We Are All Financial Managers
26/09/2022
Every manager is also a financial manager, whether we like it or not. In fact, financial management is a means to an end. Its purpose depends on the purpose of the firm. If you want to expand your business, the purpose of financial management is to provide you with the funding to do so. If you want to lower your business risk, its purpose is to help you manage the risks you have to take. If you want to improve the quality of your products, its purpose is to generate intelligent funding from investors who bring more than just money to the table. That makes financial management a tool – or rather a toolkit – that no manager can live without.
Maximising the companies’ value
Financial management should be part of the bigger picture and applied at all levels. Even an HR manager practises financial management. Companies invest in people after all. Recruitment is facing challenging times now so money is spent seeking out the best personnel as shortages in staffing limit production, and an ageing workforce also poses its own challenges. All of these aspects of HR carry elements that are at the core of financial management: sunk cost investments, depreciation rate, investment rations, solvency and credit rationing.
A thorough understanding of the financial decisions that have to be made in a corporation is thus essential to be able to maximise the value of the firm whilst considering the interests of all stakeholders. This is why Financial Management, alongside Management Accounting and Corporate Governance, is one of the three main topics of the MaastrichtMBA’s module on Corporate Finance and Accounting. The module focuses on the most important theoretical underpinnings of Financial Management and its relevance for practitioners.
Pension provision decisions
Pension provision is a good example of the importance of understanding financial management. Many companies offer their employees pension provision. This is an important commitment to current and past employees. However, it can become an intergenerational constraint that affects other financial decisions in a company. Jaap Bos, Professor in Banking and Finance at Maastricht University School of Business and Economics sees that the topic of pension provision is becoming more and more visible particularly now that the environmental impact of pension investment is under scrutiny. “If my company makes provision for my pension, where do I want that money to be invested? Many companies are starting to realise that the days of creating pension provision and investment decisions without a thorough stakeholder analysis are gone.”
Under pressure
In the news, we read that the current pension system is under pressure. This is mainly caused by an ageing population. “We like to think that we all work for and save for our own pension, but the truth is that all of our investments have to be pooled in order to invest at a low cost. Also, whether we like it or not, pension systems are intergenerational, meaning that changes in pension contributions and regulations affect not just ourselves, but also younger and older generations”, says Bos. He thinks the biggest change for companies will be a huge professionalisation of the pension fund system. Smaller pension funds, especially company pension funds, will have a hard time operating in the best interests of past and current personnel with these changes.
Competitive edge
As well as concerns around pension provision, Bos thinks that many companies would benefit greatly from a much more thorough understanding of financial institutions, financial regulation and risk management. “Going to a bank to get a loan, without knowledge of how the bank assesses your loan application and decides on the loan terms, is a bit like walking in blindfolded and is a sure-fire way of getting pounded by the system”, explains Bos. His advice to the MBA participants: “learn to think more like a banker (or an investor), and you will have the competitive edge”.
Price of risk
Bos would also love companies to think more about the correct price of risk. “Companies often pay a lot of money for derivative products such as options and swaps, and insurance products. As useful as these products may be, they cannot solve the problem of paying the wrong price for something. For example, if you pay too much for the building in which you operate, you will also end up paying too much for your commercial real estate insurance. Risk that is correctly priced at the beginning is always easier to manage than trying to smooth out the wrinkles caused by incorrectly priced risk. Do not leave it to the risk managers to handle afterwards what you can take care of from the beginning.” Bos’s final words on this – do not leave it to the risk managers – offer a wise lesson for all of the ‘financial managers’, even if this is not what is printed on your business card.
MaastrichtMBA – Executive On-Campus
Prof. Dr. Jaap Bos performed in the MaastrichtMBA On-Campus programme in the educational week on Corporate Finance and Accounting in September 2022.
MaastrichtMBA is UMIO’s part-time international executive MBA programme; a unique learning journey that enhances knowledge and enriches capabilities through action-oriented learning, encompassing business practice and interactive co-creation with professors and fellow students.
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Jaap Bos
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