The emergence of financial management as a distinct management discipline is relatively recent and linked to changes in business and socio-economic scenario, brought about by the advancements in computer and information technology, emergence of multi-product and multi-division corporations with complex and dynamic organizational set-ups, increasing global competition etc.
Finance, no doubt, is the sine qua non of business operations, and traditionally the role of financial manager (known as an accountant or accounts manager) was limited to managing business finance or ‘counting the beans.’ However, the emerging discipline of financial management varies considerably from its traditional functions and extends to more inclusive functions of ‘growing the beans.’
The role of financial manager can be best understood by analyzing the definition of financial management. According to Prof. Bradley, “Financial management is the area of business management, devoted to a judicious use of capital and a careful selection of sources of capital, in order to enable a spending unit to move in the direction of reaching its goals. [Cited Gitman, 1986; Pg. 8] This definition points to the four essential aspects of financial management, an analysis of which exemplifies the role of a financial manager.
They are:
– Financial management is a distinct area of business management – i.e. financial manager has a key role in overall business management
– Prudent or rational use of capital resources -proper allocation and utilization of funds
– Careful selection of the source of capital – Determining the debt equity ratio and designing a proper capital structure for the corporate
– Goal achievement – ensuring the achievement of business objectives viz. wealth or profit maximization.
The essential objective of financial management can be categorized into two broad functional categories -recurring finance functions and non-recurring or episodic finance functions – defining the functional role of a financial manager.
– Performing the regular finance functions including financial planning including assessing the funds requirement, identifying and sourcing funds, allocation of funds and income and controlling the use or utilization of funds towards achieving the primary goal of profit/wealth maximization.
– Performing the non-recurring functions including, though not exclusively, the preparation of financial plan at the time of promotion of the business enterprise, financial readjustment during liquidity crisis, valuation of enterprise at the time of merger or reorganization and such other episodic activities of great financial implications.
In the regard, it may be noted that irrespective of the area of jurisdiction, any business decision, particularly of strategic importance, cannot be decided unless the financial implications are assessed. This extends the role of financial manager to other domains of business management and suggests his or her importance in overall business management.
Financial Manager Vs. Traditional Accountant
Traditionally the management of business finance was performed by accountants, who focused on reporting and organizing financial data and were seldom involved in the decision-making process. Also the accounting function was essentially paper-driven and human resource intensive, and accountants functioned more or less as clerks. However the recent advances in information technology, combined with the competitive pressures of globalization and corporate restructuring, have radically changed the accounting and finance function from a clerical to a more analytical and advisory role. As computers began performing the essential functions of an accountant – recording and organizing financial data – with incredible accuracy, the role of accountants in business organizations have been replaced by financial mangers, who are not only capable of analyzing financial data but also developing strategies and implementing the long-term goals of their organization.
According to a study conducted by the Institute of Management Accountants (IMA) in 1996, the profession of management accounting has been in transition since the mid 1980s; and today management accountants are increasingly required to complement their traditional accounting role – those associated with accounting systems and financial reporting-with more financial analysis and management consulting functions of strategic planning, short-term budgeting processes, and internal consulting. The IMA study describes this change as a ” . . . shift from number cruncher and corporate cop to decision-support specialist.” [The Practice Analysis of Management Accounting, 1996]
Thus, in the present context, the financial manager plays a variety of important roles in creating and maintaining an effective and successful financial management organization including:
a) Providing leadership in the cost-effective use of an organization’s financial resources by employing effective general and financial management practices;
b) Involving actively in organizational decision-making by providing timely and reliable financial and performance information and by analyzing the implications of this information in relation to the achievement of the organization’s goals and objectives; and
c) Ensuring that the organization’s resources are protected from waste, fraud, and abuse by improving its accounting systems and internal controls.
While a traditional accountant have essentially focused on the first and last role, the financial manger in his new role is increasingly required to take on the second – that of a strategic business partner in organizational decision-making. Studies have emphasized the need for financial managers to have sound interpersonal and communication skills, an enterprise perspective, an overall organizational knowledge and appropriate initiative to support his new role, apart from the financial expertise and the knowledge of advanced financial management tools to support his traditional role.
