The present value of a project or an investment decision determined by summing the discounted incoming and outgoing future cash flows resulting from the decision.
The Role of Financial Managers
Financial managers perform data analysis and advise senior managers on profit-maximizing ideas. Financial managers are responsible for the financial health of an organization. They produce financial reports, direct investment activities, and develop strategies and plans for the long-term financial goals of their organization. Financial managers typically:
The role of the financial manager, particularly in business, is changing in response to technological advances that have significantly reduced the amount of time it takes to produce financial reports. Financial managers' main responsibility used to be monitoring a company's finances, but they now do more data analysis and advise senior managers on ideas to maximize profits. They often work on teams, acting as business advisors to top executives.
Financial managers also do tasks that are specific to their organization or industry. For example, government financial managers must be experts on government appropriations and budgeting processes, and healthcare financial managers must know about issues in healthcare finance. Moreover, financial managers must be aware of special tax laws and regulations that affect their industry.
Capital investment decisions are long-term corporate finance decisions relating to fixed assets and capital structure. Decisions are based on several inter-related criteria. Corporate management seeks to maximize the value of the firm by investing in projects which yield a positive net present value when valued using an appropriate discount rate in consideration of risk. These projects must also be financed appropriately. If no such opportunities exist, maximizing shareholder value dictates that management must return excess cash to shareholders (i.e., distribution via dividends). Capital investment decisions thus comprise an investment decision, a financing decision, and a dividend decision.
Management must allocate limited resources between competing opportunities (projects) in a process known as capital budgeting. Making this investment decision requires estimating the value of each opportunity or project, which is a function of the size, timing and predictability of future cash flows.
Achieving the goals of corporate finance requires that any corporate investment be financed appropriately. The sources of financing are, generically, capital self-generated by the firm and capital from external funders, obtained by issuing new debt or equity.
Types of Financial Managers
There are distinct types of financial managers, each focusing on a particular area of management.
Controllers direct the preparation of financial reports that summarize and forecast the organization's financial position, such as income statements, balance sheets, and analyses of future earnings or expenses. Controllers also are in charge of preparing special reports required by governmental agencies that regulate businesses. Often, controllers oversee the accounting, audit, and budget departments. Treasurers and finance officers direct their organization's budgets to meet its financial goals and oversee the investment of funds. They carry out strategies to raise capital and also develop financial plans for mergers and acquisitions.
Credit managers oversee the firm's credit business. They set credit-rating criteria, determine credit ceilings, and monitor the collections of past-due accounts. Cash managers monitor and control the flow of cash that comes in and goes out of the company to meet the company's business and investment needs. Risk managers control financial risk by using hedging and other strategies to limit or offset the probability of a financial loss or a company's exposure to financial uncertainty. Insurance managers decide how best to limit a company's losses by obtaining insurance against risks such as the need to make disability payments for an employee who gets hurt on the job or costs imposed by a lawsuit against the company.
Important Skills for Financial Managers
Analytical skills. Financial managers increasingly assist executives in making decisions that affect the organization, a task for which they need analytical ability.
Communication. Excellent communication skills are essential because financial managers must explain and justify complex financial transactions.
Attention to detail. In preparing and analyzing reports such as balance sheets and income statements, financial managers must pay attention to detail.
Math skills. Financial managers must be skilled in math, including algebra. An understanding of international finance and complex financial documents also is important.
Organizational skills. Financial managers deal with a range of information and documents. They must stay organized to do their jobs effectively.