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    This checklist outlines the role of the financial manager.

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    Definition A financial manager is responsible for providing financial advice and support to colleagues and cli ents to enable them to make soundbusiness decisions. The role of the financial manager i s more than simply accounting; it is multifunctional. Financial managers mustunderstand all aspects of the business so that they are able to adequately advise and support the chief executive officer in decision-making and ensuring company growth and profitability.

    Almost every firm, government agency, or other type of organization has one or more financial managers. Financial managers oversee thepreparation of financial reports, direct investment activities, and implement cash management strategies. They also implement the long-termgoals of their organization.

    Many corporations operate multifunctional teams where the financial manager is responsible for a particular division or function, or looks after a range of departments and functions. Financial managers often have specific roles and titles:

    Controllers prepare financial reports and analyses of future earnings or expenses that summarize the organizations financial position.Controllers are also in charge of preparing special reports required by regulatory authoritiesespecially important because of the SarbanesOxley Act, designed in part to protect investors from fraud.

    Treasurers and finance officers direct and oversee budgets, monitor the investment of funds, manage associated risks, supervisecashmanagement activities, execute capital raising strategies, and deal with mergers and acquisitions.

    Risk and insurance managers administer programs to minimize risks and losses that could arise from financial transactions and businessoperations.

    Credit managers supervise the firms issuance of credit, fix credit-rating criteria, determine credit limits, and monitor the collection of past-dueaccounts.

    Cash managers supervise and manage the flow of cash receipts and disbursements to meet business and investment needs.

    The financial managers role, particularly in business, is changing in response to technological advances that have significantly reduced thetime it takes to produce financial reports. Financial managers now perform more data analysis to offer senior management ideas on how tomaximize profits. They play an increasingly significant role in mergers and acquisitions and in r elated financing, and in areas that r equirewide-ranging, focused knowledge to diminish risks and maximize profit.

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    Adva nt agesy

    Financial managers improve business organization and risk management by providing reassurance on the effectiveness and efficiency of operations, financial reporting, and compliance with applicable laws and regulations.

    y Financial managers provide management with an in-depth and unbiased understanding of risks that the organization may be facing, allowingfor preemptive planning.

    y Financial managers give company officers and directors forewarning of ethical and legal issues that may affect the organization.

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    Dis adva nt ag esy Although they are meant to be independent and impartial, financial managers are paid by the company and are an integral part of the

    company management; this can lead to conflicts of interest when advising senior management on, for example, investment risk.

    y Financial managers judgments, estimates, and interpretations are not always objective because of their close relationship with theorganization for which they work.

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    Action Che ckl isty Has the financial manager worked in related business fields previously and, if so, for how long? What reliable references can be provided?

    y How good is his/her track record on risk assessment and planning for contingencies?

    y In assessing business processes, how up-to-date is he/she with technology controls in auditing?

    Saturday, October 25, 2008The Role of Finance ManagerThe role of finance manager in the company is an important one. The function of the finance manager is not confined to themanagement and making of the accounts but it also plays a major role in dividend decisions, capital budgeting decisions, capitalstructure outlay of the firm, decision related to the merger and acquisitions, and all the investment decisions of the firm. Thus thefinance manager plays an important role in any business enterprise.

    The different decisions can be classified into:

    1. The routine working capital and cash management decisions.

    2. Dividend decisions3. Investment decisions4. Financial forecasting5. International financial decisions6. Portfolio management

    7. Risk management 8. Cash management

    while the dividend decisions are related to deciding the amount that is to be distributed to the shareholders, the investment decisions relate to the investment that the company makes in different projects so as to expand the business and improve itsprofitability. The finance manager here appraises the various projects and judges their profitability. The manager also decides howmuch capital should be employed in the project and which sources are the best for financing the project. Such decision also extendsto the investments in the foreign and the local market which requires a thorough knowledge of the market trends thus the rolebecomes important.

    The top management takes the advice of the finance manager for the capital structure outlay of the firm.

    On the monthly and yearly basis the manager looks into the inventory requirements, daily cash requirements, and the objectives of

    the firm and then plans a budget accordingly for different departments so that they receive optimum amount to carry out theactivities and achieve the business objectives.

    On the basis of the previous year budget utilization, different reviews and study reports prepared by the research department,finance manager prepares a budget and allocate the recourses for the coming year.

    With globalization the role of finance manager is not confined to the regional boundaries but has spread to the activities involvingtaking the decisions regarding mergers and acquisitions, establishing of the subsidiaries and investing in the foreign markets. Herethe finance manager looks into the profits that the business can generate from establishing the subsidiary, what should be thecapital outlay of the firm, what tax benefits the firm can avail by establishing and expanding into the foreign market?

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    A finance manager thus not only acts as a person maintaining the accounts but also plays a major role in the management of portfolio, risk, cash and capital.Posted by Lauren at 5:09 AM

    Labels: function of finance manager , importance of finance manager , role of finance manager

    Sources of Finance - Long Term Sources of Finance

    An activity that looks at sources of finance for Level 2.Long Term Sources of Finance

    Long term sources of finance are those that are needed over a longer period of time - generally over a year. The reasonsfor needing long term finance are generally different to those relating to short term finance.

    Long term finance may be needed to fund expansion projects - maybe a firm is considering setting up new offices in aEuropean capital, maybe they want to buy new premises in another part of the UK, maybe they have a new product thatthey want to develop and maybe they want to buy another company. The methods of financing these types of projects willgenerally be quite complex and can involve billions of pounds.

    Large-scale development of plant and equipment may cost millions of pounds. Long term finance is needed for this type of development. Copyright: Alfonso Lima,

    from stock.xchng .

    I t is important to remember that in most cases, a firm will not use just one source of finance but a number of sources.There might be a dominant source of funds but when you are raising hundreds of millions of pounds it is unlikely to comefrom just one source.

    Shares

    A share is a part ownership of a company. Shares relate to companies set up as private limited companies or public limitedcompanies (plcs). There are many small firms who decide to set themselves up as private limited companies; there areadvantages and disadvantages of doing so. I t is possible, therefore, that a small business might start up and have just twoshareholders in the business.

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    I f the business wants to expand, they can issue more shares but there are limitations on who they can sell shares to - anyshare issue has to have the full backing of the existing shareholders. PLCs are different. They sell shares to the generalpublic. This means that anyone could buy the shares in the business.

    M errill Lynch: a merchant bank that engages in large-scale deals to acquire sources of fin ance.

    Some firms might have started out as a private limited company and have expanded over time. There might come a timewhen they cannot issue any more shares to friends or family and need more funds to continue expanding. They might thendecide to become a public limited company. This is called 'floating the business'. I t means that the business will have to gothrough a number of administrative and legal procedures to allow it to be able to offer shares to the general public.

    I t might be that a business wants to raise 300 million to finance its expansion plans. I t might issue 300 million 1 sharesin the company. The offering of these shares has to be accompanied by a prospectus which lays out details of the business- what it is involved in, how it is structured, how it will be managed and so on. This is so that prospective investors, peopleor institutions who might want to buy the shares, can get information about the company before committing to buyingshares.

    Often a business will employ the services of a merchant bank to help with a share issue. These institutions specialise inarranging large financial deals of this sort. Examples of such institutions are Morgan Stanley, Merrill Lynch, Rothschilds andGoldman Sachs. These institutions may agree to underwrite the share issue. What this means is that if all the shares arenot sold, the institution will stil l provide all the money to the firm i ssuing the shares.

    Once the shares are sold, share owners can buy and sell their shares through the stock exchange. Such buying and sellingdoes not affect the business concerned directly and is one of the main advantages of the stock exchange. You can getmore details of how the stock exchange works through our resource on the London Stock Exchange .

    There may be times in the development of a plc when it needs to raise more funds. I n this case it can issue more shares.Many firms will do this through what is called a 'rights issue'. This occurs where new shares are issued but existingshareholders get the right to purchase new additional shares at a reduced price. I f the business is doing well and the newfinance is needed for expansion, this can be an attractive proposition for existing shareholders. For the business it is arelatively quick and cheap way of raising new funds.

    Task

    Follow this link to Morgan Stanley's United Kingdom Transactions.

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    Select three of the transactions from the list. Try and work out who was trying to raise finance,how much they wanted to raise and then think about what they might have wanted to raise thismoney for. For example, one of the entries for March read:

    March - Transport for London - 200 million Euro market public issue, 25-year fixed-rate note.

    In this case, the business trying to raise money was Transport for London. They wanted to raise200 million and did so through borrowing money over a 25 year period. The people lending themoney would have received a fixed rate of interest for the period that they choose to hold theloan. (These notes can be bought and sold as well!). Why did Transport for London want to raisethe money? Well, that is for you to think about.V enture Capital

    V enture capital is becoming an increasingly important source of finance for growing companies. V enture capitalists aregroups of (generally very wealthy) individuals or companies specifically set up to invest in developing companies. V enturecapitalists are on the look out for companies with potential. They are prepared to offer capital (money) to help thebusiness grow. I n return the venture capitalist gets some say in the running of the company as well as a share in theprofits made.

    V enture capitalists are often prepared to take on projects that might be seen as high risk which some banks might notwant to get involved in. The advantages of this might be outweighed by the possibility of the business losing some of i tsindependence in decision making.

    Examples of venture capitalists (who are also cal led private equity firms) are Advantage Capital Limited, BraveheartV entures, Permira and Hermes Private Equity.

    Task

    Go to the B V CA Web site .

    The site contains a l ist of members - all firms providing capital for businesses! I t also contains some case studies of howprivate equity firms have helped entrepreneurs. To find this, go to 'Entrepreneurs', 'Entrepreneurs - case studies' and openthe pdf file. You can get some interesting information on the work of venture capitalists here.

    Now go to Permira's page on the Gala Coral Group and read the information.

    y How much money did Permira invest in Coral?y I n October 2005, Gala bought Coral Eurobet. How much did they pay to buy this company?y What do Permira plan to do to help the business grow in the future?y Why do you think that Permira believes the investment in the Gala group is a good one?

    G overnment G rant

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    T he Eden Project near St Austell in Cornwall. T he cost of the project was 133.6 million. Some of thefunding came from the National Lottery and some came from the

    EU. Copyright: Simon Nicholson, from stock.xchng .

    Some firms might be eligible to get funds from the government. This could be the local authority, the national governmentor the European Union. These grants are often linked to incentives to firms to set up in areas that are in need of economicdevelopment. I n Cornwall, for example, there have been a number of initiatives to encourage new businesses to locatethere.

    Cornwall has the lowest gross domestic product (GDP) per head of the population in the UK. The average wage in Cornwallis 28% below the UK average. As a result, the area attracts funding from the EU and the government. Firms looking to setup in Cornwall might be able to apply for some help in starting or moving a business to the area. One of the disadvantagesof this type of funding is that it involves large amounts of paperwork and administration. This can add to costs and in somecases might not make the project worthwhile.

    One famous example of how a business project can be developed using European Union funding was the Eden Project. The

    EU was not the only source of finance to help set up the project but was an important partner in helping to realise thisimportant tourist destination for a deprived part of Cornwall.

    B ank Loans

    As with short term finance, banks are an important source of longer term finance. Banks may lend sums over long periodsof time - possibly up to 25 years or even more in some cases. The loans have a rate of interest attached to them. This canvary according to the way in which the Bank of England sets interest rates. For businesses, using bank loans might berelatively easy but the cost of servicing the loan (paying the money and interest back) can be h igh. I f interest rates risethen it can add to a businesses costs and this has to be taken into account in the planning stage before the loan is takenout.

    Mortgage

    A mortgage is a loan specifically for the purchase of property. Some businesses might buy property through a mortgage.I n many cases, mortgages are used as a security for a loan. This tends to occur with smaller businesses. A sole trader, forexample, running a florists shop might want to move to larger premises. They find a new shop with a price of 200,000. Toraise this sort of money, the bank wil l want some sort of security - a guarantee that if the borrower cannot pay the moneyback the bank will be able to get their money back somehow.

    The borrower can use their own property as security for the loan - it is often called taking out a second mortgage. I f thebusiness does not work out and the borrower could not pay the bank the loan then the bank has the right to take the

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    home of the borrower and sell it to recover their money. Using a mortgage in this way is a very popular way of raisingfinance for small businesses but as you can see carries with it a big risk.

    T here may be a need to move to larger premises but the risks could be great if usin g your home as security for a loan. Copyright: Sue Anne Joe, from stock.xchng .

    w ner's Capital

    Some people are in a fortunate position of having some money which they can use to help set up their business. Themoney may be the result of savings, money left to them by a relative in a will or money received as the result of aredundancy payment. This has the advantage that it does not ca rry with it any in terest. I t might not, however, be a largeenough sum to finance the business fully but wil l be one of the contributions to the overall finance of the business.

    Retained Profit

    This is a source of finance that would only be available to a business that was already in existence. Profits from a businesscan be used by the owners for their own personal use (shareholders in plcs receive a share of the company profits in theform of a dividend - usually expressed as Xp per share) or can be used to put back into the business. This is often called'ploughing back the profits'.

    The owners of a business will have to decide what the best option for their particular business is. I n the early stages of business growth, it may be necessary to put back a lot of the profits into the business. This finance can be used to buynew equipment and machinery as well as more stock or raw materials and hopefully make the business more efficient andprofitable in the future.

    Selling Assets

    As firms grow they build up assets. These assets could be in the form of property, machinery, equipment, other companies

    or even logos. I n some cases it may be appropriate for a business to sell off some of these assets to finance other projects.

    B iz/ed is owned by T homson Learning. T homson Learning, in turn, is part of the T homson Corporation. T he T homson Corporation consists of a variety of different

    businesses, of which T homson Learning is one.

    I n October 2006, the Thomson Corporation announced that it would be selling Thomson Learning. Part of the reasoningwas that the learning part of the business was different to other parts of the corporation and that it did not fi t into thestrategic direction which the corporation as a whole wanted to go in. Selling Thomson Learning will help to raise valuable

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    funds for the rest of the corporation to be able to develop. I t is estimated that Thomson Learning will be worth somethingin the region of 5 billion!

    Lottery Funding

    I n the UK the National Lottery might be a possible source of funds for some types of business. These businesses will

    mostly be charities or charitable trusts. The Eden Project, referred to earlier, received some funding from the Lottery. Thecompany that run the Eden Project are a not for profit business so any surplus they make is put back into the business tohelp develop and improve it

    The capital of a company is divided into number of equal parts known as shares.Preference sharesAs the name suggests, there have been certain preference as compared to other type of shares. These shares are giventwo preferences. There is a preference for payment of dividend. The second preference for shares is repayment of capitalat the remaining of the profits.

    Feature of preferences shares

    1. Preference share have been priority over payment of dividend and repayment of capital.2. Preferences shares do not hold voting rights.a. Cumulative preference shares:- these shares have been a right to claim dividend for those years also for which therewere no profits.b. Non cumulating preference shares:- the holders of these share have no claim for the arrears of dividend. They are paida dividend if there are sufficient profits.c. Redeemable preference share:- neither the company can return the share capital nor the shareholder can demand itsrepayment.d. I rredeemable preference shares:- the shares which cannot be redeemed unless the company is liquidated are known asirredeemable preference shares.

    Advantages

    1. Helpful in raising long term capital for a company2. There is no need to mortgage property on these shares.3. Redeemable preference shares have the added advantages of repayment of capital whenever there is surplus in thecompany.4. Rate of return is guaranteed.

    Disadvantages

    1. Permanent burden on the company to pay a fixed rate of dividend before paying anything on the other shares.2. Not advantageous to investors from the point of view of control and management as preferences shares do not carryvoting rights.3. Compared to other fixed interest bearing securities such as debentures, usually the cost of raising the preference sharecapital is higher.

    Advantages and Disadvantages of Debentures The Advantages of Debentures are as follows:

    1) The holders of the debentures are entitled to a fixed rate of interest. I t can be presented as "5% Debenture".

    2) Debentures are for those who want a safe and secure income as they are guaranteed payments with h igh interest rates.

    3) They have priority over other unsecured creditors when it comes to debt repayment.

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    The Disadvantages of Debentures are:

    1) Unlike ordinary shares, debenture holders are not considered the owners of the company. They are long termloan capital and holders will have no right to vote at the annual general meeting.

    2) Debentures are more secure than stocks, but will lead to a lower rate of theoretical return.

    3) I t is a type of debt instrument which i s not secured by collateral (or physical asset). I n case of bankruptcy, the bondholders are given priority over the debenture holders.

    * Next: Features of Debentures