Discuss about the Corporate Financial Management for CFO Responsibility.
The proper monitoring and governing of the financial resources is highly critical for organisations to optimise the profitability and thus ensuring the long-term growth and development. In this context, the role and responsibility of Chief Financial Officer (CFO) becomes very important for maximising financial efficiency and achieving financial stability. CFO position in an organisation is accountable for managing administrative, financial and risk management operations (CTI Reviews, 2016). In this report, the role and responsibilities of CFO of GrainCorp, a public listed company in Australia involved in receiving and storing of grain and related commodities (GrainCorp, 2015). The next section of the report evaluates the efficiency of market-hypothesis theory in selection of portfolio with a pin by pension fund manager.
Three general areas of responsibility for a chief financial officer (CFO) of GrainCorp Limited listed on ASX
Alistair Bell is the Chief Financial Officer (CFO) of GrainCorp and holds the responsibility of managing international finance, treasury and investor relations. The company is mainly involved in manufacturing of food ingredients and agribusiness on an international level (GrainCorp, 2015). The three general areas of responsibilities of CFO of the company can be described as follows:
Controllership duties of Chief Financial Officer (CFO) of the company involve providing accurate and timely historical information to all the stakeholders of the company. The information presented to the stakeholders including shareholders, analysts, creditors and employees must be true and reliable for decision-making (Eeden, 2014). The CFO of the company also monitors and controls the capital structuring by taking decisions regarding the raising of funds for carrying out its regular operational activities. The CFO determines the best proportion of equity and debt in the capital structure by taking into consideration the risk and liquidity position of the company. CFO also holds the responsibility of controlling the cash flow position by maintaining an appropriate balance of cash payments and cash receivables (Sutcliff, and Donnellan, 2006). The cash flow statements of the company is also prepared under the leadership of CFO who determines the accounting policies and procedures to be followed at the time of preparation of all the financial statements including balance sheet, cash flow and income statement. In addition to this, CFO is also accountable for developing and implementing tax management strategies for reducing the operational cost of the company (Fabozzi et al., 2008). CFO also establishes the lines of communication with the investment bankers, financial analysts. Shareholders and all the senior management people for conveying all the relevant financial information to them that supports them in taking decisions. CFO incorporates the use of tools such as balanced scorecard, dashboards and financial statements ration analysis for communicating the company’s financial performance to the stakeholders. The budgets of the company are also prepared under the supervision of CFO who develops and implements all the budgeting policies and procedures. Budget preparation enables the CFO to identify the major areas of improvement required in the financial performance by comparing the results obtained with the estimated outcomes (Bragg, 2010). The company’s financial performance indicates that its processing business contributes to a major part if its earnings while its grain business is still facing some challenges in achieving profitability. Thus, CFO of the company is recommended to implement new strategies for controlling and monitoring the grain business for enhancing the revenue generation from this segment (GrainCorp, 2015).
GrainCorp is presently emphasising on developing and adopting many strategic initiatives for enhancing its organic growth. As such, the company in storage and logistics is planning to reduce the operational cost by rationalising the network. In this context, the company is planning to invest about $60 million of capital for developing operational sites that aims to revitalise the network and improve customer services. This strategic planning by the senior management needs support and supervision of CFO who holds all the important information regarding the availability of financial sources to support the project implementation. Moreover, the company senior managers also taking key initiatives to market the company’s products on new areas of Western Australia, South Australia, North America and Europe. This is being planned in order to target new customers and increase the company’s sales in the future context (GrainCorp, 2015). However, this strategic initiative of the company is also being guided and controlled by the CFO by providing the funds required for marketing the company’s products in new business areas. The sustainable performance of the company around the years is possible with the effective capital management achieved by the CFO of the company. The company is investing significantly in developing and implementing new projects for supporting its future growth expansion plans that are supported by a well disciplined approach adopted by the CFO in capital management. Thus, it can be stated that all the strategic decision-making process of the company are supported and guided under the leadership skills of the Chief Financial Officer (CFO) of the company (Lapovsky and McKeown-Moak, 2010).
GrainCorp is involved in food ingredients and agribusiness and as such involves huge business risk in its operational functions that are dependent on the availability of raw materials from the natural resources. As such, the nature of business of the company itself involves huge financial risk that need to be controlled effectively by the CFO of the company. The successful completion of new projects is dependent on the availability of ingredients that can be maintained in continuation with the deployment of new technologies. The new technologies implemented will enable to source high quality raw materials to boast the productivity and profitability of the company. However, with increasing use of innovative technologies the financial risks also increases as it can lead to the occurrence of financial constraints in the company. This financial risk need to be controlled and mitigated by the Chief Financial Officer (CFO) by providing support and advice from the Chief Executive officer (CEO) (GrainCorp, 2015). The successful completion of new projects planned by the company such as widening the market segment and significant changes in storage and logistic unit requires investment in huge financial resources. The failure of these new projects can cause heavy losses for the company that need to be mitigated in advance by taking proactive steps. Thus, CFO in assistance with CEO must develop and implement proper risk management strategy in the company that identifies in advance all the financial risks associated with its business operations. This is necessary for avoiding the occurrence of any type of contingency in the business and thus ensure smooth running of company’s operational functions (Fuhr and McDonagh, 2012).
The ultimate objective of the company is to become an international leader in food ingredients and agribusiness by creating value for all its stakeholders (GrainCorp, 2015). The supervision position of Chief Financial Officer (CFO) is highly important for the company in attaining these ultimate objectives (Nolop, 2012). The roles and responsibility of CFO discussed above involving controller duties, strategic planning and risk management will facilitate the company to achieve its ultimate objective of becoming an international leader in its business area. The controller duties such as maintaining cash flow, budgets, record-keeping ad financial planning is essential for aligning its operational activities with the financial resources. This will ensure that all the day-to-day operational activities are carried out smoothly without any financial constraints. The strategic planning is also carried out under the assistance of CFO to ensure the proper availability of funds for supporting the new strategies planned to be implemented. The development of risk management strategy is also essential for the CFO so that the company is able to achieve its ultimate objectives without the occurrence of any emergency conditions (Sutcliff and Donnellan, 2006).
“If the efficient-market hypothesis is true, the pension fund manager might as well select a portfolio with a pin.” Explain why this is not the case
Efficient market hypothesis (EMH) theory that it is relatively impossible to beat the market consistently as market prices are only affected by the new information and changes in discount rates. The EMH theory in financial economic context states that share prices fully reflect all the available information that directly implies that stocks are always traded at their fair value making it relatively impossible for investors to either purchase undervalued stocks or sell stocks at inflated prices. However, if this is true then pension fund manager can easily select a portfolio with a pin that is generally achieved in real practice. The pension fund manager role is very important in creating and managing a portfolio for the clients. Portfolio is created by pension fund manager by proving advice to the investors for investing in various types of financial securities such as stocks or bonds. It is the responsibility of pension fund manager to evaluate a particular financial security properly before its selection in the portfolio so that it is able to provide maximum return to the clients. If the efficient-market hypothesis is true, then there would be no way for the investors to obtain superior rates of return by beating the market risk. However, market risk can be minimised by the pension fund manager by properly diversifying the portfolio (Williams, 2011). Diversification of the portfolio can be achieved by the pension fund manager by selection of particular stock or bond that have lower rate of co-relation between them. This means if one financial security is giving lower rate of return than it could be balanced by the return obtained from other financials security that is performing well. The pension fund manager has certain targets and goals to be achieved by providing higher rate of return on the portfolio created for the clients (Micocci et al., 2010). Throwing darts at the stick page might create a diversified portfolio but there is no method of controlling the expected return and risk of the portfolio. The reduction in the systematic risk is only possible with the selection of stocks and bonds that have lower beta. Lower beta, lower is the co-relation between the financial securities in a portfolio so that underperformance of one security does not have affect on the performance of the other. The efficient-market hypothesis also assumes that the investors realise all the information available of a financials security in a similar manner. This is also not generally true as investors incorporate the use of different methods for analysing and valuing the financial securities. For example, if one investor has analysed a financial security on the basis of growth potential and other on the basis of undervalued market opportunities, then the fair market value of that particular security will differ for the two investors. Thus, in context of the overall discussion the statement ‘If the efficient-market hypothesis is true, the pension fund manager might as well select a portfolio with a pin’ is regarded as false. This implies that pension fund manager need to create portfolio by proper evaluation of each financial security so that the portfolio is well-diversified and ensure yielding maximum return. Pension fund manager should advice to the clients for safe investments that is lection of stocks or bonds that have lower beta (Williams, 2011).
Conclusion
Thus, it can be stated from the overall discussion held in the report that CFO role is very important in an organisation for achieving its strategic aims and objectives. The financial performance of GrainCorp reveals that CFO carried out his roles and responsibility appropriately that is resulting in increased profitability for the company. The CFO, in future context, is recommended to develop new strategies for enhancing the company’s revenue generation in grain business in assistance with the CEO. The next part of the report inferred that pension fund manager can beat the market risks through diversification of the portfolio in contrasts to the findings of efficient-market hypothesis.
References
Bragg, S.M. 2010. The New CFO Financial Leadership Manual.John Wiley & Sons.
CTI Reviews. 2016. Essentials of Corporate Finance: Business, Finance. Cram101 Textbook Reviews.
Eeden, D.V. 2014. The Role of the Chief Human Resources Officer: Perspectives, Challenges, Realities and Experiences. Knowres Publishing.
Fabozzi, F. J. et al. 2008. The Complete CFO Handbook: From Accounting to Accountability. John Wiley & Sons.
Fuhr, E.A. and McDonagh, C.W. 2012.The Risk Manager.FTI Journal.
GrainCorp. 2015. Annual Report.
Lapovsky, L. and McKeown-Moak, M.P. 2010. Roles and Responsibilities of the Chief Financial Officer: New Directions for Higher Education, Number 107. John Wiley & Sons.
Micocci, M. et al. 2010.Pension Fund Risk Management: Financial and Actuarial Modeling. CRC Press.
Nolop, B. 2012.The Essential CFO: A Corporate Finance Playbook. John Wiley & Sons.
Sutcliff, M. R. and Donnellan, M. 2006. CFO Insights: Delivering High Performance. John Wiley & Sons.
Williams, R. T. 2011. An Introduction to Trading in the Financial Markets: Trading, Markets, Instruments, and Processes. Academic Press.
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