Question

Balancing the financial position of a business can be a very tricky endeavor. Financial managers have a wide variety of options available to them as it relates to the management of income and expenditures. How these twin forces are approached operationally and reflected on a business balance sheet can be influenced by a financial manager. This week we will be discussing why certain decisions are made, and the different apparent effects seen on financial statements because of these decisions. Considering this please address the following prompts in your discussion: Can these balances be viewed as “investment” decisions? Is the placement of “investments” in these accounts an ethical practice? Could it be designed to influence reporting results?

Answer 1

Financial management refers to the acquisition, financing and management of assets. This decision-making process is very sensitive and must be under the control of a Financial Manager to analyze external and internal variables that can affect the normal development of company activities.

Role of the Financial Managers in the decision-making process can be divided into four main areas:

• Investments: in the investments area, the Financial Manager is responsible for defining the optimal size of the company. In this regard, it is important to have a market study in place and be clear on the objectives that the company needs to meet. It is important to have properly studied the demand, technology and equipment, financing methods and human resources available.In second place, the director must analyze whether the resources adapt to the optimal size desired for the company. If they don’t, it is necessary to define the types of assets that the company must acquire, or otherwise sell or get rid of, in order to achieve efficient management.

• Financing: defining a financing strategy is essential to the continuity of the business over the long term. Access to financing is closely related with maintaining a constant inflow of capital since the savings margin will not allow operations to continue for much longer without the support of additional liquidity. The Financial Manager must define several aspects of the financing strategy. For example, study the sources willing to offer credit to the organization, and define the best financing options for operations. The Financial Manager can also design a mixed financing strategy for efficient financial management: this is called the company’s “financing mix”. Sometimes the company can benefit from a combination of short and long term financing to meet investment and financial strategy objectives.   

• Asset management: asset management is one of the main aspects for a company to adequately meet its obligations and in turn to position itself to meet the objectives or growth targets that have been laid out. In other words, the Financial Manager must stipulate and assure that the existing assets are managed in the most efficient way possible. Generally, this manager must prioritize current asset management before fixed asset management. Current assets are those that will become effective in the near future, such as accounts receivable or inventories. By contrast, fixed assets lack liquidity since they are needed for permanent operations. This includes offices, warehouses, machinery, vehicles, etc.

• Dividend Policy: one of the most important financial decisions that a Financial Manager must make is related to the company’s dividend policy. It concerns how much of the company’s earnings will be paid out to shareholders. Specifically, it is necessary to determine if generated earnings will be reinvested in the company to improve operations or if they will be distributed among shareholders. It is also possible to choose a mixed policy in this regard, distributing a part among shareholders and investing the rest in the company. However, if the dividends distributed are too high, the company may encounter limitations to expand or improve the management of its operations. It is important to consider that in order to have growth perspectives over the long term, short term reinvestments are necessary.

Hence,it can be said that these will be considered as Investment decisions and influences reporting results.