10 major financial management functions:

Financial management functions are vital for managing financial resources.

Finance is referred to as the provision of funds at the time when it is needed for
the business. Finance function involves the procurement of funds from a number
of sources and their proper utilization in business concerns. The basic concept
of finance comprises capital, funds, and amount. The core finance function is the
process of acquiring and utilizing funds for a business. Finance functions are
connected to the overall fund management of a business organization. The
finance function is also concerned with the decisions such as business nature,
size of the firm, type of machinery used, use of debt capital, liquidity position and
so on. A brief discussion of major financial management functions is stated

below:
1. Estimates the capital requirements of business:
A financial manager firstly has to make the estimation with regards to overall capital requirements of the
business. This will depend on several determinants like probable costs and expected profits and upcoming
programs and policies of the company. Predictions have to be made in an adequate and concern manner
which increases the earning capacity of business and which ensures proper use of financial resources.
Thus financial management functions guide a financial manager to estimate organizational capital
requirements.

2. Ascertains capital composition:

Once the estimation of capital requirement has been made with the best effort,
the capital structure of the enterprise has to be decided. This involves the
analysis of short- term and long- term debt equity. This will depend on the
proportion of possessed equity capital a company and other additional funds
which have to be raised from outside parties through borrowing.
3. Makes the Choice of sources of funds:
A financial manager needs to evaluate different sources of funds. A company
has many choices for raising additional funds to be procured in the business like
loans to be taken from banks and other financial institutions, issue of company
shares and debentures, public deposits to be drawn like in form of bonds. Choice
of a factor depends on the relative advantages and disadvantages of each
source and financing period.

4. Investment of total funds:

The finance manager has to decide how to allocate the total amount of funds
into profitable ventures. He has to make sure that there is safety on investment
and positive regular returns are possible. The capital should be invested in a
wisely manner so that there is less possibility of losing funds or experience
loses. For that, the manager can use different investment tools like portfolio
analysis, net present value, internal rate of return, an average rate of return and
so on.

5. Disposal of surplus:
Financial manager calculates profits of business at the end of an accounting
period. Then the net profits decision has to be taken by the finance manager of
the company. This decision can be made in two ways. He can declare a dividend
to the shareholders of a company where the ordinary shareholders will get the
profits in the form of money or share or retain profits for some purposes like
expansion, diversification or innovation of the business.

6. Manages of cash flow:

Finance manager of a company has to make decisions regarding cash
management. Cash is required for several purposes like payment of wages and
salaries to the workers, payment to the creditors, payment of electricity and
water bills, meeting current liabilities of the business, cost of maintenance of
having enough stock, purchase of raw materials for daily production etc.
7. Controls Finances:
The functions of a finance manager are not only to do a financial plan, procure
fund and utilize the funds but he also has to control the finances involving in the
business. This function can be done by many techniques like ratio analysis,
forecasting of financials, cost analysis and control and profit distribution
techniques etc.

8. Decisions regarding acquisitions and mergers:

A business organization can either be expanded through acquiring other
business or by entering into the business by mergers with other firms. While
acquisition decision denotes a process of purchasing new or existing companies,
the merger is a process where two or more companies join together in the
formation of a new business. During such decision, a financial manager has to
deal with many complex valuations of securities of each company.

9. Tax Planning and protection of Assets:

It is the duty of a financial manager to lessen the tax liability of the business. This
task should be performed wisely. It is very important that a finance executive
properly examines various schemes and invest accordingly. He should also
protect the assets engaged in the business to ensure the best use of the
resources.

10. Decision on Capital Budgeting:

Long-term decisions involve investing in share or bond, purchasing new
equipment, building new plant etc. These decisions are called capital budgeting.
In this decision making of the company financial managers faces many
complicated situations. As the process requires a huge amount of capital, it is
necessary that a financial manager identifies the investment opportunities and
involved challenges.

The efficient use of financial management functions helps a company to

maximize wealth. Financial management is a continuous and interrelated
process which involves identifying the required amount of capital that is needed
for running the business promptly, evaluating and selecting best alternative
sources of funds, allocating the funds according to the need of business area
and distributing earned profits.

Function of Financial Management

Estimation of capital required to commence a Business – It is the foremost function of the
financial management. It is capital amount which provide base for the commencement of a
business. It is required, to purchase fixed assets, to meet day-to-day expense of the business, to
meet cash requirement so to modernist and expand business.
Determination of capital structure –It is very important step which has to be taken by the
financial management. It is the second most step which a management has to decide about just
after estimating the capital requirements. It is determination of structure of capital of a company
e.g. mix of equity and debt, short-term and long-term debt ratio.
Choice of source of funds – It is the foremost of the financial manager to decide about ways by
which a company can raise its funds. There are several ways like equity shareholders,
debentures, banks, public-deposits etc. for the procurement of funds.
Utilization of raised funds – it is very easy for a company to raise its funds but it very challenging
for the company to utilize its raised funds. To get maximum return on investments, financial
manager has to invest funds in right and accurate place.
Proper disposal of profits – If a company raised its funds through shares, or debentures then it is
must for a management team to decide about its surplus funds at the end of year like how much
to retain within the company and how mush have to distribute among shareholders or debenture
holders etc.
Forecast of future needs and requirements – it is the responsibility of the financial management
to forecast future needs and requirements which are concerned to funds as immediate
arrangement is difficult.
Proper management of cash – it is very important to manage current assets and cash amount of
the company. It means that it must ensure channelized and continuous cash inflows and
outflows so that there is neither surplus or shortage of funds within the company.
Transaction control –it is one of the major parts of financial control. With the help of cash
budgeting, cost control, internal audit etc. financial management can control its unwanted or
needless transaction which gives positive results to business in long run.

Fiscal management is the process of planning, directing and controlling financial resources. The
term is associated with management responsibilities for expenditures working together with an
accounting team that is under the Chief Financial Officer of an organization.
 Administrative Financial Management Level

These are the top level management officials. They work directly under the
shareholders of the organizations and are even elected by the shareholders or by
the CEO of the organization.

 Financial Director – The top most management position in the

administrative financial management is of a financial director who is also
referred to as the Chief Financial Officer, CFO. Numerous years of vital
experience is required by the organization for this honorable
management position.

 Financial Consultant – These professionals are also termed as the

financial advisors and are government authorized and licensed officials
hired by a company to assist these companies in their beneficiary and
profitable decisions relating to finance of the company. This job title is
further sub categorized in two categories aka internal financial
consultants and external financial consultants.
Executive Financial Management Level

This is basically the middle level in the financial management  hierarchy.

Normally the head of the departments incorporates this ardent group. This group
includes –

 Financial Manager – This professional is basically the head of the

finance department for a company and hence play a crucial part in
managing as well as ensuring the company’s operating data and the
professional standards of the firm is up to the requirement. Along with
this, the growth and improvement of company’s financial area is also
handled by this covetous professional.

 Financial Analyst – A financial analyst is also termed as a financial

associate. He works as an assistant to the HOD of the finance department
of a company along with handling and managing the company’s financial
statements. Company’s investment strategies also come under the
responsibility of a financial analyst. Minimum of two to three years of
financial experience is required by the companies for hiring a financial
associate.

Supervisory Financial Management Level

This is basically the lowest level in the financial management hierarchy.

 Financial Trainee – The lowest level of the financial management

hierarchy incorporates a financial trainee. This person is basically a
finance graduate with little or even zero work experience in the industry.
These individuals work under the amorous experience and guidance of a
senior financial management official for gaining vital experience.
Thes powers and duties of the Bureau of Internal Revenue are:

 Reduction and collection of all internal revenue taxes, fees and charges; and
 enforcement of all forfeitures, penalties, and fines connected therewith, including the execution of
judgments in all cases decided in its favor by the Court of Tax Appeals and the ordinary courts;
 It shall also give effect to the administer supervisory and police powers conferred to it by the National
Internal Revenue Code and special laws

Problems of Government Borrowing

15 April 2019 by Tejvan Pettinger

What are the problems of high government borrowing?

The potential problems of government borrowing include; higher debt interest
payments, a need to raise taxes in the future, crowding out of the private sector and – in
some cases – inflationary pressures.

Higher debt interest payments. As borrowing increases, the government have to pay
more interest rate payments on those who hold bonds. This can lead to a greater
percentage of tax revenue going to debt interest payments.
Higher interest rates. In some circumstances, higher borrowing can push up interest
rates because markets are nervous about governments ability to repay and they demand
higher bond yields in return for perceived risk. This was particularly a problem for
countries in the Eurozone because in 2011/12 there was no real lender of last resort. In
periods of high inflation, investors will also demand higher bond yields – e.g. in the
1970s, high government borrowing caused an increase in bond yields.

Higher interest rates on government bonds tend to push up other interest rates in the
economy and reduce spending and investment. (This impact of higher interest rates in
reducing private sector spending is known as financial crowding out)

Crowding out A classical monetarist argument is that high levels of government

borrowing cause ‘crowding out’. What they mean is that the government borrow from
the private sector by selling bonds. Therefore, because the private sector lends money to
the government, they have less money to spend and invest. Therefore, although
government spending increases, private sector spending falls. Also, it is possible
government spending may be more inefficient than the private sector and so we get a
decline in output.

 However, crowding out is unlikely to apply in a recession because in a

recession private sector saving is rising and there are surplus savings. If the
government borrows, they are making use of surplus savings and so do not
‘crowd out’ the private sector. The government are spending to offset the rise
in private sector saving.
Higher taxes in the future. If the debt to GDP rises rapidly, the government may need
to reduce debt levels in the future. It means future budgets will need to increase taxes
and/or limit spending. The danger is that if taxes are increased too early too quickly, it
could snuff out the recovery and cause a further downturn. But, if they don’t raise taxes,
markets may be alarmed at the size of borrowing. High government borrowing can cause
difficult choices for future chancellors; it is a difficult situation to be in.

Vulnerable to capital flight. If a government finances its deficit by borrowing from

abroad, then there is potential for the economy to suffer from capital flight in the future.
For example, if investors feared a country like Greece would be forced out of the Euro
and devalue, investors would lose out from the devaluation. Therefore, this would
encourage foreign investors to sell – causing more pressure on the economy.
Inflationary pressures. It is rare for government borrowing to cause inflation. But, some
governments may be tempted to deal with high levels of debt by printing more money.
This increase in the money supply can cause inflationary pressures to increase.
uppose markets fail to buy enough gilts to finance the deficit, the deficit can always be
financed through ‘monetisation’. i.e. creating money. This creation of money creates
inflation, reduces the value of the exchange rate and makes foreign investors less willing
to hold that countries debt.
However, in the period 2010-16 in the UK and US, quantitative easing did not cause
inflation because of the falling velocity of circulation (and depressed economy). But, if the
economy was close to full capacity, printing money to ‘monetize the debt’ would lead to
inflation. In the case of Zimbabwe, high government debt and printing money led to a
severe case of hyperinflation.

How Does Fiscal Policy Work?

Proponents of Fiscal Policy utilization believe that public finance can influence

inflation and employment by manipulating two key variables:

1. The level of government spending or the amount of money the government

spends
2. The tax rate or the amount of money the government earns

In times of economic contraction, such as the Great Depression in the 1920s and
1930s and the 2008-2009 financial crisis, the government engages in Expansionary
Fiscal Policy. This involves a reduction in taxes and an increase in government
spending. Both of these measures are meant to stimulate the economy and increase
the level of activity within the economy. During a recession, producers and
consumers both lose faith in the market. Thus, consumers reduce consumption and
producers cut production. As a result, the economy stagnates.

In 2009, when Barack Obama took office as President of the United States, he signed
the American Recovery and Reinvestment Act (ARRA). The ARRA was a stimulus
package that involved government spending amounting to almost $800 billion. The
ARRA was meant to create jobs, boost demand, and improve faith in the economy as
a whole. Many have argued (mostly fiscal conservatives) that Obama could have
achieved a similar result by cutting taxes

If instead, the government faces a situation of high inflation characterized by excess

demand in the market, it can engage in contractionary fiscal policy. For example, the
government can impose new taxes and raise existing tax rates. This will reduce
disposable income, which will cause consumption and investment to fall, thereby
correcting the situation of excess demand.

 
 

Taxes vs. Government Spending

According to classical Keynesian economics (derived directly from the General

Theory), a reduction (or increase) in taxes and an increase (or reduction) in
government spending affect the economy in similar ways. However, the government
may choose to utilize one over the other for various reasons. For instance, raising
taxes tend to make governments extremely unpopular. Hence, most governments,
when faced with inflation and excess demand in the market, tend to lower
government spending instead of raising taxes.