Functions of Financial Management

The functions of financial management are guided by the ultimate aim of any business i.e. profit and wealth maximization. If we broadly classify the functions of a finance head of the business, it can be the procurement of funds and utilization of funds. The objective underlying the function of procurement of funds is to minimize the cost of funds whereas the objective behind the utilization of funds is to maximize the returns.

Following is a diagrammatic representation of the Functions of Finance. Extracted from Prasath Saravana B, Padhuka’s Student’s Handbook on Cost Accounting And Financial Management.

Functions of Finance

PROCUREMENT/SOURCING OF FUNDS

Assessing the Requirement of Funds

The function of procurement of funds starts from estimating the requirement of funds. It involves a lot of forecasting exercises to identify each and every future requirement of the project and find out the sum required for investment in fixed assets and working capital. Not only the quantum of a requirement is enough, the finance manager has also to decide the timing of that requirement. The timing of funds is very important in financial management because it carries time value of money and we know ‘a dollar today is the same as a dollar 1 year later’.

Financing Decisions/Capital Structure Decisions

Once a reasonable estimate of funds is charted out, the capital structure decisions would finalize two things viz. a) the mix of long-term finance and short-term finance 2) the mix of own funds and debt funds. Longs term funds are normally used to finance long-term requirements such as fixed assets, other long-term investments and a part of the working capital that remains permanently invested at any point of time.

UTILIZATION/APPLICATION OF FUNDS

Working Capital Management Decisions

Working capital management is a very important day to day activity for a finance manager. It spreads over both the broader functions i.e. procurement as well as utilization of funds. It mainly involves management of current assets and current liabilities and keeps the gap between two managed as per the available funds with the organization. Cash management is a big task in working capital management. The finance manager has to ensure that all the branches, units etc have the sufficient cash to address the necessary expenses. The smoother the management of cash, the smoother is the flow of operations of the business.

Dividend Decisions

Dividend decisions mainly involve taking decisions in relation to the payment of dividend to the shareholders. The main concerns to handle is to decide the dividend payout ratio which is dependent on a lot of things like requirement of funds to the company in their projects, the comparison of returns expected in company’s projects and the return available to the shareholder in the normal market, stability of the dividend payment, market expectations, trend of earnings, tax considerations to the shareholders etc.

Investment Decisions/Capital Budgeting

Investment decisions involve utilization/application of funds in the right mix of projects and fixed assets to maximize the returns for the organization. There are various techniques used like Net Present Value, Internal Rate of Return, and Payback Period etc.

Financial Analysis/Performance Appraisal

The financial analysis is neither included in the functions of the finance but it is necessary to evaluate all the functions of finance which are performed. This evaluation results in the findings for improvements etc. Performance appraisal assesses the effectiveness of procurement of funds and their respective utilization.

There are other functions like dealing with day to day transactions and negotiating with the creditors, debtors, bankers etc.

Last updated on : February 27th, 2018
What’s your view on this? Share it in comments below.

One Response

  1. EMILIA SIMON

Leave a Reply

Financing Strategies
  • Intellectual Property Rights
    Intellectual Property Rights
  • Agency Cost
    Agency Cost
  • Shareholder’s Wealth Maximization Vs. Stakeholder Welfare as a Corporate Objective
    Shareholder’s Wealth Maximization Vs. Stakeholder Welfare
  • Financing Policy
    Financing Policy
  • Subscribe to Blog via Email

    Enter your email address to subscribe to this blog and receive notifications of new posts by email.

    Recent Posts

    Find us on Facebook


    Related pages


    economic order quantity model inventory managementdefinition of vertical mergerwhat is a overdraft facilitypayback period in project managementdifference between bond and debentureassest definitionmeaning of profitability indexdisadvantages of income statementoperating profits formulacash operating cycle formulathe internal rate of return irrcontingent liability meaningamerican depository recieptsformula for turnover ratiooperating profit calculatormeaning of incremental in hindiwealth management investopediaasc 360 impairmentsimilarities between management accounting and cost accountinghow to calculate inventory turnover ratioreceivables turnover ratio formulaare bonds secured or unsecuredlimitations of liquidity ratiosdebt to equity ratio interpretation exampleregistered debenturesdebt turnover ratio formulaadvantages of capitalisationreturn on capital employed ratio interpretationoverdraft loan interest ratespurchasing vs leasingroe equationliquidation valuedebt equity ratio formula with exampledisadvantages of investing in sharesifrs definition of assetgearing ratio debt to equitythe payback methodhigh inventory turnover ratio indicatesformula for epsincreasing overdraftbep analysiswacc and cost of equitywhat is the formula for inventory turnoverprofit leverage effect formulaaccounting profitability ratiospercentage of sales forecasting methodhow to calculate depreciation and amortization expensecalculate pay back periodzero based budgeting advantages and disadvantageswhat is beditreturns on capital employednon constant dividend growth calculatorirr appraisalcost of debt in wacccapital budgeting techniques advantages and disadvantagespvifa calculationhow to improve solvency ratiopayback method disadvantagesdefine intangible assetdefine management accountantprofitability ratios accountingoperating lease vs finance lease accountingloan debenturedebtors account receivableretained profits advantages and disadvantagesprofit leverage effect definitiondouble entry bookkeeping system definitionproject waccprofitibility indexsteps in zero based budgetingsales turnover ratio definitiondebt equity ratio analysis interpretationwhat does bank overdraft meanowners equity definition in accountinghow to calculate payables turnover