The major Functions Of Financial Management In Organizations According to Financial Management Theory And Practice
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The functions of finance in an organization is diverse. Thus, authors have identified and grouped the functions from different perspectives. Ezenta ((1987) identified three major functions of finance performed by the financial manager to include:
• Financial analysis and planning.
• Management of the firm's asset structure.
• Management of the firm's financial structure.
Okafor (1997) on the other hand has a wider perception of the functions of a financial manager and he went forward to identify the distinct functions as follows:
• ASSESSMENT OF THE FINANCIAL NEEDS OF AN ENTERPRISE:
The financial needs of an enterprise falls under the following two categories:
** Capital Requirements: This includes funds required for the purchase of fixed assets. Long-term funds are usually required for this purpose.
** Working capital requirements: These are funds required for transactions which can include the purchase of raw materials and the payment of salaries. In assessing the capital and working capital needs, there must be a balance between funding capital and working capital so as to avoid a possible mismatch of funds. A mismatch of fund occurs when short-term funds are used to finance long term projects and vice versa. The assessment of organizational financial needs is always embodied in a budget. A budget is a statement of the projected income and expenditure of an enterprise within a given period of time.
• PROCUREMENT OF FUNDS:
After determining the financial needs, the financial manager has to source for the funds from the suppliers who include the shareholders (ie owners of the equity), raw material suppliers (through credit delivery of goods and services), loans and advances, gifts received from relations, friends and well-wishers among others. The financial manager has to identify the sources of funds applicable to his or her organization. In choosing the sources, he should also consider factors like the cost of securing funds from a preferred source, the type of organization (government, private or public), the regulatory framework attatched to the sources and the likes of them. The financial manager should not procure from one source only but he should also try to maintain an optimal mix which will invariably lower the cost of funds to the organization. Financial mix is the composition of. The financial structure that maximizes the weighted average cost of capital to the organization.
• ALLOCATION OF FUNDS AMONG COMPETING UNITS OF THE ENTERPRISE AND ORGANIZATION:
Each of the units or departments in the organization requires funds and there must be a way of apportioning the available funds. Thus, the aportionment is a major issue in financial management because under normal situation and circumstance, the financial requirement of any business tends to be higher than the available funds. That is to say that there is always a funding gap and the need to close such a gap constitutes a serious problem and hindrance to the financial manager. There must be some criteria for rationing what is available so as to take good and proper care of the enterprise units. Some people use what is considered as a 'defensible criterion' which includes land, mass, population and other measures. But in corporate organizations, apportionment has to be base on objective criteria. So, the criteria for apportionment must be defensible and lead to the growth of the overall enterprise. In other words, economic, social and political considerations may be the guide when approtioning funds.
(Egungwu, 2004:6-7)
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The functions of finance in an organization is diverse. Thus, authors have identified and grouped the functions from different perspectives. Ezenta ((1987) identified three major functions of finance performed by the financial manager to include:
• Financial analysis and planning.
• Management of the firm's asset structure.
• Management of the firm's financial structure.
[Post Image Courtesy of Serge Bertasius Photography at FreeDigitalPhotos.net]
Okafor (1997) on the other hand has a wider perception of the functions of a financial manager and he went forward to identify the distinct functions as follows:
• ASSESSMENT OF THE FINANCIAL NEEDS OF AN ENTERPRISE:
The financial needs of an enterprise falls under the following two categories:
** Capital Requirements: This includes funds required for the purchase of fixed assets. Long-term funds are usually required for this purpose.
** Working capital requirements: These are funds required for transactions which can include the purchase of raw materials and the payment of salaries. In assessing the capital and working capital needs, there must be a balance between funding capital and working capital so as to avoid a possible mismatch of funds. A mismatch of fund occurs when short-term funds are used to finance long term projects and vice versa. The assessment of organizational financial needs is always embodied in a budget. A budget is a statement of the projected income and expenditure of an enterprise within a given period of time.
• PROCUREMENT OF FUNDS:
After determining the financial needs, the financial manager has to source for the funds from the suppliers who include the shareholders (ie owners of the equity), raw material suppliers (through credit delivery of goods and services), loans and advances, gifts received from relations, friends and well-wishers among others. The financial manager has to identify the sources of funds applicable to his or her organization. In choosing the sources, he should also consider factors like the cost of securing funds from a preferred source, the type of organization (government, private or public), the regulatory framework attatched to the sources and the likes of them. The financial manager should not procure from one source only but he should also try to maintain an optimal mix which will invariably lower the cost of funds to the organization. Financial mix is the composition of. The financial structure that maximizes the weighted average cost of capital to the organization.
• ALLOCATION OF FUNDS AMONG COMPETING UNITS OF THE ENTERPRISE AND ORGANIZATION:
Each of the units or departments in the organization requires funds and there must be a way of apportioning the available funds. Thus, the aportionment is a major issue in financial management because under normal situation and circumstance, the financial requirement of any business tends to be higher than the available funds. That is to say that there is always a funding gap and the need to close such a gap constitutes a serious problem and hindrance to the financial manager. There must be some criteria for rationing what is available so as to take good and proper care of the enterprise units. Some people use what is considered as a 'defensible criterion' which includes land, mass, population and other measures. But in corporate organizations, apportionment has to be base on objective criteria. So, the criteria for apportionment must be defensible and lead to the growth of the overall enterprise. In other words, economic, social and political considerations may be the guide when approtioning funds.
(Egungwu, 2004:6-7)
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The major Functions Of Financial Management In Organizations According to Financial Management Theory And Practice
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