Finance and Banking · Classes 9-10 · Chapter 1 · 1.6

Functions of Financial Manager.

You are opening a tailoring shop and need a sewing machine. Where will the money come from? And how will you know the machine is worth buying? Those two questions are exactly the two big decisions of a financial manager.

1. Two questions, two decisions

A financial manager works with two types of decisions. One is the income decision, also called the financing decision. The other is the expenditure decision, also called the investment decision. Tap the cells to match each one with its names, its job and an example.

2. Income decision: where the money comes from

The income or financing decision is mainly the process of collecting fund. Weighing the advantages and disadvantages of alternative sources, choosing one, and taking a financial plan all fall within its scope.

Generally, fund for current expenses comes from short term sources, and fund for fixed expenses comes from long term sources.

Fund comes through own capital and through loans from various sources. A large company can also raise capital by selling shares, and the shareholders are the real owners of the company.

Capital raised as a loan increases the liability of the organization. Ownership right, on the other hand, is built on the amount collected in the owners' fund. A right financing decision balances loan liability against the owners' rights, and the organization succeeds. Walk through the steps one at a time.

3. Expenditure decision: where the money goes

The expenditure or investment decision, also called capital budgeting, is the decision to invest in fixed assets: buying machinery, furniture or a refrigerator, or building a factory. It needs a plan of the inflow and outflow of expected money.

A machine for a tailoring shop is an investment decision. So is furniture or a refrigerator for a grocery shop. When a manufacturer buys machinery or builds a factory, that is an investment decision too.

A producer buys a machine only when three things line up: sales of the machine's products rise above before, profit and cash flow increase, and the total cash flow is greater than the machine's purchase price.

Work out yourself whether the producer should buy a machine. Change the units sold a year and the price a unit; each year's cash flow piles on top of the years before.

If the machine looks usable for 10 years, the inflow from 10 years of sales is compared with its purchase price. To find that 10-year cash flow, the product price and sales volume of the next 10 years are considered. Put imaginary numbers in below and try the comparison.

To get profit from cash flow, you deduct production and other expenses from the sale proceeds.
profit (cash flow) = sale proceeds − (production expense + other expenses)
An imaginary example: 1,000 − (600 + 200) = 200 taka.

The investment decision is very hard for an organization, because it is very difficult to measure how much will be sold in future and to fix the selling price.

4. A few more decisions

Beyond those two, the manager has more to settle. How much raw material is right to buy, and from which source its fund will come, is the current investment decision. The manager also fixes how much cash to hold for daily expenses, and pays what is due to the sources of fund.

If fund comes from a bank loan, bond or debenture, paying the fixed interest on time is an important duty of the manager. If it comes from selling shares, the manager must consider earning profit at the expected rate and distributing the dividend. Now sort seven actions into two boxes.

5. Check yourself

Three questions in the exam's style. Start with the first.

In the second, pin down the name of the decision.

Give the last one a little more thought.

The whole note on eight cards.

Source: Finance and Banking, Classes 9-10 (NCTB), Chapter 1 “Finance and Business Finance”, section 1.6.