The Role of Financial Management: Functions And Organizational Goals

The Role of Financial Management: Functions And Organizational Goals

In this article, you will learn about financial management, the role of financial management and it functions and Organizational goals.

Before we go into the role of financial management, we should first know what is financial management in the society.

What is Financial Management

The field of the financial management is an exciting and challenging one. Financial management is efficient and effective management of money (funds) in such a manner as to accomplish the objectives of the organization. It is the specialized function directly associated with the top management. The significance of this function is not seen in the ‘Line’ but also in the capacity of the ‘Staff’ in overall of a company. It has been defined differently by different experts in the field.

It must be appreciated that any business whether large or small, profit seeking or non for profit is a Financial concern and as such its success or failure depends in a large part on the quality of its financial decisions. Thus financial management is an exciting area of business administration. Nearly every key decision made by a firms manager has important financial implications. Financial managers daily face questions like the following;

  • Will a particular investment be profitable?
  • Where will the funds come from to finance the investment?
  • Does the firm have adequate cash or access to cash through bank borrowing arrangements, for example to meet its daily operating needs?
  • What kind of credit should be granted the firms customers and which customers should be given credit privileges?
  • How much inventory should be held?
  • Is a merger or acquisition advisable?
  • How should profits be used or distributed?

The Role of Financial Management and Organizational Goals

Role of financial management

Below are the roles of the financial management in the organization

1. Maximization of profits

Every organization or institution whether profit oriented or non profit oriented, has formal and informal goals that it thrive to achieve. A goal of a corporation is or should be to make as much profit as possible. The answer of course is qualified to the extent that the corporation or firm is expected to act within the legal boundaries established by the society.

Although profit maximization appears to be intuitively appealing, it represents only one aspect of corporate performance ;the second one is the risk associated with pursuing any profit making venture. Therefore, one needs to consider the goal of profit maximization in conjunction with the risk of making a decision.

2. Maximization of Sales

Another role of financial management that could be considered is to maximize sales that is, a firm should act in such a way its sales are maximized. But why would a firm want to maximize sales? This could result in either maximizing profits or increasing the market share. Increasing the market share would provide the firm with increased bargaining power in dealing with its suppliers and clients and would ultimately increase profits.

In this sense, maximization of sales is really equivalent to maximizing profits.

3. Minimize Risk

F1rm could aim to minimize risk. This could be achieved by holding all of its assets in cash or risk free securities such as federal government bonds. However, the investors could do the same on his own so why should he let his funds be managed by a professional manager when he the investor could equally obtain good results himself.

Maximizing of Share Price

The preceding discussion indicates that profit maximization and risk minimization need to be taken into consideration simultaneously. This can be by considering the corporation’s common share. All things being equal, an increase in the firms profits will increase the market value of the firms common stock.

In the same vein, other things being the same, a decrease in risk would also increase the price of the firms common stock since existing and potential stockholders would have greater utility for less risk associated profits. Ideally, then the goal of a firm should be maximize profit and minimize risk simultaneously.

Functions of the Financial Management

Below are the functions of the financial management or financial manager;

Managing the Corporate Asset Structure

It will be recalled that the two principal responsibilities of a financial manager include;

  1. Identifying and maintaining the most desirable combination of assets for the firm
  2. Identifying and maintaining that the most desirable combination of methods for financing the firms assets.

The above responsibilities are more of general statements. The first one indicates that financial management is partly concerned with decisions regarding the firm’s assets. These decisions pertain to the acquiring and dispensing of assets and therefore not only involve profitability analysis, but also determine the size of a firm and its growth rate.

Managing the Corporate Financial Structure

The second responsibility of the financial manager in the financial management is to finance the needs of the firm through a desirable combination of debt and equity. Some debt obligations of the firms are spontaneously generated. Most manufacturing firms purchase materials on credit. The firm has to pay for the purchase within a specified number of days.

That’s all i have on the role of financial management, it’s functions and organizational goals.

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