Financial management in corporate sector


The financial manager plays a dynamic role in a modern company’s development. This has not always been the case. Until around the first half of the 1900s financial managers primarily raised funds and managed their firms’ cash positions— and that was pretty much it. In the 1950s, the increasing acceptance of present value concepts encouraged financial managers to expand their responsibilities and to become concerned with the selection of capital investment projects.

Today, external factors have an increasing impact on the financial manager. Heightened corporate competition, technological change, volatility in inflation and interest rates, worldwide economic uncertainty, fluctuating exchange rates, tax law changes, and ethical concerns over certain financial dealings must be dealt with almost daily. As a result, finance is required to play an ever more vital strategic role within the corporation. The financial manager has emerged as a team player in the overall effort of a company to create value. The “old ways of doing things� simply are not good enough in a world where old ways quickly become obsolete. Today’s financial manager must have the flexibility to adapt to the changing external environment if his or her firm is to survive. A financial manager’s ability to adapt to changes, raise funds, invest in assets, and manage wisely will affect the success of the firm and the overall economy as well.

The growth of the economy will be slowed to the extent that funds are misallocated. When economic wants are unfulfilled, this misallocation of funds may work to the detriment of society. In an economy, efficient allocation of resources is vital to optimal growth in that economy. It is also vital to ensuring that individuals obtain satisfaction of their highest levels of personal wants. Thus, through efficiently acquiring, financing, and managing assets, the financial manager contributes to the firm and to the vitality and growth of the economy as a whole.

Financial management is concerned with the acquisition, financing and management of assets with some overall goal in mind. Thus, the decision function of financial management can be broken down into three major areas: the investment, financing, and asset management decisions.

Investment Decision

The investment decision is the most important of the firm’s three major decisions when it comes to value creation. It begins with a determination of the total amount of assets needed to be held by the firm. The financial manager needs to determine the dollar amount that appears above the double lines on the left-hand side of the balance-sheet—that is, the size of the firm.. Even when this number is known, the composition of the assets must still be decided. For example, how much of the total assets should be devoted to cash or to inventory? Also, the flip side of investment— disinvestment—must not be ignored. Assets that can no longer be economically justified may need to be reduced, eliminated, or replaced.

Financing Decision

The second major decision of the firm is the financing decision. Here the financial manager is concerned with the makeup of the right-hand side of the balance sheet. If you look at the mix of financing for firms across industries, you will see marked differences. Some firms have relatively large amounts of debt, whereas others are almost debt free. Does the type of financing employed make a difference? If so, a certain mix of financing must be thought of to sort out the difference.

In addition, dividend policy must be viewed as an integral part of the firm’s financing decision. The dividend –payout ratio determines the amount of earnings that can be retained in the firm. Retaining a greater amount of current earnings in the firm means that fewer dollars will be available for current dividend payments. The value of the dividends paid to stockholders must therefore be balanced against the opportunity cost of retained earnings lost as a means of equity financing.

Once the mix of financing has been decided, the financial manager must still determine how best to physically acquire the needed funds. The mechanics of getting a short-term loan, entering into a long-term lease arrangement, or negotiating a sale of bonds or stock must be understood.

Asset Management Decision

The third important decision of the firm is the asset management decision. Once assets have been acquired and appropriate financing provided, these assets must still be managed efficiently. The financial manager is charged with varying degrees of operating responsibility over existing assets. These responsibilities require that the financial manager be more concerned with the management of current assets than with that of fixed assets. A large share of the responsibility for the management of fixed assets should be with the operating managers who employ these assets.

The Goal of the Firm

Efficient financial management requires the existence of some objectives or goal because judgment as to whether or not a financial decision is efficient must be made in light of some standard. Normally it is assumed that the goal of the firm is to maximize the wealth of the firm owners.

Shares of common stock give evidence of ownership in a corporation. Shareholder wealth is represented by the market price per share of the firm’s common stock, which, in turn, is a reflection of the firm’s investment, financing, and asset management decisions. The idea is that the success of business decision should be judged by the effect that it ultimately has on share price.

What Companies Say About Their Corporate Goals

Ø There is a partnership between the board and its executives that is truly focused on our prime purposes of building long-term shareowner wealth.

Ø Our mission is to maximize share-owner value over time.

Ø Our key objective is to increase shareholder value.

Ø Our success has been driven by one overriding goal: to create long-term value for our shareholders who have entrusted their capital to us. Our strategic plans, capital investments, acquisitions, new business initiatives, and compensation plans are all aimed at this goal. It is the force behind everything we do.

Ø The Georgia-Pacific Group continues to focus on creating long-term shareholder value.

Ø Our ultimate goal is to continuously increase shareholders value overtime.