The Role of a Financial Manager - Essay Example

The Role of a Financial Manager Finance is a very important part of every business organization, and financial considerations lie at the heart of all crucial business decisions. The Financial Manager (FM) is the person responsible for supervising and keeping in existence the organization’s financial policies and history. The role of a FM is to analyze financial information and generate financial reports that will assist the organization in decision-making, business progress and elaborate planning procedures. The FM is the pivotal figure in the two halves of the financial circle involving an organization – one involving the movement of money from investors into the organization, and the other half including the movement of money from the organization to the same investors (MBA Alliance). Nearly every business organization, whether in the private or public sector, employs at least one FM. His or her duties vary slightly according to the size of the organization. A typical FM is required to perform 5 roles – that of a Controller, Treasurer, Credit Manager, Cash Manager and Risk & Insurance Manager (U.S. Bureau of Labor Statistics). As a Controller, the FM controls and supervises the organization’s accounting, auditing and budget departments. Controllers are in charge of preparing financial reports which may be regular {covering the organization’s financial status, like income statements and balance sheets}, special {government authorities frequently demand the preparation of special reports of specific nature}, which requires the FM to be well-educated in Federal and State laws and regulations that govern the industrial sector to which the organization belongs, and futuristic {estimation of future earnings and expenses}. The vast technological advancement brought about by computers has greatly enhanced the ability of the FM to generate complex calculations in a very short period of time. Every FM makes maximum use of state-of-the-art computer systems and information services to analyze data and prepare plans on how to maximize profit for the organization. To do this, the FM takes pains to become well versed in computer technology and keep track of latest improvements in this sector (U.S. Bureau of Labor Statistics). As a Treasurer {also called Finance Officer}, the FM organizes and controls the organization’s financial goals, targets and plans for allocating resources. He or she supervises the functions of investing money for the purpose of making profit, makes provisions to handle related risks, oversees cash management functions, formulates plans to attract capital to assist the organization’s expansion plans (U.S. Bureau of Labor Statistics) {the common way involves offering investors a share in future benefits in return for their cash investment} (Ewton), and managing and supervising mergers and acquisitions. As mergers and acquisitions often involve one or more incursions into foreign countries, the FM is required to have specialized knowledge about the laws in those countries {particularly related to tax matters}. Proper analysis and development of financial reports and strategies involving mergers and acquisitions are so crucial that an organization may encourage its FM to widen his or her knowledge and expertise by attaining professional certification from specialized institutes, such as the Chartered Financial Analysts (CFA) Institute that confers the ‘Chartered Financial Analyst’ credential, or the Association for Financial Professionals (AFP) that grants the ‘Certified Cash Manager’ title to all candidates who successfully pass the related exams. Some organizations resort to hiring external specialist firms {that contract out their financial management skills}, to get the most efficient reports and advice about mergers and acquisitions (U.S. Bureau of Labor Statistics). As a Credit Manager, the FM manages and controls the organization’s credit dealings. This includes the allotment of credit, drawing up credit-rating standards, establishing upper limits of credit and supervising the recoveries of debts, especially those that are overdue (U.S. Bureau of Labor Statistics). As a Cash Manager, the FM controls and supervises the organization’s cash. Cash refers to money readily available for use in the bank or in the business (as opposed to potential sources of money like inventory, debtor dues, property and profit). Cash inflows come from customers, lenders and investors, while cash outflows include payments made to suppliers, creditors and as employee salaries. Negative cash flow occurs when cash outflow is more than cash inflow (due to several reasons such as weak debtor collections, outdated inventory, etc.); in such a situation, the organization is forced to borrow money from lenders, otherwise it will be in bad trouble – the main source of which is non-payment of dues to creditors, suppliers and employees. Organizations do their best to avoid this scenario and instead strive to attain a positive cash flow, which takes place when the cash inflow is more than the cash outflow. The overall aim of the organization is to generate profit. But the amount of profit earned is meaningless if the organization does not experience a positive cash flow, simply because it is possible to spend cash, not profit. A positive cash flow is therefore seen as a sign of good cash management and a sign that the organization is financially sound (FindLaw). As a Risk & Insurance Manager, the FM supervises policies aimed at reducing the effect of business hazards and loss that the organization could encounter in the course of its business transactions. The FM also controls and supervises the insurance budget of the organization (U.S. Bureau of Labor Statistics). The FM in two different types of organization experiences a departure from the usual role and duties of a typical FM in private or public sectors. These organizations are multinational corporations and branches of banks and financial institutions (U.S. Bureau of Labor Statistics). The FM of a multinational corporation is specialized in international finance and his or her duties include formulation of accounting systems and financial policies that are compatible with and obey the laws of the foreign countries in which the corporation’s branches are located. The FM is required to monitor the activities of all international branches and undertakes periodic visits to them in order to ensure proper functioning. Another duty is to attend meetings of financial and economic institutions of those countries to keep abreast of latest changes and developments in business policies (U.S. Bureau of Labor Statistics). The role of a FM of a branch of a bank or other financial institution is more involved in the working of the branch and more attuned to sales and marketing. The duties of the FM are to hire and manage employees, approve loans and other types of credit facilities, maintain a friendly relationship with the local community with the aim of attracting investment from them, and help existing customers with advice and solutions associated with their account problems (U.S. Bureau of Labor Statistics). The role of a FM is different from that of a traditional accountant. The latter’s role, as defined by Encyclopedia.com is to “evaluate records drawn up by the bookkeeper and show the result of this investigation as losses and gains, leakages, economies or changes in value, so as to reveal the progress or failure of the business and also its future limitations and possibilities.” The fundamental difference between the FM and a traditional accountant is what is called the “comprehensive factor.” An accountant is needed to go totally by the book, faithfully abide by all related rules, and generate true and trustworthy financial information to the best of his or her ability. The FM, on the other hand, has the luxury of taking risks and arriving at decisions based on instinct or ‘gut feeling’ (Ewton). In other words, the traditional accountant concentrates on financial reporting, whereas the concentration of the FM is on planning and money management (MBA Alliance). Among the many decisions the FM is required to take, the most important are those relating to financing, investment and asset management. Decisions about financing are largely based on their prospective sources, an important point the FM must thoroughly analyze before taking a decision. Financing can be got through debt or equity. The former involves bringing into existence a liability that must be settled, which involves cash outflow irrespective of whether the organization is a success or failing. Equity is not so risky {when viewed from cash flow perspective}, but ultimately weakens the ownership and earnings of the organization (‘Corporate Finance’: Wikipedia.org). The decision to invest in a project follows a proper evaluation of the project. It is the duty of the FM to calculate project value by employing the discounted cash flow {DCF} method that assesses the size and timing of all the increases in the amount of cash flow emanating from the project. These prospective cash flows are then discounted to arrive at their present values that are then summarized to arrive at the Net Present Value {NPV}. The FM will then select the project with the maximum NPV, as it constitutes a good investment decision (‘Corporate Finance’: Wikipedia.org). Asset management involves handling and controlling the physical assets of the organization in ways that will generate the most value. A company that has a large amount of physical assets faces the challenge of functioning profitably in very competitive markets. The FM takes decisions aimed at the optimal asset utilization and performance, such as lowering capital costs, lowering asset associated operating costs, prolongation of asset life, improvement of return on assets {ROA}, best method to calculate depreciation and safety monitoring to ensure conformation to rules governing rules and regulations (‘Enterprise Asset Management’: Wikipedia.org). References used: “Corporate Finance.” Wikipedia.org. 2007. 19 May 2007. “Enterprise Asset Management.” Wikipedia.org. 2007. 19 May 2007. Ewton, Zane. “Role of the Financial Manager.” Associated Content, Inc. 2006. 19 May 2007. “Finance & Accounting Careers.” MBA Alliance. 2004. 19 May 2007. “Financial Managers.” U.S. Bureau of Labor Statistics. 2007. 19 May 2007. “The Importance of Cash Management.” FindLaw. 2007. 19 May 2007. Read More