There are some important responsibilities of financial management in a business enterprise,
which are performed by performing various functions which are known as finance functions. These are also called Scope or Contents of Finance Functions. There is no consensus among financial experts about these functions of financial management and their names. Different experts describe different functions of financial management and call the same function by different names. Some of these tasks are decision related which are of strategic importance, some tasks are of routine nature which result in action of decisions and some are related to non-recurring business activities. Therefore, from the point of view of study, these functions of financial management are given according to the following chart-
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| Function of Financial Management |
(i) primary or administrative functions;
(ii) auxiliary work, and
(III) routine work.
Primary or Administrative Finance Functions
Primary or administrative financial functions are meant to take important decisions related to finance. Reasoning is required for these decisions. Therefore, a high level of knowledge, skill and experience is required in the financial manager to take these decisions. To meet the short term and long term needs of the enterprise. The main objectives of financial management are receipt of funds, proper allocation and effective utilization and mobilization of profits and wealth. For the fulfillment of this objective the following administrative or decisional work has to be done.
1. Financial Planning
It is basically decision making. Therefore, the first task of a financial manager is to prepare a sound financial plan for the undertaking, whether it is new or old. According to Weston and Brime, “Planning refers to the determination of the goals or objectives of the business or the selection of the best option among the various options available and the formulation of policies and programs to achieve the objectives.” Financial planning is required in the organization and operation of the enterprise. The following three steps are taken in financial planning work:
Determination of financial objectives, both long term and short term,
Formulation of financial policies, capitalization, capital structure, sources of finance, appropriation of funds, dividends etc.
Re-planning to remove pitfalls and inefficiencies
2. Financial Control
Financial control is necessary for the successful implementation of the objectives, policies and programs laid down under financial planning. This is an important function of financial management. Under this, giving necessary direction and leadership to subordinate employees to achieve predetermined objectives, periodic evaluation of financial progress according to the plan and making necessary corrections in case of deviations. Management uses disease control method for this purpose. For proper control, the financial manager may establish a reporting system. According to Weston and Brime, control method involves (1) the acquisition of information, (ii) the drafting of information, (ii) the collection of information, (IV) the processing of information (v) the analysis of information, and (vi) the use of information.
3. Acquisition of Funds
The main function of the financial manager is to arrange the necessary funds. For this, the required capital quantity is first determined by estimating the amount to be invested in the assets (permanent, current and intangible) of the organization. After this, arrangements are made to get this capital quantity from various sources like equity share, preference share, loan etc. The source from which funds should be arranged is decided keeping in view the cost of capital, nature of cost (permanent or variable) and duration of the fund. Funds are arranged not only for meeting the initial financial requirements but also for future development, expansion and integration plans of the enterprise.
4. Allocation of Funds
The allocation of funds received in various assets is the function of financial management. These assets are of two types, fixed assets and current assets. Decisions about whether or not to invest money in fixed or long-term assets are made on the basis of the costs of these assets and the benefits or returns arising from them. These are called capital budgeting decisions. Decisions regarding investment in current or short-term assets are made keeping in mind the profitability and liquidity. Under-investment in current assets will increase the margin of profitability, but failure to pay current liabilities on time will invite the risk of bankruptcy and liquidity situation. On the other hand, excessive investment of funds in current assets will improve the liquidity and risk conditions but at the same time reduce the degree of profitability. Therefore, while appropriating funds in current assets, the financial manager has to see that there is a balance between profitability, liquidity and risk.
5. Distribution of Income
In this, it is decided that what part of the net profit is given as cash dividend.