In this unit, you will be able to know who a Finance Manager is and identify his role in the financial management ‘mix’ of a firm.
Among other things, he coordinates the flow in the working cycle and makes the correct ‘dose’ of investment to be at the proper place in order to avoid “too much or too little of fund”.
At the end of this unit, you should be able to:
- explain who a Financial Manager is
- identify the role of Financial Manager
- plan profit of a Business firm
- Describe Capital Market.
3.0 MAIN CONTENT
3.1 Financial Manager
This is the person responsible for performing finance functions. In a modern firm, finance manager’s position is significant. He is recognised as a member of the top management team. He maintains records, prepares progressive financial report through auditing, financial/managerial accounting and assists in raising funds when required.
As an adviser, the finance manager now shapes the fortunes of the firm and he is involved in the most vital decision of allocation of capital. Finance Manager must be broad in knowledge and far-sighted in outlook, to ensure that the funds of the business outfit are utilized in an efficient and effective way.
Finance decisions influence the size, profitability, growth, risk and survival of the firm; and these in turn, affect the overall value of the firm. Hence, a finance manager must have clear understanding and professional grasp of the nature and scope of the finance functions.
SELF ASSESSMENT EXERCISE 1
Describe a financial manager
3.2 Funds Raising
The scope of financial management includes fund raising in the modern approach to financing. This was not the case in the past because raising funds was always done during major events in the life of the firm like:
As a cardinal duty, the finance manager sees that a firm is well funded to be able to meet its obligation. This had already been discussed previous unit of this course.
3.3 Funds Allocation
The modern approach to finance is an analytical way of looking at the financial problems of the business. Financial management is therefore considered as a vital and an integral part of overall management.
In a modern firm, the basic function of finance department is to decide about the expenditure decisions and to determine the demand for capital to meet these expenditures. That means, the finance manager is duty bound to allocate funds in an efficient and effective manner.
The finance manager should be able to find answers to the following questions:
- How large should the firm be?
- How fast should it grow?
- What form of assets should it hold?
- How should the funds be raised?
3.4 Profit Planning
Profit-planning function is one of the acquired roles of the Finance Manager. Profit planning is the operating decisions in the areas of pricing, costing of the volume of output and the firm’s product lines selection.
It is, therefore, a pre-requisite for optimising investment and financing decisions. The cost structure of the business organization (the mix of fixed and variable costs) has a significant influence on a firm’s profitability.
Fixed costs remain constant while variable costs change in direct proportion to changes in volume of goods. The fixed costs enhance profit fluctuation at a higher degree than the fluctuations in sales. The change in profits due to the change in sales is an operating leverage.
Profit planning is an aid to anticipating the relationships between volume, costs and profits. It is from here that an action plan emanates.
SELF ASSESSMENT EXERCISE 2
Discuss the different roles of a finance manager.
3.5 Capital Markets
Capital market is the meeting point for investors (lenders) and firms (borrowers), hence, the understanding of the operations of the capital markets and the way in which the capital markets value securities.
In Nigeria, it is known as the Nigeria Stock Exchange (NSE). The Exchange is the market that serves as an intermediary between fund-raisers and supplier of capital. The Nigerian Securities and Exchange Commission (SEC) is the regulator and monitor of activities in the Nigerian Capital Market in order to protect both the largely unaware investing public and issuers of securities.
The finance manager should know how risks are measured and how to cope with dynamism of investment and financing through the capital market.
It is worthy of note that, if a business organization uses excessive debt to finance growth, investors may perceive it as risky. The value of a firm share may shrink or decline. In the same vein, investors may not like the decision of a highly profitable, growing firm to distribute dividend. They may like the firm to plough back the profits into more lucrative and prospective opportunities (investments) that would enhance futuristic prospects of high capital gains.
These types of operations in capital markets are where investors continually assess the capability of the finance manager, after all investments involve risk and return.
SELF ASSESSMENT EXERCISE 3
Investment is about risk and return. Discuss.
We have explained who a financial manager is and also identify the role of the financial manager in a going concern (business organization). The financial manager coordinates the inflow and outflow of fund in the business cycle of a firm.
In this unit, we have discussed the financial manager’s role as follows: – Financial Management
- fund raising
- fund allocation
- profit planning and
- The operation of capital markets.