvinator India Ltd., the CFO assists the CEO in identifying and evaluating options from marketing, finance, technological and competitive points of view for sustained competitive advantage. In Companies like TCS and Hindustan Lever Chief finance officer (CFO) spends maximum time on strategy formulation and portfolio review. Finance inputs in these organizations are considered most critical in setting business directions and evaluating inorganic growth opportunities. Managing business risk is another important task which a finance chieftain is now supposed to perform. In view of permanently uncertain and volatile business environment, he has to look at risk from an enterprise, reputational, customer and other perspectives. The CFO has to see the business as series of different scenarios, each with its probability and respond proactively to world events and change the business portfolio accordingly so as to ensure that earnings are relatively stable and volatility is minimized.
Another new responsibility which a finance wannabe has to assume is to act as stunningly spry agent between the firm and various constituencies-both internal and external-so as to foster their interests and guard them against nepharious practices. To begin with, he has to help the corporate management in evolving corporate governance norms containing a set of systems and processes that ensure the conduct of the affairs of the firm in the best interest of all the stakeholders and ensure that these norms are strictly adhered. In lots of companies, the external world prefers to interact with finance people more than with some other parts of the business because they are expected to have deep insights into the total perspective of the firm and its activities. At Marico Industries, the CFO has to share relevant information on the company’s policies and actions to all the stakeholders with transparency and openness. In some organizations like Hindustan Lever and Marico the CFO is performing function of custodian of statutory compliance with spate of financial scandals at organizations like Enron, Anderson, World Com. and Shell. The CFOs are being made responsible for providing financial and non- financial information to the stakeholders with greater accuracy. They are required to conjure up the greater financial report according to standards and regulations so as to rebuild public trust. At Electrolux Kelvinator India Ltd, the finance function has been reorganized around internal customers to allow a service mentality to prevail with a view to dispensing the necessary financial support to the operating departments. From a tough task master and keeper of financial discipline, the CFO has now to be a service provider. Alongside the business function, the CFO has to perform the finance function in strategic manner, concatenating the financial objectives and strategies to corporate objectives of value maximization and competitive excellence. For this, the CFO has to focus from the perspective of profit maximization to maximization of profit pool which signifies maximization of total profits earned in the industry at all points along-with the industry value chain. He is, therefore, called upon to undertake perspicacious winnowing on an on-going basis of each value activity separately with a view to determining each activity’s cost and contribution. This exercise will enable the organization in deciding which activity needs to be continued and which to be dropped. In the liberalized environment corporate finance manager has to embark on financial reengineering process in order to revamp extant financial policies and procedures as also the practices, and invent new ways of procuring and deploying resources and ferret innovative solution to financial problems of the organization. Financial reengineering process should be designed in sync with new approach of strategy making based on the ‘concept of fit and stretch’, accent of which is not only on allocation of resources but also on their leveraging.
Instead of pushing inventory into the system in order to make products, the JIT system turns the process round and uses the pull from the market place or the next operation as a way of making the system more directly responsive and eliminating unnecessary waste due to over production and so on. With the help of this approach a finance manager can minimize inventories through small incremental reductions. Use of JIT system in inventory management has been considerably facilitated by web-based accounting and inventory software. In his endeavour to reduce cost of funding the firm’s requirements, finance managers of Indian Corporate shall have to evolve new financial instruments of the likes of zero coupon bonds, deep discount bonds, floating rate bonds, secured premium notes, convertible warrants, futures and options incorporating attractive features that could entice finicky investors. Securitization can prove to be the most potent financial instrument for a finance manager in garnering funds at relatively cheaper rate. Securitization, in fact, is a carefully structured process by which a pool of loans and other receivables are packaged and sold in the form of asset-backed securities to the investors to procure the required funds from them. Through this process relatively illiquid assets comprising loans and receivables are converted into securities. Securitization is cheaper source of financing in comparison to conventional fund raising instruments. In highly discontinuous and uncertain environment business risks arising out of tumultuous fluctuations in commodity prices, share prices, interest rates and foreign exchange rates have increased considerably which, in turn, have not only enhanced cost of managing business but also increased vulnerability of the organization. A finance manager will have to play crucial role in hedging the unwanted business risks of the firm. He has to take recourse to financial derivatives such as currency futures, stock index futures, interest rate futures, forward contracts and various kinds of swaps which can be significantly useful in minimizing risk exposure of the firm, facilitating unbundling of risk and offering greater flexibility for restructuring hedges based on changed market conditions. Thus, if Indian Corporates have to jumpstart and leapfrog the global competing, the CFOs will have to play pragmatic role strategically in every aspect of a company’s business and manage its affairs with new paradigms and perspectives and innovative problem-solving approaches and techniques. He has to be resilient, and business-oriented with deeper insights into the risks so as to foster stakeholders’ interests while maximizing value to the firm.
