[MUSIC] After watching this video you will be able to explain the role of a financial manager, briefly describe the investment and financial decisions and working capital management, explain the goal of a financial manager in a corporation. The financial manager asks as a conduit between the financial markets and the company. She raises capital from financial markets through the issuance of debt and equity. She then invests this capital in profitable investment opportunities she has identified. These investments generate profits in the form of cash. And finally the financial manager decides how much of the cash generated should be retained by the company and reinvested in the company's operations, and how much should be paid out to investors. Retaining and reinvesting profits back into the company's operations is commonly referred to as plow back. The manager will not have any control over how much is paid back to debt holders because those are obligations. Failure to pay debt holders on time leads to the company going bankrupt and likely being liquidated. The only part over which the manager has control is how much is paid out as dividends to shareholders. The manager decides if and how much dividends are paid out to shareholders. Payouts to shareholders are not an obligation. Managers may decide against paying any dividends if they feel that the money is better used if invested in profitable investment opportunities. This is one of the reasons that firms in the information technology industry usually do not pay dividends. For example, Google and now it's holding company, Alphabet Incorporated, has never paid dividends. Holding cash helps companies, especially in the fast changing and competitive information technology industry, to quickly invest in profitable opportunities once the managers identify them. The role of the financial manager may be categorized into three. One, the investment decision. Two, the financing decision. And three, working capital management. The investment decision is identifying profitable opportunities from a number of available investments. Later in this course we will talk about how a manager determines whether an investment opportunity is profitable or not. This is the area of capital budgeting. Once the manager identifies profitable opportunities, she needs cash to invest in these opportunities. The decision on how to raise this capital is the financing decision. The manager decides how much money should be raised through debt and how much through equity. She also decides how much should be raised through various debt channels like bank loans, bonds, etc. Similarly, she decides how much should be raised through various equity channels like common stock, preferred stock, warrants, etc. Finally, the manager is also responsible for working capital management. Working capital management ensures that the company has sufficient cash to meet its short-term operating costs and debt obligations. This leads to the company maintaining financially efficient operations. While we have seen what the role of a financial manager, the main goal of a financial manager in a corporation is to maximize shareholders' wealth. The shareholders are the owners of the company. They invest in the company with the primary objective of growing their wealth. If the manager does not maximize shareholder wealth, the shareholders will fire the manager. We have already talked about the agency problem between managers and shareholders and how offering shares to managers as part of the compensation package can minimize these agency costs. Once managers become shareholders, they will work towards maximizing their wealth and consequently towards maximizing all shareholders' wealth. Next time, we will talk about what accounting is and the different types of accounting. [MUSIC]
