Financial management is that managerial activity which is concerned with the planning and controlling of the firm’s financial resources. It involves the decision of the three decisions of the firm i.e.
- Investment decision
- Financial decision
- Dividend decision
Together they determine the value of the firm to its shareholders. The finance manager makes use of certain analytical tools in the analysis, planning and control activities associated with the major decisions of the firm.
1.1 Role of the Finance Manager
A financial manager is a person who is responsible in a significant way to carry out the finance functions.
- Interaction with the financial markets
In order to raise finance knowledge is needed of the financial markets and the way in which they operate.
Decisions have to be made concerning how much to invest in real assets and which specific projects to undertake (capital budgeting decisions).
- Treasury management
Many firms have large sums of cash which need to be managed properly too obtain a high return for shareholders. Other areas of responsibility might include inventory control, creditor management and issues of solvency and liquidity.
- Risk management
Exposures to interest rates changes and commodity price fluctuations can be reduced using hedging techniques. These often employ instruments such as futures, options, swaps, and forward agreements.
Managers need to formulate and implement log term plans to maximize shareholders wealth. This means selecting markets and activities in which the firm given its resources has a competitive edge.
1.2 Functions of a Finance Manager
Financial manager is concerned with;
A. Investment decision or long term asset mix
A firm’s investment decisions involve capital expenditures. Therefore referred to as capital budgeting decisions. It involves the decision of allocation of capital or commitment of funds to long term asset that would yield benefit (cash flows) inn the future.
B. Financing decision
The mix of debt and equity is known as the firm’s capital structure. The finance manager must strive to obtain the best financing mix or the optimum capital structure for his/ her firm. Broadly he/ she must decide when, where from and how to acquire funds to meet the firm’s investment needs.
C. Dividend decision
The finance manager must decide whether the firm should distribute all profits, or retain them, or distribute a portion and retain the balance. The proportion of profits distributed as dividend is called the dividend payout ratio and the retained portion is known as the retention ratio.
D. Liquidity decision.
Investment in current assets affects the firm’s profitability and liquidity. Current assets should be managed efficiently for safeguarding the firm against the risk of illiquidity. The profitability liquidity trade off requires that the financial manager should develop sound techniques of managing current assets.