Basics of Financial Management – Part 6

The major financial function is mobilization of required funds and their effective utilization in the business. Finance function covers financial planning, forecasting of cash receipts and disbursements, releasing of funds, and financial control.

Finance function may be classified into two groups – executive finance function and incidental finance function. The executive finance function is so termed because it requires administrative skill in planning and execution and the incidental function is so called because for the most part it covers routine work – chiefly clerical, which is necessary to carry into effect financial decisions at the executive level.

Establishing asset-management policies: All finance functions are concerned with the control of the cash flows. In order to estimate and arrange for cash requirements of an enterprise, the financial managers must know, among other things, how much cash will be tied up in the various kinds of non-cash assets. The determination of asset management policies includes decision regarding kind and coverage of insurance that a company will carry. The formation of sound and consistent asset-management policies is an indispensable pre-requisite to successful financial management. However, the efficient performance of other functional areas in this direction is also very much necessary. The decision and performance of personnel management in optimum utilization of manpower, the role of Marketing Manager in maintaining less finished goods inventories and quick revenue realization through sales, scientific inventory management of incoming raw materials by the Materials Manager and increased productivity through proper scheduling and sequencing by Production Manager are all equally important for strong asset management policies.

Determining the allocation of net profits: A business organization generally determines allocation of new profits after payment of taxes in any of the three areas or in all the three areas: pay dividends to the shareholders, payment to employees, and allocating surplus funds for expansion and growth of the organization.