FINANCIAL ANALYSIS : What is corporate finance?
The financial manager has three main roles:
- To ensure the company has enough funds to finance its expansion and meet its obligations. To do this, the company issues securities (equity and debt) and the financial manager sells them to financial investors at the highest possible price. In today's capital market economy, the role of the financial manager is less a buyer of funds, with an objective to minimise cost, and more a seller of financial securities. By emphasising the financial security, we focus on its value, which combines the notions of return and risk. We thereby de-emphasise the importance of minimising the cost of financial resources, because this approach ignores the risk factor. Casting the financial manager in the role of salesman also underlines the marketing aspect of his job, which is far from theoretical. He has customers (investors) that he must convince to buy the securities his company issues. The better he understands their needs, the more successful he will be.
- To ensure that over the long run the company uses the resources investors put at its disposal to generate a rate of return at least equal to the rate of return the investors require. If it does, the company creates value. If it does not, it destroys value. If it continues to destroy value, investors will turn their backs on the company and the value of its securities will decline. Ultimately, the company will have to change its senior managers, or face bankruptcy.
- To identify and manage the financial risks the company is facing.
In his first role, the financial manager transforms the company's real assets into financial assets. He must maximise the value of these financial assets while selling them to the various categories of investors.
His second role is a thankless one. He must be a “party-pooper”, a “Mr No” who examines every proposed investment project under the microscope of expected returns and advises on whether to reject those that fall below the cost of funds available to the company. But it is also the job of a strategist who may go as far as to challenge the current perimeter of the company's activities.
In his last role, the financial manager guarantees that the operational performance of the company is not spoiled by financial events.