The primary goal of a finance manager is to manage the cash flow. Generally, the finance manager is an intermediary between the investor and the firm’s operations. In addition, the finance manager is responsible for seeing that the operational needs are financed from operating sources to avoid any mismatch.
Depending upon the agreement between the firm’s finance manager and a third-party contract, the terms of services provided will either be paid in cash, credit, or a partial mix of both. This payment-type agreement is essential when the finance manager accounts for account receivables, inventory purchases, and account payables.
The finance manager needs to consider the terms for payment or receipt, such as 30 days, 60 days, and 90 days. Essentially, they are responsible for cash management, credit management, capital expenditure management, and capital budgeting.
Concerning goals on a macro level, they are also responsible for creating value for money for the firm’s shareholders. As earlier stated, the finance manager, acting as a bridge to shareholders, must have complete knowledge and awareness regarding investment decisions, capital budgeting, valuation of securities, and risk associated with the financial contracts.
In simple terms, the cash flow of the firm comprises many facets. Money is raised from the investors by sowing in more equity, loan subordination, or selling financial assets (such as bonds, shares, stocks, and warrants). It could also be regarding tangible and intangible assets (brand name) investment—cash generated from operations.
In essence, the sales are deduced through working capital budgeting, such as how many products were sold, the cost of goods sold, and the operating expenses and operating income. Then, while calculating cash flows, we must add the non-expense amount to the net profit to see how much cash was generated.
It is vital to remember that an increase in accounts receivable and inventory decreases cash and needs to be deducted regarding operating needs. Put. It is cash-outflow. Simultaneously, an increase in accounts payable is an increase in cash inflow. This is how the working capital cycle is assessed in a cash flow statement.
Last but not least, it is inherent that the finance manager should also match the cash flows with the repayment of financial obligations (such as loan payments and interest). On the other hand, it is at the discretion of the top management that investment is paid either out, in terms of dividend payments, or resort to capital gains).
Thirdly, the valuation of assets (tangible and intangible) is ascertained by its cash flows, as it incorporates both the traits of the time value of money and risk premium. In a free market, the valuation of the asset can be ascertained through demand and supply.
Budgeting
It is a tool the finance manager provides to decide which investments are high-yielding and less risky. Such projects are credible to generate future cash flows for many years. The choice to say yes or no to a project on Capital Budgeting largely depends on evaluating the cash flows generated by the project and related expenses. Mainly, there are only three things that the top management looks at while making decision-related to Capital Budgeting:
Payback
In essence, the Payback Period is associated with recovering the initial cost of a Capital Budgeting project. Following this process, decision-making is relatively easier and quicker if the payback period is less than the projected one and is typically accepted.
Net Present Value
While working on the Capital Budgeting project, the Net Present Value (NPV) implies the project’s anticipated influence on the company’s value. Therefore, a capital Budgeting project yielding a positive NPV is expected to elevate the company’s value.
A project with a positive NPV should be a good factor in the decision-making process. To calculate the NPV, one must subtract the project’s cash inflows from the present value of the project’s cash outflows.
Rate of Return
Simply put, the Internal Rate of Return (IRR) of any project related to Capital Budgeting is the base rate where NPV equals zero. Therefore, the investors’ decision should be favorable if the IRR is greater than the cost of capital.
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