Top 8 Functions Of Financial Management

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Financial management is the process of planning, directing, and controlling an organization’s financial resources. Its goal is to maximize the organization’s economic value and shareholder wealth. Financial managers play a critical role in ensuring that an organization has the financial resources it needs to achieve its strategic objectives. Top 8 Functions Of Financial Management.

Primary Functions Of Financial Management

Primary Functions Of Financial Management
Management of Cash
Estimating the Amount of Capital Required
Determining Capital Structure
Financial Control
Choice of Sources of Funds
Disposal of Profits
Procurement of Funds
Utilisation of Funds

Management of Cash

One of the most important functions of a finance manager is to ensure that there are sufficient cash balances available with the firm to meet its short-term obligations. This is known as cash management or working capital management.

Estimating the amount of capital required

A finance manager has to find out how much funds are needed by the firm for carrying out its activities. This is known as estimation of capital requirement or assessment of financial needs of the firm. The estimation of capital requirement is influenced by various factors such as sales forecast, price policy, nature and expansion plans of business, etc.

Determining capital structure

Once the amount of required capital is estimated, a finance manager has to work out an optimal capital structure. Capital structure refers to the proportionate relationship between equity share capital and debt-raising instruments such as preference shares, debentures, term loans, etc. An optimum or ideal capital structure is one which maximises the market value of shares or the wealth of shareholders.

Financial Control

Financial control is the process of ensuring that the financial resources of an organization are being used in an efficient and effective manner. It involves setting up financial targets and then monitoring and evaluating actual results against these targets. Financial control can be exercised at both the strategic and operational levels of an organization.

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Choice of Sources of Funds

After working out the capital structure, a finance manager has to choose the sources of funds. The sources of funds can be internal (from within the firm) or external (from outside the firm). The choice of source of funds depends upon various factors such as cost, nature of business, maturity period, etc.

Disposal of Profits or Surplus

A finance manager has to decide what to do with the profits or surplus generated by the firm. These profits can be distributed among the shareholders in the form of dividends or can be reinvested in the business for its future growth and expansion.

Procurement of Funds

Once the decision about the choice of sources of funds is taken, a finance manager has to raise or procure the required amount of funds from different sources. This process is known as procurement or mobilisation of funds.

Utilisation of Funds

After procuring the required amount of funds, a finance manager has to utilise or invest these funds in different assets such as land, buildings, machinery, shares, etc. The utilisation of funds should be done in such a way that the return from these assets is more than the cost of raising these funds.

These are some of the major functions of a finance manager. However, the role of a finance manager is not limited to these functions only. He has to perform many other tasks such as risk management, investment decision-making, etc. which are essential for the smooth running of a business organization.

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