Q. What goals should always motivate the actions of a firm's financial manager and why?
Answer: Please note that a minimum of 250 words is required on all responses to the discussion topic.
Also comment on at least two of your colleagues' postings (see below). The comments on your colleagues' postings have no minimum requirement.
1
According to our textbook, and restricting the financial manager to 'for-profit business,' mentality, the goal of financial managers would simply be, "to make money or add value for the owners." However, further expanding, the goal of financial managers and management should be to survive, avoid financial distress and bankruptcy, beat the competition, maintain steady earnings growth, maximize profits, minimize costs, maximize market share and maximize the current value of the company's stock. These are several goals and motivators for a firm's financial manager and their role.
The reason financial managers have the above goals, motivators and responsibilities are identified in our text because of two main reasons or classes those reasons fall into; profitability and controlling risk. Profitability involves sales, market share, and cost control; all which relate and help earnings and increasing a firm's profits. While, controlling risk involves a firm avoiding bankruptcy, maintaining stability and safety.
However, both of these two classes are a bit contradictory as pursing profits involves a level of risk, and according to our text, it's not possible to maximize both safety and profit, therefore it's really up to the financial manager to make sound decisions that increase the overall value of the stock and avoid poor decisions that decrease the value of the stock. The financial manager should always have in mind to maintain the uninterrupted overall financial health of their firm and make sure the firm has enough capital, and sources of capital, to accomplish their short term and long term goals. Further, the text clearly states, "there is no ambiguity in the criterion, and there is no short-run versus long run issue; the explicit goal is to maximize the current value of stock." Another way to state the goal for financial managers and firms is (for those firms who have no traded stock) is to simply 'maximize the market value of the existing owners' equity.'
2
Financial Manager is a person who is responsible for a significant corporate investment or financing decision of a firm. (But except in the smallest firms, no single person is responsible for all the decisions as responsibility is dispersed throughout the firm). In large corporations, separation of ownership and management is a practical necessity. There is no way that all of the shareholders, who are the actual owners of that company can get actively involved in management. That's where authority has to be delegated. But the question arises here, how shareholders can decide how to delegate decision making as Delegation can work only if all of the shareholders have a common objective. And fortunately there is a natural financial objective on which almost all shareholders agree: Maximize the current market value of shareholders' investment in the firm.
A smart and effective financial manager makes decisions that increase the current value of the company's shares and the wealth of its stockholders. The financial manager makes decisions for the stockholders of the firm. His goal is to maximize the current value per share of the existing stock and with this goal in mind; it doesn't matter whether the business is a proprietorship, a partnership, or a corporation, for each of these, good financial decisions increase the market value of the owners' equity and poor financial decisions decrease it. Managers who consistently ignore this objective are likely to be replaced. (Brealey, Myers & Marcus, 2009)
Also the financial manager must be concerned with the firm's long-term investments known as capital budgeting. In capital budgeting, the financial manager tries to identify investment opportunities those are worth more to the firm than they cost to acquire. This means that the value of the cash flow generated by an asset exceeds the cost of that asset.