The financial function of those responsible for this department is closely related to the economy and accounting.
The importance of the financial function depends largely on the size of the company. In small companies the financial function is normally carried out by the accounting department, as the company grows the importance of the financial function usually results in the creation of a separate financial department; an autonomous unit directly linked to the president of the company, through a financial administrator.
Current financial management is viewed as a form of applied economics that emphasizes theoretical concepts while also taking accounting information, which is also another area of applied economics.
Economy Vs finance
The importance of economics in the development of the financial environment and financial theory can best be described in light of two broad fields of economics:
- Macroeconomics:
This branch deals with the institutional and international environment in which a company operates, financial intermediaries, the structure of the banking system, the nation's treasury, the concepts involved in supply and demand relationships, as well as strategies to maximize profits and economic policies available to the government to cope with and control the level of economic activity within the economy.
- The microeconomics:
This deals with determining the optimal operating strategies of companies and individuals, defines the activities that allow the company to achieve financial success such as the results of the mixture of productive factors, optimal levels of sale and strategies to set prices.
Knowledge of economics is necessary to understand both the financial environment and the theory of decisions that are the fundamental reason for financial management.
Indispensable
The financial function is necessary for the company to operate efficiently and effectively
Accounting Vs Finance
For many, the financial and accounting function of a business is virtually the same. Although there is a close relationship between these functions, the accounting function should be considered as a necessary input to the financial function.
Facing the management of funds, the accountant whose main function is to produce and supply information to measure the operation of the company, prepares the financial statements based on the premise that income is recognized as such at the time of sale and expenses when incurred. The financial manager is concerned with maintaining the solvency of the company, obtaining the cash flows necessary to satisfy the obligations and acquiring the fixed and current assets necessary to achieve the objectives of the company and instead of recognizing income and expenses as the accountant makes, he recognizes them with respect to cash inflows and outflows.
Faced with decision-making, the obligations of the financial officer of a company differ from those of the accountant in that the latter pays most of his attention to the compilation and presentation of financial data, the financial officer evaluates the accountant's reports, produces Additional data and decision-making based on your analysis.
The company's accountant provides easy-to-present data regarding the company's operations in the past, present, and future. The financial manager uses this data in the form in which it is presented to you or after certain adjustments and modifications have been made as an important input in the financial decision-making process. This does not imply that the accountant never makes decisions or that the financial manager never collects information.
Financial function
The financial manager plays an important role in the company, its functions and its objective can be evaluated with respect to the Basic financial statements. Its three primary functions are:
- Analysis of financial data Determination of the asset structure of the company Fixing of the capital structure
The new business perspective is no longer based on profit maximization, it has been changed to a wealth maximization approach.
1. Analysis of financial data
This function refers to the transformation of financial data into a form that can be used to control the financial position of the company, make plans for future financing, assess the need to increase production capacity, and determine the additional financing required.
2. Determination of the company's asset structure
The financial manager must determine both the composition and the type of assets found in the balance sheet of the company. The term composition refers to the amount of money comprising current and fixed assets.
Once the composition is determined, the financial manager should determine and try to maintain certain optimal levels of each type of current assets. Also, you must determine which are the best fixed assets to be acquired. You should know when fixed assets become obsolete and need to be replaced or modified.
Determining the optimal asset structure of a company is not a simple process; it requires insight and study of the company's past and future operations, as well as an understanding of long-term goals.
3. Determination of the capital structure
This function deals with liabilities and capital in the Balance Sheet. Two fundamental decisions must be made about the capital structure of the company.
The most appropriate composition of short-term and long-term financing must first be determined, this is an important decision as it affects the company's profitability and overall liquidity. Another matter of equal importance is determining which sources of short or long-term financing are best for the company at any given time. Many of these decisions are imposed by necessity, but some require a careful analysis of the available alternatives, their cost and their long-term implications.
The evaluation of the Balance by the financial manager reflects the general financial situation of the company, when making this evaluation, it must observe the operation of the company and look for problem areas and areas that are susceptible to improvement.
By determining the asset structure of the company, the asset part is shaped and by setting the capital structure, the liability and capital parts are being built on the Balance Sheet.
It must also fulfill specific functions such as:
- Evaluate and select clients Assessment of the company's financial position Acquisition of short-term financing Acquisition of fixed assets Distribution of profits
The ultimate goal that the financial manager must meet must be to achieve the goals of the business owners. Faced with this financial function, the administrator must propose a more viable strategy than efforts to maximize profits. It is a strategy that emphasizes increasing the current value of the owners' investment and implementing projects that increase the market value of the company's securities.
When using the strategy of maximizing wealth, the financial manager faces the problem of uncertainty when considering the alternatives between different types of returns and the corresponding levels of risk. Using his knowledge of these anticipated risk-return alternatives, he refines strategies aimed at maximizing owners' wealth in exchange for an acceptable level of risk.
