Role of finance manager and finance function is our next article or post as this article is going to focus on.

ROLE OF FINANCE MANAGER AND FINANCE FUNCTION

The main objective of business finance is to arrange sufficient finance for meeting short-term and long-term needs.

A financial manager will have to concentrate on the following areas of the finance function. This session looks at the role of the finance manager and the finance function in any business organization.

Objectives by the end of this session, you should be able to:

(a) discuss the roles of finance manager

(b) explain the finance function

(c) describe the contemporary roles of the finance function

Now read on …

3.1 ROLE OF FINANCE MANAGER

The finance manager performs different roles in different business organizations. He or she is needed in almost all organizations. The following are the major roles played by the finance manager.

3.1.1 Estimating financial requirements

The first task of a financial manager is to estimate the short-term and long-term financial requirements of his business. For that, he will prepare a financial plan for the present as well as

for the future. The amount required for purchasing tangible non-current assets as well as needs for working capital will have to be ascertained.

 3.1.2 Deciding capital structure

Capital structure refers to the kind and proportion of different securities for raising funds. After deciding the quantum of funds required it should be decided which type of securities should be raised. It may be wise to finance tangible non-current assets through long-term debts.

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Even here if the gestation period is longer than share capital may be the most suitable. Long-term funds should be employed to finance working capital also, if not wholly then partially.

Entirely depending on overdrafts and cash credits for meeting working capital needs may not be suitable. A decision about various sources for funds should be linked to the cost of raising funds.

 3.1.3 Selecting a source of finance

An appropriate source of finance is selected after preparing a capital structure which includes share capital, debentures, financial institutions, public deposits, etc.

If finance is needed for short-term periods then banks, public deposits, and financial institutions may be appropriate. On the other hand, if long-term finance is required then share capital and debentures may be useful.

3.1.4 Selecting a pattern of investment

When funds have been procured then a decision about investment pattern is to be taken. The selection of an investment pattern is related to the use of funds.

A decision will have to be taken as to which assets are to be purchased? The funds will have to be spent first on tangible non-current assets and then an appropriate portion will be retained for working capital and for other requirements.

3.1.5 Proper cash management

Cash management is an important task of a finance manager. He has to assess various cash needs at different times and then make arrangements for arranging cash. Cash may be required to purchase raw materials, make payments to creditors, meet wage bills and meet day-to-day expenses. The idle cash with the business will mean that it is not properly used.

3.1.6 Implementing financial controls

An efficient system of financial management necessitates the use of various control devices. They are Return on Investment (ROI), cost-volume-profit (CVP) analysis, cost control, ratio analysis, cost, and internal audit. ROI is the best control device in order to evaluate the performance of various financial policies.

3.1.7 Proper use of surpluses

The utilization of profits or surpluses is also an important factor in business finance. Judicious use of surpluses is essential for expansion and diversification plans and also in protecting the interests of shareholders.

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The plowing back of profits is the best policy of further financing but it clashes with the interests of shareholders. A balance should be struck in using funds for paying dividends and retaining earnings for financing expansion plans.

The objective of the finance function is to arrange as many funds for the business as are required from time to time. This function has the following objectives.

3.2.1 Assessing the financial requirements

The main objective of the finance function is to assess the financial needs of an organization and then finding out suitable sources for raising them. The sources should be commensurate with the needs of the business. If funds are needed for longer periods then long-term sources like share capital, debentures, term loans may be explored.

3.2.2 Proper utilization of funds

Though raising funds is important their effective utilization is more important. The funds should be used in such a way that maximum benefit is derived from them.

The returns from their use should be more than their cost. It should be ensured that funds do not remain idle at any point in time. The funds committed to various operations should be effectively utilized. Those projects should be preferred which are beneficial to the business.

3.2.3 Increasing profitability

The planning and control of the finance function aim at increasing the profitability of the concern. It is true that money generates money. To increase profitability, sufficient funds will have to be invested.

The finance Function should be so planned that the concern neither suffers from inadequacy of funds nor wastes more funds than required. Proper control should also be exercised so that scarce resources are not frittered away on uneconomical operations. The cost of acquiring funds also influences the profitability of the business.

3.2.4. Maximizing value of a firm

The finance function also aims at maximizing the value of the firm. It is generally said that a concern’s value is linked with its profitability

3.3 CONTEMPORARY ROLE OF BUSINESS FINANCE

Due to recent trends in the business environment, financial managers are identifying new ways through which finance functions can generate great value to their organization.

3.3.1 Current Business Environment

The progress in financial analytics is because of the development of new business models, trends in the role of the traditional finance departments, alternations in business processes, and progress in technology. Finance function in this vital environment emerged with enormous opportunities and challenges.

  3.3.2 New Business Model

At the time when the internet was introduced, three new e-business models have evolved. They are business-to-business (B2B), business-to-customer (B2C) and business-to-employees (B2E) future of financial analytics can be improved with the help of this new model of business.

Traditionally, financial analytical is emphasizing on utilization of tangible assets like cash, machinery, etc., whereas some companies are mainly focused on intangible assets which are not easy to evaluate and control. Hence financial analytics solved this problem by:

• Recognizing the complete performance of the organization.
• Determining the source through which the value of intangible assets can be evaluated and increased.
• Predict the trends in the market.
• The abilities of information systems are encouraged.
• Minimizes the operating costs and enterprise-wide investments are effectively controlled and upgrade the business processes.

 3.3.3 Changing Role of the Finance Department

The role of the finance function has been changing simultaneously with the changes in the economy. These changes are mainly due to Enterprise Resource Planning (ERP), shared services, and alternations in its reporting role.

In the field of transaction processing, the role of financial staff has been widened up because of automated financial transactions.

Now financial executives are not just processing and balancing transactions but they are focusing on decision-making processes.

International organizations are facilitating their customers by providing financial information and the facility to update both finance and non-finance functions from any place around the world. It resulted in the department of decision support in the organization.

Finance professionals are held responsible for supplying suitable analytical tools and methods to decision-makers.

(i). Business Processes:

With the evolution of business processes, queries regarding business are becoming more complicated. In order to solve, it requires analytics with a high level of data integration and organizational collaboration. In the last few decades, organizations are replacing function-based legacy systems with new methods like ERP, BRP, etc., in order to get accurate and consistent financial and non-financial information.

In 1990s organizations were applying some modern systems like supply chain management, Customer Relationship Management (CRM), and many others to encourage their transactions. Overall organizations were building strong relations with customers.

(ii). Technology:

With the developments in technology, ERP, internet, data warehousing have also improved. Internet helps in increasing the sources of acquiring financial data, whereas ERP vendors are building their own financial analytics which helps in evaluating the performance, planning and estimating management and statutory reporting and financial consolidation.

Till now, data warehousing solutions used to emphasize developing elements of analytical infrastructure such as data stores, data marts, and reporting applications but in the future these data ware housings provide advances analytical abilities to data stores.

(iii). Integrated Analytics:

To survive in this competitive environment, organizations must have an advanced level of integrated financial analytics. Integrated financial analytics are useful for organizations to evaluate, combine and share information inside and outside the organization. Hence, with the progress in the role of the finance function, financial analytics are used in organizations effectively.

SUMMARY

Wonderful work you have done. You were able to read and understand this session in record time. You remembered that we looked at the role of finance managers and the finance function in the business organization. You further learned the contemporary roles of business finance. This implies that the roles change from time to time with the passage of time. Finance, therefore, is a living subject that we cannot just throw away.

By: Eric Adjei

Co-Author 

A professional with six (7) years of experience in finance and accounting. Demonstrating expertise in accounting procedures, computerized accounting system management, and financial operations. Financially astute with excellent analytical, problem-solving, management, people supervision, organizational, business administration, operation, and commercial management, and teaching skills.