THE ROLE OF A FINANCIAL MANAGER

Any company, be it a small or medium size to the large corporations such as IBM, Google, Microsoft, Amazon, etc. needs money to operate their business. In order to generate revenue, they must first spend their capital/equity (money) on inventory and supplies, equipment and facilities, employee wages and salaries. With that being said, finance is undoubtedly critical to the success of all companies. Although it may not be as visible as marketing or production, however, the art of managing a company’s finances is just as much a key to the firm’s sustainability.

Basically, financial activities of a company is one of the most important and complex activities. And, in order to take care of these activities, a financial manager is the one who is in charge of performing all the requisite financing activities. At the heart of every financially successful organization, for instance, you will surely find a financial manager – a professional who plays a vital role in steering the financial ship towards organizational profitability and growth. Although the role of a financial manager has long been one of the key positions at any organizations operating with significant turnover, however, for those who have been working in the financial field or for those who possess a strong grasp of numbers and good analytical and communication skills may be the ideal fit for the position.

Furthermore, the typical financial managers have a complex and challenging job. They analyze financial data prepared by accountants, monitor their company’s financial status, and prepare and implement financial plans. One day, they may be developing a better way to automate cash collections and at other times, they may be analyzing a proposed acquisition. This is simply one of the main responsibilities of being a financial manager. Since there are other critical functions that a financial manager performs, below here are some of the multifaceted roles that are embedded in the financial manager’s duties or responsibilities.

 

1. TRANSFORMING A COMPANY’S REAL ASSETS INTO FINANCIAL ASSETS

One of the core responsibilities of a financial manager is to ensure that the company has enough funds to finance its expansion and meet its obligations. In order to do this, the company issues securities (equity and debt), and the financial manager sells them to financial investors at the highest possible price. In today’s capital market economy, for instance, the role of a financial manager is less a buyer of funds with an objective to minimize cost and more a seller of financial securities. In other words, a financial manager must have the ability to maximize the value of these financial assets while selling them to the various categories of investors.

 

2. FINANCIAL PLANNING AND ALLOCATION OF FUNDS

Financial managers are technically the architects of a company’s financial future. They work closely with top management to develop long-term financial goals and strategies, which includes assessing the company’s current financial position, forecasting future trends, and devising plans to achieve financial objectives. By carefully analyzing data and economic indicators, financial managers help organizations to make informed decisions about investments, expansion, and risk management.

Aside from being a strategic financial planner, one of the primary duties of a financial manager is to allocate funds. Simply put, they allocate resources efficiently in order to ensure financial resources are utilized to the fullest. This involves setting the spending limits for various departments, monitoring expenses, and adjusting when necessary. Needless to say, the effective budgeting that a financial manager executes will help companies control costs, maximize profits, and maintain financial stability.

 

3. MAXIMIZING A COMPANY’S VALUE

The main goal of a financial manager is to maximize the value of the company to its owners. For a publicly owned corporation, for example, it is measured by the share price of its stock whereas for a private company, the value is gauged by the price at which it could be sold. To maximize the company’s value, a financial manager has to consider both short and long term consequences of his company’s actions.

Perhaps, maximizing profitability is one approach; yet, it should not be the only one determining aspect. This is because in some cases, such an intuitive approach favors making short term gains over achieving long term goals. As a quick illustration, questioning what would happen if a company in a highly technical and competitive industry had done no research and development? In the short run, profits would be high because research and development is very expensive. However, if it is in the long run, the company might lose its ability to compete because of its lack of new creativities and innovations.

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FDI – FOREIGN DIRECT INVESTMENT

Theoretically, the FDI which stands for "Foreign Direct Investment" refers to an investment in the acquisition of foreign assets with the intent to control and manage them. In fact, such companies can make an FDI in several ways, including purchasing the assets of a foreign company; investing in the company, new property, plants, equipment; or participating in a joint venture with a foreign company which typically involves an investment of capital. Normally, FDI is primarily a long-term strategy where companies usually expect to benefit from it through an access to local markets and resources, often in exchange for expertise, technical know-how, and capital. Subsequently, a country’s FDI can be both inward and outward where the inward FDI refers to investments coming into the country, and the outward FDI are the investments made by companies from that country into foreign companies in other countries. Thus, the difference between inward and outward investments made is called the net FDI inflow, which can be either positive or negative.

Firstly, there are two main categories of international investment – portfolio investment and foreign direct investment. Portfolio investment refers to the investment in a company’s stocks, bonds, or assets, but not for the purpose of controlling or directing the firm’s operations or management. Typically, investors in this category are looking for a financial rate of return as well as diversifying investment risk through multiple markets. As for the FDI which stands for "Foreign Direct Investment" in other definitions, it refers to an investment made from a party in one country into a business or corporation in another country with the intention of establishing a long lasting interest. This is what generally differentiates FDI from foreign portfolio investments where investors passively hold securities from a foreign country, and a foreign direct investment in contrast can be done by obtaining a long lasting interest through the expansion of one’s business into a foreign country.

Secondly, there are two forms of FDI in the realm of international business, namely are horizontal and vertical FDI. The horizontal FDI occurs when a company is trying to establish a new market such as a retailer, for example, that builds a store in a new country to sell to the local market. Whereas the Vertical FDI refers to when a company invests internationally to provide input into its core operations, which is usually in its home country. To illustrate this further, a company may invest in production facilities in another country. When a company brings the goods or components back to its home country (e.g. acting as a supplier), this is known as the backward vertical FDI. However, when a company sells the goods into the local or regional market (e.g. acting as a distributor), this is referred to as forward vertical FDI. In any cases, the largest global companies often engage themselves in both backward and forward vertical FDI depending on their industry.

Thirdly, many companies engage in the backward vertical FDI. The auto, oil, and infrastructure which include industries related to enhancing the infrastructure of a country such as energy, communications, and transportation are good examples of the backward vertical FDI. Companies from these industries invest in production or plant facilities in a country in order to supply raw materials, parts, or finished products to their home country. In recent years, these same industries have also started to carry out forward FDI by supplying raw materials, parts of components, or finished products to newly emerging local or regional markets.

Meanwhile, there are different kinds of FDI – two of which the "Greenfield and Brownfield" are increasingly applicable to global companies. The Greenfield FDI occurs when multinational corporations enter into developing countries to build new factories or stores. These new facilities, in addition, are built from scratch which is usually in an area where no previous facilities existed. As the name originates from the idea of building a facility on a green field, such as farmland or a forested area, companies build new facilities which can best meet their needs as well as create new long-term jobs in the foreign country by hiring new employees. Bottom line, many foreign countries tend to offer prospective companies tax breaks, subsidies, and other incentives to set up the so-called Greenfield investments.

On the other hand, the Brownfield FDI takes place when a company or government entity purchases or leases existing production facilities to launch a new production activity. One application of this strategy is where a commercial site used for an "unclean" business purpose, such as a steel mill or oil refinery to be cleaned up and used for a less polluting purpose, or a commercial office space and a residential area. Usually, the Brownfield investment is less expensive and can be implemented faster, yet, a company may have to deal with many challenges including existing employees, outdated equipment, entrenched processes, and cultural differences.

As we know, many governments encourage FDI in their countries as a way to create jobs, expand domestic technical expertise, and increase their overall economic standards. Such countries as Hong Kong and Singapore long time ago realized that both global trade and FDI would help them grow exponentially and improve their citizens’ standard of living. As a result, Hong Kong (prior to its return to China), was one of the easiest places to set up a new company where the guidelines were clearly available and businesses could set up a new office within days. This is also similar to Singapore albeit the country was a bit more discriminatory on the size and type of business, however, its government offered foreign companies a clear streamlined process for setting up a new firm.

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FOUR TYPES OF BUSINESS FIRMS

Broadly speaking, the term business in general refers to an entity that operates for commercial, industrial, or professional reasons. If judging from the organizational context, a business entity is basically an establishment intended to carry out commercial activities by producing goods or services and meet the people’ needs. As we know, most of the organizations have their own standard such as social structure, purpose goals, utilization of resources, rules and regulations, and so on. Although the fundamental purpose of a business organization revolves around facilitating efficient operations, optimizing resource utilizations, managing risks, and ultimately driving profitability and growth, however, determining the legal structure of the business is an important factor to consider since business owners may need to secure permits and licenses and follow registration requirements to begin their legal operations.

1. SOLE PROPRIETORSHIP

This is the traditional and popular form of business organization and has the least complex type of business due to the minimal government regulation. A sole proprietorship is a business owned and run by one person. It is usually very small with a few numbers of employees. Although they do not account for much sales revenue in the economy, however, they are the most common type of firm in the world. Due to the fact that the entity is incorporated between the owner and the business, still, the sole business owner is not free from liabilities associated with the business. After all, a local grocery store is the most common example of sole proprietorship where the scale of its business is relatively small.

2. PARTNERSHIPS

A partnership is identical to a sole proprietorship, except it has more than one owner. If two or more persons agree to do business together, a partnership is formed. Doing business as a partnership is a common-law right since there is no specific statute is needed to form a partnership. Each individual in a partnership business partners is liable for the firm’s debt owing to the fact that they share equally in the distributions of income and they have equal rights to manage the partnership. Regardless of whether the business is making profits or losses, it is usually advisable to have a written partnership agreement which will set forth the following details:

- Names and addresses of the partners.

- Relative rights to management and profits of each partner.

- The nature of the partnership business.

- Length or duration of the partnership.

- Requirements for admission and withdrawal of partners.

- Provisions concerning the dissolution of the partnership and any other provisions where the partners wish to govern their relationship as well as the entire operations of the business.

3. LIMITED LIABILITY COMPANIES (LLC)

A limited liability company (LLC) is a limited partnership without a general partner. It is neither a partnership nor a corporation, but a "hybrid" entity with some of the characteristics of each. In this type of business, the LLC may be solely owned or it may have several owners. The owners are called members like limited partners or shareholders, but they are not liable for the company's debts based upon their status as owners. Because the members have the right to manage the company's business and affairs, they may also elect to have the LLC to be run by one or more managers if they do not want to run it themselves.

4. CORPORATIONS

This is the most complex form of business structures because they are established under the laws of each state and also are subjected to all the corporate income tax. Besides, all the profits issued to shareholders as dividends are taxed as per the individual tax rates on their private annual tax returns. The distinguishing feature of a corporation is that it is a legally defined and artificially being separated from its owners. Because a corporation is a legal entity separate and distinct from its owners, it is solely responsible for its own obligations. That being said, the owners of a corporation or its employees, customers, etc. are not liable for any obligations the corporation enters into. Similarly, the corporation is not liable for any personal obligations of its owners, employees, customers, and so forth.

Perhaps, one of the unique features of a corporation is that there is no limitation on who can own its stock. That is, an owner of a corporation, do not need to have any special expertise or qualification. As the feature allows free trade in the shares of the corporation and provides one of the most important advantages of organizing a firm as a corporation rather than being a sole proprietorship, partnership, or LLC, the ability to raise substantial amounts of capital is greater because those who own the ownership shares can sell them to outside investors. Bottom line, corporation is also the most expensive to form and is subjected to double taxation where the business pays a tax on its income when earned, and its shareholders pay a tax on the income when it is distributed to them in the form of dividends, or the distributions upon the corporation's liquidation when bankrupted.

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GENERAL OVERVIEW OF CORPORATE FINANCE

From startups to multinational conglomerates, corporate finance is literally a critical element in guiding companies towards attaining their financial goals, optimizing resources, and maximizing shareholder value. As it involves the planning and financing of investments made by a company as well as the distribution or reinvestment of the income generated, the primary goal of corporate finance is to maximize shareholder value while striking a balance between risks and profitability, which entails both the long and short term financial planning while implementing various strategies, capital investment, and tax considerations.

First of all, when discussing about the field of corporate finance, it is essentially a branch or a part of financial management concerning with how corporations or companies address funding sources, capital structuring, investment decisions, and accounting. It is a broad subject comprised of many topics including capital structure, capital financing, risk management, capital budgeting, and the time value of money. Because the ultimate purpose of corporate finance is to maximize the value of a business through planning and implementation of resources while balancing risks and profitability, it also incorporates the tools and analysis utilized to prioritize and distribute financial resources. Hence, the financial management of a corporation or a company involves two functions, namely are:

1. Resource Acquisition: This function involves generating funds from internal and external sources at the lowest possible cost to the corporation. The two main categories of resources, in this case, are equity and liabilities. Equity refers to proceeds (profits) from the sale of stocks, retained earnings, and returns from investments. Whereas liabilities refer to the commitments from which an entity derives value including bank loans, other debts, product warranties, accounts payables, etc.

2. Resource Allocation: This function refers to investing funds with the goal of increasing shareholders’ wealth over time. The two main categories of investments, in this stage, are current assets and fixed assets. Current assets encompass cash, inventory, and accounts receivables, while fixed assets on the other hand are buildings, real estate, and machinery.

Second of all, corporate finance is crucial because it enables businesses to manage their financial risks, for example, by hedging against stock market or interest rate fluctuations. Due to the fact that some companies can control their exposure to currency risks, corporate finance therefore provides the necessary tools to enable them to make sound financial decisions for growth and success in the long run. Regardless of the size or the type of business operation, each company seeks to streamline its corporate financing for optimal wealth distribution and return generation, which is pivotal for ensuring a company's long-term financial health and sustainability.

Meanwhile, corporate finance helps companies to maximize their shareholder value by increasing profitability and share price. As it helps them to identify and evaluate growth opportunities by analyzing the financial feasibility of new projects as well as assessing the impact of those projects on their financial positions, corporate finance as a result enables companies to also gain a competitive advantage through a string of financial decisions, such as investing in new technologies, mutual funds, real estate, or acquiring and merging with other business entities, which allow them to outperform over their competitors.

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LEARNING HOW TO READ A COMPANY’S FINANCIAL STATEMENTS

Before you decide whether or not if you should invest in stock market, here are a few questions that would help you make a better decision and push you to think very carefully.

- How much cash does the company already have?

- How much revenue has the company made since it was started?

- How much revenue does the company expect to make in the future?

- Does the company have any debts?

Then, once you have done asking yourself with the above questions, the next step for you to start is by looking at the company’s financial statements. Learning how to read Financial Statements is similar to learning a new language. If you want to order a better dish in a Spanish restaurant, you will probably need to speak Spanish to read the course of menu. This is similar with a company’s business. If you want to find a good stock to invest in, you will need to learn how to speak the language of finance and read their financial statements. Just like learning any new languages other than your mother tongue. It is difficult at first, yet, the more you practice the more fluent you will become.

Broadly speaking, all companies need to keep track of their finance which means that they are keeping track of all the money coming in and going out, as well as other transactions that do not necessarily involve the exchange of money. At the end of each month, quarterly (three months), and year, a company will prepare financial statements which literally are the summary of all its financial transactions in that given period. In the case of a company that is publicly traded where its shares are sold on a stock market, for instance, it is required that the company prepare and file quarterly and annual financial statements so that the government and the public can see how the company is doing.

Actually, there are a lot of parties who will be keen to have a look at the financial statements of a company. First, the company’s management and board of directors will use the financial statements to track performance. The financial statements typically show how the company has done in the past and will help management to make better decisions about the future. Second, Lenders or the so-called creditors such as banks that have provided loans to the company may also want to see its financial statements. Some loans may have certain requirements, such as the company’s debt-to-equity ratio "cannot be more than either 0.3 or 0.4" in order to receive that loan, or the lender may just want to see how much cash the company has in order to estimate how likely it is the company will be able to pay back the loan and interest in a timely manner.

Here’s a quick illustration of a company’s debt-to-equity ratio, and how to calculate it is by "dividing a company's total liabilities with its shareholders’ equity".

On the other hand, investors are very interested in seeing the financial statements. They are making decisions about whether to buy or sell stock in the company and thus they need to know how the company is doing to help inform their decisions. When it comes to a company’s financial statements, there are three types that you need to learn how to read them before you decide to invest or buy its shares.

Firstly, it is a balance sheet. The balance sheet basically shows a snapshot of the company’s assets (its resources that it expects to create value in the future), liabilities (the loans and other obligations due to others), and owners’ equity (also known as shareholders’ equity or stockholders’ equity – the stake that the owners or investors like yourself have in the business).

Secondly, it is an income statement. The income statement practically demonstrates how much revenue the company generated over the year, how much it cost to sell its main products, how much it cost to pay its employees over the year, and how much it owed in interest and taxes for the year. On a very basic level, if the company makes more revenue than it spends in costs, it is a profitable business. However, if the company’s costs are greater than its revenues, then it is not a profitable business.

Thirdly, it is a statement of cash flows. The statement of cash flows technically illustrates how much cash came into the business and how much cash went out of the business. It is important to note here that when we use the term cash in the financial world, we mean not only the currency bills like you normally think of such as dollars or euros, but also checks, electronic transfers, as well as the balance in the bank account. In fact, most businesses will do a lot of their transactions through electronic means (e.g. mobile banking, wire transfers, etc.); yet, they are still considered as the amount of cash which flows in and flows out.

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