Introduction to

Financial
Management
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• Understand the key positions in a corporate organization

and identify the roles of each.
• Identify the primary activities of the financial manager.
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CORPORATE ORGANIZATION STRUCTURE

Stockholder
OWNERS

BOD

President/
CEO
MANAGERS

VP for
VP for VP for VP for
Administratio
Marketing Finance Production
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 FINANCE IN A BUSINESS ORGANIZATION
BOD

CEO/President

General Administrative
Finance Division
Product & Operation Division Marketing Division
Division (Vice President for
(VP for Administration (Vice President for
Finance or Chief Finance
(VP for Operation) or HR Development Marketing)
Officer)
Officer)

Accounting Department Finance or Treasury

This figure presents the typical organizational (Chief Accountant,
Controller, Comptroller,
Department
(Treasurer or Finance
arrangement of finance in a business or Finance Officer) Officer)

organization.
In the large companies, the finance department is
headed by the VP for finance while in medium or
small organizations, the common designation of
the head of finance is the comptroller or a finance
officer. 4
 FINANCE IN A BUSINESS ORGANIZATION
BOD

CEO/President

Operating
Division Finance Division
(Chief Finance
(Chief Operating Officer)
Officer)

Production &
Human Resources Marketing Accounting Treasury
Operation

Some business organization follow a structure of

two major divisions under the CEO/President.
These are the operating and finance division 5
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Responsibility of Stockholders/shareholders
stockholders • elects and seated as the Board of
Directors (BOD).
• Each share held is equal to one voting
right.
• their responsibility is to carry out the
objectives of the shareholders;
otherwise, they would not have been
elected in that position.
 Responsibilities of the Board of Directors

• Board of Directors
• 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 following are among the responsibilities of the board of directors:
• Setting policies on investments, capital structure and dividend policies.
• 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
(Cayanan, 2015) 7
 Responsibilities of the President or CEO

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,
leading, directing and controlling.
• Representing the company in professional, social, and civic activities.
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 Responsibilities of VP for Marketing

The following are among the responsibilities:

• 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).
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 Responsibilities of VP for Production/Operation

The following are among the responsibilities:

• 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 company’s production facilities.
• Identifying adequate and cheap raw material suppliers (Cayanan,
2015). 10
 Responsibilities of VP for Administration

The following are among the responsibilities:

• 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).
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 Quotes from Chief Financial Officers (CFO)

• 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 Huet
• Jollibee: “It’s very exciting because you are not just thinking of today
but what the company will need in the future.” (Ysmael V. Baysa)
• Globe Telecom: “Yesterday’s solutions are never adequate for the
future.”-Albert De Larrazabal

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 Financial Manager/Financial Officer

part of a management team whose ultimate goal is to

maximize shareholders wealth.
-responsible for the financial health of an organization
-produce financial reports, direct investment activities, and
develop strategies and plans for the long -
term financial goals of their organization.
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 Responsibilities of Financial Manager/Financial Officer
Prepare financial statements, business activity reports, and
Prepare
forecasts,
Monitor financial details to ensure that legal requirements are
Monitor
met,
Supervise employees who do financial reporting and
Supervise
budgeting,
Review company financial reports and seek ways to reduce
Review
costs,
Analyze market trends to find opportunities for expansion or
Analyze
for acquiring other companies,

Help Help management make financial decisions.

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Example Statement of Financial Position 15
Primary decision-making functions of
Financial Officers

Financing Decision Investment Decision

Operating Decision Dividend Policies

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 Types of Financial Decisions Executed by the Chief Finance Officer

Financial Decisions
of the CFO

Operating Decisions Financing Decisions

Credit and collection Investing Decisions Equity financing
Level of inventory Non-current asset acquisition Debt financing
Granting of discount Investment portfolio Cost of capital and borrowing Dividend Decisions
Budgeting Pricing decision of stocks and bonds
Discounted cash flow analysis in Short-term and long-term
Payment and control of operating
expenditure capital budgeting borrowings
Daily operating decisions Interest rate

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 FINANCING
DECISION

to determine the appropriate capital structure of the company

and to raise funds from debt and equity.

Role of Financial officers in financing is to determine the

appropriate capital structure of the company.

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 Capital structure

Definition Example Interpretation

refers to how Asset – 100% The total asset is

much of your Debt (Liability) – 60% financed by 60%
total asset is Equity (Capital) – 40% debt and 40% equity.
Accordingly, the
financed by debt capital structure is
and how much is 60% debt and 40%
financed by equity.
equity

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The answer is No. The mix of

debt and equity varies in
different corporations
Is there an ideal depending on management’s
mix of debt and
strategies. It is the
equity across
corporations? responsibility of the Financial
Manager to determine which
type of financing (debt or
equity) is best for the company.
 In making a financing decision, the following
questions must be answered:

• How much should be borrowed from external sources?

• What is the allocation of the borrowed funds into the short
term and long term?
• Will the much-needed funds be sourced from creditors or
company owners?
• Is the borrowing short term or long term?
• What is the expected cost of borrowing the funds? 21
 Choose which source of financing a company should use? What do they
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need to
consider in making this decision?
SHORT-TERM LONG-TERM
payable in at most 12 months mature in longer periods
• short-term bank loans- the interest rate is lower as • Since this will be paid much
compared to long-term loans that lead to a lower financing later, the lenders expect more
cost risk and place a higher interest
• suppliers’ credit - are the amounts owed to suppliers for the rate which makes the cost of
inventories they delivered or services they provided long-term sources higher than
• free of interest charges short term sources
• obligations have to be paid on time to maintain good • since long term sources have a
supplier relationship (should be nurtured to ensure longer time to mature, it gives
timely delivery of inventories/services) the company more time to
Pose a trade-off between profitability and liquidity risk (less accumulate cash to pay off the
interest expense means profit however the source matures in a obligation in the future
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)
 Choose which source of financing a company should use?
What do they need to consider in making this decision?

• The choice between short and long-term sources

depends on the risk and return trade off that
management is willing to take.

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 Two types of liquidity risk
1. Risk that the company will fail to pay its
short-term obligations.
2. Risk that you will not be able to sell
investments in financial assets immediately.

Presentation title 24
 INVESTMENT DECISION

What will you do on the excess cash to make if profitable?

To invest.

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 INVESTMENT DECISION

•deals with choosing a small and large project

with several investment opportunities.
•Investments may either be short term or long
term.
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 INVESTMENT DECISION

Short term investment Long term investments

Short term investment decisions are needed Long term investments

when the company is in an excess cash position. should be supported by a
• To plan for this, the Financial Manager should capital budgeting analysis
be able to make use of Financial Planning which is among the
tools such as budgeting and forecasting. responsibilities of a finance
• Moreover, the company should choose which manager
type of investment it should invest in that would
provide most optimal risk and return trade off
or have a best profit.
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 Capital budgeting analysis
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/creditor 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.

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 OPERATING DECISIONS

• deal with the daily operations of the company.

• The role of the financial manager is to determine 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.

Working Capital = Current Asset less Current Liabilities

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 DIVIDEND POLICIES

• These determine when the company should declare cash

dividends.

• The role of a financial manager to determine when the

company should declare cash dividends.

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Dividend

Holders of shares receive dividends from a

corporation as returns on their investments in
form of cash or other properties.

Companies which have better dividend policies are

generally more attractive than companies who do
not pay out dividends.

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 SEC Section 43 of the Corporation Code:

• stocks corporations are prohibited from retaining surplus profits in excess of 100% of their
paid-in capital stock, except:
• (1) when justified by definite corporate expansion projects or program approved by the
BODs; or
• (2) when the corporation is prohibited under any loan agreement with any FI or creditor,
whether local or foreign, from declaring dividend w/o its consent, and such consent has not
yet been secured; or
• (3) when it can be clearly shown that such retention is necessary under special
circumstances obtaining in the corporation, such as when there is a need for special reserve
for probable contingencies.
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 Cash dividend

Definition Example

Cash dividend is paid by Acquire 100 shares for P500/share = cash paid
P50,000
corporations to existing Percentage of ownership if with 2,500 paid-up
shareholders based on shares =100 shares / 2,500 shares = 0.04 or 4% of
total shares
their shareholdings in the
company as a return on If declared P1,000,000 cash dividend, how much
cash dividend will be received?
their investment. 1,000,000 x .04 = P40,000 cash dividend

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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.

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 The following can affect the decision of the
management in paying dividends:

• Availability of financially viable long-term investment –

some small enterprises which are undergoing expansion
may have limited access to long term financing (both long
term debt and equity). This results to these small companies
reinvesting their earnings into their business rather than
paying them out as dividend.

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 The following can affect the decision of the
management in paying dividends:

• Access to long term sources of funds - The management usually

appropriates a portion of retained earnings for investment
undertakings and this may limit the amount of retained earnings
available for dividend declaration.
• Because Creditors are not willing to finance entirely the cost of a
company’s long-term investment. Hence, the need for equity
financing (e.g. internally generated funds or issuance of new
shares).

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The following can affect the decision of the

management in paying dividends:
• Management’s Target Capital structure - For companies
which have limited access to capital and have target capital
structure, they may end up with a residual (remaining)
dividend policy.
This means that when companies are faced with
investment opportunities, internally generated funds
will be used first to finance these investments and
dividends can only be declared if there are excess funds.