Accounting
The Nature and Roles of Financial Management

Generally, business activities can be categorized into several functional departments such as marketing operation, finance, human resources and information technology. Each of the functional department plays an important role in making the organization a successful and sustainable one. It is very important to realize that without the mutually supportive coordination between each of these functional departments, a firm may suffer from the lack of proper management of any of the functional department as mentioned above. From these different functional departments, there are various philosophy and suggestion on how to manage an organization properly. The terms of marketing management, human resources management, and information system management are nothing new in the academic and research context. Financial management is similar – it is one of the important concepts and management sciences to be learnt by managers for the organization to achieve sustainable growth and profitability in the marketplace.

Every firm exists in order to make profit and create wealth for its owner. That is the main theme of financial management. It is well-known that the key objective of financial management is to create wealth for the owner, or shareholders (in the case of a publicly listed company). In financial management jargon, that is called as the wealth maximization objective. Every decision making is aimed to enhance and maximize the shareholders’ or owners’ wealth (Brigham & Houston, 2004).

The financial management objectives have close relationship to the company vision and mission. Generally, as we have discussed above, the existence of a company is to maximize wealth for the shareholders. This is a quantitative measure. From the marketing, operational, and human resources management perspective, this is enabled when a firm able to deliver value to the society. It is through the delivering of services or products to the marketplace that the firm generates return or profit. Thus, the company mission or vision is in fact a qualitative description of what a firm is doing to deliver values to the society in return for financial rewards. The objectives of financial management however are dealing with quantitative measure of that return (John, 2000). Both the objectives of financial management and corporate mission and vision are closely related.

Financial management plays various roles in management of an organization. It is very practical and useful management concepts, ideas, philosophy and sciences in assisting a firm’s managerial decision making. All of the roles of financial management are discussed in the following sections as below.

Shareholders’ or owners’ wealth maximization. It is widely known in the context of financial management that the main objective of a firm’s existence is to make money for the owners. In fact, the goal of financial management is to maximize the profit or wealth for the shareholders or owners. This has many impacts to the managerial decision making process of an organization.

Forecasting and planning. The scope of financial management in a firm is large. In fact, the essential planning and forecasting activities in an organization is always being placed as the duties and responsibilities of the finance department. Financial management is thus to perform accurate and reasonable forecasting and planning activities. This means that the financial management plays an important role in coordinating, collecting of information, feedback and data from the various departments for planning, and forecasting purposes. The forecasts generated by the finance department, as well as the plans derived by them are essential in shaping the firm’s future. All these information from forecasting and planning is highly important as these are the input to various managerial decision making process. Manager will often based on these forecasts and planning to outline their actions, strategies, and daily operational activities. Without the forecasts and plans, it is very hard for the managers to make decisions (John, 2000).

Major investment decisions. A successful firm is a firm that is constantly growing. For a firm to grow, the firm needs to invest. Many of the investments are necessary for the firms to implement the growth strategies in the firm. Most of the time, to sustain the growth of the company, or simply to increase the market share and enhance the products and services delivered by a firm to the society, the organization has to invest in plants, machines, equipment, inventory, and purchases of raw materials. In this context, it is the finance department’s duty and responsibility to help an organization to determine the optimal sales growth rate, to assist in deciding what specific assets to acquire and then to select the best method to finance the purchase of these assets required. All the investment decisions are selected based on the objective of shareholders’ wealth maximization. Through accurate, reliable and dependable quantitative measure, the finance department will analyze the various investment opportunities and approaches, and to select the best choice of actions according to wealth maximization philosophy. All of these decisions will be considered in the capital budgeting decision making process (John, 2000).

Major financing decisions. Many of the various activities in a firm require cash flow. The financing decision is regarding the approach by which a firm acquires or sources the required cash flow for the implementation of a project or strategy. For example, the firm can choose to finance its operations from equity, bond or preferred shares. When a manager decides that a particular activity is relevant and necessary, the finance department will have to find the best way to finance the implementation of the activity. This will assist the managers in obtaining sufficient funds for their projects. Similar to the financial management role to assist the managers in making investment decision, the financing decisions for a project will be considered by the finance department through the capital budgeting decision making process (Robert, Hawkins and Merchant, 1999).

Coordination and control of activities and system. Apart from that, another important role the financial management plays in a firm is to coordinate and control the many activities and system in an organization. Nowadays, the various data and information gathered, processed or generated from the various departments in an organization are presented and delivered to the finance department. It is the finance department duty to ensure that all the activities are operating as efficiently and effectively as possible. This is not unreasonable as eventually all decisions in the various departments in an organization has financial implications – and all of these activities throughout the value chain should be seriously analyzed and considered (Robert, Hawkins and Merchant, 1999). Not only that, the various data and information from these departments can be highly critical to managerial decision making. The managers simply need all of these data, particularly, the key performance metrics, sales and revenue data and operational efficiency ratio to make decision. The key performance metrics will be essential for managers to follow the progress of the firm, and to evaluate the strategies implementation progress in the organization. The sales data will be important for manager to detect any changes or emerging trend in the market place, as well as to plan new marketing strategies for better profitability of the firm. All these information is collected by the finance department and is a central activates of financial management (Meigs, Haka, and Bettner , 1999).

Dealing with the financial market. Many of the firms today are large public listed companies. As long as these firms remain publicly listed, they have some concern with the financial market. The financial market is a complex one, and managers in a public listed company have a lot to deal with the shareholders and the regulatory agencies related to the stock market. Financial management includes the management process and actions to handle the request, requirements and demand from the various stakeholders related to the stock or financial market. For example, it is important for managers to constantly update and communicate to the bondholders, shareholders, and the respective regulatory agencies. All of these are important in assisting the key managers to make decision concerning its objective to maximize shareholders’ wealth (Brigham & Houston, 2004).

Setting of dividend policy. It is not uncommon that to reward the shareholders for their contribution of capital or taking up the risk in a firm, the management should provide sufficient dividend for the shareholders. In terms of financial management, distribution and setting of dividend policy is a critical subject not to be ignored. Financial management relies on many theories and scientific researches to decide which level of dividend is relevant to maximize the shareholders’ wealth (Meigs, Haka, and Bettner , 1999). Besides, it also assists in determining the relevant dividend policy for a particular firm. All these provide value to the key managerial decision making in the wealth maximization process for an organization.

Profit and corporate fund allocation decision making. The management of retained earnings is placed as a responsibility of finance department. It is important to decide the best way to use the retained earnings from a financial management perspective – whether to continuously reinvest it in the business or simply to distribute the retained earnings as dividend or capital repayment for the shareholders (Robert, Hawkins and Merchant, 1999).

Working capital and cash flow management. Nonetheless, finance management is the management of cash flow in a company. The working capital management is an essential area in management of a firm. It is important to decide on the level of inventory, the amount of cash reserve in bank and the tracking of all these working capital ratios by managers to avoid insolvency issues in an organization. Strong company will tend to have better cash flow management process. In fact, highly performing companies have large amount of cash generated from the business activities. It is very important all a proper, prudent and conservative management process in the context of working capital management is in place to avoid any sort of liquidity issues from arising in the company (Robert, Hawkins and Merchant, 1999).

Risk management. In the ever increasing competitive and complex business environment, the business world and trends are moving fast. Risk is increasing and it should be managed properly. Many of these risks can be mitigated via purchase of insurance or the use of derivatives in hedging (Meigs, Haka, and Bettner , 1999). All these are one of the cornerstones of financial management. For this, the finance departments in large multinational companies are often burdened with the tasks to oversee the entire risk management program, to keep track of the potential risks in an organization and to implement strategies to mitigate the risks.

 

References

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