Financial Management Functions
Organization of the financial management functions
Financial management functions has two concepts:
The first concept: Financial management, which means the financial function or the financial activity in the institution, and this function includes the process of identifying financial needs and providing appropriate funding for them and then using them in the acquisition of various types of assets.
The second concept: the Financial Department, and this is an organizational concept, and it means the entity that undertakes the financial role of the institution.
And the function of financial management in its administrative and technical appearance is the same in all institutions, meaning that financial considerations are present in all projects regardless of their size and nature, but they differ in the extent of organization and complexity with which this function is exercised from one institution to another in practice, which leads to disparities in Details of the financial function among organizations of varying size.
Methods of organizing financial management
The method of organizing financial management differs from one institution to another depending on the difference in size in the first place and the nature of the institution itself to a lesser degree. The details of those differences are as follows:
Financial management in small businesses
The owner in small enterprises is the first – and perhaps the only – responsible for production, marketing, personnel affairs, and the financial function as well. Cash, preservation and collection of securities, while the owner retains all decisions regarding financial needs, investment and financing as well as the distribution of profits for himself.
Financial management in medium enterprises
In medium-sized enterprises, it is expected that it will have a financial department that is more independent in the exercise of its financial function and is expected to be headed by a person holding the title of financial manager, who has broader powers than those who work in small-sized enterprises with single management.
Financial management in large organizations
In the case of large-sized institutions, financial matters are not usually the responsibility of one person, but are distributed among several specialized people who hold advanced administrative positions, and the chief financial officer is often in the rank of Deputy Director General President/Finance, assisted by two people called the Treasurer and the Controller, and the tasks of these people are usually defined as follows:
1. Deputy Director General for Financial Affairs
The position of Deputy Director General for Financial Affairs (English Business: Chief Financial Officer) exists in large institutions, and the holder of this position assumes the first role in managing the financial affairs of the institution and is responsible for the activity of the financial controller and financial manager. This official plays a key role in the financial policy and overall financial planning of the organization, and this person is often a member of the management team of the organization and a member of the board of directors to be able to provide technical advice on issues related to financial matters and determines the position and power of this person on the board to the extent of the knowledge of the members of the board in financial matters.
Among the important matters in which the Board relies on the experience of this person are decisions regarding the percentage of profits to be distributed, capital expenditure decisions, and the necessary financing for the institution’s long-term plans.
2. Financial manager or finance manager
The main role of the financial manager or the finance manager (or Treasurer) is to manage the institution’s funds, maintain its liquidity and secure its financing needs. Thus, the role of the financial manager or the finance manager and its affiliated agencies is to perform the following functions:
- Cash management
- Regulating the relationship between banks and financial institutions
- Obtaining the necessary funding for the institution
- Credit management (debts of the institution on third parties)
- Distribution of profits to shareholders
- Insurance of the institution’s assets
In general, the CFO does the outside financial business.
The Controller is the person who has direct responsibility for the following matters from the financial function of the organization:
- Preparing annual financial statements
- Internal flow
- Preparing the estimated financial statements
- Preparing tax accounts
In general, the financial controller conducts the internal financial business.
There is an essential difference between the two concepts (financial manager and financial controller), which is that the financial manager plays the role of custodial of the institution’s funds, i.e. receiving and maintaining the institution’s resources, while the role of the financial controller is a supervisory role to ensure that the institution’s resources are used properly correct.
The position of the financial management on the organizational chart of the institution
According to the modern concept of financial management the finance manager should be close to the top of the organizational structure for the following reasons:
- The great importance of the planning, investment and financing processes for which the financial manager is responsible.
- The importance of the information available to the financial management of the institution in the decision-making process.
- Importance of financial decisions in the life and future of the institution, which requires building decisions related to financial affairs on accurate information.
Powers of the financial manager
Financial management plays an important role in the life and development of modern institutions, and its role has gone beyond record-keeping, reporting, cash management, and salary preparation, and now focuses on the role of obtaining funds from various sources of financing and using these funds in various types of assets in order to maximize the current value of the institution.
As the importance of financial decisions became more important, there was a need for them to be taken by a body closer to the top management, for this reason we find that many important aspects of the financial function are carried out by the higher management of the organization (the general manager or the board of directors). Despite this, there remains a large scope for the financial manager to exercise his influence in making financial decisions in the institution, by being a consultant to this department working to help it reach the best decision.
This, and the following organizational figures, show the expected structures of financial management in small, medium, and large enterprises respectively.
Relationship of financial management with other functions
It was pointed out that the functions of the institution are production, marketing, use and financing, and that there is a strong interrelationship between the financing function and all these functions due to the mutual effect between them.
Financial management and accounting
There are many who confuse these two functions due to the use of the same terminology and the same financial statements when dealing with these two topics, and therefore they do not find a difference between them.
But it is true that accounting is primarily concerned with the process of collecting data, while financial management is concerned with analyzing this data for the purposes of decision-making. The accountant prepares budgets and income statements, while the financial manager focuses on cash flows and historical accounting information when making his decisions in managing assets and investment.
Financial management and economics
There is a strong interrelationship between financial management functions and economics because both aim to optimize the use of available resources. The economist aims to use limited resources to meet the society’s goals for a better life, and the financial management takes its financial decisions to achieve the best return for the project owners. The macroeconomic and fiscal and monetary policies and their impact on the abundance of credit, as well as being able to predict the future performance of the economy.
Financial management, marketing, and production
Marketing, production, and quantitative methods have a relationship with the daily decisions of the financial manager. The financial manager must consider the impact of developing and marketing a new product, because these two activities need financing, and therefore have an impact on the cash flows of the institution. Also, changing production methods leads to the use of new machines, and this requires estimating and financing these needs. Finally, quantitative analysis tools are aids to financial management in making complex decisions.
Financial Management Functions
Financial management is considered part of the overall management of an organization and is usually entrusted with the responsibility of managing its financial affairs in coordination with other functions of the department. The most important thing that the financial management undertakes is planning to provide funds in sufficient quantities at the appropriate dates and at acceptable costs for the purposes of investment capable of achieving the appropriate return. In addition to taking over control over the use and sources of funds.
Considering the foregoing, the framework of financial management functions can be defined as follows:
- Financial Planning (Estimated Financial Needs)
- Investment decisions
- Financing Decisions
- Financial supervision
- Dividend distribution
- Addressing some special problems (liquidation, joining, merging and evaluation).
These functions will be covered in detail:
1. Financial Planning / Financial Needs Estimation
The financial planning function includes the financial manager’s identification of the institution’s long-term and short-term financial needs, considering its plans, using the estimated cash budgets and estimated balance sheets. Uncertainty regarding future prospects should not discourage the financial manager from using these planning tools, but he must take into account the possibilities of deviation and make his plans flexible to the extent that it accommodates such deviations.
This function is considered one of the most important functions of the financial department, and the financial department must exercise it in coordination with other departments.
2. Investment decisions / asset management
The investment decision’s function includes all decisions about investing money in the various types of assets of the institution and its classification decisions.
After the financial department determines its expected financial needs, and obtains the necessary funds to meet these needs, it must ensure that the resources available to it have been directed to the best economic use within the institution, from which the greatest possible benefits and benefits are obtained.
3. Financing / Financing Decisions
Financing Decision includes all decisions related to evaluating the impact of the use of various types of financing, such as short- or long-term financing, on the value and profitability of the enterprise.
After the financial department has identified its needs for funds, it begins searching for appropriate funding sources to meet these needs. When the financial department determines the source, it will resort to finance its needs, it must take into account the suitability between the nature of the source and the nature of use, and also pay attention to the cost, time and appropriate combination of the left side of the budget, all within the framework of its general objective, which is to maximize the current value of the institution.
4. Financial control
Associated with the development of financial plans is the existence of a good control system that enables the financial management to compare the actual performance with the expected performance in order to identify deviations and investigate the causes of their occurrence and then find the necessary solutions for these deviations, and this is the function of financial control.
5. Dividend Decisions
The dividend distribution policy includes determining the percentage that will be paid in cash to shareholders and the dividends that will be distributed in the form of free shares. It also includes working to stabilize the distribution rates over the time period.
Dividend decisions are closely related to financing decisions, because undistributed profits are among the most important sources of financing in addition to their advantage in increasing the ability of the institution to borrow.
6. Addressing some special issues
This nature of the job is what the financial management may do when it faces some problems of a special nature that do not happen frequently. And the problems that the institution may face, and fall within the jurisdiction of the financial department, the liquidation processes, as well as the merger and joining. It also falls under the jurisdiction of the financial administration to make the necessary financial adjustments to correct the financial institution’s conditions and avoid failure.
- Read also: Introduction to Financial Management
- Financial Management Encyclopedia, MDRS Center, 2022.