Page 470 - Introduction to Business

444 PART 5 Finance

On the other hand, unprofitable products lower stock and bond prices, which
depend on cash flows. Indeed, excessive losses on products can raise the risk of firm
failure or bankruptcy. Thus, the stakes are high for financial managers, not to men-
tion investment managers advising clients on purchases and sales of the firms’ out-
standing securities.

Key Financial Concepts

Owners Versus Managers
Except for in small firms, owners and managers are different people. Owners hold
shares of common stock issued by the firm that entitle them to its net profits. Also,
owners have voting power to control the important decisions of the firm. Through
voting rights, owners can remove managers who do not seek to increase the value
treasurer The financial manager of the common stock. The board of directors is elected by shareholders to represent
responsible for managing cash, raising their interests in the firm. The board typically includes both members of top man-
funds, and maintaining contacts with
the financial marketplace agement and executives from outside the firm. The separation of ownership and
controller The financial manager management in business firms ensures that firms can exist beyond the natural lives
responsible for accounting, financial of managers or owners. New managers are regularly appointed by the board.
statements, and tax payments
The Chief Financial Officer (CFO) is the highest-ranking financial manager. The
agency costs The costs that occur treasurer and controller are key financial managers who report to the CFO. The
when managers as agents of the firm
are in conflict with the shareholders as treasurer is responsible for managing cash, raising funds, and maintaining con-
principals tacts with the financial marketplace. The controller is responsible for accounting,
financial statements, and tax payments. Many other financial managers work with
EXHIBIT 13.1
these top executives to fulfill their duties. Exhibit 13.1 shows how financial man-
The Role of Financial agers fit into the organizational structure of a firm.
Managers in Business Firms
Sometimes managers make decisions that
are advantageous to their own personal goals,
Board of rather than the goals of shareholders. As an
directors
example, managers could act to engage in
empire building by seeking mergers and acqui-
Chairperson of the sitions to increase the size of the firm. Since they
board and Chief
Executive Officer (CEO) now manage more assets, the managers could
justify increasing their own salaries. However,
the larger size of the firm may not increase the
President and Chief
Operations Officer (COO) value of the firm’s common stock. In effect,
managers as agents of the firm are in con-
flict with the shareholders as principals. Princi-
pal–agent conflicts are called agency costs.
Vice President Vice President Vice President
Marketing Finance Production These costs can be reduced if the managers hold
shares in the firm. For this reason many times
firms offer managers stock options as compen-
sation instead of increased salaries. Stock
Treasurer Controller
options give managers shares of the firm that
they can buy at a specified price. As the price of
a firm’s common stock rises, the value of stock
Cost
Cash Credit Tax options rises. Let’s say you are a manager of a
Manager Manager Manager Accounting
Manager firm and hold stock options on 1000 shares at a
price of $30 per share. If share prices rise to $50
in the financial market, you can buy shares for
Capital Financial Data
Budgeting Financing Accounting Processing $30 from the firm and turn around and sell them
for $50 in the market for a profit of $20 per

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