THE ROLE OF

FINANCIAL
MANAGEMENT
LEARNING OBJECTIVES….
• LO 1. Explain why the role of financial
manager is so important
• LO 2. Describe financial management in
terms of the three major decision areas that
confront the financial manager
• LO 3. Identify the goal of the firm and
understand why shareholders’ wealth
maximization is preferred over the goals
LEARNING OBJECTIVES….
• LO 4. Understand the potential problems
arising when management of the
corporation and ownership are separated
• LO 5. Demonstrate an understanding of
corporate governance.
• LO 6. Discuss the issues understanding
social responsibility of the firm
• LO 7. Understand the basic responsibilities
of Financial managers and the differences
between a “treasurer” and a “controller”.
WHAT IS
FINANCIAL
MANAGEMENT?
• FINANCIAL
MANAGEMENT is also
referred as managerial
finance, corporate finance or
business finance.
• It is concerned with the
ACQUISITION,
FINANCING, and
MANAGEMENT OF
ASSETS with some overall
 TYPES OF
FINANCIAL
DECISIONS
TYPES OF FINANCIAL DECISIONS…
The three major types of decisions that Finance
Manager of a modern business firm will be:
1. Investment Decisions
2. Financing Decisions
3. Asset Management Decisions

All of these decisions aim to MAXIMIZE THE

SHAREHOLDERS’ WEALTH through
maximization of firm’s wealth.
INVESTMENT DECISION…
• Most Important decision (among the three) when it comes to
value creation.
• Determines the total amount of assets to be held by the firm.
• Finance managers determine the size of the firm and the
composition of its assets.
• Left-side of the basic accounting equation - ASSETS =
LIABILITIES + EQUITY.
• It deals with the question such as:
* How much of the firm’s total assets be devoted to cash or
to inventory or to receivable?
• Also considers “disinvestment”
• Assets that can no longer be economically justified may need to
be reduced.
FINANCING DECISION…
• Second major decision
• Right-side of the basic accounting equation – ASSETS =
LIABILITIES + EQUITY
• It deals with the question of:
* If I were to maintain this size of the asset or acquire
asset , how should I finance this?
• Debt and equity financing (mix of debt and equity chosen to
finance investments)
• How best to acquire the needed funds
• Short-term loan? Long-term loan? What is the cost of the
financing?
ASSET MANAGEMENT DECISION..
• The third important decision of the
firm
• Once acquired and financed, how
can we manage the assets
efficiently?
GOAL OF
THE FIRM
 PROFIT
MAXIMIZATI
ON
GOAL OF THE FIRM…

N DS F
O
IDE SE
DIV EA F
R
1. INC UE O
2. VAL IR ENT
E M
TH EST
V
IN

CORPORATION

M E
E ST
IN V
NT

INVESTOR/
SHAREHOLDER
 CORPORATE SOCIAL
RESPONSIBILITY
• Protecting the consumer
• Paying fair wages to employees
• Maintaining fair hiring practices and
safe working conditions
• Supporting education
• Becoming involved in such
environmental issues
 AGENCY PROBLEMS
• Agency theory suggests that managers,
particularly those of large, publicly owned
firms, may have different objectives from
those of the shareholders. It can assure
themselves that the managers will make
shareholder wealth-maximizing decisions
only if management receives appropriate
incentives and only if management is
monitored.
 CORPORATE
GOVERNANCE
CORPORATE
GOVERNANCE…

• It refers to the system by which

corporations are managed and
controlled.
• It encompasses the relationships
among a company’s shareholders,
board of directors, and senior
management.
ROLE OF BOARD OF DIRECTORS

• Sets company-wide policy and advises the CEO

and other senior executives, who manage the
company’s day-to-day activities.
• They hire, fire and set compensation for the
CEO.
• Review and approve strategy, significant
investments, and acquisitions.
• Oversees operating plans, capital budgets and
the company’s financial reports
ORGANIZATION OF FINANCIAL
MANAGEMENT
BOARD OF
DIRECTORS

PRESIDENT
(CHIEF EXECUTIVE
OFFICERS)

EXECUTIVE VICE-
EXECUTIVE VICE- PRESIDENT EXECUTIVE VICE-
PRESIDENT FINANCE (CHIEF PRESIDENT
OPERATIONS FINANCIAL MARKETING
OFFICER)

VICE PRESIDENT VICE PRESIDENT

(TREASURER) (CONTROLLER)
TREASURER VS CONTROLLER
 If you have no plan of
becoming a financial
manager, why do you
need to understand
financial management?