The finance functions can be divided into three broad categories:
(1) Investment decision,
(2) Financing decision,
(3) Dividend decision.
In other words, the firm decides how much to invest in short-term and long-term assets and how to raise the required funds.
Shareholders’ Wealth Maximisation (SWM): In making financial decisions, the financial manager should try to increase the value of the stake of the shareholder in the firm. This is referred to as the principle of Shareholders’ Wealth Maximisation (SWM).
Wealth: Wealth is precisely defined as net present value and it accounts for time value of money and risk.
Agency Problem and Agency Costs: Shareholders and managers have the principal-agent relationship. In practice, there may arise conflict between the interests of shareholders and managers. This is referred to the agency problem and the associated costs are called agency costs. if any agency offer ownership rights to the manager in the form of stock options, it will mitigate the agency costs.
Financial Manager: The main duty of a financial manager is to raise capital from the capital markets. They should therefore well know about the functioning of capital markets to properly allocate capital to the competing firms and how security prices are determined in the capital markets.
Chief Financial Officer: A number of companies in India either have a finance director or a vice-president of finance as the Chief Financial Officer (CFO). Most companies have only one CFO. But a large company may have both a treasurer and a controller, who may or may not operate under the CFO.