Financial management comprises of forecasting, planning, organizing, directing, coordinating and controlling of all activities relating to acquisition and

application of the financial resources of an undertaking while keeping in view its financial objective.(Article base) It is an integral function within any organisation that deals predominately, if not exclusively with any decisions taken that involve financial implications for the organisation. Throughout this essay I will demonstrate and highlight the differences in the role of the financial management function and the purpose of the financial management function. The global financial crisis, brewing for a while, really started to show its effects in the middle of 2007 and into 2008. Around the world stock markets have fallen, large financial institutions have collapsed or been bought out, and governments in even the wealthiest nations have had to come up with rescue packages to bail out their financial systems. (Shah,2010) This economic downturn has had severe detrimental effects worldwide and in this essay I will provide evidence on the direct consequences for the financial management function. Financial Management, according to J.L Massie is defined as the operational activity of a business that is responsible for obtaining and effectively utilizing the funds necessary for efficient operation.(Massie, 1987) This is based on the idea that financial management is an operational activity rather than being involved at a more strategic level. According to J. F. Bradley Financial management is the area of business management devoted to the judicious use of capital & careful selection of sources of capital in order to enable a spending unit to move in the direction of reaching its goals. (Bradley, 1969) It would not be placing too much importance on financial management if it was described as the most influential function within any organisation. Nowadays the role of financial management has transformed from historically, primarily being involved in only raising capital for investment and managed their firms cash position, into a role that is constantly becoming more and more impacted on by external factors out with the organisation itself. Heightened corporate competition, technological change, volatility in inflation and interest rates, worldwide economic uncertainty, fluctuating exchange rates, tax law changes, environmental issues, and ethical concerns over certain financial dealings must be dealt with daily. (Van Horne & Vachowicz, 2008) Effective financial management will allow a business to maximise profits, increase shareholder wealth and assist in the expansion of the organisation. Its strategic role is to help the organisation develop in the long term, as well as the deliver the specific objectives needed to reach these goals. The role of financial management can be split into three categories:

Concerns the acquisition, financing, and management of assets with some overall goal in mind. Essentially, from a financial point of view, Business firms often pursue several goals. They seek to achieve a high rate of growth, enjoy a substantial market share, attain product and technological leadership, promote employee welfare, further customer satisfaction, support education and research, improve community life, and solve other societal problems. Some of these goals may, of course, be in consonance with the goal of shareholder wealth maximization. (Chandra, 2008) This would agree that the main focus is to maximize shareholder wealth, maintaining this becomes a role that is essential for the financial manager. To assure shareholder wealth maximization is accomplished the financial management function concerns itself with the three aforementioned categories. The investment decisions relate to the investment that the company makes in different projects so as to expand the business and improve its profitability. The finance manager here appraises the various projects and judges their profitability. The manager also decides how much capital should be employed in the project and which sources are the best for financing the project. (Finance Genie, 2008) The financing decisions determine how the projects decided upon in the investment decisions i.e investment in new fixed assets for the organisation and how these will be best financed effectively. The role of the finance manager is to make this final decision on the best option for the organisation when it comes to differentiating which is the optimal form of capital. Asset management is a very wide definition. Many investors call it private banking or wealth management. Asset management includes many different aspects and relative fields among them are asset and stock selection, monitoring of investments etc. (Asset Management 123, 2009) This is the final factor that the financial management function has incorporated into its role, and when these three categories are dealt with effectively by the financial management function, it allows the organisation to achieve its goal of shareholder wealth maximization. In the corporate arena, financial management serves many purposes. It is fundamental to selling company shares, essential in the diversification of holdings, and important in keeping clean financial records. Generally, businesses rely on effective financial management as a primary tool for overall operations. (Covering Cost, 2009) This statement definitely reinforces the power which financial management posses within an organisation and this section of the essay will concentrate on the purpose of financial management. The purpose of financial management... is to fulfil the organizations mission in the most effective

and efficient manner and to remain accountable to stakeholders, including clients, partners, funders, employees, and the community. In order to accomplish this, [financial management] commits to provide accurate and complete financial data for internal and external use by the Executive Director and the Board of Directors. (Non-profits Assistance Fund, 2007) Financial Reporting holds major significance for the accounting profession, and in particular the financial management function, the ability to correctly deliver financial information to benefit the decision making process should never be understated. In order to do this efficiently and effectively an accountant should follow the clearly decrypted qualitative characteristics of financial information that have been decided upon by the IASB (International Accounting Standards Board.) Using these characteristics and the fundamental bases of accounting will ensure that your information is clear and concise, which in turn would stay in keeping with the purpose of financial management and allow the organisation to stay on track for its mission and for achieving organisational goals. The information should ideally incorporate the characteristics of relevance, reliability, understandability, comparability, and consistency. Among the characteristics described, relevance and reliability of accounting information are primary qualities, comparability and consistency are secondary, and for the information to be useful in the decision making, understandability is desirable. (Smith, 1996) Following these qualitative characteristics will allow the financial management function to follow its purpose. The definition of the purpose of financial management details that it is an essential factor to deal with the diversification of holdings. First, firm diversification increases the value of cash holdings for financially constrained firms through an efficient internal capital market, because more resources are allocated to the divisions with better investment opportunities. (Tong, 2007) This idea deals with the idea of a firms liquidity its ability for access to cash reserves that can be used to pay creditors quickly or rapidly exploit any possible opportunities in the market. The average ratio of cash to assets of listed U.S. industrial firms has increased from 10.5% in 1980 to 23.2% in 2006. This massive increase in cash has captured the attention of both academics and the media. For example, a recent article in The New York Times states, Publicly traded American firms hold so much cash that, as a group, they could pay off all their debt and still have money left over. Financial Managers are responsible for making informed decisions with the aid of the aforementioned financial statements on how best to keep a company obtaining liquidity that allows it to operate smoothly.

The final key decision for the financial manager is whether to return any of that cash to the owners of the business (in the form of dividends) and if so, how much. Dividends are the distribution of after tax profits to the shareholders of a limited company. They are handed out however frequently a company decides as long as they are awarded through the correct procedure. This means using after-tax profits and the financial management function has the deciding comment on how much these are and if they are distributed in the form of dividends to shareholders, or used for reinvestment in the company to ensure the liquidity of the organisation. As previously mentioned in this essay the role and function of financial management are being constantly affected by external factors out with the organisation itself and a current factor that is drastically affecting decision making of financial managers is that of the current global financial crisis and economic downturn. The most significant impact financially on economies all over the world in recent years is that of the global financial crisis. In this particular section of the essay I will focus on various factors such as key stages of the financial crisis and how these contributed to placing the economy in such a delicate position. Phase one on 9 August 2007 began with the seizure in the banking system precipitated by BNP Paribas announcing that it was ceasing activity in three hedge funds that specialised in US mortgage debt. This was the moment it became clear that there were tens of trillions of dollars worth of dodgy derivatives swilling round which were worth a lot less than the bankers had previously imagined. (Elliott, 2011) This was the initial indication that there was a problem, and if left untreated would cause the global economy to fall significantly. Due to the significant amount of bad debts collected it was becoming obvious that this was becoming impossible to recover and indicated that banks and mortgage lenders would be relying on the government for bail-out payments to stop their collapse. The next prominent stage in the global financial crisis saga took a year to come to a head. In one of the most dramatic days in Wall Streets history, Merrill Lynch agreed to sell itself on Sunday to Bank of America for roughly $50 billion to avert a deepening financial crisis, while another prominent securities firm, Lehman Brothers, filed for bankruptcy protection and hurtled toward liquidation after it failed to find a buyer. (Sorkin, 2008) The Lehman Brothers appealing for liquidation was a major sign that economic crisis was imminent and evident. They were known as one of the big players on Wall Street, and the fact that it could no longer operate in the current financial climate proved that the

governments and world leaders needed to meet to discuss possible remedies and the correct course of action to combat this evident global financial crisis. This was seen as the only option and was arranged that the G20 would meet on April 2nd 2009 in London. At the G20 summit in London on 2 April 2009, governments pledged to do all they can to restore confidence, growth and jobs; repair and strengthen the financial system; promote global trade and investment and reject protectionism; and build an inclusive, green and sustainable recovery for all. The OECD worked with G20 governments and other international organisations to help achieve this successful outcome and further our common mission to build a stronger, cleaner, fairer world economy. (OECD, 2009) It was decided that world leaders would commit themselves to a $5tn (3tn) fiscal expansion, provide an extra $1.1tn of resources to assist the International Monetary Fund and various other global institutions boost jobs and growth, and to reform the banking systems. The next phase of the global financial crisis came into existence when it was no longer the solvency of the banks that was the major concern but more worryingly the solvency of the governments, especially that of Greece in 2010-2011. Greece has accepted an international aid package worth 110 billion euros (US $146 billion) over three years, according to Eurozone finance ministers. The bailout deal includes a promise by Greece to cut its budget deficit to 3 percent of gross domestic product by 2014... The package was negotiated by the European Central Bank, European Commission and International Monetary Fund. (CNN News) All these events have significantly affected and are collectively responsible for the global financial crisis, but what effect does this economic downturn have on the financial management function within an organisation? Not surprisingly, given that the [financial management] sector has been at the epicentre of the financial and economic crisis, jobs in financial services around the world have been strongly affected, with announced layoffs totalling 325,000 between August 2007 and 12 February 2009.(ILO, 2009) This demonstrates the difficulties for financial managers due to their numbers being cut significantly. Meaning their roles are being distributed with a higher number of tasks, which would indicate that their performance would be detrimentally affected. For management one of the greatest tools at its disposal is that of PEST analysis, dealing with the Political, Economic, Sociological and Technological factors which affect their chosen industry in order to make informed important decisions. Therefore when

finance managers are making the necessary decisions economic factors will have to be taken into consideration namely the global financial crisis. Political regulations have been brought into place to counteract the economic downturn The Dodd-Frank Wall Street Reform and Consumer Protection Act is one of the most complex pieces of legislation ever written. Financial service firms and other impacted organizations are just beginning to understand the Act's many facets and its full impact. (Pricewaterhouse Coopers, 2010-2012) Through the Dodd-Frank Wall Street Reform and Consumer Protection Act, financial managers will have to tackle regulations that have been set in place that have to be adhered to by investment companies, thus creating more difficulty in generating the necessary capital and to fulfil their role in financial management. Congress intended advisors to private funds to register under the Advisors Act. (PWC regulatory, 2010) In doing so this creates complications to the access of these funds for financial managers. With this Act a new regulatory body has been formed. The act creates a new council of regulators, called the Financial Stability Oversight Council (FSOC)... [The FSOC will] establish risk management and reporting methodologies, and assist agencies in determining the data to collect and the format for collection (PWC regulatory, 2010) This new council will have to interact with the financial management function of an organisation to ensure both the compliance of the firm and that the companys organisational goals are still being achieved. It is worth note stating the financial crisis has diminished prospects for private capital flows (African Union Commission, 2009) indicating that the financial management function is faced with the challenge of trying to source alternative forms of funding which has been defined as one of the roles of financial management. Due to economic uncertainties investors are being more conservative to the projects they supply money to, therefore increasingly the difficulty and decreasing the possibilities of finding investment on favourable terms for the organisation. Stress tests are an expense for systemically significant banks and nonbanks. But large financial institutions impose a huge cost on the entire system when they fail during a crisis. By using rigorous stress tests and acting on the results, these institutions can protect themselves, and the financial system, from serious harm. (Pew Charitable Trust, 2011) These stress tests are designed to be implemented by the financial management function as a response to the global economic downturn, and are integral in insuring organisations have

sufficient capital and liquidity to minimise risks to the companys ability to operate in times of economic difficulty. Stress tests should be well-governed, well-managed, adequately resourced and transparent, senior managers should ensure the quality of the tests and be held accountable for the results. (Pew Charitable Trust, 2011) It is obvious to state that the implications of the global financial crisis and economic downturn are extremely relevant to the role and purpose of the financial management function. In conclusion I feel that the global financial crisis and economic downturn have had a great deal of influence on the role and purpose of the financial management function. The main characteristics of the role of financial management are clearly divided into three categories: investment activity; capital management; and asset management. Generally, businesses rely on effective financial management as a primary tool for overall operations. (Covering Cost, 2009) and the purpose of this function can be summarised as contributing to the firms organisational goals in the most effective and efficient manner. In order to achieve this, the financial management function strongly relies on the utilisation of concise financial reporting to ensure the board of directors have the necessary information to make credible decisions for the organisation. The global financial crisis has drastically changed the role of financial management in the aspect that it increases the workload of financial managers due to the massive overhaul of the global workforce, relieving many of their jobs, and is providing extra difficulties in sourcing capital for the financial management function.

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