What Is Finance?
- Finance is the core element of every business organisation. When we mention ‘Finance’, usually it means money, but it is merely not the money, it is a vast concept which is concerned with money and its flow. The word ‘Finance’ is a French word which means ‘Management of Money’.
- Finance is such a powerful medium that, it performs an important role to operate, co-ordinate and control the various economic activities of the business enterprise.
- Finance is also limited resource like other resources and a business entity needs to manage its finances resourcefully, effectively and efficiently..
- Finance is essential for expansion, diversification, modernization, as well as for establishment of new projects.
- The financial policy of any organization mainly determines not only its existence and survival but also the performance and success of that organization. Finance is required for investment purposes and also to meet substantial capital expenditure projects.
- Financial Management is a managerial process that is concerned with the planning, organizing, directing and controlling of financial resources.
Who Is A Financial Manager?
- The Finance Manager has to study and assess the profitability of various future long term projects before committing the funds.
- The financial manager is a person who is a professional/expert in the field of finance and looks after the fiscal affairs and financial health of the business organisation.
- He/she is responsible for the various financial transactions, decisions, deployment of cash, return on investment (ROI), cash inflows and outflows.
- By keeping a check on the financial situation and wise decision making, financial mangers play an integral role towards the success and Goodwill of the firm in the long run.
- The financial manager has to cater to the various financial obligations like maintaining the financial stability, sustainability and promote profitability.
What Is The Role Of The Financial Manager:
Financial forecasting:
The financial manager has to create various financial forecasts from time to time, create strategic decisions to channelise the organisation’s financial resources. Forcasting helps the organisation to gain a clarity of the fiscal affairs and take the best decisions in accordance to this.
Analysis:
By creating statical data from the financial database and conducting an efficient and effective analysis inorder to make strategic financial decisions with a calculated risk. Financial analysis plays an integral role as it shows a clear path and helps the management with better decision making.
Optimum Capital Structure:
This includes deciding the capital structure of the company, including the proportion of debt and equity financing. The capital structure refers to the proportion of the amount of capital put in the equity and debt. It should be optimum as debt makes the company pay in the form of interests and equity segment is ruled by the shareholders for which the dividend is to be paid.
In debt instruments there’s no dilution of ownership, whereas, by issuing equity capital the ownership of the capital is distributed. So the company has to maintain an optimum balance between the debt and equity, so as to keep the debtors and owners in a maintained proportion.
Investing Activities:
The financial manager has to find out prospective investments, various businesses, ventures and take business investment decisions. The primary goal is to maximize the returns while reducing the risk by managing the organisation’s asset portfolio.
Risk Analysis:
Risk management plays an integral role in the business setting. Identifying and evaluating various financial risks relating to operational, credit, market risk, etc. The financial manager has to use various tools in order to reduce the risk associated and create risk management methods like investment in sound/reliable and creditworthy insurances.
Insurance:
Insurance is an important economic tool to manage risks and to maintain a good ratio of risks and rewards. It is a financial hedging instrument. The financial manager has to make sure that the risks associated to the various financial investments are optimally covered through a sound insurance cover and safeguards the financial health of the business concern.
Principles of Insurance:
- Principle of Utmost good faith: In all insurance contracts both the parties must have utmost good faith towards each other. The insurer and insured must disclose all material facts clearly, completely and correctly regarding the subject matter. Similarly, the insurer must provide relevant information regarding the terms and conditions of the contract. Failure to provide complete information may lead to non settlement of claim.
- Principle of insurable interest: Insurable interest means some financial interest in the subject matter. This principle is applied to all the insurance contracts. For example, a person has insurable interest in his own life. A business entity has insurable interest in the goods it deals with.
- Principle of indemnity: Indemnity means a guarantee or assurance to put the insured in the same financial position in which he or she was immediately prior to the happening of the uncertain event. This principle is applicable to fire marine and general insurance. It is not applicable to Life insurance as loss of life can never be measured in monetary terms. In case of death of the ensured the actual sum assured is paid to the nominee of the ensured.
- Principle of subrogation: As per this principle, after the ensured is compensated for the loss due to damage of the property insured then the right of ownership of such property passes on to the insurer. This principle is applicable only when the damaged property has any value after the happening of the uncertain event.
- Principle of contribution: Where the insured has taken out more than one policy for the same subject matter. Under this principle, the insured can claim the compensation only to the extent of actual loss either from one insurer or all the insurers. The claim will only be settled for the actual loss occurred.
- Principle of mitigation of loss: Insured must always try to minimise the loss of the property in case of uncertain events. The insured must take all possible measures and necessary steps to control and reduce losses.
- Principle of Causa- Proxima: The principle of Causa- Proxima means, when a loss is caused by more than one causes, then proximate cause of loss should be taken into consideration to decide the liability of the insurance. The subject matter is insured against some causes and not all the causes. If the direct cause is one which is insured against the insurance company is bound to settle the claim.
Cash Management:
Cash management refers to the management of the cash inflows and outflows of the financial resources. It needs to be effectively monitored and controlled to meet its operational and financial commitments. Cash is the primary element of the business, it’s functionality depends upon its cash reserves, therefore, this resource needs to be utilised in an optimum manner and needs to be kept a thorough check on its inflows and out flows.
Financial Compliance:
- Accounting standards provide the framework and norms to be followed in accounting, so that, the financial statements of different enterprises become comparable.
- Accounting standards are written policy documents issued by expert accounting body or by government or other regulatory authorities covering the aspects of recognition, measurement, treatment, presentation and disclosure of accounting transactions in the financial statement.
- Accounting standards ensure the consistency and comparability of the financial statements presented by different enterprises creating a general sense of confidence that users have in the fairness and reliability of the statements they rely upon.
Preparing various financial statements in a timely and correct manner is very important in terms of its compliance. Adhering to regulatory reporting standards, the various accounting standards issued, inturn, help to create Goodwill.
Effective Tax Planning:
Formulating effective tax plans to reduce the business organisation’s tax obligations while guaranteeing adherence to tax rules and regulations. Tax planning refers to the reduction in the amount of net tax liability of the assesse by making use of the exemptions and deductions as prescribed by Government and the Tax regulatory authorities. It is the legal reduction in the tax payable while adhering to the tax rules.
Effective Communication:
Effectively communicating with the shareholders and various other stakeholders of the company regarding the financial information and performance. Communication is a factor which turns out to be a game changerin the social setting, effective communication with the various stakeholders of the company, helps to gain the confidence of the stakeholders, a competitive edge, helps the company to make people/ stakeholders better understand their projects/ ventures. It helps in creting a bond of trust and transparency and helps create a company with a strong work ethic and impactful reputation.
Strategic Financial Management:
- Strategic financial management is a process of systematically arranging, planning and regulating an organisation’s financial resources to meet or achieve it’s long term goals and obligations.
- It refers to making strategic choices which will have an effect on the organisation’s overall sustainability and financial position.
- It’s primary goal is to increase the performance and value of the organisation while lowering its financial risks.
- Strategic financial management plays a critical role in the success and sustainability of organisation and integrates the various branches of management like financial planning, budgeting, risk management and investment research.
- Strategic financial management primarily focuses on the management of finances of the organisation with the help of various financial tools and makes strategic decisions in order to achieve those financial objectives.
- Financial management focuses on coordinating various financial choices with the organisation’s strategic objectives and visions.
- As the word strategic financial management in itself means, financial management in a way which is strategically framed and it promotes organisation’s expansion by offering the financial foundation for growth, diversification, mergers and acquisition.
Capital Rationing:
- Capital rationing is one of the tools to manage and mitigate the financial risk associated to a business.
- Capital rationing is a situation, whereby, the funds available for completing a project are limited.
- It is a situation where a constraint or budget ceiling is put in place on to the total size of capital expenditure under the assumption that the availability of financial resources is quite limited.
- It is a financial strategy used by companies or financial institutions or investors to limit the number of projects to be taken up at a time. If there is a pool of available investments which are expected to be profitable, the strategy of capital rationing provides the investors with the most profitable one to choose from.
- Under this circumstance, the decision maker is compelled to reject some of the viable projects having positive net present value because of the shortage of funds.
- It helps in effective allocation of funds available across various investment opportunities, thereby, enhancing the bottom line of the company. The company is forced to deploy the funds in such projects which are considered to be the most profitable and carrying the highest potential in terms of risks and rewards.
- The limited funds are utilised in the best possible or optimum manner by using the profitability index technique.
- The concept of capital rationing is used by many investors and companies to make sure that investments are made only in those projects that offer the highest returns.
- It is analysed that companies which have a capital rationing strategy prevalent within their organisations typically produce a relatively higher return on investment (ROI) which is simply because its their strategy of investing its resources where it identifies the highest profit potential.
- The primary intention of capital rationing is to make sure that a company does not heavily invest into its asset without much risk analysis, and invest the funds in high worthy projects or else a company may go on to witness the returns provided by the investments going on the lower side.
- The typical goal of capital rationing is to direct a company’s limited capital resources to the projects/ ventures that are likely to be the most profitable.
- The bottom line approach of capital rationing is that all investments with high projected returns should be taken and dealt with.
SWOT Analysis:
The abbreviation SWOT stands for strengths, weaknesses, opportunities and threats.
SWOT analysis is a tool used widely by business organizations to forecast or estimate their strengths, weaknesses, opportunities and threats.
This analysis helps businesses to gain greater clarity of the prevailing business environment.
SWOT analysis provides a framework for the organisations to take and execute necessary steps. It provides guidelines to the organisation to probe further into the affairs of the economic environment.
Strengths:
Strengths are equivalent to assets of the organisation. It is an inherent capacity by which the organisation gets a competitive advantage. They represent the strongest aspects of the organisation. Strengths are the elements wherein the organisation is expert at. These are the factors responsible for the steady success of the organisation. For example: loyal customer base, high profit margin, low turnover ratio, goodwill.
Weaknesses:
Weaknesses are the factors which prevent the organisation from achieving its goals. It is an inherent limitation which creates a strategic disadvantage. They form obstacles which prevent the organisation to reach its full potential. These are the areas which require improvement. For example: Huge costs, low profit margin, high employees turnover ratio, frequently changing customer base.
Opportunities:
Opportunities refer to the external environmental factors. Opportunities represent the organisation’s vision to opt for better deals. It is a favourable condition in the organisation’s surrounding that has the potential to strengthen its position. If taken timely action, opportunities may result in the advancement of the organisation.For example: Growth in demand for a particular product or service that a company provides.
Threats:
Threats refer to the things that are threatening for the survival and growth of the business. One cannot always predict threats.A threat is an unfavorable condition in the organisation’s surrounding which leads to a risk, or causes damage to the organisation.These are the factors present in the external environment which put at risk the profitability and certainty of the business organisation.For example: business rivals.
