Question

*Question

a) Outline the key aspects of the financial manager's role within a large plc

b) Some analysts and commentators make a distinction between the 'Anglo-Saxon' and the "Contmental Europe Japanese approach to financial managenment. Briefly, explain the distinction

# The following is relevant #

a)

*They should comment initially that the fundamental objective of financial management is usually considered to be that of maximising shareholder wealth. All subsequent decisions should meet that objective (1)

*Financial management is concemed with financial planning and financial control (1)

*The financial manager will tend to make decisions in three key areas.

* Investment and capital budgeting - the financial manager will be involved in the decisions reg ardıng the acquisition of assets through carying out appraisal techniques (1)

* Financıng decisions- the financial manager concerned with the raising of finance at the lowest cost both to fund long term investment and short term working capital investment (1)

* Dividend decisions - linked to the above Retained profits are a source of finance but paying dividends may increase the value of the company and hence maximise sharcholder wealth(1)

[5 Marks]

# The following is relevant #

b)

• Distinction based on the fact that there are other stakcholders in the company beyond shareholders (1)

•The 'Anglo-Saxon- Le. US and UK (primarily) - approach has generally been to attempt to maxımıse shareholder wealth Other interests while important are subordinate to the shareholder (1)

•German, French, Japanese companies have tended to place equal or even greater importance to the rights of other stakeholders, e.g. workers and customers (1)

•As examples the student might cite the fact that workers sit on German supervisory boards or the fact that Japanese firms have traditionally placed job security above dividend payout (1)

•Good student may finally comment that wth increasing globalisation- world companies operating in all markets- there may be some merging of the approach (1)

[15 marks]

Answer 1

A. Outline the key aspects of the financial manager's role within a large plc

Answer A:   Finance is the lifeblood of every business. It works like blood in the human body. The quantity and quality of blood always affect the function of the human body and therefore, it is necessary that adequate attention is paid to the managing of finance. A human body may itself regulate the quantity and quality of blood in its body to some extent through nutritious food etc. Similarly, a business may also adjust itself with the quality and quantity of finance by intelligent use of its internal resources.

The finance function is such that it has a pervasive effect on the functioning of a firm. It can control and limit the activities of all other departments either by prescription of previous sanctions by finance departments or by planning by the finance or planning department. Finance function can even paralyze the function of the entire firm if it is not properly looked after. Hence a qualified finance manager is required for financial management. Though the financial management is not as much important, compared to production manager or the sales manager in a firm, if a talented finance manager is there with the firm, it would improve the efficiency of the organization as a whole because financial management is a professional job. A financial manager should be a person capable to understand both the matrix of financial accounting as well as financial management. The finance manager should be able to look after the problem concerned with finance i.e he should be aware of the revenue and cash generations as well as expenditure or payout.

A wide view of financial management is that it covers everything that concerns cash or funds. In that respect the finance function would move into spheres which are not its own, it would be concerned with everything under an organization.

The function of the finance manager can be summed up as a custodian function of finance. His function involves the proper custody and authorized utilization of the funds available with the firm. Another view of financial management is called the procurement view. Under this function, the finance manager tells the management about how to tap the various sources of finance and utilizing the most economical source. For this purpose, the finance manager is required to keep in touch with all financial institutions both for short term and long term finance and also keep themselves up to date with regard to the state of the capital market.

The functions of the financial manager are to advise the management regarding various aspects of finance functions which can be put in a nutshell as follows:-

(1) The best time for floatation of shares or debentures

(2) The terms on which shares and debentures to be issued.

(3) Lower profitability,

(4) Higher expenditure,

(5) Lower cash in-flow,

(6) Higher cash out-flow

(7) Purchase of Raw Materials

(8) Fixing selling price

(9) Exploring new market avenues

(10) Exploring cost-effectiveness in marketing strategy

The task of the finance manager is concerned with giving timely advise on financial matters to keep the firm vigilant on the following aspects:-

1. Have at his disposal adequate finance so that it is not made to forgo business opportunities for want of funds and that it should not be put to undue inconvenience for lack of finance.

2. Have funds to apply for different periods, some for a short period and some for a long period. The funds available shall, therefore, be such as will meet the requirements and will not put the firm to undue hardships.

3. The composition of the stream of funds comprising various types of funds contributed by the proprietors or raised by way of loans on the basis of the cost of capital and trading on equity with an option for using low geared and high geared funds based on circumstances.

4. The available funds must obviously be put to the best possible uses so that the return on capital is comparatively adequate to discharge interest on borrowings and also a reasonable dividend to shareholders.

The finance manager shall ensure that a firm will certainly earn sufficient profits and the disposal of profits directly to help to strengthen the proprietors' funds so that limit for borrowing is unaffected thereby. A consideration of the above will show that financial management involves the following:-

(a) The investment Decision, i.e the decision to be made with regard to the utilization of funds in one activity or the other

(b) The Financing Decision: i.e the decision as to how the total funds required by the firm will be made available through the issue of shares or loans or keeping back the profits etc.

(c) The dividend Decision: The decision in respect of the part of profits which will be given to the shareholders in the form of cash dividend and the amount which will be kept back for utilization by the firm or for ploughing back.

B. Some analysts and commentators make a distinction between the 'Anglo-Saxon' and the "Continental Europe Japanese approach to financial management. Briefly, explain the distinction

Answer B: Any business is run for its owners. It is the duty of the finance manager and for that matter, the management provides for a reasonable return to the investing public. If the investing public is not happy with the return of their investment they may naturally shift their investment to more profitable firms. In the long term, the company may not be able to raise required finance by floating new shares or by exploring the right issues. So also a reasonable return on equity holders is a necessary condition for getting borrowed capital. In that sense the “Anglo-Saxon” approach is right. US and UK being capitalist countries almost all enterprises are owned and operated by private individuals and as such this approach is justified.

In modern days the stakeholders of any business includes government, employees, customers, suppliers etc. So thinking of an organization essentially for the benefit of owners alone is unethical. Only if the government comes with the right policies, an organization can function profitably. The Govt. Policy may favourably or otherwise affect the business profit. Employees are an essential part of any organization. Their well is part and parcel of successfulness of a business concern. The good working of an organization shall benefit its customers and ultimately the consumers in the form of the lower price, or with more facilities being given, for the services of the product which is being sold to them. The suppliers shall also be given heir due share as the supply of right raw materials at the right time and the right price is required for a successful business. Thus the approach of "Continental Europe Japanese approach to financial management is also justified.