Study Guide in Financial Management FM-AA-CIA-15 Rev.

0 03-June-2020

FM 101: Financial Management Module 1: The Role of Financial Management

Module No. 1
The Role of Financial Management

MODULE OVERVIEW
This module talks about the role of a financial manager play in a modern company’s development. It focuses
on the theories about the successful financial manager of tomorrow will need to supplement the traditional
metrics of performance with new methods that encourage a greater role for uncertainty and multiple
assumptions.

LEARNING OBJECTIVES

1. Explain why the finance manager's position is so crucial nowadays.

2. Explain "financial management" in terms of the three key decision areas that a financial manager
must deal with.
3. Determine the firm's goal and why shareholders' wealth maximization is chosen above other
objectives.
4. Recognize the issues that might arise when a company's management and ownership are separated
(i.e., agency problems).
5. Demonstrate an understanding of corporate governance.
6. Discuss the issues underlying the social responsibility of the firm.
7. Understand the primary responsibilities of financial managers and the differences between a
"treasurer" and a "controller."

LEARNING CONTENTS

What Is Financial Management?

Financial management deals with the purchase, financing, and administration of assets with a specific
objective in mind. As a result, the decision-making function of financial management may be divided into
three primary categories: investment, finance, and asset management.

Investment Decision
When it comes to value generation, the investment choice is the most significant of the firm's three key
decisions. It starts with determining the entire quantity of assets that the company needs to hold. Consider the
balance statement of the company for a moment. Consider a balance sheet with obligations and owners' equity
on the right side and assets on the left. The number of pesos that appears above the double lines on the left-hand
side of the balance sheet – that is, the firm's size – must be determined by the financial management. Even if
this amount is known, the asset mix must still be determined.
For example:
What percentage of the company's total assets should be allocated to cash and inventory? Also, the reversal of
investment, disinvestment, should not be overlooked. It may be necessary to decrease, remove, or replace assets
that are no longer economically viable.

Financing Decision
The firm's finance choice is the firm's second key decision. The financial manager is concerned with the right-
hand side of the balance sheet in this case. There are significant disparities in the types of finance used by
businesses across industries. Some businesses have a significant amount of debt, while others are practically
debt-free. Is it true that the sort of finance used makes a difference? If so, what's the reasoning behind it? And,
in some sense, can a certain mix of financing be thought of as best?
Furthermore, dividend policy must be considered as part of the firm's financing choice. The dividend-payout
ratio affects how much profit may be kept in the company. Retaining a larger portion of current earnings in the
company means fewer cash will be available for dividend payments in the near future. As a result, the value of
dividends given to stockholders must be weighed against the opportunity cost of retained earnings used for
equity financing.
After deciding on the financing mix, the financial management must figure out how to physically get the cash
required. It is necessary to comprehend the mechanics of obtaining a short-term loan, entering into a long-term
leasing agreement, or negotiating the sale of bonds or shares.

Asset Management Decision

The asset management choice is the firm's third major decision. Assets must still be handled efficiently after
they have been bought and sufficient finance has been given. The financial manager is in charge of existing
assets to different degrees of operational responsibility. 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

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Study Guide in Financial Management FM-AA-CIA-15 Rev. 0 03-June-2020

FM 101: Financial Management Module 1: The Role of Financial Management

responsibility for the management of fixed assets would reside with the operating managers who employ these
assets.

The Goal of the Firm

Efficient financial management requires the existence of some objective or goal, because
judgment as to whether or not a financial decision is efficient must be made in light of some
standard. Although the firm's purpose might be anything, we'll assume in this book that the goal is to maximize
the wealth of the firm's current owners.
Shares of common stock serve as proof of a company's ownership. The market price per share of a company's
common stock represents shareholder wealth, which is a reflection of the company's investment, financing, and
asset management decisions.The notion is that the success of a company action should be measured by the
impact it has on the stock market.

Value Creation
Profit maximization is frequently presented as the firm's appropriate goal. However, by simply issuing shares
and investing the profits in Treasury bills, a management might continue to demonstrate profit growth under
this aim. For most businesses, this would mean a reduction in each owner's portion of profits, or a decline in
earnings per share. As a result, maximizing earnings per share is frequently promoted as a better form of profit
maximization. However, because it does not specify the timing or length of projected returns, maximizing of
earnings per share is not an entirely suitable aim. Is an investment project that will provide a 100,000 return in
five years more value than one that will generate 15,000 yearly returns for the following five years?The solution
to this question is determined by the firm's and margin investors' time value of money. Existing investors would
be wary of a project that guaranteed a return for the first time in 100 years, regardless of how great that return
was. As a result, we must include the return pattern over time in our study.
Another flaw in the goal of maximizing earnings per share – and other traditional return metrics like return on
investment – is that risk is not taken into account. Some investing opportunities are much riskier than others. As
a result, assuming these initiatives go through, the future profits per share stream will be more hazardous.
Furthermore, the amount of debt a firm has in relation to equity in its capital structure determines how
hazardous it is. This financial risk contributes to the investor's total risk. Two firms may have the same
projected profits per share, but if one's earnings stream is much more risky than the other's.
An aim of maximizing earnings per share may not be the same as increasing market price per share for the
reasons stated above. The market price of a company's stock reflects the collective opinion of all market
participants about the firm's worth. It considers current and projected future profits per share, as well as the
timing, duration, and risk of these earnings, the firm's dividend policy, and other variables that influence the
stock's market price. The market price acts as a gauge for corporate success, indicating how effectively
management is doing on behalf of the company's shareholders.

Agency Problems
The contemporary corporation's separation of ownership and control has long been recognized as a source of
potential conflict between owners and management. Management's goals may differ with those of the
company's shareholders, for example. In a huge business, stock may be held so broadly that shareholders are
unable to communicate their goals, much alone control or influence management. As a result of the separation
of ownership and management, management may act in its own best interests rather than that of the
shareholders.
Management might be thought of as the owners' agents. Shareholders expecting that the agents would work in
the best interests of the shareholders

Corporate Social Responsibility

Protecting consumers, paying fair wages to employees, maintaining fair hiring practices and safe working
conditions, supporting education, and becoming involved in environmental issues such as clean air and water
are all examples of corporate social responsibility (CSR) that management should consider.
Management should take into account the interests of stakeholders other than shareholders. Creditors, workers,
customers, suppliers, communities where a firm works, and others are among these stakeholders. The firm’s
ultimate aim of increasing profit can only be achieved by paying heed to the genuine concerns of the firm’s
diverse stakeholders.

Corporate Governance
The method through which corporations are administered and controlled is referred to as corporate governance.
It includes a company’s shareholders, board of directors, and senior management ties. These connections offer
the basis for establishing business goals and measuring success. The effectiveness of corporate governance is
thus dependent on three groups of people: first, the common shareholders who elect the board of directors;
second, the company’s board of directors; and third, the senior executive officers lead by the chief executive
officer (CEO).
The board of directors, which serves as a vital connection between shareholders and management, has the
potential to be the most effective.

The Role of the Board Directors

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FM 101: Financial Management Module 1: The Role of Financial Management

The board of directors establishes corporate policy and advises the CEO and other senior executives in charge
of the company’s daily operations. Indeed, one of the board’s most essential responsibilities is to hire, fire, and
establish pay for the CEO.
Boards of directors examine and approve strategy, major investments, and acquisitions. The board is also in
charge of the company’s operations strategies, capital budgets, and financial reporting to common shareholders.

Sarbanes-oxly Act of 2002

Due to major governance failures that resulted in failures to avoid a succession of recent corporate scandals
involving Enron, WorldCom, Global Crossing, Tyco, and others, there has been increased interest in corporate
governance in the previous decade. Governments and regulatory agencies all around the world are still debating
corporate governance reform. The Sarbanes-Oxley Act of 2002 was enacted in the United States as a statement
of the seriousness of this problem (SOX).

Sarbanes-Oxley mandates reforms to combat corporate and accounting fraud, and imposes
new penalties for securities law breaches It also established the Public Company Accounting Oversight Board
and advocates for a number of stronger corporate governance requirements (PCAOB). The chairman and
members of the PCAOB are appointed by the Securities and Exchange Commission (SEC). The PCAOB now
has the authority to establish auditing, quality control, ethical, and disclosure requirements for public
corporations and their auditors, as well as investigate and penalize those who violate them.new penalties for
securities law breaches It also established the Public Company Accounting Oversight Board and advocates for a
number of stronger corporate governance requirements (PCAOB). The chairman and members of the PCAOB
are appointed by the Securities and Exchange Commission (SEC). The PCAOB now has the authority to
establish auditing, quality control, ethical, and disclosure requirements for public corporations and their
auditors, as well as investigate and penalize those who violate them.

Organization of Financial Management Function

Whether your business career path leads you to manufacturing, marketing, finance, or accounting, it's critical
that you grasp the function of financial management in the company's operations.

The vice president of finance, or chief financial officer (CFO), reports directly to the president, or chief
executive officer, as the leader of one of the firm's three primary functional areas (CEO). In big companies, the
CFO's financial activities will be divided into two sections, one led by a treasurer and the other by a controller.
The controller's primary tasks are accounting-related. Internal consumption is addressed via cost accounting, as
well as budgets and projections. The Internal Revenue Service (IRS), the Securities and Exchange Commission
(SEC), and stockholders all get financial reports.
The decision affects the treasurer's obligations.

LEARNING POINTS

● Financial management is involved with the purchase, financing, and administration of assets in order to
achieve a certain purpose.
● Financial management's decision-making role may be divided into three categories: investment,
finance, and asset management.
● The market price of a company's stock reflects the collective opinion of all market participants about
the firm's worth. It considers current and future profits per share, as well as the timing, duration, and
risk of these earnings, the firm's dividend policy, and other factors that influence the stock's market
price.

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Study Guide in Financial Management FM-AA-CIA-15 Rev. 0 03-June-2020

FM 101: Financial Management Module 1: The Role of Financial Management

● According to agency theory, managers (agents), particularly those of big, publicly traded companies,
may have goals that differ from those of shareholders (the principals). Only if management is given
adequate incentives and is monitored can shareholders be certain that the managers will make
decisions that maximize shareholder value.
● The firm's obligation to operate in a socially responsible manner is not relieved by maximizing
shareholder wealth.
● We presume that the firm's objective is to increase the wealth of its current owners (or shareholders).
The market price per share of a company's common stock represents shareholder wealth, which is a
reflection of the company's investment, financing, and asset management decisions.
● The method through which corporations are administered and controlled is known as corporate
governance. It includes a company's shareholders, board of directors, and senior management ties.
● The finance function is the responsibility of the vice president of finance, or chief financial officer
(CFO), who reports directly to the president, or chief executive officer, in major corporations (CEO).
The CFO's financial activities will be divided into two sections, one led by a treasurer and the other by
a controller. The controller's tasks are largely accounting-related, whereas the treasurer's responsibilities
are more closely related to financial management decision-making.

LEARNING ACTIVITIES

Learning Activity

Why should I study financial management if I have no interest of being a financial manager?

Answer this question in an essay type and place it in a word document and submit it on a scheduled time
in the ms teams.

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