Functions of Financial Manager
A financial manager is responsible for the following functions:
1) Investment decision:
Investing decisions involve accepting or rejecting long-term projects. A long-term investment project is one that involves acquiring, modifying, or replacing assets.
A large portion of the cash outlay for long-term assets must be made at present, but the benefits will only be generated in the future. It is risky to invest in long-term projects since future benefits cannot be predicted with certainty.
An investor’s long-term return and risk should first be estimated by the financial manager. His next step is to evaluate the investment proposals both from a return perspective and from a risk perspective.
2) Financing decision:
Funds are collected through the financing decision. An appropriate amount and source of funds need to be determined by the financial manager.
A decision must be made regarding the sources of financing and the needs that need to be met. Capital investment starts with the financial manager assessing the firm’s needs.
Capital may be needed for fixed assets or current assets. In order to determine the amount of capital required, he assesses the situation.
Afterward, the financial manager determines where to collect the funds. It is possible to collect funds from a variety of short-term and long-term sources.
The general preference for investing in current assets is to use short-term sources, while the preference for investing in fixed assets is to use long-term sources. There may be some combinations of funding sources that are more beneficial to the firm than others.
To achieve the optimal capital structure, the manager determines the optimal combination of funds from different sources. The optimal capital structure contributes to maximization of the market price of shares by maintaining a proper balance between risk and return.
3) Dividend decision:
An equity shareholder’s preference dividend is allocated to them after tax after the net profit has been calculated after tax. There are three alternatives available to the company:
Dividends on all net income; Retaining all net income in the company; Payment of a certain percentage of net income and retaining the rest.
In order to determine the optimal dividend payout ratio, the financial manager must make a decision. Shareholder’s wealth should be increased by setting the dividend payout ratio optimally.
An investor’s preference and the firm’s investment opportunities should be considered by the financial manager when making dividend decisions.
4) Working capital decision:
Investing in current assets such as inventory, accounts receivable, cash balances, etc., refers to a working capital decision. A decision to manage current assets is also known as a decision to manage current assets.
Profitability, liquidity, and risk of a firm are affected by investments in current assets. Liquidity is provided by more investment in current assets. A firm’s liquidity refers to its ability to meet its short-term obligations.
Meanwhile, more investments in current assets will adversely affect the profitability and increase risks. This is due to the fact that current assets that are overvalued do not earn a return on investment.
Despite earning a profit, they earn a much smaller profit than their capital costs. The firm may lose its profitable opportunities as a result of investing less in current assets. Thus, liquidity and profitability should be balanced by a financial manager.
Conclusion:
There is a close relationship between these finance functions. An investment decision and a financing decision are almost made simultaneously by the firm.
As the financial manager makes investments, he or she should also consider the optimal sources of financing to satisfy the asset’s investment needs so that cost of capital is minimized and shareholder value is maximized.
The decision to pay dividends is also closely linked to the decision to invest and finance. Dividend payout is impacted when a firm retains more earnings for reinvestment purposes. A firm’s investment and financing decisions are also affected by its working capital decisions.
- Capital Structure Theories – Capital Structure | Corporate Finance
- Types of Dividends – Meaning, Examples, Advantages, Disadvantages, Methods | Accounting for Dividend
MBA,BBA.
I am Smirti Bam, an enthusiastic edu blogger with a passion for sharing insights into the dynamic world of business and management through this website.
I hold a MBA degree from Presidential Business School, Kathmandu, and a BBA degree with a specialization in Finance from Apex College,
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