exam notes

1. MOHAMED RAUFIK TAJUDDIN | MBA PAPER | May 1, 2015
FINANCIAL MANAGEMENT
As the finance manager in a company and take charge of all financial aspects of the company. Explain the financial
activities of the company that you are expected to perform and how are you going to achieve the objective of those
activities.

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Table of Contents
INTRODUCTION.........................................................................................................................................2
Duties of Financial Manager....................................................................................................................2
Types of Financial Managers................................................................................................................... 4
Important Skills for Financial Managers..............................................................................................5
The main functions of a Financial Manager: .......................................................................................7
The Financial managers’ goals ............................................................................................................... 8
The Goal Of Financial Management ..................................................................................................... 9
The General goal of finance manager...................................................................................................11
Conclusion.................................................................................................................................................. 12
Lists of Figures
Figure 1. Duties of Financial Manager .........................................................................................................2
Figure 2 . Functions of Financial manager..................................................................................................3
Figure 3. Role of Financial manager ............................................................................................................5
Figure 4 . Definition of Financial management .......................................................................................10
Figure 5 . The Importance of Financial Services .......................................................................................11
Figure 6 . The Changing Role of Financial Manager................................................................................ 12

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INTRODUCTION
Financial managers perform data analysis and advise senior managers on profit-maximizing ideas.
Financial managers are responsible for the financial health of an organization. They produce financial
reports, direct investment activities, and develop strategies and plans for the long-term
financial goals of their organization.
Duties of Financial Manager
Financial managers typically:
 Prepare financial statements, business activity reports, and forecasts,
 Monitor financial details to ensure that legal requirements are met,
 Supervise employees who do financial reporting and budgeting,
 Review company financial reports and seek ways to reduce costs,
 Analyze market trends to find opportunities for expansion or for acquiring other companies,
 Help management make financial decisions.
The role of the financial manager, particularly in business, is changing in response to technological
advances that have significantly reduced the amount of time it takes to produce financial reports.
Financial managers' main responsibility used to be monitoring a company's finances, but they now
do more data analysis and advice senior managers on ideas to maximize profits. They often work
on teams, acting as business advisors to top executives.
Figure 1. Duties of Financial Manager

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Financial managers also do tasks that are specific to their organization or industry. For example,
government financial managers must be experts on government appropriations and
budgeting processes, and healthcare financial managers must know about issues in healthcare
finance. Moreover, financial managers must be aware of special tax laws and regulations that affect
their industry.
Financial managers tasks that are specific relate to their organization corporate finance department,
like capital investment decisions.
Capital investment decisions are long-term corporate finance decisions relating to fixed assets and
capital structure. Decisions are based on several inter-related criteria. Corporate management seeks
to maximize the value of the firm by investing in projects which yield a positive net present
value when valued using an appropriate discount rate in consideration of risk.
These projects must also be financed appropriately. If no such opportunities exist,
maximizing shareholder value dictates that management must return excess cash to shareholders
(i.e., distribution via dividends). Capital investment decisions thus comprise an investment decision,
a financing decision, and a dividend decision.
Management must allocate limited resources between competing opportunities (projects) in a
process known as capital budgeting. Making this investment decision requires estimating the value
of each opportunity or project, which is a function of the size, timing and predictability of future cash
flows.
Achieving the goals of corporate finance requires that any corporate investment be financed
appropriately. The sources of financing are, generically, capital self-generated by the firm and capital
from external funders, obtained by issuing new debt or equity.
Figure 2 . Functions of Financial manager

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Types of Financial Managers
There are distinct types of financial managers, each focusing on a particular area of management.
CONTROLLERS
Controllers direct the preparation of financial reports that summarize and forecast the organization's
financial position, such as income statements, balance sheets, and analyses of future earnings
or expenses. Controllers also are in charge of preparing special reports required by governmental
agencies that regulate businesses. Often, controllers oversee the accounting, audit,
and budget departments.
TREASURERS
Treasurers and finance officers direct their organization's budgets to meet its financial goals and
oversee the investment of funds. They carry out strategies to raise capital and also develop financial
plans for mergers and acquisitions.
CREDITS MANAGERS
Credit managers oversee the firm's credit business. They set credit-rating criteria, determine credit
ceilings, and monitor the collections of past-due accounts.
CASH MANAGERS
Cash managers monitor and control the flow of cash that comes in and goes out of the company to
meet the company's business and investment needs. For example, they must project cash flow
(amounts coming in and going out ) to determine whether the company will not have enough cash
and will need a loan or will have more cash than needed and so can invest some of its money.
RISK MANAGERS
Risk managers control financial risk by using hedging and other strategies to limit or offset the
probability of a financial loss or a company's exposure to financial uncertainty. Among the risks they
try to limit are those due to currency or commodity price changes.

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INSURANCE MANAGERS
Insurance managers decide how best to limit a company's losses by obtaining insurance against risks
such as the need to make disability payments for an employee who gets hurt on the job or costs
imposed by a lawsuit against the company.
Important Skills for Financial Managers
Analytical skills. Financial managers increasingly assist executives in making decisions that affect the
organization, a task for which they need analytical ability.
Communication. Excellent communication skills are essential because financial managers must
explain and justify complex financial transactions.
Attention to detail. In preparing and analyzing reports such as balance sheets and income
statements, financial managers must pay attention to detail.
Math skills. Financial managers must be skilled in math, including algebra. An understanding of
international finance and complex financial documents also is important.
Organizational skills. Financial managers deal with a range of information and documents. They
must stay organized to do their jobs effectively.
Figure 3. Role of Financial manager

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In shorts, the finance manager will advise and carried out task related to the following:
 Formulating budget estimates in support of program objectives; presenting and justifying budget
requests; development of plans for allocating resources; monitoring program execution; reviewing
and analyzing funding documents; conducting comparative analyses to examine trends; reviewing
budget policy and statutes to ensure compliance.
 Reviewing and interpreting accounting and financial management policy, procedures, standards
and statutes to ensure compliance; monitoring and examining accounts, specific appropriations
or financial records for account status and reporting requirements; and verifying accounts
documentation.
 Planning and conducting performance and financial reviews of major programs and entities to
evaluate the reliability, effectiveness, and efficiency of the organization; making recommendations
based on findings that identify cost savings through improved operations; and following up on
recommendations to ensure implementation.
 Managerial activities which deals with planning and controlling of firms and financial sources.
Financial management is an area of financial decision making, harmonizing individual motives
and enterprise goals.
A financial manager has three main duties. They are to manage the budget of the company, keep a
report of all financial transactions and to manage the financial team.
Financial activities of a firm is one of the most important and complex activities of a firm. Therefore
in order to take care of these activities a financial manager performs all the requisite financial
activities.
A financial manager is a person who takes care of all the important financial functions of an
organization. The person in charge should maintain a far sightedness in order to ensure that the
funds are utilized in the most efficient manner. His actions directly affect the Profitability, growth
and goodwill of the firm.

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The main functions of a Financial Manager:
1. Raising of Funds
In order to meet the obligation of the business it is important to have enough cash and liquidity. A
firm can raise funds by the way of equity and debt. It is the responsibility of a financial manager to
decide the ratio between debt and equity. It is important to maintain a good balance between equity
and debt.
2. Allocation of Funds
Once the funds are raised through different channels the next important function is to allocate the
funds. The funds should be allocated in such a manner that they are optimally used. In order to
allocate funds in the best possible manner the following point must be considered
 The size of the firm and its growth capability
 Status of assets whether they are long term or short tem
 Mode by which the funds are raised.
These financial decisions directly and indirectly influence other managerial activities. Hence
formation of a good asset mix and proper allocation of funds is one of the most important activity
3. Profit Planning
Profit earning is one of the prime functions of any business organization. Profit earning is important
for survival and sustenance of any organization. Profit planning refers to proper usage of the profit
generated by the firm. Profit arises due to many factors such as pricing, industry competition, state
of the economy, mechanism of demand and supply, cost and output. A healthy mix of variable and
fixed factors of production can lead to an increase in the profitability of the firm. Fixed costs are
incurred by the use of fixed factors of production such as land and machinery. In order to maintain
a tandem it is important to continuously value the depreciation cost of fixed cost of production. An
opportunity cost must be calculated in order to replace those factors of production which has gone
thrown wear and tear. If this is not noted then these fixed cost can cause huge fluctuations in profit.

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4. Understanding Capital Markets
Shares of a company are traded on stock exchange and there is a continuous sale and purchase of
securities. Hence a clear understanding of capital market is an important function of a financial
manager. When securities are traded on stock market there involves a huge amount of risk involved.
Therefore a financial manger understands and calculates the risk involved in this trading of shares
and debentures. It’s on the discretion of a financial manager as to how distribute the profits. Many
investors do not like the firm to distribute the profits amongst shareholders as dividend instead
invest in the business itself to enhance growth. The practices of a financial manager directly impact
the operation in capital market.To make profit in the businesses.
Assuming that we restrict ourselves to for profit businesses, the goal of financial management is to
make money or add value for the owners.
This goal is a little vague, of course, so we examine some different ways of formulating it to come up
with a more precise definition. Such a definition is important because it leads to an objective basis
for making and evaluating financial decisions.
Functions of a financial manager also include:
1) financial planning and controlling
2) deciding financial policy
3) acquisition of funds
4) investment of funds
5) helping in evaluating decisions
6) maintaining proper liquidity
7) understanding the capital market
The Financial managers’ goals
If we were to consider possible financial goals, we might come up with some ideas like the following:
*Survive.
*Avoid financial distress and bankruptcy.
*Beat the competition.
*Maximize sales or market share.
*Minimize costs.
*Maximize profits.
*Maintain steady earnings growth.

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These are only a few of the goals we could list. Furthermore, each of these possibilities presents
problems as a goal for the financial manager.
For example, it's easy to increase market share or unit sales: All we have to do is lower our prices or
relax our credit terms. Similarly, we can always cut costs simply by doing away with things such as
research and development. We can avoid bankruptcy by never borrowing any money or never taking
any risks, and so on. It's not clear that any of these actions are in the stockholders' best interests.
Profit maximization would probably be the most commonly cited goal, but even this is not a precise
objective. Do we mean profits this year? If so, we should note that actions such as deferring
maintenance, letting inventories run down, and taking other short-run cost-cutting measures will
tend to increase profits now, but these activities aren't necessarily desirable.
The goal of maximizing profits may refer to some sort of “long-run” or “average” profits, but it's still
unclear exactly what this means. First, do we mean something like accounting net income or earnings
per share? As we will see in more detail in the next chapter, these accounting numbers may have
little to do with what is good or bad for the firm. Second, what do we mean by the long run? As a
famous economist once remarked, in the long run, we're all dead! More to the point, this goal doesn't
tell us what the appropriate trade-off is between current and future profits.
The goals we've listed here are all different, but they tend to fall into two classes. The first of these
relates to profitability. The goals involving sales, market share, and cost control all relate, at least
potentially, to different ways of earning or increasing profits.
The goals in the second group, involving bankruptcy avoidance, stability, and safety, relate in some
way to controlling risk. Unfortunately, these two types of goals are somewhat contradictory. The
pursuit of profit normally involves some element of risk, so it isn't really possible to maximize both
safety and profit. What we need, therefore, is a goal that encompasses both factors.
The Goal Of Financial Management
The financial manager in a corporation makes decisions for the stockholders of the firm. Given this,
instead of listing possible goals for the financial manager, we really need to answer a more
fundamental question: From the stockholders' point of view, what is a good financial management
decision?

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If we assume that stockholders buy stock because they seek to gain financially, then the answer is
obvious: Good decisions increase the value of the stock, and poor decisions decrease the value of the
stock.
Figure 4 . Definition of Financial management
Given our observations, it follows that the financial manager acts in the shareholders' best interests
by making decisions that increase the value of the stock. The appropriate goal for the financial
manager can thus be stated quite easily. The goal of financial management is to maximize the current
value per share of the existing stock.
The goal of maximizing the value of the stock avoids the problems associated with the different goals
we listed earlier. There is no ambiguity in the criterion, and there is no short-run versus long-run
issue. We explicitly mean that our goal is to maximize the current stock value.
If this goal seems a little strong or one dimensional to you, keep in mind that the stockholders in a
firm are residual owners.

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Figure 5 . The Importance of Financial Services
By this we mean that they are entitled to only what is left after employees, suppliers, and creditors
(and anyone else with a legitimate claim) are paid their due. If any of these groups go unpaid, the
stockholders get nothing. So, if the stockholders are winning in the sense that the leftover, residual
portion is growing, it must be true that everyone else is winning also.
Because the goal of financial management is to maximize the value of the stock, we need to learn
how to identify investments and financing arrangements that favourably impact the value of the
stock. In fact, we could have defined corporate finance as the study of the relationship between
business decisions and the value of the stock in the business.
The General goal of finance manager
Given our goal as stated in the preceding section (maximize the value of the stock), an obvious
question comes up: What is the appropriate goal when the firm has no traded stock? Corporations
are certainly not the only type of business; And the stock in many corporations rarely changes hands,
so it's difficult to say what the value per share is at any given time.
As long as we are dealing with for profit businesses, only a slight modification is needed. The total
value of the stock in a corporation is simply equal to the value of the owners' equity. Therefore, a
more general way of stating our goal is as follows: Maximize the market value of the existing owners'
equity.

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Figure 6 . The Changing Role of Financial Manager
Conclusion
With this in mind, it doesn't matter whether the business is a proprietorship, a partnership, or a
corporation. For each of these, good financial decisions increase the market value of the owners'
equity and poor financial decisions decrease it. In fact, although we focus on corporations in the
chapters ahead, the principles we develop apply to all forms of business. Many of them even apply to
the not for profit sector.
Finally, our goal does not imply that the financial manager should take illegal or unethical actions in
the hope of increasing the value of the equity in the firm. What we mean is that the financial manager
best serves the owners of the business by identifying goods and services that add value to the firm
because they are desired and valued in the free marketplace.