The Financing Decision of the Financial Manager - Essay Example

Financial Managers: Contents Contents Introduction 3 Role of Financial Manager 4 The capital budgeting decision 4 The financing decision of the financial manager 5 Profit planning 6 Understanding of the capital markets 6 Issues facing financial managers 6 Keeping pace with healthcare reform 6 Uncertainty 7 Development of talent and succession 7 Poor Communication 8 Financial literacy 8 Motivating employees 9 Relationship between financial manager and other company staff 9 How to address issues faced by financial managers 11 Provision of education 11 Availing adequate and qualified staff 11 Freedom from interference 12 Conclusion: 12 Works Cited: 12 Introduction Financial managers are tasked with advising and supporting colleagues and clients in matters that are financial in nature. This is done to enable them make decisions that are sound and that are beneficial to the business. Financial managers’ work in several sectors be it public or private and many are the times when their services are sought after in multinationals, financial institutions, businesses that are general, institutions of learning such as universities, charitable institutions and manufacturing industries among others (Dorfman and David, 27). Financial managers are crucial in the financial management of businesses. This is because all decisions are done based on financial considerations. Budgets that are well planned are used both in the long term and short term planning of business activities and thus all financial implications need to be assessed before any decision can be arrived at (Crowther, 23). As such, this essay is going not only to look at the current issues facing financial managers in the business world but also their roles, the implications brought about by the discussed issues, ways to solve them and the relationship that they have with other staff. Role of Financial Manager The capital budgeting decision This is usually a vital role for any company as it determines whether the company will succeed or not. Several examples can be given to attest to this fact. Walt Disney Company spent over $ 2 billion to build a Disneyland Paris themed park in the late 1980s (Dorfman and David, 33). In was later discovered by Euro Disney that the venture had led to accumulate loses of $ 200 million as of May 1992. This was a financial decision that was ill informed and which led to loses despite an investment worth billions of dollars. This decision was attributed to the financial management of Walt Disney Company. However, not all decisions made by the financial management of companies have led to losses. Boeing made a decision to bet the company a move that saw it make the 757 and 767 jets. This venture cost the company a total of $ 3 billion, a figure that was twice the investment made by the company’s stakeholders. This investment as per the year 1997 had led to profits that neared 1 $ billion (Saunders, Marcia and Patricia, 53). The above two examples not only show good and bad financial decisions but give an insight into the role of financial managers in terms of capital budgeting decision. Financial managers are each day faced with the task of making decisions that will have an impact on the financial fortunes of companies or institutions all over the world, and it is the results of these decisions that determine whether they were right or wrong. The financing decision of the financial manager The financial manager is tasked with coming up with the cash to cater for payment of investments in the real estate. Companies usually call upon investors to have a share in its dealing by investing cash with the agreement that profits emanating from such undertakings will be shared in line with share proportions (Kacperczyk, 1466). This happens through issuance of the share stock whereby the investor becomes a shareholder or arrangements can simply be done in which case he lends money to the company and expects to be repaid later. The decision is usually made by the financial manager who must come up with ways to raise fund for the company. In addition, he also needs to decide on how raise funds to meet company’s expenses such as payment of staff wages, electricity bills, and water bills among other bills. Profit planning In addition to this, financial mangers plan on how profits accrued from business activities are utilized. This is because the aim of any business is to make profits. The finance manager ensures that an opportunity cost is calculated so as to replace factors used in production in order to avert fluctuations in the company profits. These profits are later redistributed within the organization, some going to investments while others to catering for costs. Understanding of the capital markets Companies are involved in the trading of shares on the stock exchange. A financial manager needs to understand the capital market as this is also where securities are bought and sold. Activities such as the sale of securities carry with it huge risks that may endanger the finances of the company. The manger usually calculates such risks to ensure that they remain minimal as he is also the one tasked with distribution of acquired profits. Issues facing financial managers Keeping pace with healthcare reform In the United States, the Patient Protection and Affordable Care Act, has complicated the workings of businesses. Financial executives are faced with rise in costs as a result of the healthcare reforms although none is certain of the financial impact on businesses (Crowther, 51). Companies are required to pay for their employees’ health problems a factor that has made their premiums increase. Despite firms doing this for their employees, there are still some dissatisfied voices who question this very insurance plan. Thus the healthcare reform has complicated the work of the financial manager as the rise of costs means that he has to avail more funds for the insurance plan at the expense of distributing of profits to shareholders and investing in other ventures. Uncertainty Financial manager are faced with a lot of uncertainties. These uncertainties have to do with what is going on in the business environment and that touch on the economy be it issues of regulation, taxation mechanisms, the political landscape among others. Political uncertainty has had an impact on businesses as they affect how customers invest (Saunders, Marcia and Patricia, 36). Most of the times investments made are long-term but cases whereby there have been government shutdowns such as what happened in the year 2013 makes them nervous and non committal. This means none or limited investment. In addition, uncertainty on the requirements of government regulation is affecting operations and planning as much time is spent doing this. All these have hampered the activities of financial managers as they try to ensure that companies make sound investment and get good profits. Development of talent and succession Companies are required to hire people who are qualified to undertake tasks. They also develop such people and plan for their succession. Financial managers are required to develop the company’s staff to ensure that financial goals are met (Kacperczyk, 1462). This is not always easy as redefining career paths and imparting leadership skills in the young employees is staff. The young people are considered to be less self motivated compared to the older ones and hence have frictional relationship with management. Failure to develop an efficient workforce puts a limit on the company’s effectiveness leading to financial losses, a phenomenon that is synonymous with some financial managers. Poor Communication Financial managers are faced with the challenge of communicating effectively with other company staff. This is due to the introduction of new communication tools that include emails, video conferencing, and social media among others (Crowther, 35). At times the financial manager may not be familiar with the communication tool in question. For example those who belong to the older generations may not be conversant with the operations of the social media and other technological tools of communication (Ross et al, 9). The same may be true for other company employees down the chain of command. In addition, some financial managers may not have time to communicate face to face with the rest of the company staff even if the situation requires so. This means that important policies may not be passed out well hampering the smooth running of the organization which may have an impact on the company’s financial income. Financial literacy Some financial managers may not be conversant with the workings of modern financial management practices. These are the ones who stick to traditional management practices that do not put into mind the workings of modern capital markets, financial institutions and government regulations governing business undertakings (Ross et al, 9). The same may apply to people working under the financial manager which implies that they will not be in a position to formulate or even adapt policies that integrate the company into a global business network characterized with constant changes. In addition, some financial managers may not even know how to source for funds and even account for profits gotten from business undertakings. All this hampers their undertakings with stakeholders and other interested parties. Motivating employees Financial manager are in charge of making decisions that have a bearing on the company’s undertakings (Kacperczyk, 1460). They are required to plan for the company’s finances including how costs will be catered for. In doing this, most companies insist that they keep in mind the profitability of the company at the expense of other aspects. It is thus likely to find situations whereby less welfare services such as paid leave periods, paid overtime, house and lunch allowance or even provision of daycare services for employees are availed to the staff. This is because such services are costly and will eat into the profit levels of the company. This in turn demoralizes the staff and puts them at loggerheads with the company’s management. Low morale implies low productivity which in the long run affects productivity. Relationship between financial manager and other company staff Both the financial managers and the other employees aspire to work for the company that has a bright future. Same is the case for the company’s top management which has invested heavily to ensure that the returns are good (Kacperczyk, 1458). The financial manager is tasked with ensuring financial success of the company by making decisions that are in line with company policies. Such decisions include how to distribute profits that in most instances go towards paying staff and offsetting other operational costs including bills. At times financial managers are accused by other staff for allocating too much funds for investment at the expense of salary adjustments for employees (Saunders, Marcia and Patricia, 33). The staff is usually in constant demand for better pay while the company’s top management is in continuous demand for higher profits which implies limited operational costs. It is this conflict that has at times led to sacking of company staff seen to offer less vital services. This has led to legal battles whereby the sacked employees have sued the company for illegal dismissal. Other times financial managers are compelled to slice the pay of some staff in order to cut down on costs and improve on investments that is perceive to contribute towards the company’s growth and development (Crowther, 22). This creates a unique relationship between the different units or departments within the company. The relationship between financial managers and the rest of the staff needs to be looked into as it clearly affects the working of the company. The financial manager needs to make decisions that not only cater for the needs of top management but also of the junior staff. Company profits should be well planned for and should go towards catering for salary rises, providing welfare services such as housing and transport allowance and even health insurance (Crowther, 22). This will go a long way towards boosting employee morale and also make them feel part and parcel of the company. How to address issues faced by financial managers Provision of education Companies should come up with comprehensive strategies on how to educate financial managers on modern business practices. Such education should introduce them to modern communication techniques that embrace the internet, Facebook, Youtube, Twitter and others as these are mechanisms that are in constant use in the modern business environment. Doing this will ensure that they can effectively communicate with the companies’ younger staff who are social media enthusiasts and who spend quite a lot of hours on the internet to know about among other issues businesses practices. In addition, the education should expose the financial mangers to the workings of the capital markets and ways to acquire funds to finance company operations. This will impart in them modern business practices that are being used all over the globe. Availing adequate and qualified staff Financial managers should have well equipped and adequate staff at their disposal to facilitate effectiveness in service delivery. Qualified personnel is responsible for growth and development of the company as they will come up with best marketing strategies, branding, packaging among others that will give it a competitive edge over others. As such, qualified personnel that includes financial analysts, production managers, purchasing manager, sales manager, marketing manager and others lead to greater profits which in turn the financial manager can use to plan for future activities and lead to more growth. Freedom from interference Financial managers should be allowed to work in an environment that is free from interference especially from top management. Financial managers are usually qualified people responsible for making financial decisions that impact on the company. There’s is always a desire to see that the decisions lead to growth and development while incorporating the needs of management and other staff including management of cash flows. Thus all efforts should be done to ensure that they work in an environment devoid of intimidation or patronage as this has been found to affect their performance. Thus financial managers play a great role in a company’s growth and development and a lot needs to be done to ensure that they work in an environment that is conducive. Conclusion: Financial managers play an important role within an organization. These people are responsible for regulating the financial flow of the company, and determining the manner which an organization would raise its capital, for purposes of growth. Because of their important role within the company, financial managers normally earn a good sum of money. Despite the many challenges that financial managers can experience, there is a need of initiating policies that can help in encouraging their service delivery. Works Cited: Crowther, David. Managing Finance: a socially responsible approach. Routledge, 2004. Dorfman, Mark S., and David Cather. Introduction to risk management and insurance. Pearson Higher Ed, 2012. Kacperczyk, Marcin, STIJN VAN NIEUWERBURGH, and Laura Veldkamp. "Time‐Varying Fund Manager Skill." The Journal of Finance 69.4 (2014): 1455-1484. Ross, Stephen A., et al. "Fundamentals of Corporate Finance." (2012). Saunders, Anthony, Marcia Millon Cornett, and Patricia Anne McGraw. Financial institutions management: A risk management approach. 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