Functions of Financial Manager

Functions of Financial Manager

The financial manager deals with two types of decisions:

1. Income or Finance Decision

2. Expenditure or Investment Decision

Income or Financing Decision

Income decision mainly means the process of fund collection. The scope of this decision covers selection of the alternative sources of funds and taking financial plans by analyzing the advantages and disadvantages of these sources. Generally, to bear the current expenses fund is collected from short-term sources, and to bear the fixed expenses fund is collected from long-term sources. For the purpose of fund collection, it is collected through own capital and arranging loans from different sources. Besides, large companies may gather capital by selling shares. Shareholders are the real owners of a company. The portion of capital which an organization collects through loans increases the liability of the organization; again ownership right is established on the basis of the amount of capital collected through the owners’ fund. Thus, an institution becomes successful to create a balance between the liability of the loan and the rights of the owners through a right finance decision.

Expenditure or Investment Decision

The machine purchasing decision is an investment decision for a tailoring shop. In the case of a grocery shop, the decision for furniture purchasing or refrigerator purchasing is also an investment decision. For a production organization, production machines purchase or factory construction is also this type of decision. Through this decision, a plan of the expected inflow and outflow of funds has to be calculated. For example, a production organization decides to buy machines only when the selling of the machine-made products is greater than before and if thus profitability and inflow of funds are increased and if the total inflow of funds is greater than the purchase price of the machine.

That means, if it seems that the machines can be utilized for 10 years, then, for the purpose of investment decision, a comparison has to be made with the 10 years inflow of funds from sale proceeds for adding the new machines and the purchase price of these machines. So, it is possible to find out the 10 years cash flow from selling only by considering the product price in 10 years and the volume of sales. Production and other expenses are deducted from the sales earnings to measure the profit from the cash flow.

The investment decision is very tough for an organization because measuring the amount of selling in the future and determining the selling price is a very difficult task.

Other Decisions

Above two decisions are very important for financial managers. Besides, financial managers have to take some other decisions, such as:

a) Purchase of how much amount of raw materials is suitable and from which sources this fund can be collected – this type of decision is called a current investment decision.

b) How much amount of cash reserve should be kept for daily expenses is another important decision too.

c) Dues payment for the sources of funds is another decision.

If the fund is collected through a bank loan and other loans like- bonds, debenture, etc., then payment of a certain amount of interest at the right time is an important responsibility for the financial manager. In the same way, if a fund is collected through selling shares, then earning profit at the expected rate and distributing dividends is another important thing to be considered by the financial manager.

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