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Financial Management Competencies Discussion

The Most Important Competencies of a financial manager

A financial manager understands the environment that he is an operation in and makes a decision with this in mind. The outside world affects the kind of decision that a manager makes at a certain particular time. The success of an organization is dependent on the quality of the decision made by its manager. One of the major attributes that make a good manager stand out is his or her decisiveness. The quality of decisions made by a manager is reflected in the performance of his or her organization. The ability to make decisions in times of risk is an important attribute of an efficient financial manager. To portray this I will discuss my own experience as an overseas missionary in Malaysia.

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Own experience

Over the last decade, the intellectual and practical dynamics of understanding and managing the risks that face financial institutions have changed. For three years I have been to an overseas missionary in Malaysia where I observed that financial institutions have started to use new financial instruments, new participants, and new technologies, for example, electronic trading. This has not only improved the information efficiency of markets but also facilitated the matching of savings with investment opportunities. Before this discovery, most financial institutions such as banks operated with fear because of the uncertainties that engraved the sector. Today, the major risk facing financial institutions is credit risk. This is the risk that the person to whom a loan is granted does not have the means to repay the loan; leading to a loss for the bank. Another risk is the liquidity risk whereby banks borrow over a short period but lend over longer periods. There is a minimum cash reserve that all banks are required to hold at any given time. However, there may be an unexpected demand for cash which will require that assets be sold to raise the cash or request an overnight loan from the reserve bank to meet the demand (Casserley, 1993). Other risks include exchange risk, interest rate risk, and investment risk.

Risk and Return Scenarios

Casserley (1993) defined scenario analysis as the process used to analyze the expected events by taking into consideration the possible scenarios. It is done to facilitate a smooth decision-making process that considers the future outcomes and their repercussions. A financial institution may attempt to predict potential scenarios that may affect the economy and also the financial market returns for example stocks or bonds. By calculating the risk and return scenario, a business seeks to manage its own business risk and not the portfolio risk for the client.

Formulation of a Liquidity Exposure

Liquidity has long been recognized as one of the most significant drivers of financial innovation. Many financial industries have strengthened their focus on the role of liquidity in the investment management process. A liquidity exposure is formulated by following a three-dimensional framework. We have liquidity sorting, liquidity constraints, and a mean-variance liquidity objective function. As a finance manager, I agree with the proposition that portfolios close to each other on the conventional mean-variance proficient frontier can vary to a large extent in their liquidity characteristics. For example, the liquidity exposure of mean-variance proficient portfolios adjusts radically from month to month, and even straightforward forms of liquidity optimization can yield noteworthy benefits reducing a portfolio’s liquidity risk exposure without sacrificing an enormous deal of the expected return per unit risk (Guy Ford, 1999).

The Effects of Product and Geographic Expansion

Product and geographic expansion have both negative and positive effects. As an organization evolves and expands in size, its operation becomes more complex than it was initially. Since 1990, I have been in family business ownership and I have learned that the degree of complexity is dependant on the form of products, product lines, functional departments, and strategic business units. There exists a non-linear relationship between geographic expansion and firm performance. Research and development assets and advertising-based assets, enhance the value of the firm’s geographical expansion while its ability to internalize the intermediate markets, such as technology, production expertise is positively associated with its performance. (Kolb & Overdahl, 2003).

Reference List

Casserley, D. (1993). Facing up to the risks: how financial institutions can survive and prosper. Canada: John Wiley and Sons.

Guy Ford, T. V. (1999). Readings in financial institution management: modern techniques for a global industry. Australia: Allen & Unwin.

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Kolb, R. W. & Overdahl, J. A. (2003). Financial derivatives, Volume 127 of Wiley. Canada: John Wiley and Sons.

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