The Role

of
Financial
Manager
• The role of the VP for Finance
of the Financial Manager is to
determine the appropriate capital
structure of the company
• Capital structure refers to how
much of your total assets are
financed by debt and how much is
financed by equity.
 Equity 40
Asset %
s Debt 60
100 %
%
Assets = Liabilities + Owner's
• 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.
•Short term
investment
decisions are
needed when the
company is in an
•To plan for this, the
Financial Manager should
be able to make use of
Financial Planning tools
such as budgeting and
forecasting Financial
Planning Tools and
•Long term
investments should be
supported by a capital
budgeting analysis which
is among the
responsibilities of a
•Capital budgeting
analysis is a tool to
assess whether the
investment will be
profitable in the long run
and Basic Long Term
•This is a crucial
function of
management
especially if this
investment would be
• 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
• Operating decisions deal
with the daily operations of
the company. The role of the
VP for finance is determining
how to finance working
capital accounts such as
accounts receivable and
•The company has a
choice on whether to
finance working capital
needs by long term or
short-term sources.
•Why does a Financial
Manager need to choose
which source of financing a
company should use? What
do they need to consider in
making this decision?
•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
•Suppliers' credit is 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.
•Short term sources
pose a trade-off
between profitability
and liquidity risk.
• 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
•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.
Sources and
uses of
Dividend Policies
Cash dividends are paid
by corporations to
existing shareholders
based on their
shareholdings in the
company as a return on
Some investors buy
stocks because of the
dividends they expect
to receive from the
company.
Hence, it is the role of
a financial manager
to determine when the
company should
declare cash dividends.
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
 Financial
Instruments
When a financial instrument
is issued, it gives rise to a
financial asset on one hand
and a financial liability or
equity instrument on the
other.
 Financial
Instruments
• Cash
• An equity instrument of
another entity
• A contractual right to
receive cash or another
financial asset from another
A contractual right to exchange
instruments with another entity
under conditions that are
potentially favorable. Example:
Notes Receivable, Loan
Receivable, Investment in
Stocks, Investment in Bonds
A Financial Liability is any
liability that is a contractual
obligation:
•To deliver cash or other financial
instrument to another entity.
• To exchange financial instruments
with another entity under conditions
Examples: Notes
Payable, Loans Payable,
Bonds Payable
- An Equity Instrument is any
contract that evidences a
residual interest in the
assets of an entity after
deducting all liabilities.
•Examples: Ordinary
Share Capital, Preference
Share Capital
when companies are in need of
funding, they either sell debt
securities (or bonds) or issue
equity instruments. The proceeds
from the sale of the debt securities
and issuance of bonds will be used
to finance the company's plans.
On the other hand, investors
buy debt securities of equity
instruments in hopes of
receiving returns through
interest, dividend income or
appreciation in the financial
Debt instruments
generally have fixed
returns due to fixed
interest rates,. Examples
of debt instruments are as
Treasury Bonds and
Treasury Bills are issued by
the Philippine government.
These bonds and bills have
usually low interest rates and
have very low risk of default
since the government assures
Corporate Bonds are
issued by publicly listed
companies. These bonds
usually have higher interest
rates than Treasury bonds.
However, these bonds are
If the company which issued the
bonds goes bankrupt, the
holder of the bonds will no
longer receive any return from
their investment and even their
principal, investment can be
wiped out.
Equity Instruments generally
have varied returns based on
the performance of the issuing
company. Returns from equity
instruments come from either
dividends or stock price
appreciation.
Types of
equity
instruments:
• Preferred Stock has priority
over a common stock in
terms of claims over the
assets of a company.
• Holders of Common Stock
on the other hand are the
real owners of the company.
SHORT QUIZ!

I. Direction: Read each

question wisely and choose
the letter of the correct
answer in the box.
1. The VP for Finance
of the Financial
Manager is to
determine the
appropriate
2.
sources are those
that will be
payable in at most
3. are
paid by
corporations to
existing
4. When a is
issued, it gives rise to
a financial asset on
one hand and a
financial liability or
equity instrument on
5. Treasury
and Treasury
are issued by the
Philippine
government.
II. Direction: Solve
the following problem
a. Find the total assets,
if the liabilities is Php
210, 520. 00 and
owner’s equity is Php
940, 729.00.
b. Mr. Reyes invest Php
340, 000 cash and Php
120, 000 in cars, what
is the owner’s equity?