Understanding the functions of financial management

Let’s say a company wants to raise 100 crores. A noted investment firm offers to help them. The options are — equity and debt. Now, this is where smart financial management comes in. How much equity and how much debt? 60 – 40 percent? 50 – 50 percent? 20 – 80 percent?

Choose wisely. This is a very critical decision to make. It takes a deep understanding of finances to arrive at a logical conclusion.

If you sell too much equity, your company valuation gets diluted. Too much debt means you have to incur high-interest rates. It is up to the financial manager to determine the capital structure. This means he needs to create the right balance of equity and debt to ensure the company receives the funds without taking too many financial risks.

The capital structure varies from company to company. It takes a shrewd, analytical professional to ensure the company makes low risks but gets high returns.

That is the function of financial management.

What is financial management?

When there is a lot of money at stake, you need financial management. Professionals in this field are qualified to understand a company’s financial situation on a deeper level. They analyse the current scenario, create strategic plans to boost capital and devise smart budgets to fit future needs. Before you can claim this field as your career, you need to understand the functions of financial management and how relevant it is to a company’s fiscal health and productivity.

8 main functions of financial management

1. The allocation of capital or funds

If you’re in the business of managing finances for a business, you will spend a large chunk of your time figuring out how much capital is needed. You will be required to assign funds for various purposes. Maybe the organisation leaders are planning to buy assets, or expansion plans are moving into execution. Whatever the reasons, it is up to you to ensure the optimal allocation of funds for short-term and long-term goals. It is one of the primary functions of financial management, so many professionals take this task very seriously.

2. Calculating a capital structure

Through careful analysis and research, financial managers create an equity-to-debt ratio for the company. This is called the capital structure, and it is crucial for a financially healthy organisation. It can help companies finance their current operations as well as growth plans. Developing an accurate capital structure is one of the functions of financial management.

3. Financial Reporting

Financial managers have to keep a watchful eye over the company’s various expenditures. Through financial reports, they can highlight the financial situation, including details like expenses, assets, cash flow and liabilities. These reports are created periodically to ensure all finances are in order.

4. Acquiring new sources of funding

One of the functions of financial management is to find various sources of funding for the company. Your job includes finding investors, analysing the market conditions and reviewing corporate regulations. These steps will help you figure out funding options. After that, you can negotiate with your sources to finalise the capital. As you can see, it requires a sharp mind to take on the role of financial manager.

Also Read – Master financial management with these top online courses

5. Profit management

When a company does good business, it means there is a surplus of funds coming in. The financial manager then has to decide what to do with the profits. What part goes to shareholders? How much does the company put back into the business? Then there are employee bonuses to deal with. It is one of the functions of financial management to ensure that the money is accurately distributed across the board.

6. Predicting future expenses

When you join the finance industry, you will realise one of the functions of financial management is to make strategic decisions about the future. This includes estimating expenses and liabilities based on current financial data.

7. Maintaining cash flow

When a company stays solvent, you know that is the work of a smart finance manager. The functions of financial management include ensuring that the business has enough cash available for daily expenses, salaries and other transactions.

8. Avoiding bankruptcy

An effective financial manager is someone who knows how to keep a company from spending too much money. They keep track of all expenses, know where to cut costs and ensure risks are kept to a minimum. This is one of the functions of financial management.

Proschool’s financial modelling and investment banking courses

If you have your heart set on becoming a financial manager, good news. IMS Proschool has two courses that will set you on the right track for your career. As one of India’s best coaching institutes, Proschool offers financial modelling and investment banking courses for students who want to be in the finance industry. Both courses are taught by excellent professors who also happen to be industry experts. They focus on teaching through active learning methods, case studies and real-world skills. Students also learn about the functions of financial management to help them lay the foundation for their careers.

Proschool highlights

• The syllabus is taught through real-life examples and hands-on training.
• You can learn in a proper classroom set-up or take online classes.
• The institute has a placement program that ensures all certified students can apply to various entry-level positions within the finance industry.
• Candidates are also taught about interview etiquette and resume-writing techniques.

FAQs

Which courses are best for learning financial management?

You can get a Bachelor’s or Master’s degree in finance or accounting. You can also do a CFA or MBA in finance. An investment banking certification and a financial modelling qualification will also help.

Is financial modelling a requirement in financial management jobs?

Financial modelling helps you gain a better and deeper understanding of a business. You can build authentic valuations, budgets and financial strategies with specific models. Many companies prefer financial managers who are proficient in modelling as it helps perform the functions of financial management.

In conclusion

Finance managers are a vital part of any organisation. They help to carry out the functions of financial management that are essential for the company’s well-being and financial security. If this is your chosen career path, then you need the training and education required to break into this industry. Once you are certified, you will be able to make a mark in your field.