FINANCIAL MANAGEMENT

(FIMA 30013)

MODULE 1: INTRODUCTON TO FINANCIAL MANAGEMENT

Scope of Financial Management

Financial Function

This function deals with decisions on how to raise funds to finance the activities of
the organization..The short-term sources of funds include; bank overdrafts, factoring,
commercial papers, account payable delays, sale and leaseback, and account
receivables collections. The long-term sources of funds include; ordinary share
capital, preference share capital, long term loans (debt capital) and leases. Before
choosing the source of funds, a financial manager must consider factors such as
cost, tax effects, dilution of ownership and control, financial risks, collateral securities,
access to capital markets, nature of project to be financed and other conditions and
restrictive covenants.

Investment function

This function involves decisions concerning the allocation of funds to various

projects. A financial manager needs to evaluate the various projects to venture into
considering both their returns and the level of risk. Investment decisions are difficult
to make as they involve assessment of the future which is difficult to predict with
precision and most of the investments are irreversible.
 Liquidity function

These are decisions involving the management of working capital to avoid liquidity
problems.it generally involves investment into current assets and liabilities. Current
assets are those assets that can easily be converted into cash within a year. Current
liabilities mature for payment within a financial year.

Dividend function

This involves decisions on how much of the total earnings of the organization
should be paid out as dividends to the shareholders and how much should be retained
by the organization for re- investment. The dividend decision should be in line with
the dividend policy of the organization, which is contained in the article of association.
The finance manager should ensure that the organization has an optimal dividend
payout ratio.

The Firm and its Financial Manager

Goals or Objectives of a Firm

The main goal of any firm is maximizing the wellbeing of owners or the shareholders.
This is indicated using the following parameters:

1. Profit maximization which means maximizing the income of a firm either by

increasing sales volume or increasing the price in return the business maximizes
profit which leads to an increase in the dividends paid to shareholders
2. The capital gain or wealth maximization. Capital gain is represented by the
market value of shares where wealth is said to be maximized when there is an
increase in the value of those market shares.

The secondary objectives of the firms are those responsibilities owed to other
parties required by the firm in the pursuit of its main objective. For example, the
responsibilities owed to employees are; providing them with reasonable
remuneration, providing them with medical facilities and providing them with
transport, pension and training facilities. Responsibilities owed to customers are;
providing them with high-quality goods and services at reasonable prices.
Responsibilities owed to society are participating in charitable organizations and
ensuring that the of the firm are environmentally friendly.

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 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.

Importance of Financial Management to Organizations

1. Financial management ensures that a firm is able to meet its day to day
expenses such as wages to workers, maintain enough product to meet customer
 demands and maintaining enough funds for investment and expansion of the
business.
2. Budgeting, a tool of financial management, ensures a business makes
outstanding decisions using information and resources available.
3. Bookkeeping. This helps track the daily financial activities of the organization,
such as sales.
4. Through financial management, a firm is able to allocate funds
appropriately. Proper use of allocated funds to assets enhance the
operational proficiency for the business concern.
5. Growth and stability of financial management ensures business plans for
its resources for both investment and growth purposes.

Role of Financial Managers

1. Accounting and bookkeeping. A financial manager prepares or supervises the

preparation of the various financial statements, activity reports, and forecasts.
He should also ensure that there is an effective accounting system in the
organization.
2. Estimating the amount of capital required for purchase of assets, growth,
and expansion of the business and meeting working capital requirements
3. Ensures that debt and equity ratios are maintained and balanced when raising
funds from various sources.
4. Analyze the market trends to identify available opportunities for both
investment and expansion of the business
5. Financial control. A financial manager financial control through the use of
techniques like an internal audit.
6. Forecasts cash flowing into the business and cash flowing out of the business
to ensure that there is no shortage of funds or even surplus cash within the
firm. Funds must be available to meet the day to day expenses of the firm,
such as wages to employees.
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.

Finance

A Finance Department manages a firm's long-term and day-to-day monetary

operations and strategy. Finance groups oversee incoming and outgoing payments,
budget creation, cash management (treasury), accounting, financial reporting and
many other tasks related to the finances of the company. Finance organization size
varies based upon total company-wide head count, company revenue, industry, and
overall business strategy.

Common Finance job titles: Chief Financial Officer (CFO), EVP/SVP of

Finance, Director of Finance

Accounts Payable (AP)

The Accounts Payable, or A/P, function is responsible for keeping the lights on and
ensuring that all company vendors are paid in full and on time. They process
invoices, cut checks and manage relationships with creditors. It is important, from
a vendor management perspective, to ensure that debts are paid on-time and in
full to avoid default and strained relationships with third party suppliers.

Common Accounts Payable (AP) job titles: Accounts Payable Analyst,

Accounts Payable Clerk, Accounts Payable Specialist
Accounts Receivable (AR)

The Accounts Receivable, or A/R, function is responsible for collecting payments

from customers or clients for goods or services provided. Some clients/customers
may be extended a line of credit.

The A/R group is tasked with ensuring that payments are made within the terms
outlined in the original invoice or contract (e.g., net 30 days). When
clients/customers fail to meet these terms, they are referred to the Collections
Department (or a Collections Agency) and may face additional fees or penalties.

Common Accounts Receivable (AR) job titles: Billing Specialist, Accounts

Receivable Clerk, Accounts Receivable Analyst

Accounting & Reporting (Controller Group)

The Controller Group is responsible for maintaining a company's books and

ensuring that all business transactions are properly recorded and managed. The
general ledger is the main source for all of the company's financial reports, so it is
important that the Financial Controller and other staff accountants keep an
organized record of all credits and debits (a double-entry general ledger 'journal').
The controller group also performs tasks such as cost accounting and fixed assets
accounting.

Common Accounting & Reporting (Controller Group) job titles:

Bookkeeper, Certified Public Accountant (CPA, Staff Accountant, Accounting
Analyst, Accountant

Budgeting & Forecasting

The Budgeting and Forecasting Group is responsible for producing and

assessing a company's budget by calculating the variance between planned and
actual costs. They also forecast the revenue and expenses of certain groups or
functions, allowing budget 'owners' to plan and prioritize spending. The
Forecasting Group also produces 'what if' scenarios to prepare the company for
a variety of possibilities.

Common Budgeting & Forecasting job titles: Budget Analyst, Budgeting &
Forecasting Analyst, Staff Accountant

Expense Management

The Expense Management Group is responsible for monitoring and auditing all
employee-initiated expenses. Expenses can include travel, lodging, entertainment
and food. The group is also responsible for outlining and enforcing policies related to
employee expenses, and in many cases, implementing an automated expense
management system (software; SaaS) to improve efficiency.

Common Expense Management job titles: Expense Report Auditor,

Travel and Expense Processor, Expense Analyst

Internal Audit & Compliance

The Internal Audit & Compliance Group is responsible for overseeing a company's
financial operations to ensure that they are in line with internal and external policies
and regulations. Legislation such as the Sarbanes-Oxley Act of 2002 has increased
pressure on finance functions to improve reporting performance and internal audit
quality/frequency.

Common Internal Audit & Compliance job titles: Auditor, Compliance

Resolution Analyst, Financial Compliance Analyst

Tax

The Tax function is responsible for managing and planning all tax-related
expenses. The circumstances that surround tax management can be
complicated, especially when taking into account the various rules of taxation
dealt with by companies that operate globally. The function also ensures that all
tax payments are in compliance with any government requirements to avoid
interest fees or penalties.

Common Tax job titles: Tax Accountant, Tax Analyst, Tax Associate, Tax
Preparer, Staff Accountant

Treasury Management

Also known as Cash Management, the Treasury Group manages all of the
company's assets to maximize liquidity and reduce risk. The group is
responsible for ensuring that a company has a steady cash flow and for
securing any funding that may be needed. The group may also explore
investment options for excess cash.

Common Treasury Management job titles: Treasurer, Treasury Analyst,

Treasury Specialist, Treasury Operations Analyst

Payroll

The Payroll Group is responsible for the administration and documentation of all
salaries, wages, bonuses and deductions (payroll tax, social security) received by
employees. Though this group is commonly outsourced or carried out within the
HR group, if the business is small, payroll may be handled directly by the owner
or an associate.

Common Payroll job titles: Payroll Specialist, Payroll Clerk, Payroll Processor