Roles and responsibilities of financial managers

Date of Course Title

Section I: Table of Contents

1.0 Examination of financial managers’ tasks and responsibilities 3 1.1 Roles of a financial manager 3 1.2 Ethical issues confronted by financial managers 4

1.3 Government safeguards are in place to prevent financial reporting fraud.

4 2.0 Distinctions between financial markets and institutions 5 2.1 Reasons for becoming public

5 2.2 Distinction between the two main stock markets in the United States 5 2.3 Comparison of investment choices

6 3.0 Financial ratio computation

6 3.1 Ratios of profitability

6 3.2 Liquidity proportions

7

3.3 Ratios of financial leverage

11 4.0 Industrial examination

13

References 15

1.0 Analysis of roles and responsibilities of financial managers

1.1 Roles of a financial manager

One of the main roles of a financial manager is the performance of data analysis within the organization and provides the senior managers with the necessary advise pertaining to the profit maximization ideas. The financial managers also help in the drafting of financial statements and business reports. The financial manager will easily tell whether the organization will be financially sustainable in the short-run or in the long-run depending on its current performance. Another role that the financial managers play within the organization is to monitor the company’s financial details with the aim of ensuring that all the requirements, both legal and financial are met (Christensen, Cottrell & Budd, 2016). The financial manager also analyses the market trends to find the opportunities that may be available for expansion or the chances that the company may grasp with an aim of gaining a competitive advantage over the rival firms in the market.

They also help the management in making financial and management decisions. The financial managers will always determine whether an organization will benefit in terms of an increase in their productivity or suffer from losses and this is usually attributed to the various business strategies that they put forward (Christensen, Cottrell & Budd, 2016). Once funds are raised by the organization through different channels, it is the role of the financial manager to ensure that he or she allocates the funds. In the quest for the allocation funds, the financial manager has to ensure that he puts into consideration the size of the firm and its growth capability, the status of the assets, whether long-term or short-term and the strategies that the company uses in the raising of the funds.

1.2 Ethical issues faced by financial managers

There are various ethical issues that financial managers may end up getting exposed to. One of these ethical issues is greed. In most organizations across the globe, financial managers manipulate the financial statement and this is usually as a result of their self-interests or the interests of the company. Manipulation of financial statements is usually driven by the urge by the financial managers to swindle funds from the company (Christensen, Cottrell & Budd, 2016). The cooking of financial statements by the financial managers may also result to the quest by the organization to portray a good image to the public and the shareholders of the company.

The financial managers, will therefore, manipulate the financial statements in such a way that it will appear that the company is in a profit making streak, when in real sense the company is suffering. Another ethical issue faced by the financial manager is the transparency issue (Christensen, Cottrell & Budd, 2016). In some companies, the activities that are conducted by the financial managers lack transparency and this puts question marks on the firm’s credibility. The financial managers may also face internal conflicts in the company and this leaves them making all the wrong financial decisions that leave the company heading to the gutters.

1.3 Federal safe guards put in place to curb financial reporting abuse

The creation of the Sarbanese Oxley act of 2001 was aimed at ensuring that the level of corporate financial reporting was enhanced significantly and that issues of corporate financial scandals were curbed. The Sarbanes Oxley Act has been instrumental in enhancing the accuracy and the reliability of the accounting information presented by organizations. it should, however be noted that the act is attached with the challenge of cost and time-consuming process of creating the financial reports that is needed for organization’s compliance.

After the Enron scandal, the federal regulations were tightened to make it hard for companies to hide liabilities and assets from the shareholders. The Securities and Exchange Commission also adapted rules that were aimed at changing some practices that were weak. The implementation of whistleblower programs has also helped in addressing issues of financial reporting abuse in various organizations across the globe (Elliott & Elliott, 2008). Through the whistle blower programs, organizations have found it hard to manipulate their financial statements or engage in double counting accounting.

2.0 Difference between various financial markets and institutions

2.1 Reasons for going public

A company goes public due to its desire for growth. Small companies looking for the desire to grow usually use IPO as a way of generating capital that they will use for their expansion. One of the main advantages of an organization going public is that it gains financial benefits from raising capital through IPOs. Another benefit that the company enjoys is an increase in its public awareness. An increase in its public awareness comes from the fact that IPO generates publicity by making the company’s products available to the public (Elliott & Elliott, 2008). With an increase in the publicity, the company benefits from an increase in its market share. It should, however be noted that the company faces an increase in its regulations as well as an increase in the additional costs due to the compliance with acts such as Sarbanes. The public companies may also be faced by market pressure, thus making them concentrate on the short-term results rather than the long-term results.

2.2 Difference between the two largest U.S. stock markets

The main U.S. stock markets include New York Stock Exchange and the National Association of Security Dealers and Automated Quotations (NASDAQ. The main difference between the two is that NASDAQ trading location takes place electronically through the internet while the NYSE takes place on the floor of exchange in person. Another difference that arises between the two stock market is that unlike NASDAQ, the NYSE is well established with a huge turnover. For the private investment, the best option would be NASDAQ because it is the largest stock exchange in the country and is merged with AMEX.

2.3 Comparison between investment options available

There are various investment options that one may pick to invest into and they include bonds, stocks, mutual funds, money markets, capital markets, and exchange traded funds. Bonds are investment options that obligate the issuer to pay the bond holder the specified sum of money. Types of bonds include U.S. Treasury bonds, agency, municipal, corporate and the high yield. Mutual funds, on the other hand, refer to when an organizations pools money from multiple investors and invest the money in securities that include bonds and stocks. The exchange traded funds (ETFs) that tracks index at the stock exchange. Investing in the ETFs calls for one to buy shares of a given portfolio and waiting for it to yield returns. Stocks, on the other hand, refer to securities that give stockholder ownership of a given company with shares.

3.0 Computation of financial ratios

3.1 Profitability ratios

Profitability ratios measure the profit levels of an organization, and they include Gross profit margin, net profit margin and ROCE (Balasundaram, 2012, p4).

Gross profit margin

Gross profit margin ratio compares the company’s sales to its gross profits. It is given by

(Revenue-Cost of Goods sold)/(Revenue)

2014

(2972-1587)/(2972)=0.466

2015

(3387-1847)/(3387)=0.45

2016

(3627-1970)/(3627)=0.457

Comparisons between industrial average and company ratio

The gross profit margin for the Puma SE declined from 2014 to 2015 but slightly increased in 2016. A decline in the gross profit margin from 2014 to 2015 was attributed to the low selling prices of some of the company’s products leading to lowered gross profits versus sales. An increase in the gross profit margin from 2015 to 2016 implied an increase in the company’s profits. The gross profit margin industrial average was, however, higher than that of the company, standing at 0.467 in 2014 and 0.48 in 2016.

3.2 Liquidity ratios

Liquidity ratios measure the liquidity levels of a given organization, and they include interest coverage ratio, current ratio, and quick ratio.

Current ratio

Current ratio is used in the measurement of the ability of the firm to clear both short-term and long-term financial obligations (Elliott and Elliott, 2008, p43). It is given by

Current assets/current liabilities

2014

1683/823=2.04

2015

1685/880=1.914

2016

1765/895=1.97

Current ratio vs industrial average

The current ratio for Puma Corporation increased significantly from 2014 to 2015 but declined in 2016. An increase in the current ratio from 2014 to 2015 implies that the ability of the organization to clear its financial obligations increased from 2014 to 2015 but declined in 2016 thus a decline in its liquidity levels. The industrial average was lower than the company’s ratios across the three years ranging from 1.37 to 1.51.

Quick ratio

Quick ratio is used in measuring the ability of a firm to clear its short-term financial obligations.

(current assets-inventory)/(current liabilities)

2014

(1683-572)/823=1.35

2015

(1685-657)/(880)=1.17

2016

(1765-719)/895=1.17

Quick ratio vs industrial average

The quick ratio for the Puma Corporation declined across the three years. The decline in company’s quick ratio implies that its ability to clear short-term financial obligations also decreased across the three years. The industrial averages, on the other hand, increased from 0.83 in 2014 to 0.93 in 2016. The industrial averages were comparatively lower than the company’s ratios.

Interest coverage ratio

Interest coverage ratio is used to measure the ability of a company to pay-off its interest expenses on its outstanding debts (Bull, 2008, p16).

Profit before interest and tax/interest

2014

0

2015

56/14=4

2016

111/13=8.54

Industrial averages vs interest coverage ratios

The interest coverage ratio for the firm increased significantly across the three years. The increase in the interest coverage ratio is an indication that the ability of the firm to clear interest expenses on the outstanding debt also increased from 2013 to 2016. The industrial average was higher than the company’s interest coverage ratios standing at 5.3 in 2014, 5.7 in 2015 and 9 in 2016.

3.3 Financial leverage ratios

Financial leverage ratios measure how much assets a firm holds relative to its liabilities. Financial leverage ratios include debt ratio, debt-to-equity ratio, and equity ratio.

Debt ratio

Debt ratio measures the solvency of a firm by comparing its total assets to total liabilities (Braun, Tietz and Harrison, 2010).

Debt ratio=total liabilities/total assets

2014

955/2550=0.375

2015

1009/2620=0.385

2016

1058/2765=0.383

Company vs industrial average

The overall financial leverage of the firm increased across the three years, and this is an indication that the company’s debt burden increased from 2014 to 2016. The ability of the firm to pay its debts using its assets increased across the three years. The industrial average was, however, lower than the company ratios, standing at 0.35 in 2014, 0.337 in 2015 and 0.34 in 2016.

Debt-to-equity ratio

Debt-to-equity ratio falls under the financial leverage ratios and is used in the comparison of the company’s total debt to total equity (Braun, Tietz and Harrison, 2010, pp34-43).

Debt-to-equity ratios=total liabilities/total equity

2014

955/1595=0.598

2015

1009/1611=0.626

2016

1058/1707=0.619

Debt-to-equity ratio vs industrial averages

The debt-to-equity ratio for Puma increased from 0.598 to 0.626 in 2015 but slightly declined to 0.619 in the year ended 2016. An increase in the company’s debt-to-equity ratio implied that the firm was reliant mainly on creditors in the financing of its financial activities, but this slightly declined in 2016 (Braun, Tietz and Harrison, 2010). The industrial average was slightly lower compared to the company’s ratios across the three years, and this was represented by 0.237 in 2014, 0.27 in 2015 and 0.2096 in 2016.

4.0 Industrial analysis

Some of the major competitors for the Puma Corporation in the market include Adidas, Under the Armour and Nike. The global sports market has one of the most competitive, and this is attributed to its extensive segmentation. In the past five years, Nike Corporation has enjoyed a large market share compared to Puma, Adidas and Under the Armour. In 2015, for instance, Nike registered revenues of $27.83, Adidas $16.92 and Puma $3.39. Much of Nike’s success has been attributed to its sponsorship deals and brand marketing strategies. In the past decade, Puma has come up with strategies aimed at giving it a competitive advantage over its rivals and these strategies include collaboration with fashion designers and celebrities in the promotion of its brand as well as the incorporation of more edge and creativity in the production of its products. Puma faces a lot of competition in the U.S. especially with the pressures from the fast-rising Under the Armour brand.

References

Bull, R. (2008). Financial ratios. 1st ed. Oxford: CIMA.

Christensen, T., Cottrell, D., & Budd, C. (2016). Advanced financial accounting (1st ed.). New York, NY: McGraw-Hill Education.

Elliott, B. & Elliott, J. (2008). Financial accounting and reporting. 1st ed. Harlow: Financial Times Prentice Hall.