Question

For this submission, you will write a response to the following scenario:

Imagine that you have completed an internship in the finance division of a technology corporation. Your boss, the financial manager, is considering hiring you for a full-time job. He first wants to evaluate your financial knowledge and has provided you with a short examination. When composing your answers to this employment examination, ensure that they are cohesive and read like a short essay.

Answer 1

A. Examine the types of decisions financial managers make. How are these decisions related to the primary objective of financial managers?

The Financial Manager of a company must have the proper ability and training to address key financial management decisions. The main aspects of the financial decision-making process relate to investments, financing dividends and asset management.

According to the Inter-American Investment Corporation (IIC), the 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.
• B Analyze the various ethical issues a financial manager could potentially face and how these could be handled.

• Accuracy

  A company’s financial manager ensures that all financial publications accurately and fairly reflect the financial condition of the company. Accounting errors and financial fraud, such as what was seen in the cases of Enron and WorldCom, damage the interests of shareholders, employees and affect confidence in the financial system. Some organizations document ethics guidelines specifically for financial managers. For example, the ethics code of the United States Postal Service requires senior financial managers to maintain accurate records and books, maintain internal controls and prepare financial documents in accordance with generally accepted accounting principles.

  Transparency

  Financial documents reflect a company's performance relative to its peers, and its internal strengths and weaknesses. Regulatory agencies require publicly traded companies to submit periodic financial statements and make full disclosures of material information. A change in the senior executive ranks, buyout offers, loss or win of a major contract and new product launches are examples of material information. Transparency also means explaining financial information clearly, especially for those who aren't familiar with the company’s operations. Financial managers should not hide, obscure or otherwise render relevant financial information impossible for ordinary shareholders to understand.

• Timeliness

  Timely financial information is just as important as accurate and transparent information. Management, investors and other stakeholders require timely information to make the right decisions. Many cases exist of a publicly traded company's stock reacting sharply and negatively to negative earnings surprises or unpleasant product-related news. For example, a company should promptly disclose manufacturing problems that could temporarily affect sales. Similarly, the company should not hold back news of a major contract loss in the hope that it can replace the lost revenue with new contracts.

  Integrity

  Financial managers should strive for unimpeachable integrity. Customers, shareholders and employees should be able to trust a financial manager's words. Managers should not allow prejudice, bias and conflicts of interest to influence their actions. Managers should disclose real or apparent conflicts of interest, such as an investment position in a stock or an ownership interest in one of the bidding companies for a procurement contract. The structure of certain stock-based incentive compensation schemes could also result in ethical issues. For example, managers might be tempted to manipulate stock prices by selectively disclosing or not disclosing relevant financial information.