The financial executive with in a modern corporation perform certain spectial functions . these are broadly classified as
A) Money Management
B) Record Keeping and Reporting
C) The control function
D) And Finally, Advisory function
Money Management:
The major task of financial Management, as indicated earlier, consists of efficient management of the monetary resources of the firm. This would mean that the corporation retains and keeps only the essential quantum of money of which every single rupee is effectively deployed. This part of the task could be called money management or financial management proper. Effective money management consists of planning and implementing three important tasks. A. Resource Mobilisation, B. Working capital Management, C. Investment decisions
Resource Mobilisation
One of the major problems in corporate management is mobilising adequate resources in order to be in business. let us assume that a firm needs rs 100 Lacs in order to be in business, some part of money would be from the promoters and some part from the other share holders of the firm. The remaining amount has to mobilise from various other sources. In the case of an ongoing firm, in addition to having the ability to raise the resources from outside, the firm may have internally generated resources which would be utilised for both operational and long term purposes
The quantum of money deployed and the sources from which they are mobilised have serious implications on the operational efficiency of a firm. To illustrate this point, lets take an example. Suppose you have decided to go into the business and you estimate that you need rs 1,00,000/- fortunately, you have this money and this is currently in a bank which is earning 10% per annum( its an assumption for having clear understanding), let us also assume that another friend of yours also planning to enter the same business as yours and at the same level of operations. Unfortunately, he does not have funds of his own. But he can borrow this money at a cost of 15% annum. It is obvious that the minimum rate of return you would need to earn this money in the business will have to earn a min of 15% just to have a break even. In other words the opportunity cost of your operation is 10% and that of your friend is 15%
The same is true of corporate organisation, two companies A and B are entering the same business, but the way the resources are mobilised is such that company A is able to raise 100 Lacs required an average cost of 10% and company B at an average of 15%. The min rate of return required on the part of thse two companies would vary widely as much as 5%. In other words, even if the two companies are equally efficient in all respects, the very fact that one company has to pay a higher cost for the capital deployed would erode its profitability and thereby harm the interest of shareholders, there fore one of the crucial areas of financial management is deciding the quantum and sources to be used for raising the required capital to ensre that the cost of money to the company is kept at minimum.
Working Capital Management
Working capital consists of two components. The assets( what the company owns) 0r what is commonly reffered to current assets, which includes such items as cash at bank and hand, Inventories, Sundry debtors, and invstments in marketable securities and current liabilities( what the company owes) which includes mainly sundry creditors, advances from customers and other short term liabilities. The term current usually represents the firms operating cycle or period, often considered as one year . working capital in effect is the difference between current assets and current liabilities
Investment decision
The third main area of money management is investment, or all thefund at the command of a company, a certain portionis deployed for short term or working capital purposes and the balance for long term purposes in the form of investments such as land, building, plant and machinery. How long terms are deployed is most important. If not more than effective working capital management. Let us take example of companies A and Companies B. Let us assume that A and B mobilise the required capital of rs 100 lacs at an average cost of 10% each and that both of them are equally efficient in working capital management and have deployed only 30 lacs each. Both of them deployed another 70 lacs in investment in long term assets, managers of company a carefully prepared the project selected the right technology, purchased the right kind of equipment at the right time and in the process were able to get a 30% return from the capital employed for long term purposes. But in company B, due to errors of omission and commission in the investment decision process, the company is able to earn only a return of 25% from capital employed for long term purposes, it would be obvious that even if resource raising and working capital management are efficient and even if the two companies are equally efficient t in all the other operations, the way the long term investments are selected would continue to affect the profitability and operational efficiency of the company. The vital areas of money management, there fore cosnist of effective resource mobilisation, effective working capital management and the optimal choice of investment decisions
Recording and reporting
Another important area of financial management consists of recording and reports corporate transactions, popularly called accounting . in view of the numerous transactions, that take place it is essential that accounts are properly maintained and this service is normally oprivided by the finance department of corporation. The accounting services provided can be broadly classified into financial accounting, cost accounting and management accounting.
Financial accounting consists of recording and reporting of the various transactions that take place within the company. There are certain standard formats and procedures in which such recording and reporting should take place. Thus under the laws in force in our country certain reports such as Balancesheet and Profit and loss account. Should be periodically sent to the share holdrs. The stock exchange in which the shares of the company are listed, the registrar of companies, the income tax authorities central excise collection authorities and other such agencies require certain reports are to be presented at periodical intervals in a specified manner, the accountant who specialises in this area of recording and reporting of transactions of outsiders and agencies, in keeping with in the law, is known as financial accountant.
The control function
The third important task performed by the finance manager consists of evolving and employing financial controls and contol systems with in the firm. A control is a technique to ensure that corporate progress is according to plans. Financial controls could be broadly classified into techniques and systems. The finance manager may use techniques like budgeting, cost control and internal audit as control techniques to monitor that the firm is progressing according to business plans
With in the area of controls, the finance manager may also be required to evolve the systems for evaluating the performance of sub units with in the firms. This is often done as a part of the budgetary process with in the firm. For example, consider a single unit company. The top management is interested in evaluating the performance of each one of the functional areas within the company ie production, marketing, finance and personnel mgt. Crtain other companies may have other organisational arrangements to suit there operational needs. For example, a company may have many divisions while other may have independent units operating in different parts of the country or even abroad. The top mgt in such a company wpid be interested in knowing the comparative effectiveness and efficiency of the performance of the various divisions or units. Thus a control system is useful to one kind of organisational and operational structure may not be suitable to another. Usually the finance manager conceives of an operating unit as a responsibility centre on the basis of the responsibility given to an operating unit. From this point of view an operating unit can be conceived as a profit centre, cost centre or an investment centre
The advisory function
In addition to the above mentioned functions, namely money managements, accounting and controls, the modern financial manager is often required to advise the operating executies on important operation and strategic matters. Normally the advice of the financial manager is sought ion the important matters such as pricing, acquisations, expansions, diversifications, dividend policy etc. In many companies the financial controllers often combine in their advice is required on special laws and legal formalities, affecting the business such as monopolies and restrictive trade practices act, the foreign exchange regulation act. In fact Indian laws are complex that most of the time and talent of top financial managers are spent in managing the complex laws rather than in the effective management of the scare resources of the economy
