13 Functions of a Finance Manager [Most Crucial Tasks]

Finance managers play a vital role in organizations by making financial decisions, managing assets and funds, planning, coordinating, and ensuring financial success.

The role of finance managers is crucial for an organization’s success. Their sound financial decisions, effective asset management, and long-term growth strategies are essential for ensuring profitability and achieving organizational objectives.

Without their expertise, organizations may struggle to thrive in today’s competitive business environment. Therefore, it is imperative to recognize and value the contributions made by finance managers toward the success of any organization.

MANAGERIAL FUNCTIONS

Financial management is concerned with acquiring, financing, and managing assets with an overall goal in mind. The decision function of financial management can be broken down into three major areas: investment, financing, and asset management decisions.

Investment Decision – Where to invest funds and at what amount?

The investment decision is the most important of the firm’s three major decisions. It begins with determining the total amount of assets needed to be held by the firm. Visualize the firm’s balance sheet, with liabilities and owners’ equity on the right side and assets on the left side.

The financial manager needs to determine the dollar amount that appears above the double lines on the left-hand side of the balance sheet, representing the size of the firm.

Additionally, the composition of the assets must be decided. For example, how much of the firm’s total assets should be allocated to cash or inventory? Disinvestment, or the disposal of assets that can no longer be economically justified should also be considered.

Financing Decision – Where to raise funds and at what amount?

The financing decision involves the makeup of the right-hand side of the balance sheet. Different firms across industries employ varying types and amounts of financing.

Does the type of financing employed make a difference? If so, why?

The financing decision encompasses capital structure theory and capital structure decision. Once the financing mix is determined, the financial manager must figure out how best to acquire the necessary funds, such as obtaining short-term loans, entering into long-term lease arrangements, or negotiating the sale of bonds or stock.

Dividend Policy Decision – How much to pay by way of dividends?

Dividend policy is an integral part of the firm’s financing decision. The dividend-payout ratio determines the portion of earnings that can be retained in the firm.

Retaining a greater amount of current earnings means fewer dollars will be available for dividend payments. The value of dividends paid to stockholders must be balanced against the opportunity cost of lost retained earnings as a means of equity financing.

Asset Management Decision

The asset management decision is another important aspect of financial management. Once assets have been acquired and financing has been provided, the financial manager must efficiently manage these assets.

The financial manager is primarily responsible for the management of current assets, while the management of fixed assets falls under the purview of operating managers who utilize these assets.

ROUTINE FUNCTION

Routine functions are the day-to-day responsibilities of a financial manager. They can be categorized as follows:

Financial Planning

Financial planning involves deciding on future financial actions and activities for the organization. Long-term planning is interconnected with other aspects of business planning, and future investments are typically supported by various financing alternatives.

Long-term investments should be financed by long-term sources, while short-term investments should be financed by short-term sources. Matching and planning these activities are essential for the organization’s success.

Identification of Sources

Financial managers must determine the sources from which the organization will be financed, including short-term, mid-term, and long-term sources of funds.

These sources can include banks, financial institutions, specialized financial and investment companies, insurance companies, bonds, shares, and personal sources. The financial manager needs to identify the most cost-effective and desirable sources for financing.

Raising of Funds

After identifying and planning, the financial manager must decide how and where to raise the necessary funds. This decision should align with the financial needs and demands of the organization.

The financial manager must be aware of the interest rates associated with the funds being raised. The process of raising funds involves complex procedures that the financial manager must navigate and fulfill.

Investment of Funds

Financial managers need to make decisions regarding the short-term investment of funds. To optimize the utilization of idle funds, organizations often engage in short-term

investments. The financial manager must ensure the liquidity of funds and aim for earnings from investments. Managing risk and seeking profitable investments with low risk are important aspects of the financial manager’s responsibilities.

Distribution of Profit

Financial managers are responsible for making decisions regarding yearly profit distributions. They propose profit payment options, which are then approved in the annual general meeting (AGM). The financial department then proceeds with the distribution of yearly profits.

The distribution options typically include providing 100% profit, retaining 100% of the profit, or making partial payments and retaining a portion of the profit.

Forecasting Cash Flow

Cash flow forecasting is vital for financial managers, as cash is the lifeblood of an organization. Profit on the balance sheet does not guarantee the company’s financial position unless the finance department has sufficient cash on hand.

Financial managers analyze and forecast cash flow to identify future cash requirements and availability. If there is a shortage or surplus of funds, the financial manager can make appropriate decisions based on the forecasted cash flow.

Coordination & Control

Financial managers must collaborate with other personnel to ensure the efficient operation of the firm. All business decisions have financial implications, and all managers, including financial managers, need to consider these implications in their decision-making processes.

Dealing with the Financial Markets

Financial managers must interact with the money and capital markets. The firm’s activities and performance effect and are affected by these markets, where funds are raised, securities are traded, and investors make or lose money.

Risk Management

Financial managers are responsible for the firm’s overall risk management program. They identify risks that should be managed and implement strategies to manage them efficiently. This includes purchasing insurance or hedging in the derivatives markets to mitigate risks faced by the business.

These managerial and routine functions collectively encompass the role played by finance managers in organizations. They are responsible for making crucial financial decisions, managing assets and funds, planning, coordinating, and ensuring the financial health and success of the organization.

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