Learning unit 1: The role of the financial manager
Financial Management
- Financial management = a process of creating value in an organization.
- The process consists of planning, organizing, directing and controlling the financial
activities of a business.
- Value is created when the wealth of the owner/s of a business increases over time.
- Financial management is also linked to economics as financial managers must make
decisions in a constantly changing economic environment.
Management accounting
= Information gathering for internal decision making purposes.
- Management accounting is forward looking (i.e. involved in planning and control to
assist in decision – making of an entity).
Goals of financial management
- Profit maximisation
- Maximising the rate of returns
- Maximising shareholder’s return
Profit maximisation
- Profit maximisation = to increase the net after – tax profit attributable to ordinary
shareholders, financial managers should increase the firm’s turnover and decrease
its operating expenses
This can be achieved by more effective marketing techniques, increasing
productivity, reducing waste and using the most cost – effective sources of
debt funding
- Flaws of profit maximisation:
Accounting profit can be manipulated – accounting profit does not always
materialise into cash flows.
Ignores the issues of timing and risk associated with generating profit.
It ignores the time value of money (i.e. future cash flows are not discounted
at a suitable discount rate to represent their present value).
1
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Note: This document is protected under the Copyright Act - Illegal distribution of the document is
not allowed. Please note that we do not take responsibility for your test/exam results. Our notes are
up to date with the current module outlines.
,Role of the financial manager
- Financial manager manages the monetary affairs of a business.
- Primary focus is on the acquisitions, financing, and management of assets, to ensure
their optimal utilisation in order to maximise the wealth of shareholders.
- Primary responsibilities:
Financial planning and analysis (FP & A)
Investment decisions
Financing decisions
- Other responsibilities:
Cash management
Relationship management
Dividend decisions
Risk management
- Profit maximization is not a goal of the financial manager because profit
maximization:
Ignores time-value, and money
Ignores risk
Ignores cash flow
Profit does not always materialise into cash; some credit sales will end up
being credit losses.
Profit calculation is subject to creative accounting / “window dressing”
It is a short-term goal
Primary responsibilities of a financial manager
Financial planning and analysis
- The financial manager must possess knowledge of:
Sources of finance and their respective cost
Capital structure (balance between debt & equity)
The difference between profit and cash flow
Forecasting and budgets
- The forecasting and budgeting process will provide an indication of what the
business’s capital or funding requirements will be in the intermediate and longer
term.
- Financial forecasting and budgeting enables the financial manager to:
Assess & understand the business’s available funds and future funding
requirements
Assess & understand the key areas that will influence the business’s sales and
profit growth
2
Created by Pastthattest
Note: This document is protected under the Copyright Act - Illegal distribution of the document is
not allowed. Please note that we do not take responsibility for your test/exam results. Our notes are
up to date with the current module outlines.
, Assess financial risk and expectations about the economic environment
Assess the business’s capital investment requirements
Assess the business’s future commitments and resource demands
Compare benchmarks to actual performance and evaluate the performance
of departmental managers
A financial forecast
- In preparing a financial forecast, the FM (financial manager) will use historical
financial information to predict what will happen in the next few months.
- They are typically prepared 3 times a year
- They concern the financial expectations of the current financial year
Timing of forecasts:
- Forecast 1: prepared 3 months into the financial year
Comprises of 3 month’s actual financial data and 9 month’s expected
information
- Forecast 2: prepared 6 months into the financial year.
Compromise of 6 month’s actual financial data and 6 month’s expected
information
- Forecast 3: prepared 9 months into the financial year
Comprises of 9 month’s actual financial data and 3 month’s expected
information
A budget
= financial plan of the financial year immediately following the current year and predicts the
expected cash flows of that year.
- Prepared annually (usually in the last quarter of the financial year)
Coordination & control
- Financial control is key in managing business funds
- FM must monitor & review the financial performance
- Consider whether business objectives are being satisfied
- Take corrective action where needed
- Compare actual performance against forecast and budget
- Use ratio analysis to achieve financial control
Investment decisions
- The financial manager must decide on:
Internal investments (to enhance internal growth)
3
Created by Pastthattest
Note: This document is protected under the Copyright Act - Illegal distribution of the document is
not allowed. Please note that we do not take responsibility for your test/exam results. Our notes are
up to date with the current module outlines.
, External investments (via acquisitions)
Disinvestments (withdraw from unsuccessful projects)
- The FM must determine what short, medium, and long term investments are
required to achieve regular returns
- In the short term: employing working capital management policies to ensure money
is available to meet the working capital requirements
- In the medium and long term: assessing projects using budgeting tools (e.g. net
present value and discounted cash flows) to allow for planned investments in non-
current assets.
- Key investment decisions include whether to:
Take on new projects
Invest in new or sell of old property, plant or equipment
Embark on research and development
Invest in marketing and advertising campaigns
Embark on merges, acquisitions and disinvestments of other companies
Financing decisions
- Once capital requirements have been determined, the FM must evaluate and decide
on the capital structure of the business & how the funds are to be raised
- The major decisions are whether to rise funds through borrowing (bank loans,
issuing bonds) or share capital
- Financial negotiation = A FM will regularly need to liaise with financial institutions,
banks, brokers, etc. to raise funds for the business on the most favourable terms.
Secondary responsibilities of a financial manager
Cash management
- FM must ensure sufficient cash funds are available as needed by areas of the
business
Relationship management
- FM must maintain a positive relationship with stakeholders.
- Other stakeholders interested in the business include shareholders, creditors,
employees, government, customers, and the community
- The various stakeholders have different interests:
Shareholders: wealth maximisation
Suppliers: paid amount owed in full by due date
Lenders: repayment of capital and interest
Employees: continuity of employment & salary
Government: economic growth, employment levels & taxes due
4
Created by Pastthattest
Note: This document is protected under the Copyright Act - Illegal distribution of the document is
not allowed. Please note that we do not take responsibility for your test/exam results. Our notes are
up to date with the current module outlines.
Financial Management
- Financial management = a process of creating value in an organization.
- The process consists of planning, organizing, directing and controlling the financial
activities of a business.
- Value is created when the wealth of the owner/s of a business increases over time.
- Financial management is also linked to economics as financial managers must make
decisions in a constantly changing economic environment.
Management accounting
= Information gathering for internal decision making purposes.
- Management accounting is forward looking (i.e. involved in planning and control to
assist in decision – making of an entity).
Goals of financial management
- Profit maximisation
- Maximising the rate of returns
- Maximising shareholder’s return
Profit maximisation
- Profit maximisation = to increase the net after – tax profit attributable to ordinary
shareholders, financial managers should increase the firm’s turnover and decrease
its operating expenses
This can be achieved by more effective marketing techniques, increasing
productivity, reducing waste and using the most cost – effective sources of
debt funding
- Flaws of profit maximisation:
Accounting profit can be manipulated – accounting profit does not always
materialise into cash flows.
Ignores the issues of timing and risk associated with generating profit.
It ignores the time value of money (i.e. future cash flows are not discounted
at a suitable discount rate to represent their present value).
1
Created by Pastthattest
Note: This document is protected under the Copyright Act - Illegal distribution of the document is
not allowed. Please note that we do not take responsibility for your test/exam results. Our notes are
up to date with the current module outlines.
,Role of the financial manager
- Financial manager manages the monetary affairs of a business.
- Primary focus is on the acquisitions, financing, and management of assets, to ensure
their optimal utilisation in order to maximise the wealth of shareholders.
- Primary responsibilities:
Financial planning and analysis (FP & A)
Investment decisions
Financing decisions
- Other responsibilities:
Cash management
Relationship management
Dividend decisions
Risk management
- Profit maximization is not a goal of the financial manager because profit
maximization:
Ignores time-value, and money
Ignores risk
Ignores cash flow
Profit does not always materialise into cash; some credit sales will end up
being credit losses.
Profit calculation is subject to creative accounting / “window dressing”
It is a short-term goal
Primary responsibilities of a financial manager
Financial planning and analysis
- The financial manager must possess knowledge of:
Sources of finance and their respective cost
Capital structure (balance between debt & equity)
The difference between profit and cash flow
Forecasting and budgets
- The forecasting and budgeting process will provide an indication of what the
business’s capital or funding requirements will be in the intermediate and longer
term.
- Financial forecasting and budgeting enables the financial manager to:
Assess & understand the business’s available funds and future funding
requirements
Assess & understand the key areas that will influence the business’s sales and
profit growth
2
Created by Pastthattest
Note: This document is protected under the Copyright Act - Illegal distribution of the document is
not allowed. Please note that we do not take responsibility for your test/exam results. Our notes are
up to date with the current module outlines.
, Assess financial risk and expectations about the economic environment
Assess the business’s capital investment requirements
Assess the business’s future commitments and resource demands
Compare benchmarks to actual performance and evaluate the performance
of departmental managers
A financial forecast
- In preparing a financial forecast, the FM (financial manager) will use historical
financial information to predict what will happen in the next few months.
- They are typically prepared 3 times a year
- They concern the financial expectations of the current financial year
Timing of forecasts:
- Forecast 1: prepared 3 months into the financial year
Comprises of 3 month’s actual financial data and 9 month’s expected
information
- Forecast 2: prepared 6 months into the financial year.
Compromise of 6 month’s actual financial data and 6 month’s expected
information
- Forecast 3: prepared 9 months into the financial year
Comprises of 9 month’s actual financial data and 3 month’s expected
information
A budget
= financial plan of the financial year immediately following the current year and predicts the
expected cash flows of that year.
- Prepared annually (usually in the last quarter of the financial year)
Coordination & control
- Financial control is key in managing business funds
- FM must monitor & review the financial performance
- Consider whether business objectives are being satisfied
- Take corrective action where needed
- Compare actual performance against forecast and budget
- Use ratio analysis to achieve financial control
Investment decisions
- The financial manager must decide on:
Internal investments (to enhance internal growth)
3
Created by Pastthattest
Note: This document is protected under the Copyright Act - Illegal distribution of the document is
not allowed. Please note that we do not take responsibility for your test/exam results. Our notes are
up to date with the current module outlines.
, External investments (via acquisitions)
Disinvestments (withdraw from unsuccessful projects)
- The FM must determine what short, medium, and long term investments are
required to achieve regular returns
- In the short term: employing working capital management policies to ensure money
is available to meet the working capital requirements
- In the medium and long term: assessing projects using budgeting tools (e.g. net
present value and discounted cash flows) to allow for planned investments in non-
current assets.
- Key investment decisions include whether to:
Take on new projects
Invest in new or sell of old property, plant or equipment
Embark on research and development
Invest in marketing and advertising campaigns
Embark on merges, acquisitions and disinvestments of other companies
Financing decisions
- Once capital requirements have been determined, the FM must evaluate and decide
on the capital structure of the business & how the funds are to be raised
- The major decisions are whether to rise funds through borrowing (bank loans,
issuing bonds) or share capital
- Financial negotiation = A FM will regularly need to liaise with financial institutions,
banks, brokers, etc. to raise funds for the business on the most favourable terms.
Secondary responsibilities of a financial manager
Cash management
- FM must ensure sufficient cash funds are available as needed by areas of the
business
Relationship management
- FM must maintain a positive relationship with stakeholders.
- Other stakeholders interested in the business include shareholders, creditors,
employees, government, customers, and the community
- The various stakeholders have different interests:
Shareholders: wealth maximisation
Suppliers: paid amount owed in full by due date
Lenders: repayment of capital and interest
Employees: continuity of employment & salary
Government: economic growth, employment levels & taxes due
4
Created by Pastthattest
Note: This document is protected under the Copyright Act - Illegal distribution of the document is
not allowed. Please note that we do not take responsibility for your test/exam results. Our notes are
up to date with the current module outlines.
