BUSINESS FINANCE

Module 02 (Week 02)

INTRODUCTION TO BUSINESS FINANCE (Part 2)

INTRODUCTION

“Beware of little expenses. A small leak will sink a great ship.” – Benjamin Franklin

OBJECTIVES

Our objectives for this module would be the following:

• Define and understand Finance

• Describe who are responsible for financial management within an organization
• Describe the primary activities of the financial manager
• Describe how the financial manager helps in achieving the goal of the organization

PRE-TEST

DISCUSSION

To be able to understand Finance we need to start with how a business is managed and how finance influence business decisions.

How is a business managed?

As students of business, you will always hear the words managed and management. This is because Accountancy, Business and
Management Strand focus on how to develop your skills to become business owners and managers in the future.

According to Millan & Ferrer (2017) “Good management is the key to a business’ success. On the other hand, mismanagement is, the
cause of every business’ failure.”

Management:
- Is the process of establishing common objects
- Coordinating efforts towards those objectives, and
- Efficiently and effectively utilizing available resources so as to achieve certain goals.

Technical skills are needed to be able to manage a business well. Technical skills together with people skills will make a good manager
better. A manager of a business sees the details together with the big picture and is able to think both inside and outside the box.

The following are the major facets of a business that you, as future business professionals, need to understand:

Finance Finance refers to how a business generates and manages its funds. Finance
is responsible in providing adequate resources need for the other facets to
function properly. (We have a separate subject for this.)
Production Production refers to how goods are produced or services are rendered.
Production is responsible for the quality of the goods and services and the
efficacy by which they are produced or rendered.
Marketing Refers to how goods or services are communicated to customers.
Marketing is responsible in creating value for customers and building
strong customer relationships.
Accounting Provides a measure of how well the other facets of the business are
performing. Accounting is responsible in providing useful information that
aids in making business decisions.

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Business Finance – Introduction to Business Finance Part 2 (Module 02, Week 02)
Millan and Ferrer (2017) mentions that a manager makes countless business decisions. Here are some examples:

a. How much money needs to be invested in the business?

b. How much inventory is enough?
c. Is the business spending too much on its marketing activities?
d. Is the business earning profits?
e. Shall the business continue or ceases its existence?

Finance, Production, Marketing and Accounting facet of a business is mutually dependent. The facets need to work hand in hand for
a business to be successful.

The Role of Finance in an Organization

Before we start our discussion on the role of finance in an organization, we must first understand a company’s organization set-up.

This is a typical organizational chart for a business.

Board of Directors

President

VP for Sales and

VP for Finance VP for Production VP for Administration
Marketing

The Board of Directors

A corporation’s highest policy-making body is the board of directors (BoD). The main responsibility of the BoD is to ensure that the
corporation is operating to serve the best interest of the stockholders. The directors, as the members of the board are commonly
called, are elected by the shareholders of the corporation. The members of the board of directors is dependent on the number of
shares owned and the number of directors in the board. For example, if there are ten directors in the board, a stockholder who owns
10% of the voting shares of the company, then the stockholder can elect one director to the board. Shareholders who own majority
of shares can therefore be able to control the company because owning majority shares means having the right to elect majority of
the directors in the board.

The board of directors’ responsibility are the following:

- Setting polices on investments, capital structure, and dividends.
- Approving the 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

A president’s responsibility in a corporation varies from one company to another. It will be better understood if a president’s
responsibilities are discussed, and they are the following:

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Business Finance – Introduction to Business Finance Part 2 (Module 02, Week 02)
 - The president makes sure that the strategies approved by the board of directors are implemented as planned.
- The company’s operations are overseen by the president.
- The president also performs all areas of management, that is planning, organizing, staffing, directing, and controlling.
- The president represents the company in professional, social and civic activities.

A large corporation cannot be managed by the president alone. To assist the company’s president are vice presidents 1 of different
functional areas: finance, sales and marketing, production and administration.

VP for Sales and Marketing

The VP for Sales and Marketing are responsible for the following:

- Formulate marketing strategies and plans

- Direct and coordinate company sales
- Perform market and competitor analysis
- Analyze and evaluate the effectiveness and cost of marketing methods applied
- Conduct or direct research that will allow the company identify new marketing opportunities, for example, variants of
existing products or services currently in the market
- Promote good relationships with customers and distributors

VP for Production

The VP for Production are responsible for the following:

- Make sure that production is meets customer demands

- Identify improves in process and or technology that will minimize production cost to make the company more cost
competitive (lower cost means higher income)
- Make a production plan that will utilize the company’s production facilities to its optimum
- Find best prices raw material suppliers

VP for Administration

The VP for Administration are responsible for the following:

- Coordinate the functions of administration, finance, and sales and marketing departments
- Identify means, processes, or systems that will minimize the operating costs of the company
- Assist departments in hiring employees

VP for Finance

The responsibilities of the VP finance are separated into functions.

Financing Investing Operating Dividend Policies

FINANCING DECISIONS

The VP for finance is responsible for making decisions as to how to finance long-term investments and working capital. Working capital
deals with the day-to-day operations of the company.

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A company may use vice president or other designation like manager depending on the size of the company but the responsibilities
are still the same.
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Business Finance – Introduction to Business Finance Part 2 (Module 02, Week 02)
The VP for finance also determines the suitable capital structure of the company. This means he or she needs sure that there is a
balance on how much of the total assets is financed by debt or equity. According to Cayanan and Borja (2017) This responsibility is
crucial because if the company is aggressively financed, that is, it is heavily financed by debt, the company becomes vulnerable to
adverse economic conditions which may result in higher volatility in earnings. Too much debt may lead to bankruptcy.

Different companies have different capital decisions as it is affected by stability of cash flows, extent of fixed operating expenses and
variable expenses. Take utility and mining companies, they are capital intensive and are characterized by high-fixed operating
expenses, as such they are these companies are conservatively financed. These types of companies are financed more by equity.
These types of companies have to generate high levels o revenues before they can cover their expenses. (Cayanan & Borja, 2017)
Higher debts for companies mean additional interest expense that will add to the already high fixed operating expenses. Higher
revenues would then be needed to be able to cove the expenses and have profits.

INVESTING DECISIONS

Investing activity means the decisions made on the amount of funds that is used for purchasing long term assets to be used in the
business. A capital budgeting analysis is usually made by the finance department to reduce the risk of failure in making long term
investment decisions. Capital budgeting analysis involves forecasting the cost of investment and the streams of cash flow expected
to be generated from the investments. Investments are only accepted if the financial parameters are met.

The decisions made by the finance manager regarding investments are crucial for a company. Many companies have suffered greatly
because of a very aggressive expansion that was heavily financed by debt.

OPERATING DECISIONS

Operating decisions are related to the daily operations of the company. The role of the VP for Finance is to determine how to finance
working capital accounts such as accounts receivable and inventories. Choices are made between short-term sources of financing or
long-term sources of financing.

Companies considers risk in making decisions between short-term or long-term financing. Aggressive companies finance their
accounts receivable and inventories with more short-term sources because the interest are lower, however it exposes a company to
liquidity problems. A more conservative company will choose to finance working capital mostly with long-term sources.

DIVIDEND POLICIES

Investors buy stocks because of the dividends they expect to receive from the company. Stock prices of companies usually are higher
if regular dividends are distributed to stockholders.

A company to be able to declare cash dividends should satisfy two conditions, and these are:

- The company must have enough retained earnings to support cash dividend declaration.
- The company must have available cash

The amount of cash that a company may declare is within the function of the VP for Finance. The VP for Finance should consider the
following factors before considering cash dividends:

1. Availability of investment opportunities. A company considers this especially if they have plans to expand. Most investors
don’t expect very large dividend payments if they know that the company is planning to expand.
2. Access to long-term sources of funds. Most large companies, like Jollibee and San Miguel, have easier access to long-term
sources of funds. It means that even if they declare cash dividends their cash for operations will not be greatly affected.
3. Capital Structure. The capital structure of a company is dependent on its nature. Capital intensive companies are more
conservatively financed. The cash dividend declaration is highly dependent on how it can affect the capital structure of the
company.

This ends the modules for the Introduction to Financial Management. It provided us with the knowledge and understanding on how
Business Finance is important in a business. The function of finance in a business depends largely on how the owners wants to ensure
that their wealth is maximized.

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Business Finance – Introduction to Business Finance Part 2 (Module 02, Week 02)
 Prepared by: Reviewed by: Approved by:

References
Brigham, E. F., & Houston, J. F. (2019). Fundamentals of Financial Management 15th Ed. Boston: Cengage.

Cayanan, A. S., & Borja, D. H. (2017). Business Finance. Manila: Rex Printing Company, Inc.

Kenton, W. (2021, January 05). Investopedia. Retrieved from

https://www.investopedia.com/terms/f/financialinstrument.asp#:~:text=Financial%20instruments%20are%20as
sets%20that,capital%20that%20may%20be%20traded.&text=These%20assets%20can%20be%20cash,one's%20o
wnership%20of%20an%20entity.

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Business Finance – Introduction to Business Finance Part 2 (Module 02, Week 02)
PRE-TEST Answers Sheet

Name: _____________________________________________ Business Finance

Accountancy, Business and Management Module 01 / Week 01
Grade 12

1. What is more important profit maximization or shareholder’s wealth maximization? Support your answer. (20
pts)
2. What are the three major areas of finance? Explain each area. (20 pts)
3. Can a company be both a saver and user of fund? Explain. (20 pts)

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Business Finance – Introduction to Business Finance Part 2 (Module 02, Week 02)
ASSESSMENT

Name: _____________________________________________ Business Finance

Accountancy, Business and Management Module 01 / Week 01
Grade 12

1. What are the four important roles of a finance manager? Explain each briefly. (25 pts)
2. In your own words, explain how a business is managed. (25 pts)

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Business Finance – Introduction to Business Finance Part 2 (Module 02, Week 02)