Today, we are going to review the functions of financial management and their role in developing a prosperous business. Financial management is a fundamental aspect of building a business strategy, so it is vital to know how it works and functions appropriately for every entrepreneur.
Roles of financial management in an organization
Any business begins with the formulation and response to three key questions:
- What should be the size and optimal composition of assets of the enterprise, allowing to achieve the goals and objectives set for the enterprise?
- Where to find sources of financing and what should be their optimal composition?
- How to organize current and prospective financial management, ensuring the solvency and financial stability of the company?
These issues are solved in the framework of financial management - one of the critical subsystems of the overall enterprise management system. Financial management is directly related to the control of the financial condition of the company.
The function of developing the financial strategy of an enterprise is based on the overall plan of economic development of an enterprise, forecast of financial market conditions, a system of goals and forming financial performance targets for a long-term period.
Organizational function ensures the adoption and implementation of management decisions on all aspects of the financial activity of the enterprise, which are built on a hierarchical or functional basis with the allocation of specific "responsibility centers."
For this function, it is necessary to ensure the continuous adaptation of organizational structures to the changing conditions of the enterprise and economic activities. The organizational structure of financial management should be integrated into the overall organizational structure of enterprise management.
Information function justifies several possible alternative options for management decisions. Also, it determines the volume and content of the information needs of financial management and generates external and internal sources of information that satisfy these needs. In addition, it organizes continuous monitoring of the financial condition of the company and economic market conditions.
The function of analyzing various aspects of an enterprise’s financial activities involves a rapid assessment and an in-depth assessment of individual financial transactions, as well as the results of commercial operations of different subsidiaries, branches and "responsibility centers" and generalized financial results. The criteria for this optimization are financial indicators, including coefficients of the enterprise as a whole and in the context of its areas.
Planning function ensures the development of a system of current strategic plans and operational budgets for the main areas of financial activity, various structural divisions and the enterprise as a whole. The basis of such planning is the developed financial strategy of the enterprise, which requires specification at every stage of its development.
The stimulating function provides a system of incentives for the implementation of adopted managerial decisions in the field of financial activities. Also, it forms a system of incentives and sanctions in the context of managers and individual structural divisions of the enterprise, respectively, for the fulfillment or non-compliance with established financial indicators, financial standards, and targets. The individualization of such a system of incentives is ensured by the introduction in the enterprise of a contract form of payment for a pile of heads of departments and financial managers.
The control function provides effective control over the implementation of management decisions in the field of financial activities. It implements the creation of internal control systems in the enterprise, division of control duties of individual services and financial managers, determination of the system of monitored indicators and control periods and also prompts a response to the results of ongoing monitoring.
Managerial functions of financial management as a special area of enterprise management
The asset management function involves identifying the real need for certain types of assets based on the envisaged objects of the enterprise’s operations and determining their total amount. It is also responsible for the optimization of the composition of assets from the standpoint of the effectiveness of their integrated use.
This function can also be considered as liquidity function of financial management as it ensures the liquidity of certain types of current assets and accelerating the cycle of their turnover and the choice of effective forms and sources of their financing.
The money management function provides the total capital requirement, that is determined to finance the enterprise, optimized capital structure to ensure its most efficient use and development of a system of measures to refinance capital into the most efficient types of assets.
The function of investment management determines the most critical areas of investment activities of the enterprise, evaluates the investment attractiveness of individual real projects and financial instruments and selects of the most effective ones. Also, it forms real investment programs and a portfolio of financial investments and chooses the most effective forms of financing investments.
The function of cash flow management is about the formation of the incoming and outgoing cash flows of the enterprise, their synchronization concerning volume and time for specific future periods and the effective use of the balance of temporarily free cash assets.
The function of financial risk management and bankruptcy prevention reveals the composition of the chief financial risks inherent in the economic activities of the enterprise, assesses the level of these risks and the volume of possible financial losses associated with them in the context of individual operations and for economic activity as a whole.
It forms a system of measures for the prevention and minimization of certain financial risks, as well as their insurance. It diagnoses the level of the threat of bankruptcy by continuous monitoring and using the mechanisms of anti-crisis financial management of the enterprise.
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