Summary
The financial manager of a company is a member whose responsibility lies in maximizing the invested equity of its Shareholders. The proper function of the financial administrator, always conducive to contributing to the purpose of maximizing shareholders' equity, can be analyzed by dividing it into the activities that it performs repeatedly and those that must occupy it from time to time. Today it is important that they have a person specialized in managing the company's finances; the growth or bankruptcy of the company depends on this person.
Abstract
The financial manager of a company is a member whose responsibility is to maximize the wealth of its shareholders invested. The specific function always conducive to contribute in order to maximize shareholder equity money manager can be analyzed by dividing it into its activities repetitively and those who should occupy from time to time. Today it is important that they have specialized in managing company finances person; This person is dependent growth or breakup of the company.
1. Introduction
Businesses are the main contributors to the financial health of our economy, they are often fragile and susceptible to failure, due to poor management, in particular financial mismanagement.
There are some significant differences between small and large businesses regarding the way they are owned, the way they are managed, and the financial and administrative resources at their disposal. These differences make it necessary to modify the principles of financial management so that they are applied in the area of small businesses. Two especially important differences are lack of resources and conflicts between goals.
It is not uncommon for the founders of a small business to have full responsibility for all phases of business operations. In fact, in many cases these individuals are reluctant to delegate any responsibility, even when the company grows significantly. Therefore, the management of small businesses is typically very lean: only one or two individuals in the business take on more responsibility than they can adequately handle.
That is why it is vitally important that the management of finances and an adequate financial administrator in a company serve to enhance the business; so that the company with the appropriate decisions can develop and achieve higher profits.
2. Finance in companies
Business decisions are not made in a vacuum, those who do so have an objective in mind which is the maximization of wealth. That is, all decisions should be aimed at obtaining better economic results every day.
Of course, companies have another objective. Thus, financial managers in particular are the real decision makers, they are interested in the well-being of their employees, the community and society on a large scale, however what really should be a priority is maximizing wealth.
Companies open their investment to the public by selling shares, this implies that each person with shares owns that portion of the company, therefore, acquires rights and obligations with it. The shareholders are the owners of the company and those who have control with the administrative personnel that will work in it.
In order to carry out adequate finances in companies, it is necessary to answer the questions: What is finances in companies? What is the role of the financial manager in a company? And what is the goal of financial management?
Suppose that a business is started, for this we must take into account the following:
- Think about what type of long-term investment will be made, that is, on what lines of business will be developed, or what kind of buildings, machinery and equipment will be needed Define where the long-term financing needed to pay the investment and decide if it can be started alone, or if it is necessary to invite other owners (partners) or if you should borrow money from a financial institution or others.Finally, know how you are going to manage daily financial operations such as collections to customers or payment to suppliers.
Logically, the previous unknowns are not the only ones that can be raised, but they are among the most important. So we can say that the objective function of the financial manager is to maximize the wealth of the shareholders; considering the risk and opportunity associated with the expected earnings per share, in order to maximize the share price.
If we consider that the value of a company is defined by the price of its shares, we could then say that the objective is to maximize its value. A characteristic of large corporations is that the financial manager is the one who represents the interests of the shareholders and makes decisions on their behalf, being a goal of financial management to make money or add value to the company.
Obviously this goal is a bit vague. Here are some important goals to consider:
- Survive Avoid financial distress and bankruptcy Defeat competition Maximize sales or market share Minimize costs Maximize profits Maintain consistent profit growth
Each of them will lead us to fulfill the objective function of the financial manager. Exemplifying the previous points, we find that if the administration does what is necessary for the company to survive, we could think that it is making a profit, therefore it is close to fulfilling the objective function; if financial difficulties are avoided and the company goes bankrupt, we could also be able to maximize shareholder wealth.
If we can end competition, our company would have more market share and thus reach the goal; If the company takes concrete actions aimed at maximizing sales, it equally influences the wealth of the shareholders; and thus, costs are minimized.
Think about how to sell more without sacrificing profits; lower costs without sacrificing market share; Borrowing money without putting the business at high risk of bankruptcy. These are just some of the goals that represent strengths and weaknesses to the financial manager for good performance.
Profit maximization would probably be the most common goal, however even this is not a very precise goal. If you want to make a profit this year, you have to take into account actions such as: deferring maintenance, keeping inventories at the lowest limits and taking cost reduction measures.
The goals that we have mentioned are different, but they tend to fall into two classes: the first is related to profitability, where all those that imply sales, market share and cost control come in. All of them are related to different ways of obtaining profits and increasing them.
On the other hand, those of the second group imply avoiding bankruptcy, achieving stability and security, they are related in some way to risk control. We can notice that these two types of goals are contradictory. If we look for reality, it is not possible to maximize both security and profits; therefore we need a goal that encompasses both factors.
If we maximize the value of the shares and avoid ambiguity in the criteria, there is no problem in the short or long term. Possibly this goal could seem one-dimensional, that is, it only benefits shareholders. We must bear in mind that the shareholders of a company are the residual owners of the same and this means that they are only entitled to the surplus profit after paying employees, suppliers and creditors. If any of these groups are left without receiving that payment, the shareholders get nothing.
It is necessary to learn how to identify those financing arrangements and those investments that have a favorable effect on the value of the shares. Once the functions of a financial manager have been identified, it is necessary to consider what is the appropriate goal when the company is not listed on the stock market? That is, it is not open to public investment. Corporations are certainly not the only type of company and the shares in many of these companies rarely change owners, so it is difficult what the value of the stock is at any given time.
For companies looking to make a profit, only a slight modification is needed: the value of the shares in a corporation is simply equal to the value of the owners' equity. Therefore a general way of expressing the goal is to maximize the value of the company, since we increase the value of the existing capital of the owners.
Bearing in mind the above, no matter the type of company, good financial decisions increase the value of the owners' equity and poor financial decisions decrease it.
For the financial manager to fulfill its objective function, it could focus on three intermediate functions. These functions focus on parameters that are believed to be related to the creation of value and long-term viability of the company, in addition to being easier to measure than the maximization of wealth. However, the assumption that these variables are always related to wealth creation is questionable.
3. Main activities of the financial manager
While the accounting department prepares the financial statements, the financial manager places emphasis on the interpretation of these financial statements so that with their result they support decision-making. He is primarily concerned with the cash flows of the company, that is, what resources go in and what resources go out; You must maintain the solvency of the company when analyzing and considering cash flows.
The cash flow of a company allows it to satisfy its obligations and acquire the assets required to achieve its goals. The financial manager evaluates the financial statements, develops additional information and, as we have mentioned before, makes decisions based on the generation of expected flows and the risks associated with these decisions.
The activities of the financial manager include all actions taken by a company that affect its financial resources; therefore, they are related to the company's strategic planning, production, distribution and marketing decisions.
One of the main activities of the financial manager is financial planning; in which the three main tasks of the financial administrator are concentrated, which are:
a) Investment decisions
b) Financing decisions
c) Dividend decisions
Investment decisions are all companies that have scarce resources and these must be allocated in different activities or projects that compete with each other. You must decide what to invest in and when to invest, always looking for these investments to be intended to fulfill the objective function.
Financing decisions are when the company must make investments that contribute to the generation of value, for which financial managers must worry about where to obtain the funds or resources necessary for those investments. In general terms, the company has two ways of obtaining resources, through shareholders or creditors.
Dividend decisions are when the company must decide how much profit that is generated must be reinvested in it and how much must be returned to shareholders. These decisions must be made with special care because if the company returns a high percentage of income to the shareholders, its chances of growth will be lower and the company could be worth less in the long term. This effect will be even greater in companies that miss investment opportunities.
4. Conclusion
To conclude, we must make it clear that the financial manager should not focus solely on the fulfillment of one of the above functions, but should be concerned with fulfilling all three together. The financial manager must worry about why through all the decisions he makes within the company; In this way, regardless of fulfilling its objective function, which is to maximize shareholders' wealth, the company will be able to maintain itself day by day so that society gives it more value and that the same employees are satisfied to work within it.. In order for them to fulfill their objective function, it must be supported mainly by three types of decisions, which are: investment decisions, financing decisions, and dividend decisions.
The financial administrator must have constant knowledge of the economic situation of the country, and of the trends of the world economy; must be a good newspaper and magazine reader.
You will know what the government thinks about tariffs, the availability of foreign exchange. the trend of the exchange rate and should lead the study of new situations, such as a change in the development scheme of a country. The financial manager, given his interrelation with all areas and the way he analyzes them globally, is perhaps the executive closest to the presidency of the company and must be ready to collaborate with it in everything concerning decision-making that involves abstract from the daily bustle.
The position given to the financial manager generally depends on the size of the company and may be referred to as vice president, assistant manager or director. In some companies, especially multinationals, it is the controller who performs the functions of financial management. Whatever name is designated, it is clear that the role of the financial manager goes far beyond simply raising funds.
5. Bibliography
- Notes on the subject of financial administration "Unach, research and postgraduate" Date of consultation November 2014. Notes of the subject of finance "Unach, Research and Postgraduate" Date of consultation November 2014.
