Principals of Finance Term Paper

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Finance

The financial manager of a firm deals specifically with the acquisition, financing, and management of assets with the overall financial security and profitability of the firm as his goal. Decisions concerning what are the best types of financing, the best financing mix; the appropriate dividend policy and how the funds will be physically acquired are all the responsibility of the financial manager. The financial manager has different degrees of operating responsibility over the firm's assets with a greater emphasis on current asset management rather than fixed asset management.

Responsibilities of the financial manager also include capital budgeting, cash management, credit management, dividend disbursement, financial analysis and planning, pension management, insurance/risk management, and tax analysis and planning through cost accounting, cost management, governmental reporting, internal control, the preparation of financial statements, and preparing budgets and financial forecasts.

The overall goal of the firm is the maximization of shareholder wealth and profit maximization or maximizing the firm's earnings after taxes. There are risks involved in both perspectives. In maximizing shareholder wealth there is the possibility of increasing current profits while harming the firm through deferring maintenance, issuing common stock to purchase treasury bills, and ignoring changes in the risk level of the firm. Problems associated with profit maximization include the ignoring of changes in the risk level of the firm, a zero payout dividend policy, and it does not specify timing or the duration of expected returns.

Shareholder wealth maximization takes into account the current and future profits and EPS, the timing, duration, and risk of profits and EPS, dividend policy, and other factors. Profit maximization does not prohibit the firm from being socially responsible.

The DuPont system of financial control enables the financial manager to show profitability through a return on assets.

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This is determined by dividing the firm's net income for the past 12 months by the total average assets. The result is a percentage which can then be shown as a return on sales or net income of sales multiplied by asset utilization or sales of assets.

Accounting practices within the firm must take into consideration inflation, disinflation, and estimation. A clause in a contract provides for increases and decreases in inflation depending on the fluctuations in the firm's cost of living wages and production costs. Securities such as bonds or notes guarantee a higher return than the rate of inflation if the security is held to maturity.

The percentage-of-sales method calls for the budgeting based on a percent of a sales figure, such as past sales, anticipated sales, or a combination of both. The percentage-of-sales is the most commonly used method when preparing the firm's advertising budget.

In the breakeven analyses method, the firm can determine increased sales in order to gain a profit if the product price is discounted. It may be used to show that an increased price with subsequent reduced sales may prove to be a better strategy for the firm in achieving a profit.

Of critical importance to the firm is working capital management. Financial managers spend about 70% of their time managing the short-term accounts of the firm such as current assets and current liabilities. There are several methods in which the financial manager can administer working capital including through cash conversion or the time between paying for inventory and collecting on receivables; using the time between ordering materials and collecting cash from receivables wisely; the accounts receivable period or the average time….....

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