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Financial Manager: Role and Responsibility

by Binam Ghimire

Learning Objectives

Introduction to Financial Management Functions and goals Key areas of responsibility for the financial

manager

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Financial Management:Concept

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Board of Directors

President (Chief Executive Officer, CEO)

Vice-president: Finance (Chief Financial Officer,

CFO)

Vice-president: Manufacturing

Vice-president: Marketing

Treasurer Controller

Credit Manager

Inventory Manager

Director of Capital Budgeting

Cost Accounting

Manager

Financial Accounting

Manager

Tax Department

Manager

Chief Financial Officer/ Financial Manager

Vice President Finance (CFO – USA, Finance Director: UK and Europe)

Prime responsibilities: Financial PlanningFinancial ControllingFinancial Analysing the financial performance

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Treasurer

Person concerned with managing cash, credit and capital structure

Prime responsibilities: Managing cash and marketable securitiesManaging firms pension fundManaging risks by way of insurance portfolio,

derivative securities etc.Planning firm’s capital structureManaging credit activitiesManaging foreign exchangeInvestor relation.

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Controller

Mainly Accounting activities Prime responsibilities:

Cost and management accountingFinancial accountingAuditing and taxationBudgeting, planning and controlReporting and interpretingEvaluating and consultingProtecting the assets.

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Functions of Financial Management

Executive and Routine

Executive Functions

Long-term Investment Decision Financing Decision Dividend Decision Working Capital Decision

Routine Functions

Supervision of receipts and payments Record keeping of financial performance Reporting to the management Supervision of fixed and current assets

Financial Manager: Relationship with other functional areas

With Marketing Management Production Management Human Resource Management

Goals of Financial Management

Profit Maximisation vs. Wealth MaximisationAccounting conceptZero dividendAmbiguityTime value of benefitsQuality of benefitsModern business environmentWho are the shareholders?Conflict of interest among stakeholders of a

firm

Financial Manager: Wealth Maximisation

How?

FCF: Free cash flows: Funds available for distributions to shareholders

V alu e = FC F1

(1 + W A C C )1 + FC F2

(1 + W A C C )2 + . . . + FC F

(1 + W A C C )

Agency Problem: Responsibility for the financial manager

Agency TheoryMichael C. Jensen and William H. Meckling

propounded this theory in 1976 Principal and Agent Management and Shareholders, Creditors and

shareholders

Agency Problem: Responsibility for the financial manager

Manager owns less than 100% of the company Agency Problem Agency Cost (Monitoring, Structuring and

opportunity costs)

Agency Cost

Owners of Corporations cannot manage them

Personally

They have to employ Directors to Manage their Businesses on

their Behalf

These Directors May not carry out the

management to the standard expected of

them

They may do it but to their own advantage or

at a higher cost

Shareholders have to pay the Directors and

these is part of Agency Cost

Because of Breakdown of Trust, Shareholders

have to employ Auditors to Vouch the Stewardship Report of

Directors

All theses add up and the management of the

Agent Principal Relationship with its attendant cost to the

Principals is the Agency Cost

Agency Problem: How to reduce?

Managerial compensation plan (e.g. performance stock)

Direct Intervention by shareholders Threat of firing Threat of takeover (e.g. hostile takeover, M&A)

Set of Contracts Model of the Firm

The firm has contracts with a large number of stakeholders.

These contracts may be explicit or implicit. Contracts may also be contingent on particular

future outcomes. The model recognizes that conflicts of interest

may exist between the various stakeholders.

Set of Contracts Model of the Firm

PreferredStockholders

Managers

The Firm

CommonStockholders

Communities

Creditors

Governments

Customers

Suppliers

Society

Banks

Environment

Bondholders

Employees

Business Ethics

EthicsMoral rulesEthics differ from one to another

Business EthicsAttitude and conduct towards stakeholders

Stakeholder Theory

Who are these

Stakeholder?

Stakeholders

identification Models

To what Extent Should Companies take them into

consideration? Stakeholders Mapping

What if what is good for one stakeholder is Bad for

Another? Satisficing

What if What is good for

stakeholders is viewed

as unethical?

Moral Frameworks

and Guidelines

A Stakeholder is someone who can affect or be

affected by the operations of an organization as it

seeks to meet its corporate objectives

Social Responsibility

Charity principles Stewardship principles

Corporate Social Responsibility

Milton Friedman's argument

There is one and only one responsibility of business: to use its resources and energy in activities designed to increase its profit so long as it stays within the rule of game and engages in open and free competition, without deception and fraud.

Corporate Social Responsibility

Keith Davis

An iron law of responsibility which states that in the long-term those who do not use power in a manner that society considers responsible will tend to lose it.

Corporate Social Responsibility

Gray, Owen and Adams (1996) described society as a series of social contracts between members of society and society itself.

Corporate Social Responsibility

Gray, Owen and Adams (1996)

1.Pristine Capitalist, 2.Expedient, 3.Social contract, 4.Social Ecologists, 5.Socialists, 6.Radiacal Feminists, 7.Deep Ecologists

Corporate Social Responsibility

Different approachesSocial ObstructionSocial ObligationSocial ResponseSocial Contribution

The Case Study

Corporate Ethics.

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Exercise: Classroom Discussion

What are the Key areas of responsibility for the financial manager

Sarbanes-Oxley Act (2002), USA Classroom Exercise: Question in Word File Homework: Word File

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Thank You