Assignment 1
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The roles of a finance manager include pursuing investment opportunities, finding funds to finance investments, making investment, financing, and asset management decisions. Specifically, a finance manager is responsible for raising long-term finance, making investment decisions on new products/expansion, and managing working capital like debtors and inventory. Overall, a finance manager ensures the company complies with financial regulations, safeguards assets, and makes decisions to maximize the total wealth and value of the firm over the long run.
Assignment 1
- 1. REFFERENCE LIST Ang, James S., Rebel A. Cole, and James Wuh Lin. “Agency Costs and Ownership Structure.” Journal of Finance 55 (February 2000), 81–106. Megginson, William L. “Outside Equity.” Journal of Finance 55 (June 2000), 1005–1038. Brennan, Michael. “Corporate Finance Over the Past 25 Years.” Financial Management 24 (Summer 1995), 9–22. Carlos ,DavidFlynn,MichaelMordern Corporate Finance”Financial Management 2001 ,15-17
- 2. BUSINESS MANAGEMENT (FINANCE) DEPARTMENT “Managing business through People” PROGRAMME BUSINESS MANAGEMENT (HMAN) LEVEL 4.1 MODE OF ENTRY CONVENTIONAL MODULE FINANCIAL PLANNING AND CONTROL LECTURER MR MAPETERE (BM411) NAME OF STUDENTREG NO MASHORA FIDELITY TATENDAR111613X PONGO CAROLINER111072F CHIBARINYA KUDZAIR112742Q ASSIGNMENT 1 What are the roles(objectives) of a finance manager(20) marks “The Lord will perfect that which concerns me”
- 3. Psalms 138 vs 8 Organizations operate in a complex, dynamic, and global business environment which forces a company to operate quickly with relevant business insights to gain competitive advantage. One of the most crucial people in the organization that ensure that the organization achieves the organization’s objectives is the financial manager.Financial managers may also be known as financial analysts or business analysts.The roles of financial managers vary significantly. According to Carlos at al (2001) financial managers have two primary roles thus to pursue wealth-creating investment opportunities and to find funds to finance the investments. This can be illustrated diagrammatically below. OPERATING ASSETS Non-Current Current Explores Investment opportunities and makes investment decisions Financial Assets CAPITAL MARKET Equit Debt Explores Financing opportunities and makes financing decisions Money Market FINANCIAL MANAGER
- 4. Ang at al (2000) is of the view that financial managementis concerned with the acquisition, financing, and management assets with some overall goal in mind. Thus the decision function of financial management can be broken down into three major areas: the investment, financing, and asset management decisions. However, before the Finance manager can decide on these strategies he needs to identify what the objectives of the company are, one of them being profitable, but this objective can be stated in various ways. The objectives are different for the various stakeholders in a company and it is the objectives that will determine the strategies to be followed. Efficient financial management requires the existence of some objective or goal, because judgment as to whether or not a financial decision is efficient must be made in light of some standard. Although various objectives are possible, we assume in this book that the goal of the firm is to maximize the wealth of the firm’s present owners. Shares of common stock give evidence of ownership in a corporation. Shareholder wealth is represented by the market price per share of the firm’s common stock, which, in turn, is a reflection of the firm’s investment, financing, and asset management decisions. The idea is that the success of a business decision should be judged by the effect that it ultimately has on share price. Megginson at al (2000). Believes that he role of the Financial Manager is to make the right decisions in order to achieve the objectives of the company in the future. The three key areas that the Financial Manager is concerned with are as follows: The raising of long-term finance: The company needs finance for investment and in order to expand. Finance can be raised from shareholders or from debt – it is the job of the Financial Manager to be aware of the different sources of finance and to decide which source to use.In addition, dividend policy must be viewed as an integral part of the firm’s financing decision. The dividend-payout ratiodetermines the amount of earnings that can be retained in the firm. Retaining a greater amount of current earnings in the firm means that fewer dollars will be available for current dividend payments. The value of the dividends paid to stockholders must therefore be balanced against the opportunity cost of retained earnings lost as a means of equity financing. Once the mix of
- 5. financing has been decided, the financial manager must still determine how best to physically acquire the needed funds. The mechanics of getting a short-term loan, entering into a long-term lease arrangement, or negotiating a sale of bonds or stock must be understood. The investment decision: The investment decision is the most important of the firm’s three major decisions when itcomes to value creation. It begins with a determination of the total amount of assets needed to be held by the firm.Decisions have to be made as to where capital is to be invested. Decisions such as is it worth launching a new product? Is it worth expanding the factory? Is it worth acquiring another company? cannot be carried out without consulting the finance department. It is the Financial Manager’s role to decide on which criteria to employ in making this kind of investment decision. The management of working capital The term working capital in the broad sense refers to investments made in current assets which comprises of cash, debtors, bills receivable, inventories. In other words, it is the aggregate of all the currents assets held by a firm as on the given date it is that part of the capital. In accountingworking capital is defined as the difference between the inflows. It is defined as the excess of current assets over current liabilities and provisions.Working capital also refers to that part of total capital which is used for carrying out the routine or regular business operations. Working capital = current assets less current liabilities In order for the company to operate, it will have to accept a certain level of debtors and it will have to carry a certain level of stock. Although these are needed to operate the business successfully, they require long-term investment of capital that is not directly earning profits. Debtors and stock are just two components of working capital and it is a job of the Financial Manager to ensure that the working capital is managed properly and that it is high enough to enable to company to operate efficiently, but that it does not get out of control and end up wasting money for the company.
- 6. Comply with authorities and safeguard assets Financial management is essential to ensuring that an organization carries out its transactions in accordance with applicable legislation, regulations and executive orders; that spending limits are observed; and that transactions are authorized. It also provides an organization with a system of controls for assets, liabilities, revenues and expenditures. These controls help to protect against fraud, financial negligence, violation of financial rules or principles and losses of assets or public money. The objective of financial management is wealth maximization rather than profit maximization. Wealth maximization means the total value of the firm. Asset Management Decision The third important decision of the firm is the asset management decision. Once assets have been acquired and appropriate financing provided, these assets must still be managed efficiently. The financial manager is charged with varying degrees of operating responsibility over existing assets. These responsibilities require that the financial manager be more concerned with the management of current assets than with that of fixed assets. A large share of the responsibility for the management of fixed assets would reside with the operating managers who employ these assets. The Goal Conclusively, the roles of financial managers vary significantly.The generic nature of the job title can be misleading as the level and scope of the responsibilities involved in any role can differ enormously. In larger companies for instance, the role is more concerned with strategic analysis, while in smaller organizations a financial manager may be responsible for the collection and preparation of accounts.