Role of a Financial Manager

Running Head: The Role of the Financial Manager Paper

The Role of the Financial Manager

The role of the financial is to maximize a shareholder’s value. A shareholders’ wealth is represented by the market price of a firm’s common stock. The financial manager should seek to maximize the present value of the expected future returns to the owners of the firm. In an efficient market, a financial manager maximizes stock prices and identifies and implements projects that add value to the firm (i.e. projects that contribute more than they cost). Lastly, financial managers also raise financing by issuing financial instruments that cost less than the financing raised.

The financial manager of a firm is synonymous with financial planning. The basic components of financial planning comprise of the investment opportunities the firm elects to take advantage of, the amount of debt the firm chooses to employ, and the amount of cash the firm must decide upon for its growth and profitability (Anonymous, 2000).

The financial manager’s role starts from the flow of cash from investors to the firm and back to the investor again. Financial managers should always use the net present value (NPV) rule. The NPV rule is defined as the value of a dollar today to the value of that same dollar in the future, taking inflation and returns into account (Ross, et al). If the NPV of a prospective project is positive, it should be accepted. However, if NPV is negative, the project should probably be rejected because cash flows will also be negative. The manager, as a stockholder’s agent, is instructed to find and invest in all positive NPV projects open to the firm.

There can be other goals for the financial manager other than maximizing profit at net present value. The manager may decide to attempt to increase the next year’s profit at the expense of the profit in the later years. A firm may also be able to increase future profits by cutting its dividend and investing the cash. However, this is not in the shareholder’s best interest, as the firm will only earn a low return on the investment (Ross, et al).

There are some ethical dilemmas that may arise out of a financial manager’s responsibility to maximize shareholder value. A conflict will arise when the goals of the firm are not the same as the goals of the manager. A firm may be interested in showing maximized stock value and instruct the financial manager to construct the financial statements as such. This unethical and unlawful act often leaves the financial manager caught in a situation where upper management attempts to take little or no responsibility. Another dilemma occurs when the manager is only interested in maximizing their own salaries and perks through dishonest dealings. These actions are generally very costly to the firm and results in reduced value of the total firm over a period of time. Although there are ways to controlling potential conflicts, they cannot be completely eliminated or reduced.

Comparison Employee/Shareholder Viewpoint

The financial manager’s view point and that of an employee regarding the role of the financial manager and maximizing stockholder value may differ. In large businesses