Question

What is the primary goal of management? What are the primary tasks of a Chief Financial Officer (CFO) and others in finance function of an organization?

Answer 1

Management’s primary goal is to maximize shareholder wealth. Shareholder wealth is represented by the market price of the firm’s share. Shareholders are the owners of the firm who own the shares. The management should seek to maximize the present value of the expected returns to the owners that is shareholders of the firm. These returns can take the form of periodic dividend payments or proceeds from the sale of the common stock. Present value is arrived by discounting the future payments to be received at appropriate rate. Shareholder wealth is measured by the market value of the shareholders shareholdings. Market price is defined as the price in which the stock trades in the stock exchanges. Thus the total shareholder wealth equals the number of shares outstanding times the market price per share.

Primary task of CFO and others in Finance function:

1. Financial Planning: The CFO and others in his team should oversee the annual budgeting process in line with the strategies of the organization. This long term financial planning should be in line with the management goal of wealth maximization. All plans should be measured through Key Result Areas (KRAs) that are set for each employee.
2. Steward of the shareholder’s money: CFO and his team must safeguard the financial interest of the owners of the company. This includes managing the company’s overall capital structure by keeping capital cost low through balancing mix of equity and debit.
3. Accounting and Taxation: These 2 functions are the basics of Finance function and its sets the foundation right for the growth of the organization. All the accounting and taxation matters should be carried in line with regulatory requirements and set the highest standards.
4. Reporting and measure performance: The CFO and his team should have a reporting system that shows and explains the company’s financial performance. This includes both internal reporting that measure performance against targets and external reporting that requires filing with regulatory bodies.