Account manager interview questions and answers that will help you to get through the interview.
What is financial management?
Financial management is used to refer to the management of funds in the context of a business firm. Similarly, Finance includes the set of activities dealing with the management of funds. This is one of the important account manager interview questions and answers.
In a broader term, it describes how money is managed and the actual process of acquiring needed funds.
Financial management is the decision of the collection and use of funds. Moreover, Financial management is the decision of the collection and use of funds. In the context of a business firm, finance is used to describe the money resources used by firms and the management of these resources.
What is the profit maximization goal?
Profit maximization refers to the maximization of the rupee income of the firm. Under this goal, all profitable financial courses of action are undertaken and unprofitable projects are avoided.
Therefore, the Profit maximization goal emphasizes on productivity improvement efforts of the firm.
It emphasizes on achieving maximum output from a given level of input or minimizing the use of inputs to achieve a given level of output. Moreover, productivity improvement leads to profit maximization. This answers one of your account manager interview questions.
What are the arguments in favor of the profit maximization goal?
The supporters of profit maximization defend this goal on the following grounds:
- Profit is a measure of the economic efficiency of the firm.
- It leads to the effective utilization of scarce economic resources.
- Profit is a source of internal financing.
What are the limitations of the profit maximization goal?
The main limitations of profit maximization goal are as below:
- The term ‘profit’ is vague. It gives multiple-meaning such as profit before tax, profit after tax, total profit, profit per share, and so on.
- Profit maximization does not consider the risk associated with investment projects.
- Profit maximization does not recognize the principle of the time value of money. This aid as the accounts manager interview questions.
Account manager interview questions and answers
What do you mean by wealth maximization goal?
Wealth maximization refers to the maximization of shareholder wealth. Shareholder wealth can be maximized by maximizing the value of the firm. Moreover, The value of the firm is maximized when a decision generates net present value.
Above all, the Net present value is the difference between the present value of benefits and the present value of costs. Therefore, Positive net present value means a positive contribution toward the value of the firm that leads to maximization of the market price of the share.
Thus, shareholder wealth is maximized.
How wealth maximization is superior to profit maximization goal?
Wealth maximization is superior to profit maximization due to following reasons:
- The wealth maximization goal considers cash flow rather than accounting profit. The meaning of cash flow is clear.
- Further, The wealth maximization goal recognizes the concept of the time value of money.
Why wealth maximization is consistent with stock price maximization?
Wealth maximization is also called stock price maximization or value maximization. Wealth maximization is consistent with stock price maximization in the sense that maximization of wealth is reflected by the increased market price of the share.
Furthermore, The financial decisions that generate positive NPV maximize the market price of the shares.
What are the differences between stock price maximization and profit maximization?
Stock price maximization refers to the maximization of the market price of shares of common stock. This is also termed as maximizing the value of the firm. Here, value of the firm is total of the market value of equity and market value of debt.
Furthermore, According to this goal, the firm total value is maximized if a financial course of action generates positive net present value. On the other hand, profit maximization refers to the maximization of accounting profits of the firm. This is the account manager interview questions.
According to this goal, a firm undertakes that financial course of action that generates higher positive accounting profits.
The fundamental difference between stock price maximization are as follows:
- Accounting profit versus cash flows:
Profit maximization emphasizes maximizing accounting profits to the firm. The accounting profit has multiple meanings. It can be earnings per share or total profit.
Earnings before interest and taxes or earnings after taxes. Maximizing earnings per share is not equivalent to maximizing total profit.
Similarly, maximizing earnings before interest and taxes are not equivalent to maximizing earnings after taxes. Furthermore, this is an important account manager interview questions.
On the other hand, stock price maximization is based on the estimate and use of cash flows from a course of action. The term cash flow has consistent meaning to all. It refers to the difference between cash inflow and cash outflow from a course of action.
- Recognition of time value of money:
Stock price maximization recognizes the concept of the time value of money. Furthermore, Under stock price maximization decision criteria all future cash flows from an investment are discounted back to present value at a required rate of return.
Similarly, All investment decisions are based on the present value of future cash flows.
However, profit maximization does not recognize the concept of the time value of money. Therefore, It treats a rupee amount of profit today equivalent to the rupee amount of profit in one year.
- Recognition of risk:
Stock price maximization is based on the consideration of risk involved in financial decisions. The level of risk associated with cash flow streams is reflected by selecting the appropriate required rate of return to determine the present value.
Generally, for risky cash flow, a higher discount rate is used to determine the present value under the stock price maximization goal. However, profit maximization does not consider the level of risk involved in financial decisions alternative.
Stock price maximization leads to an efficient allocation of resources but profit maximization does not. Stock price maximization promotes the efficient allocation of resources of the firm.
Similarly, While allocating resources, it takes into consideration the riskiness associated with an income stream. This ensures the economic use of capital.
Therefore, In the absence of a stock price maximization goal, the firm may face the problem of inadequate capital formation and lower economic growth.
Interview question for account manager
What is the goal of financial management?
There are two sets of goals of financial management: profit maximization and shareholder wealth maximization. According to the conventional theory of the firm. Profit maximization is considered to be the principal objective of the firm.
Since the price and output decision associated with a firm is usually based on the profit maximization criteria.
Profit maximization refers to maximizing the rupee income of the firm. According to this goal, the actions that increase profits should be undertaken and those that decrease profits are to be avoided.
Those who are in favor of profit maximization argue that profit is a test of economic efficiency.
It leads to the effective utilization of scarce economic resources in every business firm. And leads to total economic welfare since it increases the economic efficiency of every individual firm. Therefore, profit maximization is considered to be a basic criterion for financial decision-making.
Shareholder’s wealth maximization is the most accepted goal of a firm. According to this goal, managers should take decisions that maximize shareholder wealth. Shareholder wealth is maximized when a decision generates a net present value.
The net present value is the difference between the present value of the benefits of a project and the present value of its costs.
A decision that has a positive net present value creates wealth for shareholders. A decision that has a negative net present value destroys wealth for shareholders.
Therefore, only those projects which have positive net present value should be accepted.
What are the shortcomings of the goal of profit maximization?
Wealth maximization is considered to be superior then profit maximization because the profit-maximization goal is suffered from a number of drawbacks. They are the following:
It is ambiguous:
Profit is a vague term. It conveys different meanings to different people. For example, the term profit may mean long- term profit or short-term profit, profit after tax or profit before tax, gross profit or net profit, earning per share, return on equity, etc.
So if profit maximization is taken as a goal of the firm, there will be confusion in decision-making. Merely issuing shares and using the proceeds in Treasury bills can maximize the amount of profit. However, this would result in a decrease in earning per share (EPS).
This goal is not clear whether the financial manager should take such a step to maximize the profit.
It ignores time value of money concepts:
Benefits received in earlier periods are valuable than those received in the later period. But, the profit maximization goal ignores this fundamental truth. The benefits received earlier are more valuable than those received later because the earlier benefits can be reinvested to earn a return.
Thus, earlier the better principle matches to the real-world situation. But profit maximization goal ignores the fundamental truth, earlier the better.
It ignores the quality of benefits:
Quality of benefits refers to the degree of certainty with which the future benefits can be expected from the financial course of action. The quality of expected benefits is said to be lower if they are more uncertain or fluctuating.
Profit maximization considers only the size of total benefits, not it is quality. So, it selects a project with larger benefits without considering their degree of certainty and exposes the firm to high risks. So, profit maximization cannot be taken as an appropriate decision criterion.
Unsuitable in modern business environment:
Profit maximization objective was developed in the 19th century when the majority of business was self-financing. The modern business is characterized by separate ownership and management. The owners and managers have their own rights and responsibilities.
The owners or investors, therefore, cannot impose a profit maximization goal in a firm. Maximizing profits goal is considered outdated, unethical, unrealistic, difficult, and unsuitable in the present context. It increases the conflict of interest among a number of stakeholders such as customers, employees, government, society, etc.
It might lead to inequality of income and wealth. So it is doubtful that it leads to optimum social welfare as advocated.
Explain the primary responsibilities of a corporate financial manager?
Financial managers consist of a group of persons including a chief financial officer, treasurer, and controller. They are responsible for undertaking corporate investment decisions, financing decisions, and dividend decisions.
Besides these managerial decisions, financial managers are also responsible for routine finance functions like financial statements analysis. Financial statements analysis, financial supervision, and control, maintaining a relationship.
With banks and financial institutions, and other suppliers of funds. Some of the major responsibilities of financial managers are as follows:
To analyze the financial implications of all departmental decisions:
Besides decisions in the finance department, other department’s decisions like marketing, personnel, production, and research and development have financial implications. For example, the production department has to acquire new equipment to improve production efficiency.
The financial manager should interact with other departmental managers and should assess the financial implications associated with their departmental decisions.
To analyze investment decisions:
The investment decision is concerned with allocating resources into long-term investment projects and working capital. The financial manager should estimate the costs and benefits of each investment alternatives, use the correct project appraisal method and reach the right investment decision.
It includes both acquisitions of long-term assets as well as maintaining appropriate investment in working capital. These decisions have a significant impact on the value of the firm.
To analyze financing decision:
The financial manager is also supposed to play a significant role in identifying and using different sources of financing to satisfy its investment need for long-term assets and working capital. The financing manager can rely on long-term and short-term funds.
Similarly, he/she can evaluate the use of debt versus equity capital. While deciding on these different sources of funds. The financial manager should think of the maturity composition of assets and liabilities, cost of capital, and financial risk involved.
The appropriate mix of long-term versus short-term funds and debt versus equity capital can lower the cost of capital and financial risk.
To make appropriate dividend decision:
The dividend decision is concerned with determining the proportion of earnings to be distributed to shareholders in the form of dividend. The financial managers should determine the appropriate dividend policy of the firm that can enhance shareholder wealth.
For this, the financial manager should consider the cost of capital, capital expenditure need of the firm, tax situation of shareholders, and their effect on the market price of a share.
To analyze the financial market situation and risk:
A firm needs to raise funds from the financial market. The situation of the financial market affects both cost and risk. Therefore, the financial manager is supposed to play a significant role in closely.
Analyzing a financial market situation to take the market advantages and to avoid the risk. He/she should continuously watch the market movements and analyze the market response towards securities offered by the firm.
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