Financial Management is an integral part of Business Management. Finance is one of the key functions in an organization. The other key functions in an organization are:
- Human Resources
Each of the above function has got sub-divisions – for example Production has maintenance, Administration has purchases etc. Finance deals with financial resources. Financial management as a corollary would deal with management of financial resources and related areas.
Some of the key finance functions are:
1. Financial planning and estimation of finance required for the organization
Any activity in a business enterprise requires planning for proper execution in time. Finance is required for any activity at least in the beginning and hence financial planning is the prime function of “Finance”. This involves detailed study of any activity from understanding the total funds requirement for that activity, when the funds will be required and how much funds will be required at different stages. For a new enterprise the entire resources have to come from outside (externally); for an existing enterprise, a part of the resources at least will be available from the profits made in the past and retained in business after declaring dividend.
Example No. 1:
We require Rs. 200 lacs for an activity. Let us see how it affects an existing enterprise. Let us assume the profits available to be Rs. 60 lacs. Then we require further resources of Rs. 140 lacs only. This is the difference between an existing enterprise and a new one. Financial planning will take this into account.
2. Mobilization of financial resources
Having ascertained in the above example that we require Rs. 200 lacs for a set activity, for a new enterprise we require the entire amount to be mobilised. For an existing enterprise with available profits of Rs. 60 lacs, we require only Rs. 140 lacs. The Financial manager will then assess all the alternative resources available to him (for details please refer to Chapter no. 4) keeping in mind the following parameters:
- Adequacy (availability in adequate quantity)
- Timely (availability in time) and
- At an affordable cost
3. Adequate supply in time etc.
This has been explained this in the above point. For reinforcement the student’s attention is drawn to one of the objectives of financial management at least in the short run, the objective of maximizing profits of the organization. The profits so maximized in turn enhance the Earning Per Share.
4. Management of cash in the organization
This involves the following steps:
- Ascertaining the average cash requirement by looking at the past figures and for a new enterprise, estimating this figure.
- Preparing the cash flow statement for a given period, taking all the cash inflows and cash outflows during the period to determine whether there is a surplus or deficit at the end of the period
- Arranging for funds from outside especially through a bank with whom the enterprise has loan facilities in case of deficit in the cash flow statement; if on the contrary, the cash flow statement reveals a surplus, dealing with this surplus in a suitable.
5. Management of investment outside the organization
Over a period of time the enterprise reinvests a part of the profits for future growth of the organization in business. The Finance manager can invest such funds outside the business in other enterprises also provided the parent enterprise does not require them immediately. Short-term surplus as revealed by the Cash flow statement is also invested for short duration. Thus investment outside one’s own business becomes the responsibility of the Finance Manager
6. Management of risk in foreign exchange etc.
A business enterprise may require imports and do exports also. Whenever this is done the invoice is in foreign currency. In imports the business enterprise requires foreign exchange while in exports it gets foreign exchange. There is a risk involved while doing imports or exports. The risk is that the exchange rate of the foreign currency in terms of Indian Rupees can keep changing. We will explain this through an example.
Example no. 2
We have a US Dollar bill for 1000 receivable after a month. Presently the exchange rate is 1 US Dollar = Rs.48.25. By the time the money is received after a month, in case the rate is less than Rs. 48.25, we will lose money. On the contrary if the exchange rate is more than Rs. 48.25 we will gain. Exactly opposite will be the effect in the case of imports. The importer will pay less if the exchange rate decreases and more if the exchange rate increases. There are ways and means of minimising the risk of foreign exchange. Finance manager is expected to take care of such risks.