Lesson 6: Flow of Funds within an Organization

Expected Learning Outcome:

Describe the primary activities of the financial manager.

There is no standard structure of a financial system that operates in the world. It varies among countries
and among business organizations. Figure 1 below illustrates the structure of a typical financial system.
This system is highly responsible for the channeling of funds from the savings of the household or
business to the individual and corporate organizations that need funding support through financial
institutions, financial intermediaries, and financial instruments.

Investments may either be short-term or long-term. Short-term investment decisions are needed when the
company is experiencing 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 (this will be discussed in Financial
Planning Tools and Concepts). Moreover, the company should choose which type of investment it should
invest in that would provide a most optimal risk and return trade-off. You will learn more about this on
Introduction to Investments.

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. This is a crucial function of management especially if this
investment would be financed by debt. The lenders should have the confidence that the management
investments should be profitable or else they would not approve the company to lend any money.

Lesson 7: Role of the Financial Manager

The Financial Managers play a crucial role in the business organization.

Depending on the business structure, they are responsible for managing the finances of the organization.
Exercising decisions in finance may very delicate task that requires substantial knowledge of accounting
and economics. The Financial Managers are heavily engaged in making decisions for the business to
attain its objectives at optimum level. This decision-making function is broadly classified into operating
decisions, investing decisions, and financing decisions.

Operating decisions deal with the daily operations of the company.

The role of the Finance Managers is determining how to finance working capital accounts such as
accounts receivable and inventories. The company has a choice on whether to finance working capital
needs by long-term or short-term sources.

Short term sources are those that will be payable at most in 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 long-term loans. Hence, this would lead to a lower financing cost.

Long term sources, on the other hand, will 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 the 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. The learners will learn more about this on sources and uses of funds.

Investing decisions deal with choosing small and large projects with several investment opportunities.
The different projects are critically evaluated in terms of return on investment and expected cash flow.
Investing decisions include non-current asset, acquisition, pricing decision of stocks and bonds,
investment portfolio etc.

Investment decisions also include placing extra money or funds to stocks and bonds. Holding the money
more than the required funds of the ordinary business activities does not provide much benefit to the
business.
Sound finance management dictates that excess and idle cash mush be invested properly on fruitful
ventures like stock market.

Financing decisions deal with raising or acquiring of funds from outside sources and not from the
ordinary results of the business operation.
In other words, financing decisions are made when the business need to borrow money.

The role of the Financial Manager is to determine the appropriate capital structure of the company.
Capital structure refers to how much of your total assets is financed by debt and how much is financed by
equity.

Funds that come from outside sources such as investors, lenders and company owners are the result of
financing activities of the business. In borrowing funds from outside sources, the business pays interest
for the use of money. The finance manager must weigh and evaluate the cost of borrowing funds. The
right mix of debt portfolio must be evaluated properly.

Lesson 8: Financial Planning

Planning
Planning is an important aspect of the firm's operations because it provides road maps for guiding,
coordinating, and controlling the firm's actions to achieve its objectives (Gitman & Zutter, 2012).

Financial Planning
Financial planning is applied in both public finance and business finance. All entities whether a business
for profit or non-profit organization undertake financial planning as an inherent activity for their existence
and survival.

Long-term financial plans

These are a set of goals that lay out the overall direction of the company.

A long-term financial plan is an integrated strategy that takes into account various departments such as
sales, production, marketing, and operations for the purpose of guiding these departments towards
strategic goals
.
Those long-term plans consider proposed outlays for fixed assets, research and development activities,
marketing and product development actions, capital structure, and major sources of financing. Also
included would be termination of existing projects, product lines, or lines of business; repayment or
retirement of outstanding debts; and any planned acquisitions (Gitman & Zutter, 2012).

Short-term financial plans

Specify short-term financial actions and the anticipated impact of those actions. Part of short-term
financial plans include setting the sales forecast and other form of operating and financial data. This
would then translate into operating budgets, the cash budget, and pro forma financial statements (Gitman
& Zutter, 2012).

Planning process as follows:

1. Set goals or objectives
For corporations, long term and short-term objectives are usually identified. These can be seen in the
company's vision and mission statements. The vision statement states where the company wants to be
while the mission statement states the plans on how to achieve the vision.
Examples of a company's Vision-Mission statements are as follows:
Jollibee Foods Corporation (JK')

Vision: To excel in providing great tasting food that meets local preferences better than anyone; To
become one of the three largest and most profitable restaurant companies in the world by 2020.
Mission: To serve great tasting food, bringing the joy of eating to everyone.

2. Identify resources
Resources include production capacity, human resources who will man the operations and financial
resources (Borja & Cayanan, 2015).

3. Identify goal-related tasks

4. Establish responsibility centers for accountability and timeline

5. Establish the evaluation system for monitoring and controlling

For corporations, the management must establish a mechanism which will allow plans to be monitored.
This can be done through quantified plans such as budgets and projected financial statements. The
management will then compare the actual results to the planned budgets and projected financial
statements. Any deviations from the budgets should be investigated.

6. Determine contingency plans

In planning, contingencies must be considered as well. Budgets and projected financial statements are
anchored on assumptions. If these assumptions do not become realities, management must have
alternative plans to minimize the adverse effects on the company (Borja & Cayanan, 2015).

Financial Planning Process

Business organizations conduct financial planning as underscored by the concept of goal- setting in
monetary terms. Where will the business be in terms of financial performance five or ten years from
today?

The following steps are adopted in preparing a financial plan as illustrated in figure below.

1. The business makes explicit assumptions of the future levels of the following items:
a. Sales
b. Cost
c. Operating expenses
d. Capital expenditures
e. Borrowing and interest

2. Projected Financial statements

a. Statements of Comprehensive Income
b. Statements of Financial Position
c. Statements of Cash Flows

3. The projected financial statements are commonly analyzed and interpreted using the financial ratios.

4. The general financial plan is evaluated and reviewed by the top-level management for improvement
taking into account present trends and development in the external environment.
A closer look at the financial planning process reveals that the whole process is basically a preparation of
projections. It covers the determination of projected sales and computation of projected cost and
expenses, projected capital outlays and projected financial statements. All these things boil down to the
projected financial plan.

Hence, financial planning is usually equated with projection or forecast.