In order to understand the essence and functions of financial management, you need to understand the structure of capital, learn how to analyze it, and then make financial decisions. From this position, the financial management functions of any organization are associated with obtaining external funds and their further efficient distribution.
The main functions of financial management are based on the following decisions:
- Investment decisions are related to which assets to invest in the enterprise. Acquired assets can be long-term and short-term. The first will bring income in the future, after a certain period of time, this is capital budgeting. It is necessary if an existing asset does not justify the allocated funds or it is simply required to choose an asset from several alternative ones. An essential point here is risk analysis and assessment of benefits, since the expected income will be in the future, and far away. Assessment of benefits provides for some standards for considering this benefit (barrier standards, minimum standards for income, etc.), that is, you need to understand and measure the cost of capital.
Short-term assets turn into cash during the year, this is working capital management. This part of financial management is no less important than capital budgeting, as short-term survival at the moment ensures future success. It is important here to strike a balance between profitability and commitment. If the organization is liquid, it means that it has enough working capital, it places funds in current assets. If the funds are insufficient, if it is impossible to meet current obligations, the company has a risk of bankruptcy. There is another option for adverse events: too much funds in current assets, which adversely affects profitability.
- Financing . Here you need to know the theory of capital structure, which reflects the interaction of debt and shareholder income. First of all, this is the correct ratio of debt to equity, which leads to an optimal capital structure. In addition, you need to be able to establish the required capital structure in each case.
- Dividend policy . Here, the organization’s chosen policy is important in terms of the further use of the profit. The financial manager must know what proportion of the profits should be paid to shareholders in the form of dividends, and what proportion is retained for reinvestment.
These three fundamental decisions define the functions of financial management. Usually distinguish the functions of financial management of the subject and the object of management. The functions of the subject combine forecasting, organization, planning, motivation, control. The second types of functions include the organization of cash flow and financial work, the supply of financial resources to the organization.
Forecasting is the forecasting of changes in the financial condition of an object or its individual components. Planning is a system of measures to create planned tasks that will help in the implementation of these tasks. Organizational function involves the regulation and coordination of staff for the implementation of the financial program. Regulation is a constant impact on the objects of management, and coordination is achieved through the coordination of all components of the management system. Motivation is the achievement of employee interest in labor results. Control usually involves checking the implementation of plans and the financial work itself. The control function is based on the analysis of financial results, which, in turn, is an important component of financial management.