Module 1 – Background The Role of the Financial Manager Required Reading Financial Managers (n.d.)..

Module 1 – Background

The Role of the Financial Manager

Required Reading

Financial Managers (n.d.) Retrieved from:http://www.ncbuy.com/careers/blsj/job010.html

Kowalski, R. B., & Campbell, M. W. (2000). Leadership skills help financial managers achieve career success. Healthcare Financial Management, 54(4), 50-52.

Optional Reading

Finance and Accounting. (n.d.) Retrieved from MBA.COM . Clickhere to browse. This website provides descriptions of finance careers.

A British description of the role of the financial manager, retrieved fromhere.

This article onWhat does it take to become a CFO is also a good information source.

It is always important, especially in a field like finance, to know what your words mean. Please refer to:About.com glossary of financial terms.

For a thorough job description of a financial manager, read thisarticle from the Bureau of Labor. This article discusses the nature of the work involved in the position, working conditions associated with this job, and many other aspects of being a financial manager.

This reading calledWhy Finance Matters is a short but good introductory article that will give you a good overview of the issues involved in being a financial manager. The focus of this article is on the decision making aspects of financial management.

On the extent to which CFO’s perform well as CEO’s see the following article below by Ida Picker, published in Institutional Investor, in 1989. Reflect on her arguments. Are these still relevant in today’s environment?

These articles below on financial managers are worth reading. They are available in Proquest.

Do CFOs Really Make Good CEOs
Institutional Investor; New York; Aug 1989; Picker, Ida;

Abstract:
With the proliferation of corporate takeovers, leveraged buyouts, and restructuring in the US, it would seem that chief financial officers (CFO) hold the keys to executive wisdom. Recruiters report a growing trend of grooming CFOs for chief executive officer (CEO) positions, with some estimating that nearly 25% of top corporate leaders are former CFOs. Analysts, academics, and headhunters agree that the ideal CEO communicates well, is adept at managing managers, understands the company’s product and operations, and provides a consistent vision. A recent survey by Management Practices Quarterly reveals that, of 83 new CEOs appointed in 1988, more than 18% came from operations-production backgrounds, some 23% had technical training, while only 14.4% had a financial background. D. Wayne Calloway, who became CEO of PepsiCo in May 1986, was formerly the company’s CFO and is probably the best example of the valuable experience CFOs can bring to the CEO position.

Leadership skills help financial managers achieve career success
Healthcare Financial Management; Westchester; Apr 2000; Robert B Kowalski; Manie W Campbell;

Abstract:
Financial managers who want to distinguish themselves and their organizations need to demonstrate their leadership ability. Because financial managers sometimes overlook the need for leadership skills, cultivating mentors who can teach them specific leadership skills, such as improved communications and entrepreneurship, may be necessary.
Health-care financial managers can sharpen their leadership skills by distinguishing between leadership and management, adopting a new mentoring model, evaluating the usefulness of new management techniques, understanding the connection between technology and leadership, looking for the solution beyond the problem, and being seen and heard within the organization.

Module 1 – Terms

The Role of the Financial Manager

Course Terms

The following financial terms may be useful in understanding corporate finance. Additional terms will be added to each Module. By course end, each of you will have built a basic financial vocabulary.

American Depository Receipt (ADR): A security issued in the United States representing shares of a foreign stock and allowing that stock to be traded in the United States.

Balance Sheet: A financial statement showing a firm’s accounting value at the close of business on a particular point in time.

Benefit/Cost Ratio: The present value of an investment’s future cash flows divided by its initial cost. Also called “profitability index.”

Beta Coefficient: The amount of systematic risk present in a particular risky asset relative to an average risky asset.

Business Risk: The equity risk that comes from the nature of the firm’s operating activities.

Capital Budgeting: The process of planning and managing a firm’s long-term investments.

Capital Intensity Ratio: A firm’s total assets divided by its sales, or the amount of assets needed to generate US $1 in sales.

Capital Rationing: The situation that exists if a firm has positive net present value projects but cannot find the necessary financing.

Capital Structure: The mixture of debt and equity maintained by a firm.

Cash Budget: A forecast of cash receipts and disbursements for the next planning period. Can be prepared for as little as a week or for as long as five years.

Contingency Planning: Taking into account the managerial options implicit in a project.

Cost of Capital: The minimum require return on a new investment.

Cost of Debt: The return that lenders require on the firm’s debt.

Cost of Equity: The return that equity investors require on their investment in the firm.

Discount: Calculate the present value of some future amount.

Discount Rate: The rate used to calculate the present value of future cash flows.

Discounted Cash Flow (DCF) Valuation: The process of evaluating an investment by discounting its future cash inflows to the present.

Economic Order Quantity (EOQ): The restocking quantity that minimizes the total inventory costs.

Economic Value Added (EVA): EVA is a tool for maximizing shareholder wealth. It is a method of measuring financial performance.

Exchange Rate: The price of one country’s currency expressed in terms of another country’s currency.

Exchange Rate Risk: The risk related to having international operations in a world where relative currency values vary.

Expected Return: Return on a risky asset expected in the future.

Financial Ratios: Relationships determined from a firm’s financial information and used for comparison purposes.

Financial Risk: The equity risk that comes from the financial policy (i.e., capital structure) of the firm.

Forecasting Risk: The possibility that errors in projected cash flows lead to incorrect decisions.

Future Value (FV): The amount that an investment is worth after one or more periods.

Generally Accepted Accounting Principles (GAAP): The common set of standards and procedures by which audited financial statements are prepared. Each country’s GAAP may differ.

Income Statement: Financial Statement summarizing a firm’s performance over a period of time.

Incremental Cash Flows: The difference between a firm’s future cash flows with a project or without the project.

Initial Public Offering (IPO): A company’s first equity issue made available to the general public.

Internal Rate of Return (IRR): the discount rate that makes the net present value (NPV) of an investment zero.

Just-in-Time (JIT) Inventory: A system for managing demand-dependent inventories that minimizes inventory holdings.

Marginal Tax Rate: Amount of tax payable on the next dollar earned.

Net Present Value (NPV): The difference between an investment’s market value and its cost.

Net Working Capital: Current assets less current liabilities.

Operating Cash Flow: Cash generated from a firm’s normal business activities.

Opportunity Cost: The most valuable alternative that is given up if a particular investment is undertaken.

Payback Period: The amount of time required for an investment to generate cash flows equal to its initial cost.

Political Risk: Risk related to changes in value that arise because of political actions.

Present Value (PV): The current value of future cash flows discounted at the appropriate discount rate.

Profitability Index (PI): the present value of an investment’s future cash flows divided by its initial cost.

Pro Forma Financial Statements: Financial statements projecting future years’ operations.

Purchasing Power Parity (PPF): The idea that exchange rate adjusts to keep purchasing power constant among currencies.

Risk Premium: The excess required from an investment in a risky asset over a risk-free investment.

Sensitivity Analysis: Investigation of what happens to net present value (NPV) when only one variable is changed.

Sources of Cash: A firm’s activities that generate cash.

Statement of Cash Flows: A firm’s financial statement that summarizes its sources and uses of cash over a specified period, usually one fiscal year.

Sunk Cost: A cost that has already been incurred and cannot be removed and, therefore, should not be considered in an investment decision.

Uses of Cash: A firm’s activities in which cash is spent.

Variance: The difference between the forecasted amount and the actual amount.

Weighted Average Cost of Capital (WACC): The weighted average cost of equity and the after-tax cost of debt.

Working Capital: A firm’s short-term assets and liabilities.

Zero Base Budgeting: A system whereby each manager must justify his/her budget above the amount necessary to operate the function.

Module 1 – Case

The Role of the Financial Manager

Assignment Overview

Due to the increasingly complex nature of corporate finance, more and more corporations are tapping their chief financial officer to become their chief executive officer. The CFO brings substantial financial expertise to the position of CEO. However, there may be other reasons why the CFO is not necessarily the best person to become the CEO.

Please note that the CFO must have an external orientation: After all, the company is owned by its shareholders and if the company is to operate so as to raise the value of the shares it must consider not only the internal structure of the organization, its products, competitors etc., but it must consider the interaction between what the company ‘does’, and the way the ‘market’ evaluates its performance. It is the combination of the two that plays a role in affecting the market price of the shares and shareholders value. The individuals who must have an eye on this are usually the CEO and the CFO.

Please read the articles below, which are both available in Proquest. You need to be logged onto Proquest in order to access the links. If the links don’t work you can look up the articles in Proquest using “publication search”.

How a CFO can graduate to CEO

Corporate Finance; London; Jun 1999; Janine Brewis

Abstract:
Positions of power within corporates are highly sought after, and today’s chief financial officers and finance directors are increasingly becoming aware that they now have a realistic opportunity of becoming CEO. Part of the reason for the trend towards recruiting CFOs who can behave as strategic partners is that the investor community looks much more critically at the business performance and management strengths and weaknesses of corporates. This strategic positioning gives them an opportunity to buff up their image, and make themselves seen as a more credible candidate to take over the CEO role.

Do CFOs Really Make Good CEOs

Institutional Investor; New York; Aug 1989; Picker, Ida

Abstract:
With the proliferation of corporate takeovers, leveraged buyouts, and restructuring in the US, it would seem that chief financial officers (CFO) hold the keys to executive wisdom. Recruiters report a growing trend of grooming CFOs for chief executive officer (CEO) positions, with some estimating that nearly 25% of top corporate leaders are former CFOs. Analysts, academics, and headhunters agree that the ideal CEO communicates well, is adept at managing managers, understands the company’s product and operations, and provides a consistent vision. A recent survey by Management Practices Quarterly reveals that, of 83 new CEOs appointed in 1988, more than 18% came from operations-production backgrounds, some 23% had technical training, while only 14.4% had a financial background. D. Wayne Calloway, who became CEO of PepsiCo in May 1986, was formerly the company’s CFO and is probably the best example of the valuable experience CFOs can bring to the CEO position.

Assignment Expectations

Read the two articles above, look for newer articles on the subject by browsing the web and then write a two-page paper answering the following question:

Do you think finance departments are the best place to train future CEOs? Provide two actual examples of CFOs of publicly-traded companies who became CEOs of publicly-traded companies within the past 5 years. Do these individuals have the CPA and/or CFA designations?

Include a discussion of both the pros and cons of hiring a CFO to be CEO. Try to cite at least three articles in your paper in support of your arguments in favor of and against hiring a CFO to be a CEO. Remember to include a reference list and to refer to the articles you use in the body of your paper.

Module 1 – SLP

The Role of the Financial Manager

Assignment Overview

For this assignment, go to theYahoo Stock Screener and use this page to find a publicly traded company that you find interesting and would like to study for this class. The company should not be a bank or a financial institution of any kind including insurance companies.

SLP Assignment Expectations

Write a two to three page paper discussing what you find interesting about this company, and whether or not you think this company will have a successful future. Get to the company’s web site, into the “investors relations” section and provide some financial highlights of your company for the past year. Indicate which stock exchange the company is listed on and what was the past 12 month rate of return (% gain or loss) to investors who bought shares of this company a year ago and sold the shares yesterday. This rate of return is called the one-year Holding Period Return, or HPR. Also state what is the most recent price of the shares on the company?

In addition discuss briefly some information about the top management team including the CEO and CFO. If there are any issues involved with the company that relate to the issues discussed in the case assignment, mention them briefly as well.

Module 1 Discussions

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CFO to CEO

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There has been a trend across corporate America of promoting financial officers to CEO. What are some advantages and disadvantages of this practice? (Based on the article of Financial Managers and other reading you may have done)

Do research on the Internet and show the reference for the information. Don’t forget to respond to a colleague’s posting also.

Professor’s Note: In addition to searching the Internet for text related to this threaded discussion, please watch the following videos (click on the following link to access these videos) and post your comments.

http://www.youtube.com/watch?v=E2GxuhDRVYg David Mudrick – CFOs Becoming CEOs

http://www.youtube.com/watch?v=y5HkWah-bfs Ron Gaboury – CFOs Becoming CEOs