Financial managers in Braintree are those people in organizations responsible for a range of investment or financing decisions. Typically, the Chief Financial Officer (CFO) is the key financial manager in the organization, and is typically responsible for two major activities: financial policy and corporate planning. The CFO reports to the Chief Executive Officer (CEO) of the organization who then reports to the Board of Directors for a publicly-traded company.
As seen in the figure below, the CFO usually has two direct subordinates: the Treasurer and the Controller.
As the names imply, the Treasurer is responsible for cash management, raising capital, and relationships with external banks for the purpose of determining financing and interest rates on loans, etc.
The Controller, on the other hand, is responsible for the preparation of financial statements, accounting, and the preparation of tax returns for the organization.
Two Major Decisions
The CFO is responsible for two major decisions in the organization:
- What assets the firm should invest in (also known as the capital budgeting decision)
- How such assets should be financed
These two major decisions reside with the leadership of the CFO, but as you see, both the treasurer and the controller have responsibilities for parts of these decisions.
What Should the Firm Invest In?
How does the CFO decide what assets the firm should invest in? This is a good question, and truly the crux of how organizations maintain profitability or do not. Constantly, the CFO’s focus must be on maximizing shareholder value. Any financial decision must be adequately tied to this objective.
If a company is considering whether or not to purchase capital equipment (say a new mold for a manufacturing line), the purchase decision must be tied to the costs and benefits associated with the decision. If the mold will contribute to long-term profitability (which then maximizes the shareholder return), the machinery should be purchased. If the CFO and his/her staff determine that the capital equipment is not profitable (and in a more general sense does not maximize value for the shareholder), then the purchase should not be made.
Typically, these types of decisions are rather complex and not as simple as presented here. Most companies have many paths that they can pursue to maximize value:
- Should the firm invest in more hardware as physical capital or should it invest its assets in the human capital side of the ledger?
- If either is chosen, how much investment should occur, and what is considered to be a reasonable timeframe for return on the investment?
- What discount rate should be used to appropriately value an investment (and corresponding returns)?
- What is the life of the asset?
- What are the tax implications for the project?
- If the firm has locations around the world, how is the cost of money (i.e. exchange rates) considered in the final analysis?
- Would other projects be more profitable than the one under consideration?
These are typical questions that a CFO and his or her staff must answer.
The CFO must consider alternative investments as well. In cases where different projects have different time horizons (different lives), the financial manager must be able to make the appropriate choice. The types of tools that we will explore in this course will help you make the best decisions.
From a personal perspective, the corporate financial decision process is no different than the decision process that we make as individuals in our personal lives: Should I buy a new car? If so, should it be Car “A” or Car “B?” What characteristics of the automobiles are most appealing to me and how do I value these various attributes?
If my main objective is functional transportation, than Car “A” may fit the bill; if I am interested in a vehicle that adds extra luxury and increases my consumer utility, I may choose Car “B.” Think about how typical these types of decisions are in your daily life.
How Will the Investment Be Financed?
After a project choice is made, financial managers in Braintree and throughout the rest of the UK must then decide how the firm will pay the initial cash outlay for the project. To obtain the money necessary for the investment, the firm may need to sell assets or financial securities like stocks or bonds.
When companies sell stock or issue bonds to investors, they are raising financial capital (money) to pay for firm operations and investments. The securities actually provide the investor a claim to the firm’s assets. In some cases, they may also provide dividends.
Instead of selling securities, financial managers in Braintree and throughout the rest of the UK may decide that it is more cost-effective for the firm to borrow money from a bank in the form of a loan. In this case, the firm would commit to pay the bank back in certain intervals at a specified interest rate.
Considering the car purchase example mentioned above, how would the individual pay for the new car? The consumer could take a loan from a bank to pay for it. This would mean that the borrower would enter into a contract with the bank that would pay the bank back at a certain interest rate over a certain timeframe. Perhaps the individual has a significant amount of cash (or could generate cash by selling other assets) and would rather pay with cash instead of taking a bank loan. Maybe the individual would consider asking a relative for a loan, as opposed to paying cash out of pocket or financing a loan through the bank.
We all make financing decisions in our daily lives, whether it be a car or a mortgage, vacation, etc. Financing is a key decision that must be determined once a consumer decides to purchase an item.
So how do financial managers in Braintree and throughout the rest of the UK choose between different methods of financing? The answer lies in what is most beneficial to the firm. If the financial manager determines that it is more cost effective for the firm to borrow money from a bank as opposed to selling stock or bonds to finance the project, then the most prudent thing to do would be to borrow the money.
These types of decisions are made by comparing variables such as interest rates, payback timeframes, liquidity of the financial assets, and other considerations that would provide a distinct comparison between methods.
As you examine the following figure, consider the wide range of variables and choices financial managers in Braintree and throughout the rest of the UK must deal with to make the most effective decisions. In some ways, the financial manager’s role is that of a mediator between the financial markets and the firm’s operations.
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