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.’
[Favaro, 2001]
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.
[Gitman, 1986]
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.
[Gitman, 1986]
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.
[Walther et al, 1997; Favaro, 2001]
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