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Financial Manager: Role and Responsibility by Binam Ghimire. Learning Objectives. Introduction to Financial Management Functions and goals Key areas of responsibility for the financial manager. Financial Management: Concept. Chief Financial Officer/ Financial Manager.
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Financial Manager: Role and Responsibility by Binam Ghimire
Learning Objectives • Introduction to Financial Management • Functions and goals • Key areas of responsibility for the financial manager
Chief Financial Officer/ Financial Manager • Vice President Finance (CFO – USA, Finance Director: UK and Europe) • Prime responsibilities: • Financial Planning • Financial Controlling • Financial Analysing the financial performance
Treasurer • Person concerned with managing cash, credit and capital structure • Prime responsibilities: • Managing cash and marketable securities • Managing firms pension fund • Managing risks by way of insurance portfolio, derivative securities etc. • Planning firm’s capital structure • Managing credit activities • Managing foreign exchange • Investor relation.
Controller • Mainly Accounting activities • Prime responsibilities: • Cost and management accounting • Financial accounting • Auditing and taxation • Budgeting, planning and control • Reporting and interpreting • Evaluating and consulting • Protecting the assets.
Functions of Financial Management • Executive and Routine
Executive Functions • Long-term Investment Decision • Financing Decision • Dividend Decision • Working Capital Decision
Routine Functions • Supervision of receipts and payments • Record keeping of financial performance • Reporting to the management • Supervision of fixed and current assets
Financial Manager: Relationship with other functional areas • With Marketing Management • Production Management • Human Resource Management
Goals of Financial Management • Profit Maximisation vs. Wealth Maximisation • Accounting concept • Zero dividend • Ambiguity • Time value of benefits • Quality of benefits • Modern business environment • Who are the shareholders? • Conflict of interest among stakeholders of a firm
Financial Manager: Wealth Maximisation • How? • FCF: Free cash flows: Funds available for distributions to shareholders
Agency Problem: Responsibility for the financial manager • Agency Theory • Michael C. Jensen and William H. Meckling propounded this theory in 1976 • Principal and Agent • Management and Shareholders, Creditors and shareholders
Agency Problem: Responsibility for the financial manager • Manager owns less than 100% of the company • Agency Problem • Agency Cost (Monitoring, Structuring and opportunity costs)
Agency Problem: How to reduce? • Managerial compensation plan (e.g. performance stock) • Direct Intervention by shareholders • Threat of firing • Threat of takeover (e.g. hostile takeover, M&A)
Set of Contracts Model of the Firm • The firm has contracts with a large number of stakeholders. • These contracts may be explicit or implicit. • Contracts may also be contingent on particular future outcomes. • The model recognizes that conflicts of interest may exist between the various stakeholders.
Banks Bondholders Customers Employees Governments Environment Common Stockholders Preferred Stockholders Communities Society Creditors Suppliers Managers Set of Contracts Model of the Firm
Business Ethics • Ethics • Moral rules • Ethics differ from one to another • Business Ethics • Attitude and conduct towards stakeholders
Social Responsibility • Charity principles • Stewardship principles
Corporate Social Responsibility • Milton Friedman's argument There is one and only one responsibility of business: to use its resources and energy in activities designed to increase its profit so long as it stays within the rule of game and engages in open and free competition, without deception and fraud.
Corporate Social Responsibility • Keith Davis An iron law of responsibility which states that in the long-term those who do not use power in a manner that society considers responsible will tend to lose it.
Corporate Social Responsibility • Gray, Owen and Adams (1996) described society as a series of social contracts between members of society and society itself.
Corporate Social Responsibility • Gray, Owen and Adams (1996) 1.Pristine Capitalist, 2.Expedient, 3.Social contract, 4.Social Ecologists, 5.Socialists, 6.Radiacal Feminists, 7.Deep Ecologists
Corporate Social Responsibility • Different approaches • Social Obstruction • Social Obligation • Social Response • Social Contribution
The Case Study • Corporate Ethics.
Exercise: Classroom Discussion • What are the Key areas of responsibility for the financial manager • Sarbanes-Oxley Act (2002), USA • Classroom Exercise: Question in Word File • Homework: Word File