10 Functions of Financial Management

Financial management is essential for properly and efficiently managing financial resources. Financial management duties ensure that the appropriate quantity of capital is available when a business requires it. These responsibilities include everything from funding acquisition through proper and efficient utilization. The way finance management operates has an impact on the entire organization’s operations. Continue reading if you’re seeking for a comprehensive list of financial management functions:

10 Functions of Financial Management

Financial management functions are discussed below:

1. Calculate the Requirement of Capital 

The first responsibility of a financial manager is to estimate the total capital required by the company to achieve its goal and objectives. The amount of capital required is determined by a number of factors, including the company’s size, predicted profitability, plans, and policies. Predictions must be created in a way that meets the company’s overall growth target while also allowing for a contingency plan. The capital need calculation for the company may include both short-term and long-term capital requirements.

2. Determine the Capital Structure 

The structure must be determined after the required capital has been estimated. Short-term and long-term equity are both used in the structure. It will also establish how much of the money must be owned by the company and how much must be raised from outside sources, such as VCs or IPOs.

3. Decide the Sources of Funds 

The next financial management responsibility is to determine where the capital will come from. The company may elect to take out bank loans, seek investors for financing in exchange for equity, or hold an IPO to obtain funds from the general public in exchange for shares. The source of funding is chosen and prioritized based on the benefits and drawbacks of each source, their impact on the company’s goal and mission, and the duration of financing.

4. Investment of Funds 

The decision of how to distribute cash to productive businesses is another crucial aspect of financial management. During each investment period, the financial manager must calculate the risk and expected returns. The investing strategies must also be chosen in such a way that there is little money loss and maximum profit optimization. Portfolio analysis, internal rate of return, net present value, and other tools may be used by the financial manager to obtain this information.

Recommended: Financial Management’s Purpose

5. Surplus Funds Disposal 

After making the necessary investments and expenditures, the financial manager must decide whether a portion of the surplus profits should be distributed to investors or reinvested in the business to improve its performance. As a result, the surplus money could be retained profits or dividend declarations.

In the case of retained earnings, the financial management must calculate the percentage of money disposed of after accounting for all costs associated with business innovation, expansion, and diversification.

When it comes to dividend declaration, the financial management must choose the optimal dividend rate as well as other advantages like 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 

Financial management activities have traditionally concerned with fund procurement and management. Yet, it also pertains to financial management inside the framework of the business. Financial forecasting, cost analysis, ratio analysis, and profit distribution systems, among other things, are examples of controls. This information can assist the financial management in making future financial decisions for the organization.

Recommended: Financial Management Objectives

8. Acquisitions and Mergers 

Mergers and acquisitions are one way for a company to grow. The term “acquisition” refers to the purchase of existing or new businesses that fit the buyer’s vision and goals. A merger occurs when two existing firms join forces to form a new entity. One of the responsibilities of financial management is to assist in the merger and acquisition choice by reviewing complicated financial analyses and securities of each company.

9. Planning of Tax 

One of the finance manager’s roles is to legally lower the amount of tax a company pays. The management must select appropriate investment schemes and do it in such a way that the company can save money on taxes on returns. The financial manager will also be in charge of safeguarding the assets of businesses that are currently being used for a certain activity, project, or enterprise.

10. Work on Capital Budgeting 

One of the most significant functions of financial management is to provide food for the company’s long-term decision-making. This is known as capital budgeting. In this phase, the manager is involved in sophisticated decision-making, and they may have to identify opportunities and difficulties that could have an influence on the organization.

Final Thoughts

Any company’s finances are its lifeblood. A firm cannot run without effective management, regardless of how profitable the product or service is. A financial manager is responsible for deciding and implementing the company’s financial policies.

Frequently Asked Questions

What is financial management?

It is the planning, organization, direction, and management of a company’s financial activities and choices.

Who is a financial manager?

They are in charge of carrying out all financial management responsibilities.

Why do businesses need capital?

Companies may require funds to purchase assets, cover working capital requirements, and/or expand their business.

What is a Return on Investment (ROI)?

It is a measurement of an investment’s profitability or loss over a given time period. Several financial decisions within the organization are based on the ROI.

What are assets and liabilities in business?

Assets are things that offer or could provide economic benefit to your company in the future. Liability refers to what a firm owes and will force the company to spend money on.

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