He has to decide financing needs of the entity, raise funds from various sources like banks, primary equity market, debentures etc and allocate the funds for fixed assets or working capital. Surplus funds are invested in non core business activity like fixed deposits, shares, debentures, real estate etc.
The profits after taxes has to be distributed to shareholders as dividends or retain in the business for future expansion. He has to also monitor the use of the funds by establishing control mechanism. He calculates the actual outcome with budget and also prepare financial statements to project the performance of the entity.
There are various methods to control and monitor the financial activities and check whether the business operations have yielded desired results.
Cost of capital is calculated to check whether the return on investment is substantially higher or not. In case of adverse figures he reports the same and advices all concerned to take adequate steps to improve the financial health of the entity.
He also monitors the operating and financial leverage to check how much the profitability of business is dependent on sales or the financial debt taken by the entity. He has to maintain debt level at comfortable levels and also analyse the impact on profits on changes in Net sales or income.
Current Assets and liability can be converted in cash in a short period of time say one year. It is considered life blood of the organization. Finance manger has to ensure effective working capital management to ensure smooth running of business and avoid adverse impact on profitability. The finance and holding cost of inventory has to be minimised. There are several ratios which is used to monitor working capital management.
Current Ratio is current assets over current liabilities. It should be in the range of 1.25 to 1.75. High ratio means high levels of cash , unrealised debtors or high levels of inventory. Very high ratios indicate that the either the cash is not getting utilised due to lack of business opportunities or debtors are in default or inventory is getting piled up due to low sales. Low ratio signifies inability to pay short term obligations like payment to creditors for purchases.
Working capital turnover ratio is calculated as Net sales over Working capital. A high ratio indicates capability of the firm to generate high sales with less investment in working capital.
High inventory and debtor turnover ratio also indicates maximum sales with less investment in inventory and high speed in which debtors are converted in cash respectively.
In case of adverse ratio finance manager immediately takes up the issue for corrective action by activating field force for clearing old inventory or collection of old debts.
Generally Finance Manager tries to balance the maturity of the debts taken with the nature of investment. Short term loans for working capital and long term loans are taken to finance fixed assets and other long term investment.
There are certain profitability ratios which a finance manager considers to evaluate the financial health of the entity. Gross profit or Net Profit over Net Sales.
Return on investment is calculated as Net Profit over Assets or capital employed or shareholder funds.
In overall finance manager is the eye on the corporation. He monitors the business activities by keeping record of all the transactions and analyses them. The financial statements and other information prepared by him is used by the management to improve internal control and take corrective action to plug loopholes. His information is also used by external stakeholders who sees the business through his eyes. His data is audited by various agencies to authenticate his findings and report.
He has to ensure that rules and regulations are adhered to. The same is achieved through Financial concurrence, internal audit, self audit and internal monitoring.
Each significant business decisions or transaction is also vetted through Finance department. All possible aspects had to be checked with due diligence before the final approval is accorded and business decision is implemented.
He also has the responsibility to re engineer the current business process. Use of advanced computing tools to make system more robust, user friendly and cost effective.
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