Role of Financial Manager Complied and completed by

Shahzad Asghar Arain Shahzad.cdcu@gmail.com

Cell: 92-334-9564004

How the financial Manager can help out to increase the wealth of stake holders

How financial manager can can Improve the financial policies of any company

Success

Wealth

Management

FM Role

Before start this topic please keep few things in your mind that the FM can play vital role in

development of any organization because fm is basically controlling the finance her is my

model that can help you to understand

A brief history about the role of a financial managerA brief history about the role of a financial manager

Until around the first half of the 1900s, financial managers primarily raised funds and managed

their firm’s cash positions

As the scale of the firm is on the rising, money is always in great need.

In the 1950s, the increasing acceptance of present value concept encouraged financial managers to

expand their responsibilities and to become concerned with the selection of capital investment

projects

Why? The severe competition has rendered some project to low level of profit, even spell loss to

firms

Today, external factors have an increasing impact on the financial manager. As a result, finance is

required to play an even more vital strategic role within the corporation

Case: Kelon Financial Failure: Expand too rapidly, exhaust all its resources with slow return

How the financial Manager can help out to increase the wealth of stake holders

Forecasting and Planning: The financial manager must interact with other executives as they look

ahead and lay the plans which will shape the firm’s future

Major Investment and Financing Decisions

A successful firm usually has rapid growth in sales, which requires investments in plant,

equipment, and inventory. The financial manager must help decide the optimal sales growth rate,

and he or she must help decide what specific assets to acquire and the best way to finance those

assets

Coordination and control

The financial manager must interact with other executives to ensure that the firm is operated as

efficiently as possible. All business decisions have financial implications, and all managers---

financial and otherwise---need to take this into account

Dealing with the financial markets

The firm’s securities are traded in the financial markets

Financial markets offers opportunities for the firm

Useful information

Risk management

All businesses face risks, however, many of these risks can be reduced by purchasing insurance or

by hedging in the derivatives markets. The financial manager is usually responsible for the firm’s

overall risk management program, including identifying the risks that should be hedged and

hedging them in the most efficient manner

What is FM?What is FM?

Why we need FM? How to use funds to maximize the value of the firm with limited resource.

It is not a problem of manufacturing efficiency and minimizing cost.

(2)FM is concerned with the acquisition, financing and management of assets with some overall

goals in mind

Acquisition of assets---investment decision

Two problems to be solved: how much dollar of amount is needed and what is the composition

of these assets

The investment decision is the most important of the firm’s three major decisions when it comes

to value creation

The value creation of the firm is determined to a great extent by the investment decisions,

compared to the financing and assets management

Case of Jiuyao Corporation

Financing decision: concerned with the problem of raising money to meet the need of

investment decision

Financing decision is also very important: it concerns with capital cost, investment

opportunities, and the existence of a firm

Asset management decision

The main task of asset management is how to use the acquired assets as efficiently as

possible---to speed up the turnover of the asset

Here financial managers are concerned more with current assets than fixed assets, why?

Financial policies affect the turnover of current asset, and fixed assets are largely determined by

operation needs

It is also very important, for speeding up asset turnover can increasing the profit level in a

certain period

What do others say about FM?What do others say about FM?

CPA Examination TextbookCPA Examination Textbook

FM is a management job concerning the raising, using and distributing of funds

The object of FM is the recycle and turnover of cash

The main contents of FM is financing, investment, and dividend distribution

The main function of FM is deciding, planning and controlling

How the financial Manager can help out to increase the wealth of stake holders 2

The Goal of the FirmThe Goal of the Firm

Why do we need a goal?

Because judgment as to whether or not a financial decision is efficient must be made in light of

some standards

Profit maximizing is chosen by classic economist as the best goal

However, it is not the case in the real life because it is shaded by a little flaw: it may induce a

manager to increase profit by issuing more stock and using the proceeds to invest in Treasury

Bills, so the earning per share will fall and this will harm the shareholders’ interest

Maximizing EPS is not a fully appropriate goal either, because :

It does not specify the timing or duration of expected returns

It does not consider the risk of the firm

Maximizing the market value of the firm---the stock price is by far the best

MV(market value)=present value of net cash flow/(1+risk)

Why that? Because investors will consider a firm’s current and future earnings, risks, and other

factors which will influence a firm before he decides to make a investment decision, and the

market price of the stock will reflect all the information about these factors

Why maximizing the MV is the best goal?

It takes into account present and future EPS, the timing, the duration, and the risk of these

earnings

It also considers the dividend policy of the firm, and the other factors that bear on the market price

of the stock

Why should managers work hard to maximize stock price? Why should managers work hard to maximize stock price?

If they do not work hard to maximize stock price, they will be removed by the firm’s board of

directors or by outside forces

Others said that managers are forced by product and labor markets to work hard for the firm,

why?

Agency Problems Agency Problems

What is agency problem?

The agent do not act in the interest of the principal, but in his own interest

(2)Why does this happen? We assume that people are always self-interested

The object of the agent may differ from that of the principal, so when the behavior of the agent

cannot be closely watched, agent may choose to act in his own interest

In the case of a firm, this can also be the case: Chu Shijian Phenomenon (a good example of agent

problem)

Shareholders---Principal, managers---agent

Wolfgun said that the failure of socialist is due to too much agency problems

How can shareholders solve the agent problem?

Monitor

Motivate---surplus share

Bear loss

All these can bring about contract cost, this cost is also called agency cost

The shareholders’ objective is to minimize agency cost

Social Responsibility Social Responsibility

What is social responsibility?

Some responsibility carried on the firm according to social ethics

(2)Why shall the firm carry out social responsibility?

Carrying out social responsibility can create a good environment for the firm

In our modern market economy, social responsibility will be more appreciated by the society.

Paper industry, Coal-mining industry, food and drug industry are all the issues we watch on. For

example, poisonous milk powder event.

The goal of the firm---a linear program The goal of the firm---a linear program

Maximize shareholders’ interest

Subject to:

Minimize agency cost

Meet social responsibility