Finance is the study of money management, the acquiring of funds (cash) and the directing of these funds to meet particular objectives. Good financial management helps businesses to maximize returns while simultaneously minimizing risks.
Financial management is an integral part of overall management and not merely a staff function. It is not only confined to fund raising operations but extends beyond it to cover utilisation of funds and monitoring its uses. These functions influence the operations of other crucial functional areas of the firm such as production, marketing and human resources. Hence, decisions in regard to financial matters must be taken after giving thoughtful consideration to interests of various business activities. Finance manager has to see things as a part of a whole and make financial decisions within the framework of overall corporate objectives and policies.
Let us discuss in greater detail the reasons why knowledge of the financial implications of their decisions is important for the non-finance managers. One common factor among all managers is that they use resources and since resources are obtained in exchange for money, they are in effect making the investment decision and in the process of ensuring that the investment is effectively utilized they are also performing the control function.
There are many decisions, which the Marketing Manager takes which have a significant location, etc. In all these matters assessment of financial implications is inescapable impact on the profitability of the firm. For example, he should have a clear understanding of the impact the credit extended to the customers is going to have on the profits of the company. Otherwise in his eagerness to meet the sales targets he is liable to extend liberal terms of credit, which is likely to put the profit plans out of gear. Similarly, he should weigh the benefits of keeping a large inventory of finished goods in anticipation of sales against the costs of maintaining that inventory. Other key decisions of the Marketing Manager, which have financial implications, are:
- Product promotion and advertisement
- Choice of product mix
- Distribution policy.
As we all know in any manufacturing firm, the Production Manager controls a major part of the investment in the form of equipment, materials and men. He should so organize his department that the equipments under his control are used most productively, the inventory of work-in-process or unfinished goods and stores and spares is optimized and the idle time and work stoppages are minimized. If the production manager can achieve this, he would be holding the cost of the output under control and thereby help in maximizing profits. He has to appreciate the fact that whereas the price at which the output can be sold is largely determined by factors external to the firm like competition, government regulations, etc. the cost of production is more amenable to his control. Similarly, he would have to make decisions regarding make or buy, buy or lease etc. for which he has to evaluate the financial implications before arriving at a decision.
Top Management-Finance Interface
The top management, which is interested in ensuring that the firm’s long-term goals are met, finds it convenient to use the financial statements as a means for keeping itself informed of the overall effectiveness of the organization. We have so far briefly reviewed the interface of finance with the non-finance functional disciplines like production, marketing etc. Besides these, the finance function also has a strong linkage with the functions of the top management. Strategic planning and management control are two important functions of the top management. Finance function provides the basic inputs needed for undertaking these activities.
Economics – Finance Interface
The field of finance is closely related to economics. Financial managers must understand the economic framework and be alert to the consequences of varying levels of economic activity and changes in economic policy. They must also be able to use economic theories as guidelines for efficient business operation. The primary economic principle used in managerial finance is marginal analysis, the principle that financial decisions should be made and actions taken only when the added benefits exceed the added costs. Nearly all-financial decisions ultimately come down to an assessment of their marginal benefits and marginal costs.
Accounting – Finance Interface
The firm’s finance (treasurer) and accounting (controller) activities are typically within the control of the financial vice president (CFO). These functions are closely related and generally overlap; indeed, managerial finance and accounting are often not easily distinguishable. In small firms the controller often carries out the finance function, and in large firms many accountants are closely involved in various finance activities. However, there are two basic differences between finance and accounting; one relates to the emphasis on cash flows and the other to decision making.