Chapter 1 An overview of Finance

Finance and the Organizational Structure of the firm

Board of Directors

President

VP for Sales & VP for

VP for Finance VP for Production
Marketing Administration

Organizational Chart

Board of Directors
 is the highest policy-making body in a corporation.
 primary responsibility is to ensure that the corporation is operating to serve the best
interest of the stockholders
 the directors are elected by the stockholders
 the ability to elect a director in the board is contingent on the amount of shares
owned by the number of directors in the board.
 owning majority of the shares are means having the right to elect majority of the
directors in the board.
Responsibilities of the board of directors:
 Setting policies on investments, capital structure, and dividends
 Approving company’s strategies, goals and budgets
 Appointing and removing members of the top management including the president
 Determining top management’s compensation
 Approving the information and other disclosures reported in the financial
statements
President
Responsibilities of the presidents are the following:
 Overseeing the operations of a company and ensuring that the strategies as
approved by the board are implemented as planned
 Performing all areas of management: Planning, organizing, staffing, directing, and
controlling
 Representing the company in professional, social, and civic activities
VP for Sales and Marketing
 Responsibilities of the VP for Sales and Marketing:
 Formulating marketing strategies and plans
 Directing and coordinating company sales
 Performing market and competitor analysis
 Analyzing and evaluating the effectiveness and cost of marketing methods applied
 Conducting or directing research that will allow the company to identify new
marketing opportunities
 Promoting good relationships with customers and distributors
VP for Production
Responsibilities of the VP for Production:
 Ensuring production meets customer demands
 Identifying production technology/process that minimizes production cost and
makes the company cost productive
 Coming up with production plan that maximizes utilization of the company’s
production facilities
 Identifying adequate and competitively priced raw materials suppliers
VP for Administration
Responsibilities of the VP for Administration
 Coordinating the functions of administration, finance, and sales and marketing
departments
 Assisting other departments in hiring employees
 Providing assistance in payroll preparation
 Determining the location and maximum amount of office space needed by the
company
 Identifying means, processes, or systems that will minimize the operating costs of
the company
VP for Finance
Functions of Finance
I. Financing Decisions
 making decisions as to how to finance long-term investments and working
capital which deals with the day-to-day operations of the company
 responsible for determining the appropriate capital structure of the
company, that is, how much of the total assets should be financed by debt
and equity.
II. Investing Decisions
 to minimize the probability of failure, long-term investments have to be
supported by a capital budgeting analysis which is among the
responsibilities of a finance manager
Capital budgeting analysis – is a technique used to
determine the financial viability of a long-term investment
III. Operating Decisions
 deal with the daily operations of the company
  determining how to finance working capital accounts such as accounts
receivable and inventories
IV. Dividends Policies
Two conditions must exist before a company can declare cash dividends:
1. The company must have enough retained earnings to support cash
dividend declaration. When cash dividends are declared, the
retained earnings of a company go down to the extent of such
declaration.
2. Company must have cash.
Several factors considered in declaring cash dividends.
1. Availability of investment opportunities – the decision to declare
cash dividends can be substantially influenced by the availability
of investment opportunities.
2. Access to log-term sources of funds – Publicly listed companies
like PLDT, Globe or petron have better access to long-term
sources of funds. These companies can afford to declare cash
dividends even if they are faced with huge amounts of investments,
for a long as their retained earnings can support such declarations.
3. Capital structure – can depend largely on the nature of its business.
Companies which are intensive have to be more conservatively
financed.

Managerial Actions to Maximize Shareholders’ Wealth

Shareholders’ Wealth Maximization
 should serve as the overriding objective of managing a company. This objective
captures the different facets of operating a company including profitability,
liquidity, capital structure, and concern with the different stakeholders of the
company.
 motivates members of top management to develop a longer perspective for the
company that they manage.
 interest of the employees has to be considered in managing a company
 paying suppliers and creditors on time is a good business practice that will
improve relationships with these parties
 Compliance with the requirements of regulatory agencies also endures more
smooth operations
 supporting the community where the company operates, in whatever capacity it
can, increases the company’s chances of continuous operations in the area.
Finance

 Is defined as the management of money and includes activities such as investing,

borrowing, lending, budgeting, saving and forecasting. Finance involves the evaluation,
 disclosure, and management of economic activity and is crucial to the successful operation
of firms and markets.

Why do we need to study Finance?

Every company needs money but there is a specific use of money in each department for
example Marketing they need budget for their marketing research and marketing financial products
of course each company are very competitive so they must have budget for tis to catch up with the
new trends of the consumers. For Accounting finance is very important to them because they do
both Dual accounting and finance function, and also in preparation of the financial statements. For
Management of course for Strategic thinking, job performance, and the profitability of the
company. We can also use finance Personal personally. It is not just for the company use. For
example, in Budgeting, retirement planning, college planning or day-to-day cash flow issues.

What is Financial Management?

Is the art and science of managing a firm’s money so that it can meet its goals—is not just
the responsibility of the finance department, is also define as the one who manages organization’s
funds and actively manage the financial affairs of any type of business either Financial and non-
financial, private and public, large and small, profit-seeking and not-for-profit.

What does the Financial Manager do?

 He is the one who is responsible for firm's funds. in other words, financial manager is
actually responsible for producing financial reports of the firm, he is involved in the
financial activities within the firm, he establishes strategies and plans for long term goals
of the organization. Financial managers are in charge for getting and using money in a way
that will maximize the value of the firm.
 And also Financial managers try to answer some, or all, of these questions. The top
financial manager within a firm is usually the Chief Financial Officer (CFO)
 Treasurer – oversees cash management, credit management, capital expenditures, and
financial planning
 Controller – oversees taxes, cost accounting, financial accounting, and data processing

Functions of a Finance Manager

Finance function is one of the major parts of business organization, which involves the
permanent, and continuous process of the business concern. Finance is one of the interrelated
functions which deal with personal function, marketing function, production function and research
and development activities of the business concern. At present, every business concern
concentrates more on the field of finance because, it is a very emerging part which reflects the
entire operational and profit ability position of the concern. Deciding the proper financial function
is the essential and ultimate goal of the business organization. Finance manager is one of the
important role players in the field of finance function. He must have entire knowledge in the area
of accounting, finance, economics and management. His position is highly critical and analytical
to solve various problems related to finance. A person who deals finance related activities may be
called finance manager. Finance manager performs the following major functions:
 1. Forecasting Financial Requirements
 It is the primary function of the Finance Manager. He is responsible to estimate the
financial requirement of the business concern. He should estimate, how much
finances required to acquire fixed assets and forecast the amount needed to meet
the working capital requirements in future.
2. Acquiring Necessary Capital
 After deciding the financial requirement, the finance manager should concentrate
how the finance is mobilized and where it will be available. It is also highly critical
in nature.
3. Investment Decision
 The finance manager must carefully select best investment alternatives and
consider the reasonable and stable return from the investment. He must be well
versed in the field of capital budgeting techniques to determine the effective
utilization of investment. The finance manager must concentrate to principles of
safety, liquidity and profitability while investing capital.
4. Cash Management
 Present days’ cash management plays a major role in the area of finance because
proper cash management is not only essential for effective utilization of cash but it
also helps to meet the short-term liquidity position of the concern.
5. Interrelation with Other Departments
 Finance manager deals with various functional departments such as marketing,
production, personnel, system, research, development, etc. Finance manager should
have sound knowledge not only in finance related area but also well versed in other
areas. He must maintain a good relationship with all the functional departments of
the business organization.

Importance of Financial Management

Finance is the lifeblood of business organization. It needs to meet the requirement of the
business concern. Each and every business concern must maintain adequate amount of finance for
their smooth running of the business concern and also maintain the business carefully to achieve
the goal of the business concern. The business goal can be achieved only with the help of effective
management of finance. We can’t neglect the importance of finance at any time at and at any
situation. Some of the importance of the financial management is as follows:
1. Financial Planning.
 Financial management helps to determine the financial requirement of the business
concern and leads to take financial planning of the concern. Financial planning is
an important part of the business concern, which helps to promotion of an
enterprise.
2. Acquisition of Funds
 Financial management involves the acquisition of required finance to the business
concern. Acquiring needed funds play a major part of the financial management,
which involve possible source of finance at minimum cost.
3. Proper Use of Funds
  Proper use and allocation of funds leads to improve the operational efficiency of
the business concern. When the finance manager uses the funds properly, they can
reduce the cost of capital and increase the value of the firm.
4. Financial Decision
 Financial management helps to take sound financial decision in the business
concern. Financial decision will affect the entire business operation of the concern.
Because there is a direct relationship with various department functions such as
marketing, production personnel, etc.
5. Improve Profitability.
 Profitability of the concern purely depends on the effectiveness and proper
utilization of funds by the business concern. Financial management helps to
improve the profitability position of the concern with the help of strong financial
control devices such as budgetary control, ratio analysis and cost volume profit
analysis.
6. Increase the Value of the Firm
 Financial management is very important in the field of increasing the wealth of the
investors and the business concern. Ultimate aim of any business concern will
achieve the maximum profit and higher profitability leads to maximize the wealth
of the investors as well as the nation.
7. Promoting Savings
 Savings are possible only when the business concern earns higher profitability and
maximizing wealth. Effective financial management helps to promoting and
mobilizing individual and corporate savings. Nowadays financial management is
also popularly known as business finance or corporate finances. The business
concern or corporate sectors cannot function without the importance of the financial
management.

Finance includes three areas

(1) Financial management:
 corporate finance, which deals with decisions related to how much and what types of assets
a firm need to acquire, how a firm should raise capital to purchase assets, and how a firm
should do to maximize its shareholders’ wealth - the focus of this class
(2) Capital markets:
 study of financial markets and institutions, which deals with interest rates, stocks, bonds,
government securities, and other marketable securities. It also covers Federal Reserve
System and its policies.
(3) Investments:
 study of security analysis, portfolio theory, market analysis, and behavioral finance