the role of financial managers vis a vis macroeconomic environment

Executive Summary The financial manager's role is to understand the impact that different internal and external factors will impact the company's ability to achieve its financial and market objectives. The macroeconomic environment has both direct and indirect effects on the company. The major macroeconomic variables such as inflation, interest rates, unemployment, GDP, and exchange rates can all directly influence the financial performance of the company.

But these variables also impact on things like government policy, so there are indirect impacts on financial performance as well, and the financial manager also needs to understand these. The main tool that financial managers use are complex financial models. These models seek to illustrate the impact that different variables have on the company – both internal and external variable.

Forecasts are created using different macroeconomic and market variables, and these forecasts can highlight a range of different financial conditions, along with the expected impacts of different financial tactics and strategies. Each set of tactics and strategies has its own set of consequences, and the financial manager must be able to understand these, and express them to senior management.

Thus, the financial manager's recommendations cannot be based on guesswork, but on the use of complex models that clearly illustrate how different tactics and strategies will impact on the financial condition of the firm. This means understanding both how to optimize financial condition when the economy is going well and to minimize downside risk when the economic is doing poorly.

The best financial managers are able to take a situation when financial conditions are not as expected, and then make recommendations based both on short-term and long-term impacts of the different decisions that are being made. By being able to understand and express how the impact of changing variables in a highly complex environment will impact the firm. Dealing with this complexity is really one of the most important attributes of the best financial managers.

Introduction The goal of financial managers is to optimize the financial condition of the company, and to provide recommendations for financial tactics and strategies that will help the company to achieve its financial objectives. Financial analysis, budgeting, funds management and managing the organization of the finance department are all among the typical duties of financial managers (Accounting Tools, 2018). Tactics and strategies will be set out in accordance with both conditions in the internal environment and the external, the latter of which includes the macroeconomic environment.

While in the past tools like budgets and financial reporting were the primary things that financial managers did, the role has evolved in recent years to incorporate more of a strategic function (Ilie, 2015). This paper will focus on the ways that the financial manager role and the macroeconomic environment intersect. The Macroeconomic Environment The macroeconomic environment has an impact on companies both directly and indirectly.

Direct impacts revolve around changes in key macroeconomic measures, such as unemployment, inflation and the size of the economy (GDP), interest rates and exchange rates (Akers, 2017). Inflation affects the prices that companies pay for things – and what they can charge. Unemployment rates, which may be specific to regions or professions, affect budgeting for personnel, which at some companies is a critical input cost. The health of the GDP can impact on the market opportunities that exist.

For example, if GDP growth in the US is expected to be slow for the next several years, the company might want to build international expansion into the strategy, which would have a significant impact on the financial manager's role. Exchange rates matter when the company operates internationally, as there are two major forms of exchange rate risk, but they also matter for domestic-only companies that buy inputs from overseas. Then there are the different indirect impacts that the macroeconomic environment has.

The macroeconomic environment is used as the basis for a lot of political policymaking, and thus the macroeconomic environment can be a strong influencer on the political environment. Regulations, taxes, employment policies and more can all be subject to change based on prevailing economic conditions, and all would affect the role of the financial manager.

Impacts on Operations For the financial manager, it is important to understand that while there are many variables that can influence the role, and these many variables mean a high level of complexity, the reality is that a lot of the impacts come down to increases or decreases in cost, in risk, and in prices that the company can charge. At the high level, an environment where costs increase faster than prices is a basic problem for the financial manager.

Whether those costs are taxes, interest rates, exchange rates, or labor costs will matter, but there is opportunity for the financial manager to trade off one type of increased cost for something else that lowers costs (i.e. higher taxes offset by hiring fewer new workers). Thus, if the financial manager looks at a problem through a high-level lens, the response to the problem might not address the problem at all, but address the impact of the problem.

Forecasting The main tool that financial managers use to address the impacts of changes in the macroeconomic environment is forecasting. As Turner (2016) notes, models are frequently used by financial managers to understand the expected impacts of different changes in the macroeconomic environment. At a large company, there might be a contingent strategy in place for how the company should respond to a recession next year, a booming economy next year, or a repeat of this year's conditions.

The use of models also allows the financial manager to evaluate the impact of different financial strategies and tactics on the company as a whole. A good example would be if the company wants to analyze the impacts of changes to tax rates, and then overlay that with an analysis of different capital structures.

This type of modeling and contingency modeling would allow the financial manager to make a recommendation to senior management about, say, whether it should buy back stock this year, or issue new bonds, in order to finance expansion. The financial manager might not be able to predict the future, but is in a position to model potential outcomes and make financial recommendations on that basis, and then execute the one that the CFO, CEO and Board authorize.

There are some issues with modeling, such as biases that are often found in analyzing the different results or that might be baked into the way the model is constructed (Lim, 2002). Thus, the best financial managers are able to perform their analyses free from bias, in order make the most rational recommendations to senior management. Understanding the role that bias plays, even in something like financial management, is important for optimizing performance.

Consequences One of the most valuable aspects of modeling is that it allows both financial managers and senior executives alike to understand the consequences of the tactics that they undertake. Each move that the finance department makes to optimize one thing probably has a trade-off. If the macroeconomic environment moves in a different way from the one on which the strategy was based, the financial manager has to be able to quickly analyze the consequences of the strategy, and what the best strategic course is to follow.

For example, if the company was predicting a stable macroeconomic environment, and then a recession occurred suddenly, the company's strategy might have significant negative consequences. The role of the financial manager at that point would be to estimate those consequences, and then identify a course of action that can be implemented.