What is the Role of a Financial Manager?

With the evolution of finance from being merely a descriptive study to one that is a highly developed discipline, the role of financial managers has also undergone a sea change. His areas of responsibilities now extend far beyond keeping records, reports, the firm’s cash position, paying bills, and obtaining funds, and he is now concerned with and is fully involved in the decision making processes to decide investment of funds in assets, determining the best mix of financing and dividends in relation to the overall valuation of the firm. The responsibilities of the financial manager are linked to the goal of ensuring liquidity, profitability, or both and is also related to the management of assets and funds of any business enterprise. When the Financial Manager is involved in the management of assets, he is performing the role of the decision-maker and when he is managing funds, he is performing the staff function. In light of the different responsibilities of the financial manager, he performs mainly the following duties:

1. Forecasting of Cash Flow: This is necessary for the successful day to day operations of the business so that it can discharge its obligations as and when they arise. In fact, it involves the matching of cash inflows against outflows and the manager must forecast the sources and timing of inflows from customers and use them to pay the liability.

2. Raising Funds: The Financial Manager has to plan for mobilizing funds from different sources so that the requisite amount of funds are made available to the business enterprise to meet its requirements for the short term, medium-term and long term.

3. Managing the Flow of Internal Funds: Here the Manager has to keep a track of the surplus in various bank accounts of the organization and ensure that they are properly utilized to meet the requirements of the business. This will ensure that the liquidity position of the company is maintained intact with the minimum amount of external borrowings.

4. To Facilitate Cost Control: The Financial Manager is generally the first person to recognize when the costs for the supplies or production processes are exceeding the standard costs/budgeted figures. Consequently, he can make recommendations to the top management for controlling the costs.

5. To Facilitate Pricing of Product, Product Lines, and Services: The Financial Manager can supply important information about cost changes and cost at varying levels of production and the profit margins needed to carry on the business successfully. In fact, the financial manager provides tools for analysis of information in pricing decisions and contributes to the formulation of pricing policies jointly with the marketing manager.

6. Forecasting Profits: The Financial manager is usually responsible for collecting the relevant data to make forecasts of profit levels in the future.

7. Measuring Required Return: The acceptance or rejection of an investment proposal depends on whether the expected return from the proposed investment is equal to or more than the required rate of return. An investment project is accepted if the expected return is equal to or more than the required rate of return. Determination of the required rate of return is the responsibility of the financial manager and is a part of the financing decision.

8. Managing Assets: The function of asset management focuses on the decision-making role of the financial manager. Finance personnel meet with other officers of the firm and participate in making decisions affecting the current and future utilization of the firm’s resources. As an example, managers may discuss the total amount of assets needed by the firm to carry out its operations. They will determine the composition of a mix of assets that will help the firm best achieve its goals. They will identify ways to use existing assets more effectively and reduce waste and unwarranted expenses.

The decision-making role crosses liquidity and profitability lines. Converting the idle equipment into cash improves liquidity. Reducing costs improves profitability.

9. Managing Funds: Funds may be viewed as the liquid assets of the firm. In the management of funds, the financial manager acts as a specialized staff officer to the Chief Executive of the company. The manager is responsible for having sufficient funds for the firm to conduct its business and to pay its bills. Money must be located to finance receivables and inventories, to make arrangements for the purchase of assets, and to identify the sources of long-term financing. Cash must be available to pay dividends declared by the board of directors. The management of funds has, therefore, both liquidity and profitability aspects. If the firm’s funds are inadequate, the firm may default on the payment of liabilities and may have to pay higher interest. If the firm does not carefully choose its financing methods, it may pay excessive interest costs with a subsequent decline in profits.

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