Anil’s Commerce +3 3rd yr FM Unit – 1 Ch - 1

Unit 1 : Nature & Scope of Financial Management

Sl. No Topic Page Nos
01 What is Finance & Business Finance 2
02 Describe the evolution of FM 3
03 What is FM & explain its Scope 4
04 Relation of Finance with Business functions 5
05 Objectives of FM 6
06 Financial Decisions & Inter-relation 9
07 Functions of a Finance Manager/ Importance 11

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 Anil’s Commerce +3 3rd yr FM Unit – 1 Ch - 1
Q.No.1 WHAT IS FINANCE & BUSINESS FINANCE ?

Finance (Introduction)
• Finance is defined as the provision of money at the time when it is required. Every enterprise,
whether big, medium or small, needs finance to carry on its operations and to achieve its targets.
• Finance refers to the management of flows of money through an organisation. It concerns with the
application of skills in the manipulation, use and control of money.
• In fact, finance is so indispensable today that it is rightly said to be the lifeblood of an enterprise.
Without adequate finance, no enterprise can possibly accomplish its objectives.

Finance

PUBLIC FINANCE PRIVATE FINANCE

- Government Institutions - Personal finance

- State Governments - Business Finance
- Local Self-governments - Finance of non-profit organisation
- Central Government
• The subject of finance has been traditionally classified into two classes : (i) Public Finance ; and (ii)
Private Finance.
i. Public finance deals with the requirements, receipts and disbursements of funds in the
government institutions like State Govt., local self-governments and Central Government.
ii. Private finance is concerned with requirements, receipts and disbursements of funds in case of
an individual, a profit seeking business organisation and a non-profit organisation.
• Thus, private finance can be classified into:
(i) Personal finance; (ii) Business finance ; and (iii) Finance of non-profit organisations.
➢ Personal finance deals with the analysis of principles and practices involved in managing one's
own daily need of funds.
➢ The study of principles, practices, procedures, and problems concerning financing
management of profit making organisations engaged in the field of industry, trade, and
commerce is undertaken under the discipline of business finance.
➢ The finance of non-profit organisation is concerned with the practices, procedures and
problems involved in financial management of charitable, religious, educational, social and
other similar organisation.

Business Finance
• Literally speaking, the term 'business finance' connotes finance of business activities. It is composed of
two words (i) business, and (ii) finance.
• The word 'business' literally means a 'state of being busy'. All creative human activities relating to the
production and distribution of goods and services for satisfying human wants are known as business.
It also includes all those activities which indirectly help in production and exchange of goods, such as,
transport, insurance, banking and warehousing, etc. Broadly speaking, the term 'business' includes
industry, trade and commerce.

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 Anil’s Commerce +3 3rd yr FM Unit – 1 Ch - 1
• Finance may be defined as the provision of money at the time when it is required. Finance refers to
the management of flows of money through an organisation. It concerns with the application of skills
in the manipulation, use and control of money.
• 'Business finance' is an activity or a process which is concerned with acquisition of funds, use of
funds and distribution of profits by a business firm. Thus, business finance usually deals with financial
planning, acquisition of funds, use and allocation of funds and financial controls.
Business finance can further be sub-classified into three categories, viz ;
(i) Sole-proprietory finance, (ii) Partnership firm finance, and (iii) Corporation or company finance

Business Finance

Sole-Propritory Partnership Firms Company or

Finance Finance Corporation FINANCE

Q.No.2 DESCRIBE THE EVOLUTION OF FM

The evolution of financial management can be studied under the following 3 phases :
1. The Traditional Phase 2. The Transitional Phase 3. The Modern Phase
1. THE TRADITIONAL PHASE:-
• Financial management emerged as a distinct field of study only in the early part of 20th century as
a result of consolidation movement and formation of large sized business undertakings.
• In the initial stages of the evolution of financial management, emphasis was placed on the study
of sources and forms of financing the large sized business enterprises.
• The grave economic recession of 1930's rendered difficulties in raising finance from banks and
other financial institutions. Thus, emphasis was laid upon improved methods of planning and
control, sound financial structure of the firm and more concern for liquidity.
• The ways and means of evaluating the credit worthiness of firms were developed.
2. TRANSITIONAL PHASE:-
• The post World War II era necessitated reorganization of industries and the need for selecting
sound financial structure.
• In the early 50's the emphasis shifted from the profitability to liquidity and from institutional
finance to day to day operations of the firm.
• The techniques of analysing capital investment in the form of 'capital budgeting' were also
developed.
• Thus, the scope of financial management widened to include the process of decision-making
within the firm.
3. THE MODERN PHASE:-
• The modern phase began in mid-50’s and the discipline of financial management has now
become more analytical and quantitative.
• 1960's witnessed phenomenal advances in the theory of 'portfolio analysis' by Microwitz, Sharpe,
Lintner etc.
• Capital Asset Pricing Model (CAPM) was developed in 1970's. The CAPM suggested that some of
the risks in investments can be neutralised by holding of diversified portfolio of securities.
• The 'Option Pricing Theory' was also developed in the form of the Binomial Model and the Black-
Scholes Model during this period.
• The role of taxation in personal and corporate finance was emphasised in 80's.

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 Anil’s Commerce +3 3rd yr FM Unit – 1 Ch - 1
• Further, newer avenues of raising finance with the introduction of new capital market
instruments such as PCD's, FCD's, PSB's and CPP's etc. were also introduced.
• Globalisation of markets has witnessed the emergence of 'Financial Engineering' which involves
the design, development and implementation of innovative financial instruments and the
formulation of creative optimal solutions to problems in finance. The techniques of models,
mathematical programming and simulations are presently being used in corporation finance and
it has achieved the prime place of importance.
• We may conclude that financial management has evolved from a branch of economics to a
distinct subject of detailed study of its own.

Q.No.3 WHAT IS FINANCIAL MANAGEMENT & EXPLAIN ITS SCOPE.

Meaning
• Financial management refers to that part of the management activity which is concerned with the
planning and controlling of firm's financial resources.
• It deals with finding out various sources for raising funds for the firm. The sources must be suitable
and economical for the needs of the business. The most appropriate use of such funds also forms a
part of financial management. It is a separate managerial activity.

Definition
• According to Weston and Brigham, "Financial management is an area of financial decision-making,
harmonising individual motives and enterprise goals."
• According to J.L. Massie, "Financial management is the operational activity of a business that is
responsible for obtainting and effectively utilising the funds necessary for efficient operations."
• According to Howard and Upon, “Financial management is the application of the planning and control
functions to the finance function.”
• According to R.C. Osborn, “The finance function is the process of acquiring and utilizing funds by a
business”
Scope of FM
1. Estimating Financial Requirements :-The first task of a financial manager is to estimate short-term
and long-term financial requirements of his business. For this purpose, he will prepare a financial
plan for present as well as for future. The amount required for purchasing fixed assets as well as need
of funds for working capital will have to be ascertained. The estimations should be based on sound
financial principles so that neither there are inadequate nor excess funds with the concern. The
inadequacy of funds will adversely affect the day-to-day working of the concern whereas excess funds
may tempt a management to indulge in extravagant spending or speculative activities.
2. Deciding Capital Structure :- The capital structure refers to the kind and proportion of different
securities for raising funds. After deciding about the quantum of funds required, it should be decided
which type of securities should be raised. A decision about various sources for funds should be linked
to the cost of raising funds. If cost of raising funds is very high, then such sources may not be useful
for long. A decision about the kind of securities to be employed and the proportion in which these
should be used is an important decision which influences the short-term and long-term financial
planning of an enterprise.
3. Selecting a Source of Finance :- After preparing a capital structure, an appropriate source of
finance is selected. Various sources from which finance may be raised, include : share capital,
debentures, financial institutions, commercial banks, public deposits, etc. If finances are needed for
short periods then banks, public deposits and financial institutions may be appropriate ; on the other
hand, if long-term finances are required then share capital and debentures may be useful. If

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 Anil’s Commerce +3 3rd yr FM Unit – 1 Ch - 1
management does not want to dilute ownership then debentures should be issued in preference to
shares. The need, purpose, object and cost involved may be the factors influencing the selection of a
suitable source of financing.
4. Selecting a Pattern of Investment :- When funds have been procured then a decision about
investment pattern is to be taken. The selection of an investment pattern is related to the use of
funds. A decision will have to be taken as to which assets are to be purchased ? The funds will have to
be spent first on fixed assets and then an appropriate portion will be retained for working capital. The
decision making techniques such as Capital Budgeting, Opportunity Cost Analysis etc. may be applied
in making decisions about capital expenditures.
5. Proper Cash Management :- Cash management is also an important task of finance manager. He has
to assess various cash needs at different times and then make arrangements for arranging cash. Cash
may be required to (a) purchase raw materials, (b) make payments to creditors, (c) meet wage bills ;
(d) meet day-to-day expenses. The usual sources of cash may be : (a) cash sales , (b) collection of
debts, (c) short-term arrangements with banks etc. The cash management should be such that neither
there is a shortage of it and nor it is idle. Any shortage of cash will damage the creditworthiness of the
enterprise. The idle cash with the business will mean that it is not properly used. It will be better if
Cash Flow Statement is regularly prepared so that one is able to find out various sources and
applications. If cash is spent on avoidable expenses then such spending may be curtailed. All this
information will help in efficient management of cash.
6. Implementing Financial Controls :- An efficient system of financial management necessitates the use
of various control devices. Financial control devices generally used are, : (a) Return on investment, (b)
Budgetary Control, (c) Break Even Analysis., (d) Cost Control, (e) Ratio Analysis (J) Cost and Internal
Audit. Return on investment is the best control device to evaluate the performance of various
financial policies. The higher this percentage, better may be the financial performance. The use of
various control techniques by the finance manager will help him in evaluating the performance in
various areas and take corrective measures whenever needed.
7. Proper Use of Surpluses :- The uitlisation of profits or surpluses is also an important factor in financial
management. A judicious use of surpluses is essential for expansion and diversification plans and also
in protecting the interests of shareholders. The ploughing back of profits is the best policy of further
financing but it clashes with the interests of shareholders. A balance should be struck in using funds
for paying dividend and retaining earnings for financing expansion plans, etc.. A finance manager
should consider the influence of various factors, such as (a) trend of earnings of the enterprise,
(b) expected earnings in future, (c) market value of shares, (d) need for funds for financing expansion.

Q.No.4 RELATIONSHIP OF FINANCE WITH OTHER BUSINESS FUNCTIONS

'Business function' means functional activities that an enterprise undertakes in achieving its desired
objectives. These functions may be classified on the basis of its operational activities.
Business Finance

Purchase Production Distribution Accounting Personnel Research and

Function Function Function Function Function Development Function

Finance function of a business is closely related to its other functional areas. Funds will be wasted in the
absence of efficient production and in the absence of proper marketing. Most of the important decisions
of a business enterprise are taken on the basis of availability of funds. Financial policies of a firm should
be devised in such a manner so as to match the requirements of other functional areas. The relationship
between finance function and other business functions of an enterprise is discussed below :

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 Anil’s Commerce +3 3rd yr FM Unit – 1 Ch - 1
1. Purchase Function :- Materials required for production of commodities should be procured on
economic terms and should be utilised in efficient manner to achieve maximum productivity. In order
to minimise cost and exercise maximum control, various material management techniques such as
economic order quantity (EOQ), determination of stock level, perpetual inventory system etc. are
applied. The task of the finance manager is to arrange the availability of cash when the bills for
purchase become due.
2. Productivity Function :- Production function occupies the dominant position in business
activities and it is a continuous process. Production function involves heavy investment in fixed assets
and in working capital. Naturally, a tighter control by the finance manager on the investment in
productive assets becomes necessary. It must be seen that there is neither over-capitalisation nor
under-capitalisation. Cost-benefit criteria should be the prime guide in allocating funds.
3. Distribution Function :- As goods produced are meant for sale, distribution function is an
important business activity. It is more important because it provides continuous inflow of cash to
meet the outflow thereof. So while choosing different distributing channels, media of advertisement
and sales promotion devices, the cost benefit criterion should be the guiding factor. As every aspect of
distributory function involves cash-outflow and every distributing activity is aimed at bringing about
inflow of cash, hence both the functions are closely inter-related.
4. Accounting Function :- Moreover, the efficiency of the whole organisation can be greatly improved
with correct recording of financial data. All the accounting tools and control devices, necessary for
appraisal of finance policy can be correctly formulated if the accounting data are properly recorded,
For example, the cost of raising funds, expected returns on the investment of such funds, liquidity
position, forecasting of sales, etc. can be effectively carried out if the financial data so recorded are
reliable. Hence, the relationship between accounting and finance is intimate and the finance manager
has to depend heavily on the accuracy of the accounting data.
5. Personnel Function :- No business function can be carried out efficiently unless there is a sound
personnel policy backed up by efficient management of personnel. A sound personnel policy includes
proper wage structure, incentives schemes, promotional opportunity, human resource development
and other fringe benefits provided to the employees. All these matters affect finance. But the finance
manager should know that organisation can afford to pay only what it can bear. It means that
expenditure incurred on personnel management and the expected return on such investment through
labour productivity should be considered in framing a sound personnel policy.
6. Research and Development :- In the world of innovations and competitiveness, expenditure on
research and development is a productive investment and R & D itself is an aid to survival and growth
of the firm. Unless there is a constant endeavour for improvement and sophistication of an existing
product and introduction of newer varieties, the firm is bound to be gradually out marketed and out
of existence. However, sometimes expenditure on R & D involves a heavier amount, disproportionate
to the financial capacity of the firm. In such a case, it financially cripples the enterprise and the
expenditure ultimately ends in a fiasco. On the other hand, heavily cutting down expenditure of R & D
blocks the scope of improvement and diversification of the product. So, there must be a balance
between the amount necessary for continuing R & D work and the funds available for such a purpose.

Q.No.5 OBJECTIVES OF FINANCIAL MANAGEMENT

Financial management is concerned with procurement and use of funds. Its main aim is to use business
funds in such a way that the firm's value / earnings are maximised. The main objective of a business is to
maximise the owner's economic welfare. This objective can be achieved by :
1. Profit maximization and 2. Wealth maximization

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 Anil’s Commerce +3 3rd yr FM Unit – 1 Ch - 1
PROFIT MAXIMISATION
Profit earning is the main aim of every economic activity. No business can survive without earning
profit. Profit is a measure of efficiency of a business enterprise. The accumulated profits enable a
business to face risks like fall in prices, competition from other units, adverse government policies etc.
Thus, profit maximisation is considered as the main objective of business.
Arguments in favour of profit maximisation :
i. When profit-earning is the aim of business then profit maximisation should be the obvious
objective.
ii. Profitability is a barometer for measuring efficiency and economic prosperity of a business
enterprise, thus, profit maximisation is justified on the grounds of rationality.
iii. Economic and business conditions do not remain same at all the times. There may be adverse
business conditions like recession, depression, severe competition etc. A business will be able to
survive under unfavourable situation, only if it has some past earnings to rely upon. Therefore, a
business should try to earn more and more when situation is favourable.
iv. Profits are the main sources of finance for the growth of a business. So, a business should aim at
maximisation of profits for enabling its growth and development.
v. Profitability is essential for fulfilling social goals also. A firm by pursuing the objective of profit
maximisation also maximises socio-economic welfare.
However, profit maximisation objective has been criticised on many grounds. A firm pursuing the
objective of profit maximisation starts exploiting workers and the consumers. Hence, it is immoral and
leads to a number of corrupt practices. The concept of limited liability in the present day business has
separated ownership and management. A company is financed by shareholders, creditors and financial
institutions and is controlled by professional managers. Workers, customers, government and society are
also concerned with it. So, one has to reconcile the conflicting interests of all these parties connected
with the firm. Thus, profit maximisation as an objective of financial management has been considered
inadequate.
Arguments against profit maximisation :
i. Ambiguity :- The term 'profit' is vague and it cannot be precisely defined. It means different
things for different people. Should we consider short-term profits or long-term profits ? Does it
mean total profits or earnings per share ? Should we take profits before tax or after tax ? Does, it
mean operating profit or profit available for shareholders ? Further, it is possible that profits may
increase but earnings per share decline. For example, if a company has presently 10,000 equity
shares issued and earns a profit of Rs. 1,00,000 the earnings per share are Rs. 10. Now, if the
company further issues 5,000 shares and makes a total profit of Rs. 1,20,000, the total profits have
increased by Rs. 20,000, but the earnings per share will decline to Rs. 8.
ii. Ignores Time Value of Money :- Profit maximisation objective ignores the time value of money and
does not consider the magnitude and timing of earnings. It treats all earnings as equal though they
occur in different periods. It ignores the fact that cash received today is more important than the
same amount of cash received after, say, three years. The stockholders may prefer a regular return
from investment even if it is smaller than the expected higher returns after a long period.
iii. Ignores Risk Factor :- It does not take into consideration the risk of the prospective earnings
stream. Some projects are more risky than others. Two firms may have same expected EPS, but if
the earning stream of one is more risky then the MV of its shares will be comparatively less.
iv. Dividend Policy :- The effect of dividend policy on the market price of shares is also not
considered in the objective of profit maximisation. In case, earnings per share is the only objective
then an enterprise may not think of paying dividend at all because retaining profits in the business
or investing them in the market may satisfy this aim.

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 Anil’s Commerce +3 3rd yr FM Unit – 1 Ch - 1
WEALTH MAXIMISATION
Wealth maximization is the appropriate objective of an enterprise. A stockholder's current wealth in
the firm is the product of the number of shares owned, multiplied with the current stock price per share.
Stockholder's current wealth in a firm = Number of Current stock price
shares owned per share
Given the number of shares that the stockholder owns, the higher the stock price per share the greater
will be the stockholder's wealth. Thus, a firm should aim at maximising its current stock price. This
objective helps in increasing the value of shares in the market. The share's market price serves as a
performance index or report card of its progress. It also indicates how well management is doing on
behalf of the shareholder. We can conclude that :

Maximum Maximum stockholder's Maximum current stock

refers to refers to price per share
Utility wealth

However, the maximisation of the market price of the shares should be in the long run. The long run
implies a period which is long enough to reflect the normal market value of the shares irrespective of
short-term fluctuations. While pursuing the objective of wealth maximisation, all efforts must be put in
for maximising the current present value of any particular course of action. Every financial decision should
be based on cost-benefit analysis. If the benefit is more than the cost, the decision will help in maximising
the wealth. On the other hand, if cost is more than the benefit the decision will not be serving the
purpose of maximising wealth.
Arguments in favour of wealth maximisation :
i. It serves the interests of owners, (shareholders) as well as other stakeholders in the firm; i.e.
suppliers of loaned capital, employees creditors and society.
ii. It is consistent with the objective of owners economic welfare.
iii. The objective of wealth maximisation implies long-run survival and growth of the firm.
iv. It takes into consideration the risk factor and the time value of money as the current present value
of any particular course of action is measured.
v. The effect of dividend policy on market price of shares is also considered as the decisions are taken
to increase the market value of the shares.
vi. The goal of wealth maximisation leads towards maximising stockholder's utility or value
maximisation of equity shareholders through increase in stock price per share.
Arguments against wealth maximisation :
i. It is a perspective idea. The objective is not descriptive of what the firms actually do.
ii. The objective of wealth maximisation is not necessarily socially desirable.
iii. There is some controversy as to whether the objective is to maximise the stockholders wealth or
the wealth of the firm which includes other financial claimholders such as debenture holders,
preferred stockholders, etc.
iv. The objective of wealth maximisation may also face difficulties when ownership and management
are separated as is the case in most of the large corporate form of organisations. When managers
act as agents of the real owners (equity shareholders), there is a possibility for a conflict of
interest between shareholders and the managerial interests. The managers may act in such a
manner which maximises the managerial utility but not the wealth of stockholders or the firm.
Financial Management and Profit Maximisation
The primary aim of a business is to maximise shareholders' wealth. This can be done by increasing the
quantum of profits. Financial management helps in devising ways and exercising appropriate cost controls
which utilimately help in increasing profitability. The following elements are involved in maximising
profits.

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 Anil’s Commerce +3 3rd yr FM Unit – 1 Ch - 1
1. Increase in Revenues:- For maximising its profits, a firm will have to increase revenue
receipts. Revenues will go up only when sales increase. There should be all out efforts to increase the
sales. All possible markets should be exploited so that demand for products increases. This should be
followed by increasing production for meeting increased demand. In a competitive economy, profits
can be increased either by raising the price of products or by increasing the volume of sales. The
second alternative will be more appropriate.
2. Controlling Costs:- Another way of increasing profit is to control or reduce costs. This will increase the
margin of profit per unit. The costs may be controlled by controlling material wastages, increasing
labour efficiency, reducing overhead cost by increasing production etc.
3. Minimising Risks:- A business operates under a number of uncertainties. Business is done with an eye
on future which itself is uncertain and difficult to, predict. There are many risks, both business and
financial.
It is generally said, more the risk and more the gain. In spite of this, those financial decisions should
be taken which will not involve more risks but at the same time may help in increasing profitability. A
financial manager will have to balance the pros and cons of various decisions so that risk element is kept
under control.

Q.No.6 FINANCIAL DECISIONS

Financial decisions refer to decisions concerning financial matters of a business firm. There are many
kinds of financial management decisions that the firm makes in pursuit of maximising shareholder's
wealth, viz., kind of assets to be acquired, pattern of capitalisation, distribution of firm's income etc.
We can classify these decisions into three major groups :
1. Investment decisions.
2. Financing decisions.
3. Dividend decisions

Financial Management

Is Concerned With
Financing Decision Investment Decision Dividend Decisions

Analyses

Risk And Return Relationship

(Trade off)

To Achieve The Goal

Of

Wealth Maximisation

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 Anil’s Commerce +3 3rd yr FM Unit – 1 Ch - 1
Investment Decisions
• Investment Decision relates to the determination of total amount of assets to be held in the firm, the
composition of these assets and the business risk complexions of the firm.
• It is the most important financial decision. Since funds involve cost and are available in a limited
quantity, its proper utilisation is very necessary to achieve the goal of wealth maximisation.
• The investment decisions can be classified under two broad groups :
(i) Long-term investment decision and
(ii) Short-term investment decision.
• The long-term investment decision referred to as the capital budgeting and the short-term investment
decision as working management.
• Capital budgeting is the process of making investment decisions in capital expenditure. The finance
manager has to assess the profitability of various projects before committing the funds. The
investment proposals should be evaluated in terms of expected profitability, costs involved and the
risks associated with the projects. The investment decision is important not only for the setting up of
new units but also for the expansion of present units, replacement of permanent assets, research and
development project costs, and reallocation of funds, etc.
• Short-term investment decision, on the other hand, relates to the allocation of funds as among cash
and equivalents, receivables and inventories. A sound short-term investment decision or working
capital management policy is one which ensures higher profitability, proper liquidity and sound
structural health of the organisation.
Financing Decisions
• Once the firm has taken the investment decision and committed itself to new investment, it must
decide the best means of financing these commitments. Since, firms regularly make new investments,
the needs for financing and financial decisions are ongoing. Hence, a firm will be continuously
planning for new financial needs.
• The financing decision is not only concerned with how best to finance new assets, but also concerned
with the best overall mix of financing for the firm. A finance manager has to select such sources of
funds which will make optimum capital structure.
• The important thing to be decided here is the proportion of various sources in the overall capital mix
of the firm. The debt-equity ratio should be fixed in such a way that it helps in maximising the
profitability of the concern. The raising of more debts will involve fixed interest liability and
dependence upon outsiders. It may help in increasing the return on equity but will also enhance the
risk. The raising of funds through equity will bring permanent funds to the business but the
shareholders will expect higher rates of earnings. The financial manager has to strike a balance
between various sources so that the overall profitability of the concern improves. If the capital
structure is able to minimise the risk and raise the profitability then the market prices of the shares
will go up maximising the wealth of shareholders.
Dividend Decision
• It relates to the disbursement of profits back to investors who supplied capital to the firm. The term
dividend refers to that part of profits of a company which is distributed by it among its shareholders.
It is the reward of shareholders for investments made by them in the share capital of the company.
• The dividend decision is concerned with the quantum of profits to be distributed among shareholders.
A decision has to be taken whether all the profits are to be distributed, to retain all the profits in
business or to keep a part of profits in the business and distribute others among shareholders. The
higher rate of dividend may raise the market price of shares and thus, maximise the wealth of
shareholders. The firm should also consider the question of dividend stability, stock dividend (bonus
shares) and cash dividend.

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 Anil’s Commerce +3 3rd yr FM Unit – 1 Ch - 1
INTER-RELATION OF FINANCIAL DECISIONS
We have studied above the three major groups of financial decisions, viz., investment decisions, financing
decisions and dividend decisions. Although these are different kinds of financial management decisions
yet these decisions are inter-related because the underlying objective of all these decisions is the same,
i.e. maximisation of shareholders' wealth. All these decisions influence one another and are inter-
dependent.
Investment
Decision

Financing Dividend
Decision Decision

Q.No.8 FUNCTIONS OF A FINANCE MANAGER

1. Financial Forecasting and Planning. A financial manager has to estimate the financial needs of a
business. How much money will be required for acquiring various assets ? The amount will be needed
for purchasing fixed assets and meeting working capital needs. He has to plan the funds needed in the
future. How these funds will be acquired and applied is an important function of a Finance manager.
2. Acquisition of Funds. After making financial planning, the next step will be to acquire funds. There are
a number of sources available for supplying funds. These sources may be shares, debentures, financial
institutions, commercial banks, etc. The selection of an appropriate source is a delicate task. The
choice of a wrong source for funds may create difficulties at a later stage. The pros and cons of various
sources should be analysed before making a final decision.
3. Helping in Valuation Decisions. A number of mergers and consolidations take place in the present
competitive industrial world. A finance manager is supposed to assist management in making
valuation etc. For this purpose, he should understand various methods of valuing shares and other
assets so that correct values are arrived at.
4. Maintain Proper Liquidity. Every concern is required to maintain some liquidity for meeting day-to-
day needs. Cash is the best source for maintaining liquidity. It is required to purchase raw materials,
pay workers, meet other expenses, etc. A finance manager is required to determine the need for
liquid assets and then arrange liquid assets in such a way that there is no scarcity of funds.
5. Management of Cash, Receivables and Inventory. Finance manager is required to determine the
quantum and manage the various components of working capital such as cash, receivables and
inventories. On the one hand, he has to ensure sufficient availability of such assets as and when
required, and on the other there should be no surplus or idle investment.
6. Disposal of Surplus. A finance manager is also expected to make proper utilisation of surplus funds.
He has to make a decision as to how much earnings are to be retained for future expansion and
growth and how much to be distributed among the shareholders.
7. Performance Evaluation and Financial Control. Performance evaluation is regarded as one of the
most important function of a finance manager. It acts as the basis of financial control. Periodic
comparisons of actual costs, revenues, profits and investments with the budgeted costs, revenues,
profits and investments help the finance manager in taking decisions about future actions.

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