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- 1. Module 1 - Background The Role of the Financial Manager Required Reading Financial Managers (n.d.) Retrieved from: http://www.ncbuy.com/careers/blsj/job010.html Kowalski, R. B., & Campbell, M. W. (2000). Leadership skills help financial managers achieve career success. Healthcare Financial Management, 54(4), 50-52. Optional Reading Finance and Accounting. (n.d.) Retrieved from MBA.COM . Click here to browse. This website provides descriptions of finance careers. A British description of the role of the financial manager, retrieved from here. This article on What does it take to become a CFO is also a good information source. It is always important, especially in a field like finance, to know what your words mean. Please refer to: About.com glossary of financial terms. For a thorough job description of a financial manager, read this article from the Bureau of Labor. This article discusses the nature of the work involved in the position, working conditions associated with this job, and many other aspects of being a financial manager. This reading called Why Finance Matters is a short but good introductory article that will give you a good overview of the issues involved in being a financial manager. The focus of this article is on the decision making aspects of financial management. On the extent to which CFO's perform well as CEO's see the following article below by Ida Picker, published in Institutional Investor, in 1989. Reflect on her arguments. Are these still relevant in today's environment? These articles below on financial managers are worth reading.
- 2. They are available in Proquest. Do CFOs Really Make Good CEOsInstitutional Investor; New York; Aug 1989; Picker, Ida; Abstract:With the proliferation of corporate takeovers, leveraged buyouts, and restructuring in the US, it would seem that chief financial officers (CFO) hold the keys to executive wisdom. Recruiters report a growing trend of grooming CFOs for chief executive officer (CEO) positions, with some estimating that nearly 25% of top corporate leaders are former CFOs. Analysts, academics, and headhunters agree that the ideal CEO communicates well, is adept at managing managers, understands the company's product and operations, and provides a consistent vision. A recent survey by Management Practices Quarterly reveals that, of 83 new CEOs appointed in 1988, more than 18% came from operations-production backgrounds, some 23% had technical training, while only 14.4% had a financial background. D. Wayne Calloway, who became CEO of PepsiCo in May 1986, was formerly the company's CFO and is probably the best example of the valuable experience CFOs can bring to the CEO position. Leadership skills help financial managers achieve career successHealthcare Financial Management; Westchester; Apr 2000; Robert B Kowalski; Manie W Campbell; Abstract:Financial managers who want to distinguish themselves and their organizations need to demonstrate their leadership ability. Because financial managers sometimes overlook the need for leadership skills, cultivating mentors who can teach them specific leadership skills, such as improved communications and entrepreneurship, may be necessary. Health-care financial managers can sharpen their leadership skills by distinguishing between leadership and management, adopting a new mentoring model, evaluating the usefulness of new management techniques, understanding the connection between technology and leadership, looking for the solution beyond the problem, and being seen and heard within the
- 3. organization. SURVEYGenderAgeDepartmentPositionTenureJob SatisfactionIntrinsicExtrinsicBenefits111134.96.45.55.4133114. 95.24.64.2KEY TO SURVEY112214.95.35.72.3113115.24.75.64.5Demographics133 114.95.24.64.2112126.95.44.14.8Gender111136.86.44.84.71Mal e112122.24.74.74.72Female111133.45.25.45.4Age122126.55.32 .93.7116 - 21121134.85.35.55.2222 - 49122133.86.43.96.4350 - 65121125.25.25.85.2Department 122123.45.25.25.31Human Resources131115.56.45.84.72Information Technology132112.45.25.96.43Administration133113.55.36.45. 2Position133126.94.75.74.71Hourly Employee (Overtime Eligible)133125.56.45.85.42Salaried Employee (No Overtime)133125.25.25.66.4Tenure With Company133125.71.25.44.71Less than 2 years113125.52.42.35.222 to 5 years111124.95.35.65.43Over 5 Years111134.96.45.55.4133114.95.24.64.2Four Survey Measures112214.95.24.64.2113115.26.45.53.5SURVEY MEASURE #1 OVERALL JOB SATISFACTION (Scale 1- 7)133114.95.24.64.21 = Least Satisfied122115.25.35.72.37 = Most Satisfied121125.24.75.64.5SURVEY MEASURE #2 INTRINSIC JOB SATISFACTION (Scale 1- 7)133124.96.45.55.41= Least Satisfied122135.95.24.64.27= Most Satisfied113214.94.75.64.5SURVEY MEASURE #3 EXTRINSIC JOB SATISFACTION (Scale 1- 7)111133.25.45.65.41 = Least Satisfied133114.96.44.64.27 = Most Satisfied113214.94.75.64.5SURVEY MEASURE #4 BENEFITS (Scale 1-7)112214.95.25.74.21= Least Satisfied113115.25.24.64.27= Most Satisfied133114.96.45.53.5112126.94.75.64.5111136.85.45.65.4 112122.25.24.64.2111133.46.45.53.5122126.55.24.64.2121134. 84.75.64.5122133.86.45.55.4121125.25.24.64.2122123.44.75.64 .5121114.95.45.65.4111234.96.44.64.2133114.94.75.64.511221 4.95.25.74.2133114.96.44.64.2122115.24.75.64.5122134.95.24.
- 5. 3126.94.75.74.7233125.56.45.85.4233125.25.25.66.4233125.71. 25.44.7213125.52.42.35.2 Module 1 - Terms The Role of the Financial Manager Course Terms The following financial terms may be useful in understanding corporate finance. Additional terms will be added to each Module. By course end, each of you will have built a basic financial vocabulary. American Depository Receipt (ADR): A security issued in the United States representing shares of a foreign stock and allowing that stock to be traded in the United States. Balance Sheet: A financial statement showing a firm's accounting value at the close of business on a particular point in time. Benefit/Cost Ratio: The present value of an investment's future cash flows divided by its initial cost. Also called "profitability index." Beta Coefficient: The amount of systematic risk present in a particular risky asset relative to an average risky asset. Business Risk: The equity risk that comes from the nature of the firm's operating activities. Capital Budgeting: The process of planning and managing a firm's long-term investments. Capital Intensity Ratio: A firm's total assets divided by its sales, or the amount of assets needed to generate US $1 in sales. Capital Rationing: The situation that exists if a firm has positive net present value projects but cannot find the necessary financing. Capital Structure: The mixture of debt and equity maintained by a firm. Cash Budget: A forecast of cash receipts and disbursements for the next planning period. Can be prepared for as little as a week or for as long as five years. Contingency Planning: Taking into account the managerial
- 6. options implicit in a project. Cost of Capital: The minimum require return on a new investment. Cost of Debt: The return that lenders require on the firm's debt. Cost of Equity: The return that equity investors require on their investment in the firm. Discount: Calculate the present value of some future amount. Discount Rate: The rate used to calculate the present value of future cash flows. Discounted Cash Flow (DCF) Valuation: The process of evaluating an investment by discounting its future cash inflows to the present. Economic Order Quantity (EOQ): The restocking quantity that minimizes the total inventory costs. Economic Value Added (EVA): EVA is a tool for maximizing shareholder wealth. It is a method of measuring financial performance. Exchange Rate: The price of one country's currency expressed in terms of another country's currency. Exchange Rate Risk: The risk related to having international operations in a world where relative currency values vary. Expected Return: Return on a risky asset expected in the future. Financial Ratios: Relationships determined from a firm's financial information and used for comparison purposes. Financial Risk: The equity risk that comes from the financial policy (i.e., capital structure) of the firm. Forecasting Risk: The possibility that errors in projected cash flows lead to incorrect decisions. Future Value (FV): The amount that an investment is worth after one or more periods. Generally Accepted Accounting Principles (GAAP): The common set of standards and procedures by which audited financial statements are prepared. Each country's GAAP may differ. Income Statement: Financial Statement summarizing a firm's performance over a period of time.
- 7. Incremental Cash Flows: The difference between a firm's future cash flows with a project or without the project. Initial Public Offering (IPO): A company's first equity issue made available to the general public. Internal Rate of Return (IRR): the discount rate that makes the net present value (NPV) of an investment zero. Just-in-Time (JIT) Inventory: A system for managing demand- dependent inventories that minimizes inventory holdings. Marginal Tax Rate: Amount of tax payable on the next dollar earned. Net Present Value (NPV): The difference between an investment's market value and its cost. Net Working Capital: Current assets less current liabilities. Operating Cash Flow: Cash generated from a firm's normal business activities. Opportunity Cost: The most valuable alternative that is given up if a particular investment is undertaken. Payback Period: The amount of time required for an investment to generate cash flows equal to its initial cost. Political Risk: Risk related to changes in value that arise because of political actions. Present Value (PV): The current value of future cash flows discounted at the appropriate discount rate. Profitability Index (PI): the present value of an investment's future cash flows divided by its initial cost. Pro Forma Financial Statements: Financial statements projecting future years' operations. Purchasing Power Parity (PPF): The idea that exchange rate adjusts to keep purchasing power constant among currencies. Risk Premium: The excess required from an investment in a risky asset over a risk-free investment. Sensitivity Analysis: Investigation of what happens to net present value (NPV) when only one variable is changed. Sources of Cash: A firm's activities that generate cash. Statement of Cash Flows: A firm's financial statement that summarizes its sources and uses of cash over a specified period,
- 8. usually one fiscal year. Sunk Cost: A cost that has already been incurred and cannot be removed and, therefore, should not be considered in an investment decision. Uses of Cash: A firm's activities in which cash is spent. Variance: The difference between the forecasted amount and the actual amount. Weighted Average Cost of Capital (WACC): The weighted average cost of equity and the after-tax cost of debt. Working Capital: A firm's short-term assets and liabilities. Zero Base Budgeting: A system whereby each manager must justify his/her budget above the amount necessary to operate the function. Module 1 - Home The Role of the Financial Manager Modular Learning Outcomes Upon successful completion of this module, the student will be able to satisfy the following outcomes: · Case · Describe the role of the financial manager in the larger corporate structure. · Explain how the financial manager leads in terms of capital financing. · Discuss the important personal characteristics for a financial manager · Discuss how the financial managers leads in terms of operational financing. · SLP · Describe the role of the financial manager in the larger corporate structure. · Discuss the important personal characteristics for a financial manager. · TD · Describe the role of the financial manager in the larger
- 9. corporate structure. · Discuss the important personal characteristics for a financial manager. What is a financial manager and how does s/he fit in to the overall corporate structure? We begin by assessing the role of the financial manger in the modern corporation. Managers, in general, guide the organization. They make sure that things get done. Combining organizational resources - people, material, transportation, and the like - managers make sure that everything comes together in a way that meets the company's objectives. Management has been defined as "the process by which a cooperative group directs the actions of others towards a common goal". Others see it in terms of organizational objectives, coordinating resources, planning, directing controlling, and managing people. Of course, they are all right. These are all essential elements to the role of management in the modern corporation. A manager must have excellent interpersonal skills, be able to create and disseminate information, be a solid decision maker, and more. As if this skill list was not demanding enough, changes in the 21st century make the role of the manager even more challenging. The role of the financial manager, in particular, has very specific demands. The financial manager sees everything and is involved, to some extent, in everything. We will be looking at the issue of, what I would call, epistemic privilege, in the modular case-based analysis. The role of Financial manager moves in two different directions: · Capital Financing · Operational Financing · The financial manager must be concerned with the monies necessary in order to get the operation up and running, and
- 10. expanding. This is the matter of capital finance. · On the other hand, the financial manager must also be concerned with financing ongoing activities. This we call operational finance. · The former is discretionary. A company can move in different directions and move into new projects at its own discretion. However, operational finance is a must. Meeting payroll, paying taxes, servicing equipment, and so on, is a mandatory element of any business. The lack of this mandatory operational capital is the number one reason companies go bankrupt. · Most people see the financial manager as simply a treasurer. However, the financial manager is an integral part of the overall management team. In some sense, s/he is the cynosure. In this module we will be assessing the role of the financial manager in the overall corporate structure.