B. The Responsibilities of Financial Managers

The financial manager plays an important role in the company’s goal-setting, policy determination, and financial success. The financial manager’s responsibilities include:

• Financial analysis and planning – Determining the amount of funds the company needs.

• Making investment decisions – The financial manager makes decisions regarding the type of assets acquired and the possible modification or replacement of assets, particularly when assets are inefficient or obsolete.

• Making financing and capital structure decisions – Raising funds on favorable terms, i.e., at a lower interest rate or with few restrictions.

• Managing financial resources – Managing cash, receivables, and inventory to accomplish higher returns without undue risk.

Accounting and finance have different focuses. Financial managers need accounting information to carry out their responsibilities. In accounting, you prepare income statements to determine the net income of a firm. In finance, however, you focus on cash flows. Although the firm’s income is important, cash flows are even more important because cash is necessary to purchase the assets required to continue operations and pay dividends to shareholders.

One way companies make sure they have enough money is by developing a financial plan. That is the responsibility of a financial manager. A financial plan is a document that shows the funds a firm will need for a period of time, as well as the sources and uses of those funds. When developing a financial plan, the financial manager estimates the flow of money into and out of the business, determines whether the cash flow is negative or positive and how to use or create excess cash funds. Financial planning requires looking beyond the four walls of the company to answer questions such as: Is the company introducing a new product in the near future or expanding its market? Is the industry growing? Would an investment in new technology improve productivity? One of the most important questions a financial manager must answer is whether to make capital investments, which ones, and how to finance those that are undertaken. This process is called capital budgeting.

Financial managers also coordinate and control the efficiency of operations, raise capital to support growth, and interact with banks and capital markets.

In smaller companies, the owner is responsible for the firm’s financial decisions. In larger firms, financial planning is the responsibility of the finance department headed by the treasurer who reports to a vice president of finance or chief financial officer (CFO).

Exhibit 6.1 The Flow of a Company’s Funds Debt versus Equity

Financial management involves both finding suitable sources of funds and deciding on the most appropriate uses for those funds.

Characteristic	Debt	Equity
Maturity	Specific: Specifies a date by which it must be repaid.	Nonspecific: Specifies no maturity date.
Claim on income	Fixed cost: Company must pay interest on debt held by bondholders and lenders before paying any dividends to shareholders.Interest payments must be met regardless of operating results.	Discretionary cost: Shareholders may receive dividends after creditors have received interest payments; however, company is not required to pay dividends.
Claim on assets	Priority: Lenders have prior claims on assets.	Residual: Shareholders have claims only after the firm satisfies claims of lenders.
Influence over management management	Little: Lenders are creditors, not owners. They can impose limits on management only if interest payments are not received.	Varies: As owners of the company, shareholders can vote on some aspects of corporate operations. Shareholder influence varies, depending on whether stock is widely distributed or closely held.

Exhibit 6.2 Debt versus Equity

The cost of debt is generally lower than the cost of equity, largely because the interest

paid on debt is tax-deductible. However, too much debt can increase the risk that a

company will be unable to meet its interest and principal payments.