In: Finance
Please provide a new answer and please NO hand written assignments.
Summarize the role of management as it relates to finance in a corporation. In your post, address the following:
Indicate the various aspects of finance that management must understand.
Describe why a manager needs to understand the characteristics and importance of financial markets including risk and efficiency.
Describe why cash flow is more important than sales in a business.
Discuss what could happen if management does not fulfill responsibilities related to finance. If you have one, share a real world example from your own professional experience or from an external source.
Your post should be 200-250 words in length.
Manager needs to understand the importance of financial markets including risk and efficiency becuase he needs to make a decision on the capital structure for the business. Based on the financial markets and the risk appetite of the business, the financial manager should choose the right mix between debt and equity. If the financial markets are buoyant and growth in the economy is good, the firm can increase equity. However, if there is a recession then the financial markets can crash causing equity to hurt. So, the understanding of financial markets is most important in making capital structure decisions
Cash flow is important because it is the cash that the firm generates helps in increasing the value of the firm. If the sales is very high and so are the costs, the net profit and the net cash inflow will reduce thereby making the high sales irrelevant. On the other hand if the sales are low and the operational costs are also low, the margins will increase and hence the cash flow will increase which in turn will increase the shareholder value.
If the management does not fulfil responsibility for finance related activities, then this will lead to agency problem. Agency problem is defined as the conflict of interest between the financial managers and the shareholders. The shareholders of the business are called as "Principal" and the financial managers are called as "Agents". The financial managers (agents) must act in the best interest of the shareholders (Principal) by maximizing shareholder value. When the financial manager does not fulfill responsibilities related to finance he is not acting in the best interest of the shareholders which leads to an agency problem.