Learning Unit 1: The role of the financial manager
The objectives of a business:
Obj of the business and the financial manager is to maximise shareholder wealth
There is a diff btw profit maximisation and shareholder wealth maximisation
Profit maximisation entails maximising the bottom line – profit for the year
o Measured using earning per share (EPS)
o EPS does not take into consideration the timing of cash flows or any risk to
the business
Shareholder wealth maximisation is measured using the share price
o Share price does take into consideration the markets expectations of the
timing and magnitude of the cash flows and risks to the business
o All financial decisions made by the business will have a direct impact on the
share price
o One of the financial managers main obj is to only consider those projects and
make decisions that will have a positive effect on the share price
EPS is considered to be a good indicator of a business’s future returns
o Usually a correlation btw movements in EPS and movements in share price
The role of the financial manager:
Financial manager manages the monetary affairs of a business
Primary focus is on the acquisition, financing and management of assets
o To ensure their optimal utilisation to maximise shareholder wealth
Should have a good understanding of the business and take into account all possible
consequences of making a business decision
Scope of his/her role will be about the same in every business but the smaller the
business the more ‘hats’ the financial manager will have to wear
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, Primary responsibilities of all financial managers:
1. Financial planning and analysis
2. Investment decisions
3. Financing decisions
Other responsibilities of financial managers incl.:
4. Cash management
5. Relationship management
6. Dividend decisions
7. Risk management
1. Financial planning and analysis
Comprises 2 elements
o Forecasting and budgets
o Financial coordination and control
Forecasting and budgets:
o Overseen by the fin. man.
o Provides an indication of what the business’s capital or funding requirements
will be in the immediate and longer term
A financial forecast:
o Fin.man. will use historical financial info to predict what will happen in the
next few months
o Typically prepared 3 times a year
o Concern the financial expectations of the current financial year
A budget:
o A financial plan of the financial year immediately following the current year
o Predicts the expected cash flows of the coming year
o Prepared annually – usually in the last quarter of the financial year
Coordination and ctrl:
o Key to managing business funds
o Fin.man. monitors and reviews the activities and financial performance of the
business
o Considers whether the obj of the business have been satisfied
o Take corrective action where needed
o Measured using ratio analysis
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