A financial manager plays a crucial role in managing a firm's finances and making decisions to maximize profits and wealth for the firm and its shareholders. There are two main approaches that a financial manager can use: the accrual method and the cash flow method.
1. Accrual method: This approach focuses on recognizing revenue and expenses when they are earned or incurred, regardless of when the actual cash is received or paid. By using the accrual method, the financial manager aims to accurately match revenue with the expenses incurred to generate that revenue. This method helps in providing a more accurate picture of the firm's financial performance and profitability.
2. Cash flow method: This approach emphasizes the actual inflows and outflows of cash in the firm. The financial manager focuses on maximizing cash flow, which is the net amount of cash generated from operating activities, investing activities, and financing activities. Maximizing cash flow helps in ensuring that the firm has enough liquidity to meet its short-term obligations and invest in growth opportunities.
In terms of the objective, the financial manager can focus on either maximizing profits for the firm or maximizing wealth for its shareholders.
- Maximization of profits for the firm: The financial manager's goal is to increase the firm's profitability by increasing revenues, reducing expenses, and managing costs effectively. This objective is beneficial for the firm's long-term sustainability and growth.
- Maximization of wealth for shareholders: The financial manager's objective is to increase the value of the firm, which directly benefits the shareholders. This can be achieved through strategies such as increasing the firm's market share, improving profitability, and making wise investment decisions.
Overall, a financial manager's role involves utilizing the accrual or cash flow method while focusing on either maximizing profits for the firm or maximizing wealth for its shareholders. These approaches and objectives work together to ensure the financial success and sustainability of the firm.
(214 words)