THE ROLE AND ENVIRONMENT OF MANAGERIAL - Size, importance, and role depends on the size of the

FINANCE firm
• For small firms – accounting department
The Role and Environment of Managerial Finance has the finance function
1. Finance and Business • For large firms – finance function typically is
2. The Managerial Finance Function and Goal of the Firm a separate department
3. Financial Institutions and Markets
4. Ten Axioms of Managerial Financial Management The Managerial Finance Function – Role Within the
5. Risk and Return Discussion and Time Value of Money Organization

1. Finance and Business

Major Areas and Opportunities Finance

Financial Services
- Concerned with the design and delivery of advice and
financial products to individuals, businesses, and
government.
- Career Opportunities: Banking, Financial Planning,
Insurance, etc.

Managerial Finance
- Concerned with the duties of the financial manager in
the business firm.
• CEO (Chief Executive Officer) – highest-ranking;
Financial Managers responsibilities include making major corporate
- Actively manage the financial affairs of the business. decisions, managing overall operations and resources,
- Perform various financial tasks such as planning, main point of communication between BOD and
extending credit to customers, evaluating proposed corporate operations
large expenditures, and raising money to fund the
firm’s operations. • CFO (Chief Financial Officer) – has the primary
- Nowadays, they are more actively involved in responsibility for planning, implementation,
“growing the firm”. managing, and running of all the finance activities of
a company, including business planning, budgeting,
Business forecasting, and negotiations.
- Organization engaged in commercial, industrial, or
professional activities. • Treasurer (Chief Financial Manager) responsibilities
- Can be for-profit or non-profit. include:
Most Common Legal Forms - financial planning
- Sole Proprietorship - manage cash
- Partnership - manage credit activities
- Corporation - manage pension fund
- manage foreign exchange
Why Study Managerial Finance? • Controller (Chief Accountant) handles accounting
- Most business decisions are measured in financial activities, such as:
terms - corporate accounting
- All managers in the firm, regardless of job description, - tax
work with financial personnel to justify their plans and - financial accounting
decisions (e.g. labor requirement, operating budgets, - cost accounting
etc.)
The Managerial Finance Function – Relationship with
2. The Managerial Finance Function and Goal of the Firm Accounting
The Managerial Finance Function - Finance (Treasurer) and Accounting (Controller)
- All personnel in all areas of responsibility must interact activities are closely related.
with finance personnel, and vice versa, so that the - Main differences between finance and accounting are
forecasts and decisions of the finance personnel (a) Emphasis on Cash Flows; and (b) Decision Making.
become useful.
- The managerial finance function can be broadly The Managerial Finance Function – Relationship with
described by considering: Accounting
- Role within the organization • Emphasis on Cash Flows
- Relationship to accounting - Accounting is using the accrual basis in the
- Primary activities of the financial manager preparation and presentation of financial
statements
The Managerial Finance Function – Role Within the
Organization
 - In finance, cash flow is given emphasis,
which is based from the axiom “Cash (not Goal of the Firm – Maximization of Shareholder Wealth
- Maximize the wealth of the owners for whom the firm
profit) is king”.
is being operated.
- Measured in terms of the share price.
• Decision Making - Financial managers should accept only those actions
- Accounting is more of the gathering of that are expected to increase the share price.
information for the preparation and - Includes preservation of stakeholder well-being as
presentation of financial reports (financial part of social responsibility.
statements) which are useful in decision- - Stakeholders include those parties such as
making employees, customers, suppliers, creditors,
- Financial managers, on the other hand, are etc.
the ones making the decisions - This does not alter the maximization of
shareholder wealth
The Managerial Finance Function – Primary Activities of
the Financial Manager Goal of the Firm – Profit Maximization
Make investment decisions – determination of both - General rule is that financial managers would only
the type and mix of assets held by the firm take those actions that are expected to make major
Make financing decisions – determination of both the contributions to the firm’s overall profits.
type and mix of assets used by the firm - Commonly measured using Earnings Per Share (EPS).
- these decisions are normally made on the basis of their cash - Arguments against profit maximization as a goal:
flow effects on the overall value of the firm. - Timing – the receipt of funds sooner than
later is preferred
Goal of the Firm - Cash flows – profits do not necessarily result
- Owners of the corporation are normally distinct from in cash flows available for the firm
its managers - Risk – profit maximization normally
- Actions of the financial managers should take into disregards risk (Axiom: Risk-Return Trade-
consideration the objectives of the firm’s owners (i.e. Off)
shareholders) – Maximize Profit and Maximize
Shareholder Wealth