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Introduction to

Financial Management
(ABM_BF12-IIIa-5)
(ABM_BF12-IIIa-1)
At the end of this lesson,
the learners will be able
to:
Understand the key
positions in a corporate
organization and identify
the roles of each.
Identify the primary
activities of the financial
manager.
Corporate Organization
Corporate Organization
Shareholders: The shareholders elect the
Board of Directors (BOD). Each share held
is equal to one voting right. Since the BOD
is elected by the shareholders, their
responsibility is to carry out the objectives of
the shareholders otherwise, they would not
have been elected in that position.
Corporate Organization
Board of Directors: The board of directors is the highest policy
making body in a corporation. The boards primary responsibility is
to
ensure that the corporation is operating to serve the best interest of
the stockholders. The following are among the responsibilities of the
board of directors:
- Setting policies on investments, capital structure and dividend
policies.
- Approving companys strategies, goals and budgets.
- Appointing and removing members of the top management
including the president.
- Determining top managements compensation.
- Approving the information and other disclosures reported in the
financial statements (Cayanan, 2015)
Corporate Organization
President (Chief Executive Officer): The roles of
a president in a corporation may vary from one
company to another. Among the responsibilities
of a president 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.
Corporate Organization
VP for Marketing: The following are among the responsibilities of VP
for 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
identify new marketing opportunities, e.g. variants of the existing
products/services already offered in the market.
- Promoting good relationships with customers and distributors.
(Cayanan, 2015)
Corporate Organization
VP for Production: The following are among the
responsibilities of VP for Production:
- Ensuring production meets customer demands.
- Identifying production technology/process that
minimizes production cost and make the
company cost competitive.
- Coming up with a production plan that
maximizes the utilization of the companys
production facilities.
- Identifying adequate and cheap raw material
suppliers. (Cayanan, 2015)
Corporate Organization
VP for Administration: The following are among the
responsibilities of VP for Administration:
- Coordinating the functions of administration, finance,
and marketing departments.
- Assisting other departments in hiring employees.
- Providing assistance in payroll preparation, payment of
vendors, and collection of receivables.
- Determining the location and the maximum amount of
office space needed by the company.Identifying means,
processes, or systems
that will minimize the operating costs of the company.
(Cayanan, 2015)
Message from the CFOs
Unilever: Finance plays a critical role across every aspect of our
business. We enable the business to turn our ambition and strategy
into
sustainable, consistent and superior performance - Jean-Marc Hut
(Unilever)
- Jollibee: Its very exciting because you are not just thinking of
today but what the company will need in the future - Ysmael V.
Baysa
(Morales, 2013)
- Globe Telecom: Yesterdays solutions are never adequate for the
future - Albert De Larrazabal (Klobucher, 2015)
- SM Corporation: Now, we dont go out because we need funds.
We go out because its an opportunity. Jose T. Sio (Montealegre,
2015)
Functions of a Financial
Manager
Financing to determine the
appropriate capital structure of
the company and to raise
funds from debt and equity.
Functions of a Financial
Manager
Financing decisions include making
decisions on how to fund long term
investments (such as company
expansions) and working capital
which deals with the day to day
operations of the company (i.e.,
purchase of inventory, payment of
operating expenses, etc.).
Functions of a Financial
Manager
Capital structure refers to how much of
your total assets is financed by debt and
how much is financed by equity.
Functions of a Financial
Manager
Assets = Liabilities + Owners Equity.
To be able to acquire assets, our funds
must have come somewhere. If it was
bought using cash from our pockets, it is
financed by equity.
On the other hand, if we used money from
our borrowings, the asset bought is
financed by debt.
Functions of a Financial
Manager
No. The mix of debt and equity varies
in different corporations depending on
managements strategies. It is the
responsibility of the Financial
Manager to determine which type of
financing (debt or equity) is best for
the company.
Functions of a Financial
Manager
Investing
- Short term investment decisions are needed
when the company is in an excess cash
position.
To plan for this, the Financial Manager should be
able to make use of Financial Planning tools
such as budgeting and forecasting.
Moreover, the company should choose which
type of investment it should invest in that would
provide an most optimal risk and return trade off.
Functions of a Financial
Manager
Long term investments should be supported by a capital
budgeting analysis which is among the responsibilities of
a finance manager.
Capital budgeting analysis is a tool to assess whether
the investment will be profitable in the long run and will
be further discussed in Lesson 5: Basic Long Term
Financial Concepts. This is a crucial function of
management especially if this investment would be
financed by debt.
The lenders should have the confidence that the
investments that management will push through with will
be profitable or else they would not lend the company
any money.
Functions of a Financial
Manager
Operating - determine how to finance working
capital accounts such as accounts receivable
and inventories (short term vs. long term)
Short Term sources are those that will be
payable in at most 12 months. This includes
short-term loans with banks and suppliers
credit. For short-term bank loans, the interest
rate is generally lower as compared to that of
long-term loans. Hence, this would lead to a
lower financing cost.
Functions of a Financial
Manager
Suppliers credit are the amounts owed to
suppliers for the inventories they delivered
or services they provided. While suppliers
credit is generally free of interest charges,
the obligations with them have to be paid
on time to maintain good supplier
relationship. Such relationships should be
nurtured to ensure timely delivery of
inventories.
Functions of a Financial
Manager
Short term sources pose a trade-off
between profitability and liquidity risk.
Because this source matures in a short
period, there is a possibility that the
company may not be able to obtain
enough cash to pay their obligation (i.e.
liquidity risk).
Functions of a Financial
Manager
There are two types of liquidity risk:
A. Risk that the company will fail to pay its
short term obligations.
B. Risk that you will not be able to sell
investments in financial assets immediately.
Functions of a Financial
Manager
Long term sources, on the other hand, mature in longer
periods. Since this will be paid much later, the lenders
expect more risk and place a higher interest rate which
makes the cost of long term sources higher than short
term sources.
However, since long term sources have a longer time to
mature, it gives the company more time to accumulate
cash to pay off the obligation in the future.
Hence, the choice between short and long term sources
depends on the risk and return trade off that
management is willing to take.
Functions of a Financial
Manager
Dividend Policies - These determine when
the company should declare cash
dividends.
Non-declaration of dividends may
disappoint these investors. Hence, it is the
role of a financial manager to determine
when the company should declare cash
dividends.
Functions of a Financial
Manager
Before a company may be able to declare
cash dividends, two conditions must exist:
1. The company must have enough
retained earnings (accumulated profits) to
support cash dividend declaration.
2. The company must have cash.
Assignment
What?
Define the Following:
1. Financial Market
2. Financial Institutions
3. Private Placements
4. Public Offering
5. Financial Instrument
6. Secondary Market
7. Money Market
8. Capital Market
Where?
Crosswise