Finance Functions Revisited

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The finance function is concerned with helping managers in each of the three areas identified. The key tasks undertaken by the finance function are described below.

  • Financial planning. The likely effect of proposals on the financial performance and position of the business is a vitally important input to the overall planning process. By developing projected financial statements (such as cash flow statements and income statements), as well as other financial estimates, the viability of proposed courses of action can be evaluated.

  • Investment project appraisal. Assessing the profitability and riskiness of proposed investment projects is another important input to the overall planning process. By appraising projects in this way, managers can make more informed decisions concerning either their acceptance or rejection. They can also prioritise those projects that are expected to be profitable.

  • Financing decisions Future strategies and investment projects have to be financed. It is important, therefore, to be able to identify and assess possible sources of finance available. When choosing among different financing options, consideration must be given to the overall financial structure of a business. This involves achieving the appropriate balance between long-term and short-term finance and between the financing contribution of shareholders and that of lenders. Not all financing requirements are derived from external sources: some funds may be internally generated. An important source of internally generated funds is profits, and the extent to which a business reinvests profits, rather than distributing them in the form of dividend, is another important decision.

  • Capital market operations. A business may try to raise funds from the capital markets and so finance staff should understand how these markets work. In particular, they need to know how finance can be raised through the markets, how securities (shares and loan capital) are priced and how the markets may react to proposed investment and financing plans.

  • Financial control. Once plans are put into action, managers must try to ensure that things stay on course. Information is required on matters such as the profitability of investment projects, levels of working capital and cash flows, which can be used as a basis for monitoring performance and, where necessary, taking corrective action.