Role Of Financial Manager

Role of the Financial Manager in Maximizing Shareholder Value

The overarching goal of the financial manager in a for-profit business should be the maximization of value for shareholders. However, managerial goals may be different from shareholders. Management will continuously attempt to control and require adequate resources to prevent the company from going out of business. In addition, if left to engage in their own goals rather than those of shareholders, financial managers will choose to make decisions that allows them to rely on internally generated cash flows rather than depending on outside financial markets. The result of these two goals is that managers may have a different objective than shareholders; that of maximizing corporate wealth, which is not necessarily the same thing as shareholder wealth.

The financial manager is responsible for the effective management of finance operations and to make sure the activities contribute to the successful management of the business. To be successful corporate finance managers have several courses of action that can increase shareholder value. Two key factors are financing the company at the lowest maintainable after-tax cost and apportioning capital resources to investments that assure the highest risk-adjusted returns to investors (Lupia, 2006). To accomplish this, the finance manager must understand fundamental aspects of the business while working with the senior management team to create optimal operational practices. Finally, the finance manager must have the ability to execute the company's strategies. These actions create an environment where financial managers are able to accomplish their primary goal, which is maximizing shareholder value.

Financing at the lowest cost is key to maximizing shareholder value. Because interest and principle payments are paid for finite periods of time cash flows are controlled in quantity as well as time. In contrast, as owners of the business, shareholders' investment potential, both quantity and length of time, is unlimited. One reason debt is a less expensive source of capital than shareholder equity is because, unlike dividends, interest payments are tax deductible. Because debt is a cheaper financing source, the presence of debt in a company's capital structure increases equity's return capability. Even so, debt also increases equity's risk of loss because the interest and principle payments are fixed costs and they reduce the amount f cash flow available for reinvestment or distribution to shareholders (Lupia).

A market-oriented approach allows investors to decrease risk by creating portfolios that are diverse. The same concept holds true for corporate financial managers as well. Managers need to assess and compare the qualities and traits of internal options as well as external choices available as investor, or shareholder, opportunities. When shareholder value is the goal, it is important to evaluate investment opportunities in terms of risk and return, and needs to include existing as well as new investments that do not require external financing (Lupia).

As the business world grows and changes from an industrial economy into an intellectual capital economy, intellectual capital is becoming more important than traditional factors of production: land, labor, and financial capital (Sagner, 2001). Finance managers are no longer limited to creating accounting and capital reports; instead, their role now includes almost every major business function. Because of increased competition, companies that are productive and efficient will need CFO's that understand as well as have constant interaction with, other departments, including customer and vendor affiliations. Without an assertive response to global competition loss in market share is probable. Increasing costs of debt and equity capital have pushed finance managers to be actively involved in business activities and decisions regarding the investment of capital in projects. As business functions within companies become more interconnected