|The Role of Financial Management in a Firm|
Examine the role of management as it relates to finance in a corporation. In your post, discuss the role of management by addressing the following prompts:
- Explain the various aspects of finance that management must understand.
- Describe why a manager needs to understand the characteristics and importance of financial markets including their liquidity, competitiveness, and efficiency.
- Interpret the function of the Financial Balance Sheet in assisting in management’s decision making process.
- Discuss what could happen if management does not fulfill responsibilities related to finance. Share a real world example from your own professional experience or from an external source.
Your post should be 200-250 words in length.
Guided Response: Review several of your classmates’ postings. Respond to at least two classmates’ by commenting on their example of management not fulfilling its responsibilities. Pose a question to spark discussion regarding what could have been handled differently.
The Importance of Finance in Management
Often finance is considered a discipline of the accounting department. In my time as a commercial banker I often encountered small and medium sized business owners who thought that finance or financial management could be outsourced to the CPA. In fact the discipline of accounting is much better handled by either the controller or the CPA. The area of finance and financial management cuts across all management disciplines. While it is represented in a corporation by the Chief Financial Officer (CFO), it is critical to all areas of management.
Finance and Management Impact
All areas of management need to understand the role of finance and the financial model. While the accounting department is typically on the hook for explaining the numbers, all managers rely on financial knowledge. The facilities managers need to know how much the company can afford to spend on new plant and equipment and also the expected or desired rate of return from the investment. Whether to borrow funds in order to construct a building or execute a build to suit lease arrangement depends upon the availability of investment funds and what other options or needs exist. The sales manager is often dependent upon the credit manager to allocate a certain portion of the investment dollars to extending credit to large customers that will result in accounts receivable. Finally, the production manager needs to understand the availability of cash and lines of credit to finance the raw materials and work in process inventory in order to plan the production cycles.
Aspects of Finance
The text focuses on a corporation structure and therefore we can reference large option funding from areas such as stocks and bonds. Stocks represent ownership in the company by investors that expect a rate of return, and bonds represent loans made by a different group of investors that require repayment with interest (Byrd et al., 2013). These primary investment funding sources are augmented with bank loans, lines of credit, and access to the commercial paper markets. the company bond holders are repaid for the investment made and the risk taken.
What Happens When It Goes Wrong
Having worked as a commercial banker for over 20 years I have seen several instances of what happens when it goes wrong and the financial management discipline is not followed. Normally, the result is either a manager losing their job or a company going out of business. On a small scale I had several clients over the years that did not want to focus on financial management. They outsourced the role of bookkeeping to their CPA and thought they were done. Often these companies would mistakenly think that the simple equation of sales minus cost would lead to profits. Since they were not focusing on the total financial picture they underestimated the cost of running the business and were constantly required to inject new sources of working capital from their personal accounts. The reason was that they did not understand how much investment the company required and what the actual rate of return needed to be in order to sustain operations. They were not looking at the entire financial management picture.
When I worked with business owners and clients I often cautioned that accounting was nice, but cash was king. Many companies, both large and small underestimate the cost of projects, and overestimate the rate of return. Financial management is all about knowing how much cash is required, how soon it is required, where it can be obtained, and how quickly it will be re-created through the operation. In between are the minor but important details such as how much will the cash cost and what are the investor or lender covenants and rules that are attached to the availability of the cash.
Byrd, J., Hickman, K., & McPherson, M. (2013). Managerial finance. Retrieved from http://www.bridgepointeducation.com
Herbst-Bayliss, S., & Wachtel, K. (2013). Hedge fund manager Ackman says mistakes made in JCPenney turnaround. Retrieved from http://www.cnbc.com/id/100619870