Question

What is financial management? State its role in the organisation in brief.

Answer 1

Being a specialized function of general management, financial management is mainly concerned with raising of finance and its optimum and effective utilization for achievement of goals of the organization. It deals with planning, organizing, directing, co‐ordinating and controlling financial activities. It is also called as ‘Resource Management’.
In the words of Ezra Soloman, “Financial Management is concerned with effective use of an important economic resource, namely capital funds”. In the words of Kuchal S. C., “Financial Management deals with procurement of funds and their effective utilization in business”.


The role of financial management can be explained with reference to the functions performed by it. They are ‘routine functions’ and ‘executive functions’

Routine Functions: [Mnemonic: KFC CD]

I. Record Keeping and Reporting:
         The finance manager has to keep records of all financial transactions and send the reports to different departmental heads.

ii. Preparing various Financial Statements:
     The finance manager prepares various financial statements to analyze the position and performance of an organization.

iii. Cash Planning:
        Cash planning is properly done by the finance manager as it allows the company to plan its working capital.

iv. Credit Management:
            The financial manager has to manage the credit properly. This means managing the funds which are due (with the creditors) and accordingly deciding the credit period that is to be offered to the debtors.

v. Reporting to Directors:
        Providing accurate information to Board of Directors on current financial position for making decisions of purchases, marketing, pricing etc.

Executive functions: [Mnemonic: CAR DIP]

i. Checking and Analysis of Financial Performance:
        An organization prepares and analyzes various financial statements which helps in improving techniques of financial control.

ii. Advising Board of Directors:
            A finance manager brings to the notice of the Board of Directors problems related to finance and also suggests possible solutions for the same. He also gives advice on important matters such as pricing, expansion, acquisition, dividend policy etc.

iii. Forecasting Financial Requirements:
       Forecasting of finance means projection of financial needs of business for future. In simple words, forecasting means budgeting financial needs of the expected programmes. An organization requires capital i.e. fixed capital (long term) and working capital (short term) for running its business

Forecasting not only considers the amount of funds required but also considers:
when the funds are required, duration for which funds are required, and kind of funds (i.e. owned or borrowed).

iv. Deciding Sources of Funds:
         After determining the amount of finance required, various sources (such as shares, debentures, financial institutions, money lenders etc.) of raising such funds are to be considered. Utmost care is to be taken while selecting the source as there needs to be a proper balance between owned funds and owed funds. Further, there has to be a proper balance between long term funds and short term funds.

V. Investment Decisions:
         After raising the funds, these funds must be wisely utilized. Investment decision ensures effective utilization of funds raised by the organization in: long term assets or fixed assets such as land, building, machinery, furniture etc. short term assets or current assets such as inventory, account receivables, etc. The decision regarding fixed assets is popularly known as ‘capital budgeting’.

           Whereas, the decision regarding current assets is known as ‘working capital management’. It becomes the responsibility of the finance manager to ensure efficient utilization of every current asset to maintain control on cash inflow and cash outflow.

vi. Dividend Policy:
          A finance manager has to decide the proportion of profit that it is to be retained in the business for future expansion and the proportion that is to be distributed as dividend among shareholders. It is the prime duty of the finance manager to balance the investor’s expectations and use of retained earnings for future expansion or acquisition of additional assets.