Corporate finance and its financial manager’s Responsibilities

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Corporate finance and its financial manager's Responsibilities

Corporate finance and its financial manager’s Responsibilities

Corporate finance and the financial manager

In the previous section, we argued that corporate finance deals with long-term investment decisions, financing decisions, working capital management, and dividend decisions. These decision areas form the scope of the study of corporate finance. Now the question is – who take and implement all these decisions in a company? in a company or a corporation with many shareholders, a board of Directors (BOD) takes major policy decisions and appoints a management team led by the chief executive officer (CEO) to implement the decisions. A chief financial officer (CFO) is appointed as a member of the management team and leads the finance department. The CFO oversees all finance functions in the corporation and assets the CEO on all matters related to finance ranging from financial planning, investment decision, dividend decision, and working capital management. The CFO is known by various titles like deputy managing director, or vice-president finance, or simply a financial manager. Two key financial officers namely treasurer and controller assist the CFO. The treasurer is mainly responsible for activities such as cash management, currency trading, financing transactions, and bank relationship. The controller manages the company’s internal accounting systems and oversees the preparation of financial statements and tax returns. In a large corporation, the treasurer is assisted by other financial managers such as the credit manager, inventory manager, and capital budgeting manager. Similarly, the controller is assisted by other financial managers namely, the financial accounting manager, cost accounting manager, and tax manager.
The term financial management is used to refer to anyone responsible for an investment of financing decisions. The term is used collectively to refer to deputy director or vice-president – finance, treasurer, controller, and other managers working in the finance department. Financial jobs of an organization are dividends among the financial managers according to the need and structure of the organization. Thus, the issues that we study in corporate finance are practiced by the financial managers in a company or corporation.

Financial manager’s responsibilities

The financial manager is responsible for corporate assets management and financing decisions. This section describes the basic responsibilities of the financial manager in a corporation.

1. Analysis of the financial aspects of all decisions

There are different functional departments in a corporation. These functional departments take significant strategic decisions to adapt to the ever-changing market environment. For example, the corporation might have decided to change the marketing strategy to beat the competitors in the market. Similarly, it may have to replace the existing plant and equipment with the latest one to manufacture relatively cheap and qualitative products. The research and development department may take the decision to launch research on new product development. All these decisions, irrespective of which department undertakes them, have financial implications. So, the first and foremost responsibility of the financial manager is to interact with the concerned line managers about their decisions and then analyze the financial implications of decisions to be made by line managers.

2. Analysis of investment decision

The financial manager should interact with other managers such as the marketing manager, production manager, and human resource manager about the corporation’s future forecasts and plans. After having the forecast of the market share of the firm’s products, the financial manager is responsible for estimating the funds required to finance the projected market shares. In the course of investment decision, her/her responsibility is to estimate the costs and benefits of the investment correctly, apply correct evaluation criteria, and arrive at the correct investment decisions. The financial manager’s responsibility does not end at acquiring fixed assets. It extends to the effective management of working capital also. Her/his prime responsibility in this connection is to estimate the optimum level of investment in different components of working capital to ensure the smooth operation of the corporation.

3. Analysis of financing decision

Once the financial manager makes an investment decision, s/he knows the total funds required for the acquiring of necessary assets. Plant and equipment, other fixed assets, and different components of working capital are necessary assets of a corporation. The next responsibility of the financial manager is to identify the appropriate sources of funds. Funds may be raised from short-term or long term sources. Sources of funds should match with the life of the assets to be financed. In principle, permanent working capital and fixed assets should be financed with long-term funds and seasonal working capital with short-term funds. Trade credit and short-term bank loans are the sources of the short term funds. The financial manager may raise long-term funds from equity capital and debt capital. Both equity and debt capital have their own advantages and disadvantages. So, the financial manager’s responsibility is to analyze the comparative advantages of different sources of funds and determine the appropriate composition of debt and equity capital.

4. Analysis of dividend policy decision

As stated earlier, the financial manager has three options regarding the distribution of earnings- distribute a certain percent of earnings to the shareholders and retain the balance in the firm. Her/his responsibility is to analyze these different options relative to the cost of the funds, financial requirements, tax status of shareholders, and their effect on the share price. Finally, s/he should select the best option of distribution of earnings that maximizes the share price.

5. Analysis of the financial condition of the firm

The prime responsibility of the financial manager is to keep the sound financial health of the firm. So, s/he should regularly investigate each and every balance sheet accounts and work out financial ratios, and should take corrective measures in time if they indicate ill financial health. In the same manner, s/he should regularly examine the income statement of the firm. There may be scope to control operating costs and generate additional revenue. Nowadays, the preparation of cash flow statements has become mandatory for the firm which depicts the impact of a firm’s operating, investing, and financial activities on cash flow over an accounting period. The responsibility of the financial manager is to examine the sources and uses of cash, find out excess or deficit cash flows of the firms, and chalk out plans for the investment of excess cash or raise the deficit cash from the least expensive sources.

6. Analysis of financial markets

After making the financial decision, a financial manager should go to the financial markets to raise the required funds. Therefore, s/he should analyze the financial markets very closely and be watchful to reap the market advantages or to avoid the adverse effect of market movement on the share price of her/his corporation. The investment decision, dividend decision, financing decision, and even an announcement of the earning of a corporation may affect the security price in the markets. The responsibility of a financial manager should be to be watchful about the response of financial markets to the financial decision of her/his corporation. s/he should analyze the market’s response to the securities issued by his/her own corporation and take the appropriate decision to cope with the ever-changing markets. In addition, a financial manager should analyze the securities issued by other corporations to decide which securities should be bought and sold in the markets s/he should analyze the securities and be watchful about the financial markets for better management of the liquidity reserve of the firm.

7. Analysis of risk

All types of business firms are exposed to different types of risks such as natural calamities, foreign exchange risk, interest rate risk, security market price risk, commodity price risk, etc. a financial manager can minimize the losses arising from such risks. The appropriate measures may be the purchase of an insurance policy or hedging in the derivatives markets. For example, s/he can avoid the exchange rate risk by signing the forward contracts in the foreign exchange market. Similarly, s/he can avoid the commodity price fluctuation risk by purchasing futures contracts in the commodity market. Thus, the financial manager’s responsibility is to manage the possible risks in the most efficient manner, analyze the magnitude of losses from potential risks, minimize the potential losses from such risks and increase the value of the firm.

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