1 financial manager: role and responsibility by binam ghimire
TRANSCRIPT
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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