Environment of Finance in organization of finance function17th February 2020
The responsibilities for financial management are spread throughout the organisation in the sense that financial management is, to an extent, an integral part of the job for the .managers involved in planning, allocation of resources and control. For instance, the production manager (engineer) shapes the investment policy (proposal of a new plant) the marketing manager/analyst provides inputs in forecasting and planning the purchase manager influences the level of investment in inventories and the sales manager has a say in the determination of receivables policy. Nevertheless, financial management is highly specialized in nature and is handled by specialists. Financial decisions are of crucial importance. It is, therefore, essential to set up an efficient organisation for financial management functions.
Since finance is a major/critical functional area, the ultimate responsibility for carrying out financial management functions lies with the top management, that is, board of directors/managing director/chief executive or the cornerstone of the board. However, the exact nature of the organisation of the financial management function differs from firm to firm depending upon factors such as size of the firm, nature of its business type of financing operations, ability of financial officers and the financial philosophy, and so on. Similarly, the designation of the chief executive of the finance department also differs widely in case of different firms. In some cases, they are known as finance managers while in others as vice-president (finance), director (finance), and financial controller and so on. He reports directly to the top management. Various sections within the financial management area are headed by managers such as controller and treasurer.
Core Financial Management Decisions
In organizations, managers in an effort to minimize the costs of procuring finance and using it in the most profitable manner, take the following decisions:
Investment Decisions: Managers need to decide on the amount of investment available out of the existing finance, on a long-term and short-term basis. They are of two types:
- Long-term investment decisions or Capital Budgeting mean committing funds for a long period of time like fixed assets. These decisions are irreversible and usually include the ones pertaining to investing in a building and/or land, acquiring new plants/machinery or replacing the old ones, etc. These decisions determine the financial pursuits and performance of a business.
- Short-term investment decisions or Working Capital Management means committing funds for a short period of time like current assets. These involve decisions pertaining to the investment of funds in the inventory, cash, bank deposits, and other short-term investments. They directly affect the liquidity and performance of the business.
Financing Decisions: Managers also make decisions pertaining to raising finance from long-term sources (called Capital Structure) and short-term sources (called Working Capital). They are of two types:
- Financial Planning decisionswhich relate to estimating the sources and application of funds. It means pre-estimating financial needs of an organization to ensure the availability of adequate finance. The primary objective of financial planning is to plan and ensure that the funds are available as and when required.
- Capital Structure decisionswhich involve identifying sources of funds. They also involve decisions with respect to choosing external sources like issuing shares, bonds, borrowing from banks or internal sources like retained earnings for raising funds.
Dividend Decisions: These involve decisions related to the portion of profits that will be distributed as dividend. Shareholders always demand a higher dividend, while the management would want to retain profits for business needs. Hence, this is a complex managerial decision.
The chief financial officer often distributes the financial management responsibilities between the controller and the treasurer. The controller normally has responsibility for all accounting-related activities. These include such functions as
- Financial Accounting This function involves the preparation of the financial statements for the firm, such as the balance sheet, income statement, and the statement of cash flows.
- Cost Accounting This department often has responsibility for preparing the firm’s operating budgets and monitoring the performance of the departments and divisions within the firm.
- Taxes This unit prepares the reports that the company must file with the various government (local, state, and federal) agencies.
- Data Processing Given its responsibilities involving corporate accounting and payroll activities, the controller may also have management responsibility for the company’s data -processing operations.
- The treasurer is normally concerned with the acquisition, custody, and expenditure of funds. These duties often include
- Cash and Marketable Securities Management This group monitors the firm’s short -term finances forecasting its cash needs, obtaining funds from bankers and other sources when needed, and investing any excess funds in short-term interest -earning securities.
- Capital Budgeting Analysis This department is responsible for analyzing capital expenditures that is, the purchase of long -term assets, such as new facilities and equipment.
- Financial Planning This department is responsible for analyzing the alternative sources of long-term funds, such as the issuance of bonds or common stock, that the firm will need to maintain and expand its operations.
- Credit Analysis Most companies have a department that is responsible for determining the amount of credit that the firm will extend to each of its customers. Although this group is responsible for performing financial analysis, it may sometimes be located in the marketing area of the firm because of its close relationship to sales.
- Investor Relations Many large companies have a unit responsible for working with institutional investors (for example, mutual funds), bond rating agencies, stockholders, and the general financial community.
- Pension Fund Management The treasurer may also have responsibility for the investment of employee pension fund contributions. The investment analysis and portfolio management functions may be performed either within the firm or through outside investment advisors.
It should be emphasized that the specific functions of the controller and treasurer shown in Figure are illustrative only and that the actual functions performed vary from company to company. For example, in some companies, the treasurer may have responsibility for tax matters. Also, the board of directors of the company may establish a finance committee, consisting of a number of directors and officers of the firm with substantial financial expertise, to make recommendations on broad financial policy issues.