One of the most important things to think about at work is how to handle money. Reason being, a company can’t run well if its resources aren’t well-managed. Knowing and using good management methods while dealing with and spending money is essential for every successful business, and this is where financial management comes in. In this article, we will discuss about functions of financial management in brief with examples for your better understanding.
Financial management primarily entails planning, coordinating, leading, and regulating the activities related to an organization’s finances. Streamlining the application of management principles to monetary resources or assets is yet another perk of the approach. Compliance with rules and performance in one’s industry are strong indicators of a company’s fiscal management skills. You need solid preparation and solid execution to finish the financial management process.
Functions of Financial Management
It is the role of the finance manager to guarantee that sufficient funds are available for daily operations, including payroll and the purchase of manufacturing materials. Included in this group is cash management, the practice of recording the monetary inflow and outflow of an organization. It takes more than just keeping tabs on cash to be a good financial manager. Revenue identification, the act of recording a company’s earnings in a way that complies with GAAP, is also a part of it. Maintaining a steady accounts receivable turnover rate is a cornerstone of sound cash management and savings strategies. Given below are a few points on functions of financial management that you should know before you think of money, investing, business and managing it.
The Cost
Setting the prices for goods, services, and commodities is one of the company’s most crucial decisions. A company’s marketing, reputation, and bottom line are all affected by its pricing policies. Determining an appropriate price is the most collaborative choice a marketing manager can make. Demand in the market could shift depending on the pricing, and the decision shows the company’s position in the competition. That said, any competent CFO can explain the importance of profit margins to the company’s health and how expenses shift at different stages of production.
Managing Money
The financial manager, in addition to planning the receipt, dispersal, and expenditure of money, is responsible for developing systems and protocols to monitor the financial resources. And that’s on top of finding a way to make money. To achieve this goal, companies can employ various tools and techniques, such as financial forecasting, pricing, cost control, and ratio analysis.
Functions of Liquidity
The stability of the company plans and the availability of sufficient funds are two of the most critical responsibilities of any financial management. First things first: in order to pay its obligations, the firm gets revenue from a variety of sources. It will be far more advantageous at different points in time to have access to multiple funding sources. Second, you need a strategy for your cash flow, which means making sure your regular businesses can easily invest their money. Maintaining a steady flow of income while controlling expenses is often the key. Because it is critical for the business to know when and from whom it will receive payments. Lenders and providers are paid for their services using the remaining funds.
Earnings Distribution
Financial management decides the portion of the company’s earnings to be distributed as dividends and retained. So, these decisions are influenced by factors like earnings trends, share market price, cash required for future activities, and more.
Establishing a Financial Framework
The next step, after figuring out how much money is needed, is to decide which funding sources should be utilized and in what proportion. In this case, the responsibility for determining the right mix of equity and debt, including the right mix of short-term and long-term debt, lies with financial management. The goal is to maximize value for shareholders while minimizing the expense of capital.
Capital Allocation
Upon completion of the process for calculating the necessary funds. A choice on your financial strategy is required with regard to capital structure. Here, we study and analyze both long-term and short-term equity and debt. The amount of equity capital a company has and the amount of additional funding it needs from outside sources are the most common factors that will dictate this.
Consolidations and Purchases
Major strategic choices may be necessary for a company’s survival in a cutthroat market. A merger, which would include the formation of a new firm, could be one way for them to expand. One more choice is to buy out other companies. How to evaluate stocks in an analytical way is at the heart of these choices. Financial managers are in charge of these kinds of operations.
Decisions on Dividends
The payment of dividends to shareholders is the primary motivation behind most dividend decisions. Many factors are taken into account when calculating the dividend payout ratio. These include the capital needed for the company’s projects, the gap between the expected returns on those projects and the returns that shareholders can expect in the normal market, the stability of the dividend payment, the market’s expectations for earnings, shareholders’ tax concerns, and many more. This becomes the top priority that needs fixing right now.
Investment Planning
The term “capital budgeting” describes a set of possibilities that may include investing in stocks or bonds, building new factories, or buying new equipment. It is imperative that a company’s financial management weigh the pros and cons of potential investments before committing large sums of money.
Revenue Distribution
It is the responsibility of the individual overseeing the company’s financial matters to determine the net income. A company’s financial management system offers two strategies to achieve this. After deciding the payout amount and any potential bonuses, the company can declare a dividend. If the company retains money, its goals for growth, innovation, or diversity will still influence the determined quantity.
Capital Needs Assessment
The person in charge of the finance department is the most suitable to predict the organization’s cash flow requirements. Also, this involves considering anticipated revenue, pricing, regulations, policies, and upcoming projects. An essential part of managing one’s finances is making predictions. If a company wants to increase its profits, it must set realistic goals and objectives.
Price Regulation
Comprehensive cost-accounting systems are available to many large organizations, allowing them to keep track of spending on money management matters. Data processing systems receive new inputs daily. Additionally, computers are designed to visually present statistically significant data regarding tasks and activities. The functions of financial management include budgeting, financial planning, and investment decision-making.
FAQ
In Making Decisions, what does Financial Management Play a Part?
If you can get a handle on money management, you can start to think like a business manager. In doing so, you can boost the company’s performance without giving up any control over its finances. Enterprises may keep tabs on their finances and make educated investment choices with the help of the financial management system’s transparent data.
How can i Write an Essay about Business Finance?
A company’s “financial management” is the department responsible for raising and allocating the capital necessary for the business to run smoothly, as stated in the definition. Therefore, keeping track of money and making sure it gets spent wisely is what financial management is all about.
An Essay on Financial Management should Primarily Aim to do What?
When managing a group’s or company’s finances, the goal should be to maximize profits while minimizing expenses. Even more importantly, for its long-term viability and success, it needs to keep showing promising patterns and increasing its income.
Final Words
In order to help you simplify the financial management of your business, there are a lot of options accessible. One such program is SAP Business One, the gold standard for monitoring financial metrics like sales, inventory, and profit. The primary objectives of the financial function are to maintain accurate records that other business units can use for planning and decision-making, and to supply other business units with the financial information they need to operate efficiently and successfully inside the organization. In conclusion, the topic of functions of financial management is complex and has a huge impact on many people. Engage yourself in this engaging post to explore features of financial management topic from a historical perspective.
