ASIAN UNIVERSITY OF BANGLADESH

Assignment on
The role of managerial finance

Course title: financial management

Course code:

Submitted to

Assistant professor

Department of

Asian university of Bangladesh

Submitted by

Noruzzaman Jiban
 Assignment
On
“ The role of managerial
finance”
What is Finance?

Finance is defined as the management of money and includes activities like investing,
borrowing, lending, budgeting, saving, and forecasting. There are three main types of finance:
(1) personal, (2) corporate, and (3) public/ government.

Finance Examples

The easiest way to define finance is by providing examples of the activities it includes. There
are many different career paths and jobs that perform a wide range of finance activities. Below is
a list of the most common examples. Finance examples:

• Investing personal money in stocks, bonds, or guaranteed investment certificates (GICS)

• Borrowing money from institutional investors by issuing bonds on behalf of a public company

• Lending money to people by providing them a mortgage to buy a house with

• Using Excel spreadsheets to build a budget and financial model for a corporation

• Saving personal money in a high-interest savings account

•Developing a forecast for government spending and revenue collection

The Primary Areas of Business Finance

Finance is one of the most important functional areas of business and within a firm. It joins
other functional areas like marketing, operations technology, and management as key areas of
business. Business owners and business managers have to have at least a basic understanding of
finance even if they outsource certain areas of their financial operations. The goal of this article
is to help you understand the three areas of finance and their relationship to your company.
 Primary Areas of Business Finance

There are three primary areas of business finance, which include:

1. Corporate Finance
2. Investments
3. Financial Markets and Institutions
4. International Finance

While there is some overlap, each of these areas also covers distinct aspects of managing the
financials of a business.

Corporate Finance
Corporate finance is the area of finance dealing with monetary decisions that business enterprises
make and the tools and analysis used to make those decisions. The primary goal of corporate
finance is to maximize shareholder value. Although it is in principle different from managerial
finance, which studies the financial decisions of all firms, rather than corporations alone, the
main concepts in the study of corporate finance are applicable to financial problems of all kinds
of firms.

The discipline can be divided into long-term and short-term decisions and techniques. Capital
investment decisions are long-term choices about which projects receive investment, whether to
finance that investment with equity or debt, and when or whether to pay dividends to
shareholders. On the other hand, short-term decisions deal with the short-term balance of current
assets and current liabilities; the focus here is on managing cash, inventories, short- term
borrowing, and lending (such as the terms on credit extended to customers).

The terms corporate finance and corporate financier are also associated with investment banking.
The typical role of an investment bank is to evaluate the company's financial needs and raise the
appropriate type of capital that best fits those needs. Thus, the terms "corporate finance" and
"corporate financier" may be associated with transactions in which capital is raised in order to
create, develop, grow, or acquire businesses.

Investments
Another area of finance is investments. Within a business, particularly a large business, the firm
may invest in assets ranging from short-term securities to long-term securities like stocks and
bonds. The business invests for the same reason individual’s invest-to earn a return.
Companies invest in both financial assets such as stocks of other firms and in physical assets
such as buying a new building or new equipment.

Financial Markets and Institutions

Financial markets and financial institutions comprise the third area of business finance. Financial
markets include everything from the stock and bond markets, the primary and second markets,
and the money and capital markets.

Financial markets, such as the stock market, help facilitate the transfer of funds between savers
of funds and users of funds. Savers are usually households, and users are generally businesses
and the government. The stock market, for instance, provides a seamless exchange of ownership
of a company between one person or business and another.

International Finance
International finance sometimes known as international macroeconomics - is a section of
financial economics that deals with the monetary interactions that occur between two or more
countries. This section is concerned with topics that include foreign direct investment and
currency exchange rates. International finance also involves issues pertaining to financial
management, such as the political and foreign exchange risk that comes with managing
multinational corporations.

The financial institutions work hand in hand with the financial markets. Financial institutions
generally act as intermediaries that help make transfers of funds between businesses and savers
(working as a broker or agent for the trade). For example, an individual might deposit money
into a savings account. Then, the financial institution would take that money and loan it out to a
business.

The Importance of Finance

Finance involves the evaluation, disclosure, and management of economic activity and is crucial
to the successful operation of firms and markets.
Differentiate between managerial finance and corporate finance

Key Points

 The primary goal of corporate finance is to maximize shareholder value and it deals with
the monetary decisions that business enterprises make.

 Managerial finance is interested in the intemal and external significance of a firm's

financial figures.

 The terms corporate finance and corporate financier are also associated with investment
banking, the typical role of an investment bank is to evaluate a company's financial needs
and raise the appropriate type of capital that best fits those needs.

 Sound financial management creates value and organizational ability through the
allocation of scarce resources.

Key Terms

• Dividends: Dividends are payments made by a corporation to its shareholder members. It is the
portion of corporate profits paid out to stockholders.

The Importance of Finance

Finance involves the evaluation, disclosure, and management of economic activity and is crucial
to the successful and efficient operation of firms and markets.

Managerial Finance
Managerial finance concerns itself with the managerial significance of finance. It is focused on
assessment rather than technique. For instance, in reviewing an annual report, one concerned
with technique would be primarily interested in measurement. They would ask: is money being
assigned to the right categories? Were generally accepted accounting principles (GAAP)
followed?

A person working in managerial finance would be interested in the significance of a firm's

financial figures measured against multiple targets such as internal goals and competitor figures.
They may look at changes in asset balances and probe for red flags that indicate problems with
bill collection or bad debt as well as analyze working capital to anticipate future cash flow
problems.
 Sound financial management creates value and organizational ability through the allocation of
scarce resources amongst competing business opportunities. It is an aid to the implementation
and monitoring of business strategies and helps achieve business objectives.

The Role of Financial Managers

Financial managers ensure the financial health of an organization through investment activities
and long-term financing strategies,

Key Points

Financial managers perform data analysis and advise senior managers on profit -maximizing
ideas.

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.

Types of financial managers include controllers, treasurers, credit managers, cash managers, risk
managers and insurance managers.

Key Terms

Net present value: 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

Overview

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:

• Prepare financial statements, business activity reports, and forecasts,

• Monitor financial details to ensure that legal requirements are met,

• Supervise employees who do financial reporting and budgeting,

• Review company financial reports and seek ways to reduce costs,

• Analyze market trends to find opportunities for expansion or for acquiring other companies,
• Help management make financial decisions.

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 advice senior managers on ideas to maximize
profits. They often work on teams, acting as business advisors to top executives.

Financial Statements: This is an example of a financial statement that financial managers are
responsible for preparing and interpreting.

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 ahout issues in healtheare finance.
Moreover, financial managers must be aware of special tax laws and regulations that affect their
industry.

Capital Investment Decisions

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 rectum 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 skill:

Financial managers deal with a range of information and documents. They must stay organized
to do their jobs effectively.

Forms of Business Organization

These are the basic forms of business ownership:

1. Sole Proprietorship

A sole proprietorship is a business owned by only one person. It is easy to set-up and is the least
costly among all forms of ownership. The owner faces unlimited liability; meaning. The
creditors of the business may go after the personal assets of the owner if the business cannot pay
them. The sole proprietorship form is usually adopted by small business entities.

2. Partnership

A partnership is a business owned by two or more persons who contribute resources into the
entity. The partners divide the profits of the business among themselves.

In general partnerships, all partners have unlimited liability. In limited partnerships, creditors
cannot go after the personal assets of the limited partners.

3. Corporation
A corporation is a business organization that has a separate legal personality from its owners.
Ownership in a stock corporation is represented by shares of stock.

The owners (stockholders) enjoy limited liability but have limited involvement in the company's
operations. The board of directors, an elected group from the stockholders, controls the activities
of the corporation.

In addition to those basic forms of business ownership, these are some other types of
organizations that are common today:

Limited Liability Company

Limited liability companies (LLCs) in the USA, are hybrid forms of business that have
characteristics of both a corporation and a partnership. An LLC is not incorporated; hence, it is
not considered a corporation.

Nonetheless, the owners enjoy limited liability like in a corporation. An LLC may elect to be
taxed as a sole proprietorship, a partnership, or a corporation.
Cooperative

A cooperative is a business organization owned by a group of individuals and is operated for

their mutual benefit. The persons making up the group are called members. Cooperatives may be
incorporated or unincorporated.

Some examples of cooperatives are: water and electricity (utility) cooperatives, cooperative
banking, credit unions, and housing cooperatives.

Goals of Financial Management

All businesses aim to maximize their profits, minimize their expenses and maximize their market
share. Here is a look at each of these goals.

Maximize Profits

A company's most important goal is to make money and keep it. Profit- margin ratios are one
way to measure how much money a company squeezes from its total revenue or total sales.

There are three key profit-margin ratios: gross profit margin, operating profit margin and net
profit margin.

1. Gross Profit Margin

The gross profit margin tells us the profit a company makes on its cost of sales or cost of goods
sold. In other words, it indicates how efficiently management uses labor and supplies in the
production process.

Gross Profit Margin = (Sales - Cost of Goods Sold)/Sales

Suppose that a company has $1 million in sales and the cost of its labor and materials amounts to
$600,000. Its gross margin rate would be 40% ($1 million - $600,000/S1 million).

The gross profit margin is used to analyze how efficiently a company is using its raw materials,
labor and manufacturing-related fixed assets to generate profits. A higher margin percentage is a
favorable profit indicator.

Gross profit margins can vary drastically from business to business and from industry to
industry. For instance, the airline industry has a gross margin of about 5%, while the software
industry has a gross margin of about 90%.
2. Operating Profit Margin

By comparing earnings before interest and taxes (EBIT) to sales, operating profit margins show
how successful a company's management has been at generating income from the operation of
the business:

Operating Profit Margin = EBIT/Sales

If EBIT amounted to $200,000 and sales equaled $1 million, the operating profit margin would
be 20%.

This ratio is a rough measure of the operating leverage a company can achieve in the conduct of
the operational part of its business. It indicates how much EBIT is generated per dollar of sales.
High operating profits can mean the company has effective control of costs, or that sales are
increasing faster than operating costs, Positive and negative trends in this ratio are, for the most
part, directly attributable to management decisions.

Because the operating profit margin accounts for not only costs of materials and labor, but also
administration and selling costs, it should be a much smaller figure than the gross margin.

3. Net Profit Margin

Net profit margins are those generated from all phases of a business, including taxes. In other
words, this ratio compares net income with sales, It comes as close as possible to summing up in
a single figure how effectively managers run the business:

Net Profit Margins = Net Profits after Taxes/Sales

If a company generates after-tax earnings of $ 100,000 on its $1 million of sales, then its net
margin amounts to 10%.

Often referred to simply as a company's profit margin, the so-called bottom line is the most often
mentioned when discussing a company's profitability?

Again, just like gross and operating profit margins, net margins vary between industries. By
comparing a company's gross and net margins, we can get a good sense of its non-production and
non-direct costs like administration, finance and marketing costs.

For example, the international airline industry has a gross margin of just 5%. Its net margin is
just a tad lower, at about 4%. On the other hand, discount airline companies have much higher
gross and net margin numbers. These differences provide some insight into these industries'
distinct cost structures: compared to its bigger, international cousins, the discount airline industry
spends proportionately more on things like finance, administration and marketing, and
proportionately less on items such as fuel and flight crew salaries.

In the software business, gross margins are very high, while net profit margins are considerably
lower. This shows that marketing and administration costs in this industry are very high, while
cost of sales and operating costs are relatively low.

When a company has a high profit margin, it usually means that it also has one or more
advantages over its competition. Companies with high net profit margins have a bigger cushion
to protect themselves during the hard times. Companies with low profit margins can get wiped
out in a down tum. And companies with profit margins reflecting a competitive advantage are
able to improve their market share during the hard times, leaving them even better positioned
when things improve again.

Like all ratios, margin ratios never offer perfect information. They are only as good as the
timeliness and accuracy of the financial data that gets fed into them, and analyzing them also
depends on a consideration of the company's industry and its position in the business cycle.
Margins tell us a lot about a company's prospects, but not the whole story

Minimize Costs

Companies use cost controls to manage and/or reduce their business expenses. By identifying
and evaluating all of the business's expenses, management can determine whether those costs are
reasonable and affordable. Then, if necessary, they can look for ways to reduce costs through
methods such as cutting back, moving to a less expensive plan or changing service providers.
The cost-control process seeks to manage expenses ranging from phone, internet and utility bills
to employee payroll and outside professional services.

To be profitable, companies must not only earn revenues, but also control costs. If costs are too
high, profit margins will be too low, making it difficult for a company to succeed against its
competitors. In the case of a public company, if costs are too high, the company may find that its
share price is depressed and that it is difficult to attract investors.

When examining whether costs are reasonable or unreasonable, it's important to consider
industry standards. Many firms examine their costs during the drafting of their annual budgets.
Maximize Market Share
Market share is calculated by taking a company’s sales over a given period and dividing it by the
total sales of its industry over the same period. This metric company's size relative to its market
and its competitors. Companies are always looking to expand their share of the market, in
addition to trying to grow the size of the total market by appealing to larger demographics,
lowering prices or through advertising. Market share increases can allow a company to achieve
greater scale in its operations and improve profitability.

The size of a market is always in flux, but the rate of change depends on whether the market is
growing or mature. Market share increases and decreases can be a sign of the relative
competitiveness of the company's products or services. As the total market for a product or
service grows, a company that is maintaining its market share is growing revenues at the same
rate as the total market. A company that is growing its market share will be growing its revenues
faster than its competitors. Technology companies often operate in a growth market, while
consumer goods companies generally operate in a mature market.

New companies that are starting from scratch can experience fast gains in market share. Once a
company achieves a large market share, however, it will have a more difficult time growing its
sales because there aren't as many potential customers available.

The Agency Problem

An agency relationship occurs when a principal hires an agent to perform some duty. A conflict,
known as an "agency problem," arises when there is a conflict of interest between the needs of
the principal and the needs of the agent.

In finance, there are two primary agency relationships:

Managers and stockholders

Managers and creditors

1. Stockholders versus Managers

If the manager owns less than 100% of the firm's common stock, a potential agency problem
between mangers and stockholders exists.
Managers may make decisions that conflict with the best interests of the shareholders. For
example, managers may grow their firms to escape a takeover attempt to increase their own job
security. However, a takeover may be in the shareholders' best interest.

2. Stockholders versus Creditors

Creditors decide to loan money to a corporation based on the riskiness of the company, its capital
structure and its potential capital structure. All of these factors will affect the company's potential
cash flow, which is a creditors' main concern.

Stockholders, however, have control of such decisions through the managers.

Since stockholders will make decisions based on their best interests, a potential agency problem
exists between the stockholders and creditors. For example, managers could borrow money to
repurchase shares to lower the corporation's share base and increase shareholder return.
Stockholders will benefit; however, creditors will be concerned given the increase in debt that
would affect future cash flows.

Motivating Managers to Act in Shareholders' Best Interests

There are four primary mechanisms for motivating managers to act in stockholders' best
interests:

1. Managerial Compensation

Managerial compensation should be constructed not only to retain competent managers, but to
align managers' interests with those of stockholders as much as possible.

This is typically done with an annual salary plus performance bonuses and company shares.

Company shares are typically distributed to managers either as:

Performance shares, where managers will receive a certain number shares based on the
company's performance.

Executive stock options, which allow the manager to purchase shares at a future date and price.
With the use of stock options, managers are aligned closer to the interest of the stockholders as
they themselves will be stockholders.
2. Direct Intervention by Stockholders:

Today, the majority of a company's stock is owned by large institutional investors, such as
mutual funds and pensions. As such, these large institutional stockholders can exert influence on
mangers and, as a result, the firm's operations.

3. Threat of Firing

If stockholders are unhappy with current management, they can encourage the existing board of
directors to change the existing management, or stockholders may re-elect a new board of
directors that will accomplish the task.

4. Threat of Takeovers:

If a stock price deteriorates because of management's inability to run the company effectively,
competitors or stockholders may take a controlling interest in the company and bring in their
own managers. In the next section, we'll examine the financial institutions and financial markets
that help companies finance their operations.

Conclusion
Performance evaluation will help a company to understand different sides of their business
operations on one hand where by analyzing performance in a certain period and help the
company to forecast their future business performances. These information obtained on business
performances can be used by number of parties, different stakeholders which include
shareholders, creditors, employees, tax authorities, government, media, etc. All the mentioned
parties can use these information of performance evaluation with an aim to assess the business
operations of the firm, future of the company and can contribute towards decision-making
process of the company as evaluation will bring a clear image on the organizations financial
health or status, the financial feasibility, profitability and resource management. Also with the
right information investors and shareholders will be able to make the right decision in terms of
their investments where proper opportunities can be identified regarding the potential of positive
outcome of it. In Tesco with the recent changes in market and economy there has been lots of
changes to the organization as well. This is due to recessions well as changes in the retail
industry which affected all the players in the market. In assessing finance options for a company
like Tesco it is important to assess the industry and assess the company's performance using
different ratios to understand the situation of the company. With that understanding company
like Tesco can go ahead and consider about new investments to decide which options to select
and how to finance these options. Company's capital structure decides how the company is going
to fund their activities in the long term to obtain more benefit and maximize their wealth. With
that they can select the best options to finance their needs and wants to achieve mentioned
objectives where in Tesco's case it needed to assess sources of long and short term, finance
structure and finance disciplines before come to an conclusion.