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What are the Roles and Responsibilities of a Financial Manager?
The roles and responsibilities of a financial manager were very limited in the past, about three to four decades back. However, in the modern day, the finance managers not only control the spending and the accounts, but they play a major role in directing the organization’s efforts to synchronize all of the activities of a company.
However, depending on the depth of functionalities and their importance, the financial managers perform two main functions −
Allocation of funds which is an investment decision.
Generation of funds which is a financial decision.
These functions are guided by the finance theory which makes two assumptions to let the finance managers perform their duties meaningfully.
Assumption 1 − The first assumption is that the shareholders are the main owners of a company and so their interests must be addressed first by the financial managers.
If there is a profit made by the company from operations, the money should be distributed to the shareholders in the form of dividends if the company decides to pay dividends to shareholders. The financial managers of a company, therefore, should act as an agent of the shareholders.
The act of satisfying the needs of shareholders, however, does not go in vain. In fact, the investment a company makes in terms of dividend payment makes it more attractive to the shareholders. Therefore, shareholders tend to support the organization in case of any future needs.
A company that looks after shareholders is considered financially sound. So, they are treated better by the shareholders in the markets.
Assumption 2 − The second assumption is to be considered by the financial managers is that the capital markets are efficient in all manners.
An efficient capital market has all required information available to all participants in the market. Moreover, it has no cost of transaction and the buying and selling of shares by an individual investor cannot influence the market. In other words, a capital market is efficient to the most probable extent possible and all participants are treated in the same manner in the efficient markets.
An efficient capital market makes lending and borrowing easier. It makes investors able to invest and consume according to their own needs. Consumption is usually postponed by lending while borrowing brings it forward. The separation of consumption and investment is known as Fisher Separation Theorem which implies that financial decision-making can be delegated to financial managers.
Managers’ Duties in Real Market Situations
It is generally observed that although finance theory assumes that the capital markets are efficient and free from loopholes, in reality, they are not so. There are many imperfections in the markets and this creates opportunities for the managers to build and plan strategies to increase the shareholders’ wealth. The financial manager of the present time is surrounded by a lot of functions. They are as follows −
Understanding the real condition of markets
The assumption that the capital markets are perfect is not true. There are many drawbacks in real capital markets that can be utilized by financial managers to create and expand shareholders’ wealth. Therefore, managers must know how to deal with the capital markets to maximize shareholders’ wealth.
Utilizing the information gap
The second consideration is that all the participants in the market have all the information required to deal in shares of a particular company. In fact, managers do not know or know the insider information selectively which can be used as a boon for investing in securities in the market.
Minimizing the costs involved
The third truth about real capital markets is that there is a cost in dealing with shares in the markets. The financial managers must know these costs and deal with the opportunities in a manner so that the costs are minimized.
Utilization of Market Imperfections
The market imperfections are present in all capital markets irrespective of the markets’ location and technologies used. Some of the imperfections that are found universally in capital markets include information gaps, taxes, bankruptcy costs, signaling effects, agency costs, etc.
These imperfections should be utilized by finance managers in order to achieve maximum benefit for their shareholding pattern. The managers should know the market conditions and when and how to invest or divest money. Knowing the patterns of growth, an opportune time to invest in shares that have potential, and making own shares attractive in the markets are some duties that stem from imperfections.
Conclusion
Although financial managers need to pay attention to the most important duties to allocate funds and generate funds from the market, they can also get engaged in utilizing market imperfections in order to get success in following the duties. The ultimate aim of a company is to earn profits and the financial managers can play a big role in this by utilizing their skills and knowledge.
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