The argument in favour of centralizing the finance function is based on the following reasons:- 1. Strategic Decisions 2. Cash-Flow 3. External Orientation 4. Coordination 5. Financial Discipline 6. Information Flow.
Reason # 1. Strategic Decisions:
Many of the strategic decisions like setting up of financial goals, investment in capital projects, raising of finances through issue of variety of equity, semi-equity and debt instruments, constant appraisal of financial position, making availability of funds as per schedule, attaining target rate of return on capital employed etc. are taken by the top level management. Finance manager as a part of top management team involve in strategic decision making, therefore, it requires the centralization of finance function.
Reason # 2. Cash-Flow:
The success of the firm depends on its ability to generate cash-flows. The cash-flow is to be generated to meet the expectations of various stakeholders viz., shareholders, debenture holders, banks, financial institutions, creditors, employees etc.
Strict planning and control is required to generate the cash inflow and proper planning is required for cash outflow, to maintain the liquidity as well as long-term solvency of firm. This requires the finance decisions to be taken at a single point.
Reason # 3. External Orientation:
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Finance manager need to liaison with external agencies like banks, financial institutions, shareholders, debenture holders, Government, SEBI, RBI, tax authorities etc. This requires proper coordinated action, therefore, the centralized finance function is a necessity.
Reason # 4. Coordination:
The efficiency of other functions in an organization like production, marketing, purchase, personnel etc. is linked with availability of funds in time. Finance manager acts as a coordinator or facilitator of all other functions, in achieving the organizational goals.
Reason # 5. Financial Discipline:
The centralized finance function minimizes the risk of misappropriation of funds. The cash outflow should be according to the plan/schedule, and necessary approvals to be taken from the higher level. It requires the centralized decision making power as regards finance function.
Reason # 6. Information Flow:
The finance function requires the information, quantitative as well as monetary, on constant basis from all levels and functions of the organization. The ability of finance decisions have direct impact on the success of the organization. The information flow will reduce the uncertainty in finance decisions. Only the centralized finance function can have access to reliable and quick information.