Increasing importance of financial management

The historical trends discussed in the previous section have greatly increased the importance of financial management. In earlier times the marketing manager would project sales, the engineering and production staffs would determine the assets necessary to meet those demands, and the financial manager simply had to raise the money needed to purchase the required plant, equipment, and inventories. That situation no longer exists— decisions are now made in a much more coordinated manner, and the financial manager generally has direct responsibility for the control process.

Eastern Airlines and Delta can be used to illustrate both the importance of financial management and the effects of financial decisions. In the 1960s, Eastern's stock sold for more than $60 per share, while Delta's sold for S10. By 1991, Delta had become one of the world's strongest airlines, and its stock was selling for more than $90 per share. Eastern, on the other hand, had gone bankrupt and was no longer in existence. Although many factors combined to produce these divergent results, financial decisions exerted a major influence. Because Eastern had traditionally used a great deal of debt, while Delta had not, Eastern's costs were increased significantly, and its profits were lowered, when interest rates rose during the 1980s. Rising rates had only a minor effect on Delta. Further, when fuel price increases made it imperative for the airlines to buy new, fuel-efficient planes, Delta was able to do so, but Eastern was not. Finally, when the airlines were deregulated, Delta was strong enough to expand into developing markets and to cut prices as necessary to attract business, but Eastern was not.

The Delta-Eastern story, and others like it, are now well known, so all companies today are greatly concerned with financial planning, and this has increased the importance of corporate financial staffs. Indeed, the value of financial management is reflected in the fact that more chief executive officers (CEOs) in the top 1,000 U.S. companies started their careers in finance than in any other functional area.

It is also becoming increasingly important for people in marketing, accounting, production, personnel, and other areas to understand finance in order to do a good job in their own fields. Marketing people, for instance, must understand how marketing decisions affect and are affected by funds availability, by inventory' levels, by excess plant capacity, and so on. Similarly, accountants must understand how accounting data are used in corporate planning and are viewed by investors.

Thus, there are financial implications in virtually all business decisions, and nonfinancial executives simply must know enough finance to work these implications into their own specialized analyses.' Because of this, every student of business, regardless of major, should be concerned with finance.

Self-Test Questions

Explain why financial planning is important to today's chief executives. Why do marketing people need to know something about financial management?