Report on The Role of Managerial Finance

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REPORT ON
The Role of Managerial
Finance

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Principle of Finance
Course Code: Bus104
Submitted To
MS. RUMANA FERDOUSE
Assistant Professor
Green Business School
Submitted By
NO Members Name ID Signature
1 SHAJAHAN TIPU 173006011
2 Md. Mihad Ali 182006054
3 Kamrun Nahar 181006069
4 Fahmida Khayr Mim 172006027
5 Maliha Jahan 173006046
From Green Business School
Submission Date: December 17, 2018

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Letter of Transmittal
December 17, 2018
MS. RUMANA FERDOUSE
Assistant Professor
Green Business School
Subject: Application for submitting the report on The Role of Managerial Finance
Dear Sir,
We beg most respectfully to state that, for the fulfillment of the course assignment, we have
prepared a report on The Role of Managerial Finance.
We have written this report based on our exposure in overall Role of Managerial Finance. It
is a great pleasure for us to present you this report. We shall be glad if the Report can serve
its purpose and we are ready to explain anything to you if you feel necessary.
Thanking You,
Yours Sincerely,
Shajahan Tipu
ID: 173006011
On behalf of the Group

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Acknowledgement
First, we would like to express our gratitude to almighty ALLAH to give us
the strength to complete the Report within the stipulated time.
We are deeply indebted to our Academic Supervisor MS. RUMANA FERDOUSE
For her whole-hearted supervision. Her suggestions and comments were
really a great source of spirit to make the Report a good one.
December, 2018
On behalf of the Group
Shajahan Tipu
ID: 173006011
Student of BBA
Green Business School

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Table of Contents
SL No. Name of Contents Page No.
1 Executive summery 6
2 Abstract 6
3 What is Finance 7
4
The Primary Areas of Business Finance
7-9
5 The Importance of Finance 9-10
6 The Role of Financial Managers 10-12
7 Types of Financial Managers 12-13
8 Forms of Business Organization 13
9 Goals of Financial Management 14-16
10 The Agency Problem 17-18
11 Conclusion 18
12 References 19

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Executive Summary
The main objective of this report is to sum up our course report job and to be familiar with
practical aspect of the theoretical knowledge gained in a classroom. This report is prepared as
per fulfillment of the requirements of the Principle of Finance Course report.
This is mainly focused on the Role of Managerial Finance. We thought this topic is
interesting and appropriate for studying and writing a report.
We believe that this report will enable the reader to understand in an easy way.
Abstract
An organization’s Managerial Finance plays a critical role in the financial success of a
business. Therefore, an organization should consider financial management a key component
of the general management of the organization. Financial management includes the tactical
and strategic goals related to the financial resources of the business. In these competitive days
financial management has to face many challenges and the financial managers have to take
innovative decisions for leading the concern towards success.

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What is Finance?
Finance is defined as the management of money and includes activities like investing,
borrowing, lending, budgeting, saving, and forecasting. There are three main types of
finance: (1) personal, (2) corporate, and (3) public/government.
Finance Examples
The easiest way to define finance is by providing examples of the activities it includes. There
are many different career paths and jobs that perform a wide range of finance activities.
Below is a list of the most common examples.
Finance examples:
 Investing personal money in stocks, bonds, or guaranteed investment certificates
(GICs)
 Borrowing money from institutional investors by issuing bonds on behalf of a public
company
 Lending money to people by providing them a mortgage to buy a house with
 Using Excel spreadsheets to build a budget and financial model for a corporation
 Saving personal money in a high-interest savings account
 Developing a forecast for government spending and revenue collection
The Primary Areas of Business Finance
Finance is one of the most important functional areas of business and within a firm. It joins
other functional areas like marketing, operations technology, and management as key areas of
business. Business owners and business managers have to have at least a basic understanding
of finance even if they outsource certain areas of their financial operations. The goal of this
article is to help you understand the three areas of finance and their relationship to your
company.
Primary Areas of Business Finance
There are three primary areas of business finance, which include:
1. Corporate Finance
2. Investments
3. Financial Markets and Institutions
4. International Finance
While there is some overlap, each of these areas also covers distinct aspects of managing the
financials of a business.

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Corporate Finance
Corporate finance is the area of finance dealing with monetary decisions that business
enterprises make and the tools and analysis used to make those decisions. The primary goal
of corporate finance is to maximize shareholder value. Although it is in principle different
from managerial finance, which studies the financial decisions of all firms, rather than
corporations alone, the main concepts in the study of corporate finance are applicable to
financial problems of all kinds of firms.
The discipline can be divided into long-term and short-term decisions and techniques. Capital
investment decisions are long-term choices about which projects receive investment, whether
to finance that investment with equity or debt, and when or whether to pay dividends to
shareholders. On the other hand, short-term decisions deal with the short-term balance of
current assets and current liabilities; the focus here is on managing cash, inventories, short-
term borrowing, and lending (such as the terms on credit extended to customers).
The terms corporate finance and corporate financier are also associated with investment
banking. The typical role of an investment bank is to evaluate the company’s financial needs
and raise the appropriate type of capital that best fits those needs. Thus, the terms “corporate
finance” and “corporate financier” may be associated with transactions in which capital is
raised in order to create, develop, grow, or acquire businesses.
Investments
Another area of finance is investments. Within a business, particularly a large business, the
firm may invest in assets ranging from short-term securities to long-term securities like
stocks and bonds. The business invests for the same reason individuals invest—to earn a
return.
Companies invest in both financial assets such as stocks of other firms and in physical assets
such as buying a new building or new equipment.
Financial Markets and Institutions
Financial markets and financial institutions comprise the third area of business finance.
Financial markets include everything from the stock and bond markets, the primary and
second markets, and the money and capital markets.
Financial markets, such as the stock market, help facilitate the transfer of funds between
savers of funds and users of funds. Savers are usually households, and users are generally
businesses and the government. The stock market, for instance, provides a seamless exchange
of ownership of a company between one person or business and another.

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International Finance
International finance sometimes known as international macroeconomics – is a section
of financial economics that deals with the monetary interactions that occur between two or
more countries. This section is concerned with topics that include foreign direct
investment and currency exchange rates. International finance also involves issues pertaining
to financial management, such as the political and foreign exchange risk that comes with
managing multinational corporations.
The financial institutions work hand in hand with the financial markets. Financial institutions
generally act as intermediaries that help make transfers of funds between businesses and
savers (working as a broker or agent for the trade). For example, an individual might deposit
money into a savings account. Then, the financial institution would take that money and loan
it out to a business.
The Importance of Finance
Finance involves the evaluation, disclosure, and management of economic activity and is
crucial to the successful operation of firms and markets.
Differentiate between managerial finance and corporate finance
Key Points
 The primary goal of corporate finance is to maximize shareholder value and it deals
with the monetary decisions that business enterprises make.
 Managerial finance is interested in the internal and external significance of a firm’s
financial figures.
 The terms corporate finance and corporate financier are also associated with
investment banking. The typical role of an investment bank is to evaluate a
company’s financial needs and raise the appropriate type of capital that best fits those
needs.
 Sound financial management creates value and organizational ability through the
allocation of scarce resources.
Key Terms
 Dividends: Dividends are payments made by a corporation to its shareholder members.
It is the portion of corporate profits paid out to stockholders.
The Importance of Finance
Finance involves the evaluation, disclosure, and management of economic activity and is
crucial to the successful and efficient operation of firms and markets.

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Managerial Finance
Managerial finance concerns itself with the managerial significance of finance. It is focused
on assessment rather than technique. For instance, in reviewing an annual report, one
concerned with technique would be primarily interested in measurement. They would ask: is
money being assigned to the right categories? Were generally accepted accounting principles
(GAAP) followed?
A person working in managerial finance would be interested in the significance of a firm’s
financial figures measured against multiple targets such as internal goals and competitor
figures. They may look at changes in asset balances and probe for red flags that indicate
problems with bill collection or bad debt as well as analyze working capital to anticipate
future cash flow problems.
Sound financial management creates value and organizational ability through the allocation
of scarce resources amongst competing business opportunities. It is an aid to the
implementation and monitoring of business strategies and helps achieve business objectives.
The Role of Financial Managers
Financial managers ensure the financial health of an organization through investment
activities and long-term financing strategies.
Key Points
Financial managers perform data analysis and advise senior managers on profit -maximizing
ideas.
The role of the financial manager, particularly in business, is changing in response to
technological advances that have significantly reduced the amount of time it takes to produce
financial reports.
Types of financial managers include controllers, treasurers, credit managers, cash managers,
risk managers and insurance managers.
Key Terms
Net present value: The present value of a project or an investment decision determined by
summing the discounted incoming and outgoing future cash flows resulting from the
decision.
The Role of Financial Managers
Overview
Financial managers perform data analysis and advise senior managers on profit-maximizing
ideas. Financial managers are responsible for the financial health of an organization. They
produce financial reports, direct investment activities, and develop strategies and plans for the
long-term financial goals of their organization.
Financial managers typically:
 Prepare financial statements, business activity reports, and forecasts,

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 Monitor financial details to ensure that legal requirements are met,
 Supervise employees who do financial reporting and budgeting,
 Review company financial reports and seek ways to reduce costs,
 Analyze market trends to find opportunities for expansion or for acquiring other
companies,
 Help management make financial decisions.
The role of the financial manager, particularly in business, is changing in response to
technological advances that have significantly reduced the amount of time it takes to produce
financial reports. Financial managers’ main responsibility used to be monitoring a company’s
finances, but they now do more data analysis and advice senior managers on ideas to
maximize profits. They often work on teams, acting as business advisors to top executives.
Financial Statements: This is an example of a financial statement that financial managers
are responsible for preparing and interpreting.
Financial managers also do tasks that are specific to their organization or industry. For
example, government financial managers must be experts on government appropriations and
budgeting processes, and healthcare financial managers must know about issues in healthcare
finance. Moreover, financial managers must be aware of special tax laws and regulations that
affect their industry.
Capital Investment Decisions
Capital investment decisions are long-term corporate finance decisions relating to fixed assets
and capital structure. Decisions are based on several inter-related criteria. Corporate
management seeks to maximize the value of the firm by investing in projects which yield a
positive net present value when valued using an appropriate discount rate in consideration of
risk. These projects must also be financed appropriately. If no such opportunities exist,
maximizing shareholder value dictates that management must return excess cash to
shareholders (i.e., distribution via dividends). Capital investment decisions thus comprise an
investment decision, a financing decision, and a dividend decision.

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Management must allocate limited resources between competing opportunities (projects) in a
process known as capital budgeting. Making this investment decision requires estimating the
value of each opportunity or project, which is a function of the size, timing and predictability
of future cash flows.
Achieving the goals of corporate finance requires that any corporate investment be financed
appropriately. The sources of financing are, generically, capital self-generated by the firm
and capital from external funders, obtained by issuing new debt or equity.
Types of Financial Managers
There are distinct types of financial managers, each focusing on a particular area of
management.
Controllers direct the preparation of financial reports that summarize and forecast the
organization’s financial position, such as income statements, balance sheets, and analyses of
future earnings or expenses. Controllers also are in charge of preparing special reports
required by governmental agencies that regulate businesses. Often, controllers oversee the
accounting, audit, and budget departments. Treasurers and finance officers direct their
organization’s budgets to meet its financial goals and oversee the investment of funds. They
carry out strategies to raise capital and also develop financial plans for mergers and
acquisitions.
Credit managers oversee the firm’s credit business. They set credit-rating criteria, determine
credit ceilings, and monitor the collections of past-due accounts. Cash managers monitor and
control the flow of cash that comes in and goes out of the company to meet the company’s
business and investment needs. Risk managers control financial risk by using hedging and
other strategies to limit or offset the probability of a financial loss or a company’s exposure to
financial uncertainty. Insurance managers decide how best to limit a company’s losses by
obtaining insurance against risks such as the need to make disability payments for an
employee who gets hurt on the job or costs imposed by a lawsuit against the company.
Important Skills for Financial Managers
Analytical skills. Financial managers increasingly assist executives in making decisions that
affect the organization, a task for which they need analytical ability.
Communication: Excellent communication skills are essential because financial managers
must explain and justify complex financial transactions.
Attention to detail: In preparing and analyzing reports such as balance sheets and income
statements, financial managers must pay attention to detail.
Math skills: Financial managers must be skilled in math, including algebra. An
understanding of international finance and complex financial documents also is important.
Organizational skills: Financial managers deal with a range of information and documents.
They must stay organized to do their jobs effectively

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Forms of Business Organization
These are the basic forms of business ownership:
1. Sole Proprietorship
A sole proprietorship is a business owned by only one person. It is easy to set-up and is the
least costly among all forms of ownership.
The owner faces unlimited liability; meaning, the creditors of the business may go after the
personal assets of the owner if the business cannot pay them.
The sole proprietorship form is usually adopted by small business entities.
2. Partnership
A partnership is a business owned by two or more persons who contribute resources into the
entity. The partners divide the profits of the business among themselves.
In general partnerships, all partners have unlimited liability. In limited
partnerships, creditors cannot go after the personal assets of the limited partners.
3. Corporation
A corporation is a business organization that has a separate legal personality from its owners.
Ownership in a stock corporation is represented by shares of stock.
The owners (stockholders) enjoy limited liability but have limited involvement in the
company's operations. The board of directors, an elected group from the stockholders,
controls the activities of the corporation.
In addition to those basic forms of business ownership, these are some other types of
organizations that are common today:
Limited Liability Company
Limited liability companies (LLCs) in the USA, are hybrid forms of business that have
characteristics of both a corporation and a partnership. An LLC is not incorporated; hence, it
is not considered a corporation.
Nonetheless, the owners enjoy limited liability like in a corporation. An LLC may elect to be
taxed as a sole proprietorship, a partnership, or a corporation.
Cooperative
A cooperative is a business organization owned by a group of individuals and is operated for
their mutual benefit. The persons making up the group are called members. Cooperatives may
be incorporated or unincorporated.
Some examples of cooperatives are: water and electricity (utility) cooperatives, cooperative
banking, credit unions, and housing cooperatives.

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Goals of Financial Management
All businesses aim to maximize their profits, minimize their expenses and maximize their
market share. Here is a look at each of these goals.
Maximize Profits A company's most important goal is to make money and keep it. Profit-
margin ratios are one way to measure how much money a company squeezes from its total
revenue or total sales.
There are three key profit-margin ratios: gross profit margin, operating profit margin and net
profit margin.
1. Gross Profit Margin
The gross profit margin tells us the profit a company makes on its cost of sales or cost of
goods sold. In other words, it indicates how efficiently management uses labor and supplies
in the production process.
Gross Profit Margin = (Sales - Cost of Goods Sold)/Sales
Suppose that a company has $1 million in sales and the cost of its labor and materials
amounts to $600,000. Its gross margin rate would be 40% ($1 million - $600,000/$1 million).
The gross profit margin is used to analyze how efficiently a company is using its raw
materials, labor and manufacturing-related fixed assets to generate profits. A higher margin
percentage is a favorable profit indicator.
Gross profit margins can vary drastically from business to business and from industry to
industry. For instance, the airline industry has a gross margin of about 5%, while the software
industry has a gross margin of about 90%.
2. Operating Profit Margin
By comparing earnings before interest and taxes (EBIT) to sales, operating profit margins
show how successful a company's management has been at generating income from the
operation of the business:
Operating Profit Margin = EBIT/Sales
If EBIT amounted to $200,000 and sales equaled $1 million, the operating profit margin
would be 20%.
This ratio is a rough measure of the operating leverage a company can achieve in the conduct
of the operational part of its business. It indicates how much EBIT is generated per dollar of
sales. High operating profits can mean the company has effective control of costs, or that

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sales are increasing faster than operating costs. Positive and negative trends in this ratio are,
for the most part, directly attributable to management decisions.
Because the operating profit margin accounts for not only costs of materials and labor, but
also administration and selling costs, it should be a much smaller figure than the gross
margin.
3. Net Profit Margin
Net profit margins are those generated from all phases of a business, including taxes. In other
words, this ratio compares net income with sales. It comes as close as possible to summing up
in a single figure how effectively managers run the business:
Net Profit Margins = Net Profits after Taxes/Sales
If a company generates after-tax earnings of $100,000 on its $1 million of sales, then its net
margin amounts to 10%.
Often referred to simply as a company's profit margin, the so-called bottom line is the most
often mentioned when discussing a company's profitability?
Again, just like gross and operating profit margins, net margins vary between industries. By
comparing a company's gross and net margins, we can get a good sense of its non-production
and non-direct costs like administration, finance and marketing costs.
For example, the international airline industry has a gross margin of just 5%. Its net margin is
just a tad lower, at about 4%. On the other hand, discount airline companies have much
higher gross and net margin numbers. These differences provide some insight into these
industries' distinct cost structures: compared to its bigger, international cousins, the discount
airline industry spends proportionately more on things like finance, administration and
marketing, and proportionately less on items such as fuel and flight crew salaries.
In the software business, gross margins are very high, while net profit margins are
considerably lower. This shows that marketing and administration costs in this industry are
very high, while cost of sales and operating costs are relatively low.
When a company has a high profit margin, it usually means that it also has one or more
advantages over its competition. Companies with high net profit margins have a bigger
cushion to protect themselves during the hard times. Companies with low profit margins can
get wiped out in a downturn. And companies with profit margins reflecting a competitive
advantage are able to improve their market share during the hard times, leaving them even
better positioned when things improve again.
Like all ratios, margin ratios never offer perfect information. They are only as good as the
timeliness and accuracy of the financial data that gets fed into them, and analyzing them also
depends on a consideration of the company's industry and its position in the business cycle.
Margins tell us a lot about a company's prospects, but not the whole story

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Minimize Costs
Companies use cost controls to manage and/or reduce their business expenses. By identifying
and evaluating all of the business's expenses, management can determine whether those costs
are reasonable and affordable. Then, if necessary, they can look for ways to reduce costs
through methods such as cutting back, moving to a less expensive plan or changing service
providers. The cost-control process seeks to manage expenses ranging from phone, internet
and utility bills to employee payroll and outside professional services.
To be profitable, companies must not only earn revenues, but also control costs. If costs are
too high, profit margins will be too low, making it difficult for a company to succeed against
its competitors. In the case of a public company, if costs are too high, the company may find
that its share price is depressed and that it is difficult to attract investors.
When examining whether costs are reasonable or unreasonable, it's important to consider
industry standards. Many firms examine their costs during the drafting of their annual
budgets.
Maximize Market Share
Market share is calculated by taking a company's sales over a given period and dividing it by
the total sales of its industry over the same period. This metric provides a general idea of a
company's size relative to its market and its competitors. Companies are always looking to
expand their share of the market, in addition to trying to grow the size of the total market by
appealing to larger demographics, lowering prices or through advertising. Market share
increases can allow a company to achieve greater scale in its operations and improve
profitability.
The size of a market is always in flux, but the rate of change depends on whether the market
is growing or mature. Market share increases and decreases can be a sign of the relative
competitiveness of the company's products or services. As the total market for a product or
service grows, a company that is maintaining its market share is growing revenues at the
same rate as the total market. A company that is growing its market share will be growing its
revenues faster than its competitors. Technology companies often operate in a growth market,
while consumer goods companies generally operate in a mature market.
New companies that are starting from scratch can experience fast gains in market share. Once
a company achieves a large market share, however, it will have a more difficult time growing
its sales because there aren't as many potential customers available.
The Agency Problem
An agency relationship occurs when a principal hires an agent to perform some duty. A
conflict, known as an "agency problem," arises when there is a conflict of interest between
the needs of the principal and the needs of the agent.
In finance, there are two primary agency relationships:
Managers and stockholders
Managers and creditors

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1. Stockholders versus Managers
If the manager owns less than 100% of the firm's common stock, a potential agency problem
between mangers and stockholders exists.
Managers may make decisions that conflict with the best interests of the shareholders. For
example, managers may grow their firms to escape a takeover attempt to increase their own
job security. However, a takeover may be in the shareholders' best interest.
2. Stockholders versus Creditors
Creditors decide to loan money to a corporation based on the riskiness of the company, its
capital structure and its potential capital structure. All of these factors will affect the
company's potential cash flow, which is a creditors' main concern.
Stockholders, however, have control of such decisions through the managers.
Since stockholders will make decisions based on their best interests, a potential agency
problem exists between the stockholders and creditors. For example, managers could borrow
money to repurchase shares to lower the corporation's share base and increase shareholder
return. Stockholders will benefit; however, creditors will be concerned given the increase in
debt that would affect future cash flows.
Motivating Managers to Act in Shareholders' Best Interests
There are four primary mechanisms for motivating managers to act in stockholders' best
interests:
1. Managerial Compensation
Managerial compensation should be constructed not only to retain competent managers, but
to align managers' interests with those of stockholders as much as possible.
This is typically done with an annual salary plus performance bonuses and company shares.
Company shares are typically distributed to managers either as:
Performance shares, where managers will receive a certain number shares based on the
company's performance
Executive stock options, which allow the manager to purchase shares at a future date and
price. With the use of stock options, managers are aligned closer to the interest of the
stockholders as they themselves will be stockholders.
2. Direct Intervention by Stockholders: Today, the majority of a company's stock is owned
by large institutional investors, such as mutual funds and pensions. As such, these large
institutional stockholders can exert influence on mangers and, as a result, the firm's
operations.

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3. Threat of Firing: if stockholders are unhappy with current management, they can
encourage the existing board of directors to change the existing management, or stockholders
may re-elect a new board of directors that will accomplish the task.
4. Threat of Takeovers: If a stock price deteriorates because of management's inability to
run the company effectively, competitors or stockholders may take a controlling interest in
the company and bring in their own managers.
In the next section, we'll examine the financial institutions and financial markets that help
companies finance their operations.
Conclusion
Performance evaluation will help a company to understand different sides of their
business operations on one hand where by analyzing performance in a certain
period and help the company to forecast their future business performances. These
information obtained on business performances can be used by number of parties,
different stakeholders which include shareholders, creditors, employees, tax authorities,
government, media, etc. All the mentioned parties can use these information of
performance evaluation with an aim to assess the business operations of the firm,
future of the company and can contribute towards decision-making process of the
company as evaluation will bring a clear image on the organizations ‘financial health or
status, the financial feasibility, profitability and resource management. Also with the
right information investors and shareholders will be able to make the right decision
in terms of their investments where proper opportunities can be identified regarding the
potential of positive outcome of it. In Tesco with the recent changes in market
and economy there has been lots of changes to the organization as well. This is due to
recessions well as changes in the retail industry which affected all the players in
the market. In assessing finance options for a company like Tesco it is important to
assess the industry and assess the company’s performance using different ratios to
understand the situation of the company. With that understanding company like Tesco can
go ahead and consider about new investments to decide which options to select and how to
finance these options. Company’s capital structure decides how the company is going to
fund their activities in the long term to obtain more benefit and maximize their wealth.
With that they can select the best options to finance their needs and wants to achieve
mentioned objectives where in Tesco’s case it needed to assess sources of long
and short term, finance structure and finance disciplines before come to an conclusion.

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References
1. Principle of Managerial Finance, Lawrence J.Gitman, Chad J. Zutter
2. www.researchgate.net/publication/303856298_The_Role_of_Financial_Management
3. https://courses.lumenlearning.com/boundless-business/chapter/introduction-to-financial-
management/
4. https://www.thebalancesmb.com/main-areas-of-business-finance-392933
5. https://www.investopedia.com/terms/i/international-finance.asp
6. www.accountingverse.com/accounting-basics/types-of-businesses.html
7. https://www.investopedia.com/walkthrough/corporate-finance/1/goals-financial-
management.aspx
8. https://www.investopedia.com/walkthrough/corporate-finance/1/agency-problem.aspx