Financial Management: Importance, Role, and Sources of Finance

This report discusses the importance and role of financial management in an organization. It also covers the sources of finance that can be used to meet monetary requirements.

Financial Management

TABLE OF CONTENTS
Importance of finance function..............................................................................................3
Role of financial management...............................................................................................3
Sources of finance..................................................................................................................3
REFERENCES...........................................................................................................................4

INTRODUCTION
Financial management is concerned with the effective procurement and utilization of
funds so that organizational goals can be met. It lays high level of emphasis on managing
cash flows and working capital with the motive to get desired level of outcome or success.
Under financial management, focus is laid on taking three types of decision regarding
investment, financing and dividend. In this, report will develop understanding about the
concept of financial management and its significance within organizational context. It also
depicts funding sources that business unit can employ for fulfilling monetary requirements.
Importance of finance function
In business unit, finance function mainly includes decision taking under the
areas of financial, investment, dividend and liquidity. In investment decision, manager
focuses on allocating capital into long term assets wisely for ensuring efficient operations
(Brigham and Houston, 2021). Further, manager’s function is to assess the viability of new
investment opportunity in terms of profitability. In addition to this, finance manager’s
function is to develop strategy about fund acquisition. In addition to this, optimal capital
structure need to be formulated that maximizes shareholder’s wealth (Bhimani, 2022). In
order to maintain the faith of investors in firm’s operations business unit provides them with
suitable returns. Thus, manager sets optimal dividend policy that maximizes firm’s value and
maintain shareholder’s interest as well. Manager is also responsible for maintaining enough
current assets in line with the obligation assessed. In other words, effective working capital
management is the foremost function. Moreover, without having enough working capital
business unit would not become able to perform daily operations effectually. By taking into
account all these aspects, it can be stated that finance functions are highly vital for the growth
and success of the firm.
Role of financial management and manager
From several perspective, financial management helps firm in getting the desired level
of outcome or success. Through the means of financial management company can avoid
aspects related to the overestimation of profit, cost, sales etc. It facilitates appropriate
estimation and thereby helps in setting suitable budget for (Bulturbayevich and et.al., 2020).
By applying the concepts of financial management such as variance analyse firm can assess
deviations that take place in business performance. Hence, considering the causes of

deviations firm can take corrective measures for improvement. In this way, financial
management helps in ensuring proper fund utilization and maximizes profit as well.
Finance manager plays a vital role within business unit so that activities can be
aligned with goals in the following manner:
 Manager decides sources which need to be undertaken for fund raising by keeping in
mind the capital structure ratio. Hence, manager’s role is significant in relation to
managing coordination between equity and debt (Role of a Financial Manager, 2022).
 Budget formulation is another main aspect which finance manager prepares referring
business activities and fund availability.
 Profit generation is another main motive of firm through the means of sales
maximization and cost reduction. Hence, finance manager makes efforts in order to
find alternatives for meeting goal pertaining to profit maximization.
Sources of finance
In the context of business unit, there are several internal and external sources which
can be used for meeting monetary requirements. For expansion and ensuring smooth
functioning of business operations as well as functions company need some funds. In this
regard, firm can undertake several sources that available to business unit. Retained profit falls
under the category of internal source that organization can undertake for fund generation.
With the motive to cope up with the contingent situation business unit retains some profit
with itself every year. Hence, using retained profit firm can capitalize opportunities available
in front of business unit. Further, every business entity saves some funds In addition to this,
financial assistance can also be undertaken through the means of venture capitalist or angel
investors (Kembauw and et.al., 2020). In the dynamic business arena, angel investors offers
funding support to the start-ups whose business idea is innovative. Thus, by approaching and
presenting business idea to the angel investor’s business unit can fulfil its need.
Both medium and large sized firms can generate funds by issuing shares to the general
public at large. Moreover, in order to get return in the form of dividend usually investors
prefer to invest funds in the company which is growing and innovative. Thus, through issuing
shares company can attract investors and thereby fulfils monetary needs. However, in shares,
company offers dividend only when it generates enough profit during the concerned
accounting period. Along with this, bank loan is another important external source that

business unit can undertake for getting desired funds (Amornkitvikai and Harvie, 2018).
Interest is one of the main income sources for banks so they prefer to give loan to the large
extent. Thus, by approaching to the banks on collateral basis business entities can generate
enough funds. In bank loan, business entity is obliged to make interest payment and repay
funds in the form of instalments. Besides this, factoring is also used by entrepreneur for
meeting requirements in financial terms. Accordingly, by discounting receivables early on
discounting basis business organization can get funds.
CONCLUSION
By summing up this report, it can be concluded that finance manager plays a
significant role in taking business decisions. It is an accountability of manager to select best
options out of several alternative that available for investment purpose. Besides this, it can be
inferred from the evaluation that financial management facilitates optimum usage of funds
and thereby helps in achieving goals. It can be seen in the report that bank loan, share
issuance, retained profit, personal saving etc recognized as the main sources which help firm
in raising funds for business purpose.

REFERENCES
Books and Journals
Amornkitvikai, Y. and Harvie, C., 2018. Sources of finance and export performance:
Evidence from Thai manufacturing SMEs. The Singapore Economic Review. 63(01).
pp.83-109.
Bhimani, A., 2022. Financial Management for Technology Start-Ups: How to Power
Growth, Track Performance and Drive Innovation. Kogan Page Publishers.
Brigham, E. F. and Houston, J. F., 2021. Fundamentals of financial management. Cengage
Learning.
Bulturbayevich, M. B. and et.al., 2020. Modern features of financial management in small
businesses. International Engineering Journal For Research & Development. 5(4). pp.5-5.
Kembauw, E. and et.al., 2020. Strategies of Financial Management Quality Control in
Business. TEST Engineering & Management. 82. pp.16256-16266.
Online
Role of a Financial Manager. 2022. Online. Available through: <
https://www.managementstudyguide.com/role-of-financial-manager.htm>.