Course Code and Title: FINP1 – Financial Management

Lesson Number: 3

Topic: Functions of Financial Management

Learning Objectives:
After studying Chapter 3, you should be able to:
1. Describe the role of Finance Manager in achieving the primary goal of the firm.
2. Understand how finance fits in the organizational structure of the firm.
3. Enumerate the fundamental activities of the Treasurer and the Controller
4. Explain how the finance function relates to the other functional areas of a business.
5. Learn the importance of corporate governance in achieving the goals of a business
organization.
6. Appreciate the importance of ethics in finance.
Pre-assessment:
Write T if the statement is true and F if the statement is false.

_____1. Financial managers do analysis and planning for the financial aspect of a firm.
_____2. Financial managers are responsible in acquiring funds for a firm.
_____3. Financial managers do budget the firm’s funds by utilizing them into different areas.
_____4. Financial managers do not need to consider the risks in decision making.
_____5. The main objective of financial management is to minimize shareholder’s wealth.
 CHAPTER 3
FUNCTIONS OF FINANCIAL MANAGEMENT
ROLE OF FINANCIAL MANAGER

Having examine the field of finance and some of its more recent developments, let us turn
our attention to the functions of the financial manager.
Figure 3-1 shows the financial manager’s role in achieving the primary goal of the firm.

In striving to maximize owners' or shareholders' wealth, the financial manager makes

decisions involving planning, acquiring, and utilizing funds which involve a set of risk-return trade-
offs, These financial decisions affect the market value of the firm's stock which leads to wealth
maximization.
In the short run, many factors affect the market price of a firm's shares which are beyond
management's control. Some of the changes in market price do not reflect a fundamental change
in the value of the firm. In the long run, increased prices of the firm's stock reflect an increase in
the value of the firm. Hence, financial decision making should take a longer-term perspective.
It is the responsibility of financial management to allocate funds to current and fixed
assets, to obtain the best mix of financing alternatives, and to develop an appropriate dividend
policy within the context of the firm's objectives. The daily activities of financial management
include credit management, inventory control, and the receipt and disbursement of funds. Less
routine functions encompass the sale of stocks and bonds and the establishment of capital
budgeting and dividend plans.
The appropriate risk-return trade-off must be determined to maximize the market value of
the firm for its shareholders. The risk-return decision will influence not only the operational side
of the business (capital versus labor) but also the financing mix (stocks versus bonds versus
retained earnings).
THE FINANCE ORGANIZATION
The financial management function is usually associated with a top officer of the firm such
as a Vice President of Finance or some other Chief Financial Officer (CFO). Figure 3-2 is a
simplified organizational chart that highlights the finance activity in a large firm. As shown, the
Vice President of finance coordinates the activities of the treasurer and the controller. The
Controller's office handles cost and financial accounting, tax payments, and management
information systems. The Treasurer's office is responsible for managing the firm's cash and credit,
its financial planning, and its capital expenditures.

RELATIONSHIP WITH OTHER KEY FUNCTIONAL MANAGERS IN THE ORGANIZATION

Finance is one of the major functional areas of a business. For example, the functional
areas of business operations for a typical manufacturing firm are manufacturing, marketing, and
finance. Manufacturing deals with the design and production of a product. Marketing involves the
selling, promotion, and distribution of a product. Manufacturing and marketing are critical for the
survival of a firm because these areas determine what will be produced and how these products
will be sold. However, these other functional areas could not operate without funds. Since finance
is concerned with all of the monetary aspects of a business, the financial manager must interact
with other managers to ascertain the goals that must be met, when and how to meet them. Thus,
finance is an integral part of total management and cuts across functional boundaries.
CORPORATE GOVERNANCE
Corporate governance is the process of monitoring managers and aligning their incentives
with shareholders goals. In reality, because shareholders are usually inactive, the firm actually
seems to belong to management. Generally speaking, the investing public does not know what
goes on at the firm's operational level. Managers handle day-to-day operations, and they know
that their work is mostly unknown to investors. This lack of supervision demonstrates the need for
monitors. Figure 3-3 shows the people and organizations that help monitor corporate activities.

The monitors inside a public firm are the board of directors, who are appointed to represent
shareholders' interest. The board hires the CEO, evaluates management; and can also design
compensation contracts to tie management's salaries to firm performance.
The monitors outside the firm include auditors, analysts, investment banks, and credit rating
agencies. External auditors examine the firm's accounting systems and comment on whether
financial statements fairly represent the firm's financial position. Investment analysts keep tract of
the firm's performance, conduct their own evaluations of the company's business activities, and
report to the investment community. Investment banks, which help firms access capital markets,
also monitor firm performance. Credit analysts examine a firm's financial strength for its debt
holders. The Government also monitors business activities through the Securities and Exchange
Commission (SEC), Bureau of Internal Revenue (BIR), Bangko Sentral ng Pilipinas (BSP), and
so forth.
JOBS IN FINANCE
Finance prepares students for jobs in banking, investments, insurance, corporations and
the government. Accounting students need to know finance, marketing, management and human
resources; they also need to understand finance, for it affects decisions in all those areas. For
example, marketing people propose advertising programs, but those programs are examined by
finance people to judge the effects of the advertising on the firm's profitability. So to be effective
in marketing, one needs to have a basic knowledge of finance. The same holds for management
indeed most important management decisions are evaluated in terms of their effects on the firm’s
value.
It is also worth noting that finance is important to individuals regardless of their jobs. Some
years ago, most businesses provided pensions to their employees, so managing one's personal
investments was not critically important. That's no longer true. Most firms today provide what's
called "defined contribution" pensions plans, where each year the company puts a specified
amount of money into an account that belongs of the employee. The employee must decide how
those funds are to be invested — how much should be divided among stocks, bonds or money
funds and how risky the equity shares and bonds should be. These decisions have a major effect
on people's lives, and the concepts covered in this book can improve decision-making skills.
ETHICAL BEHAVIOR
Ethics are of primary importance in any practice of finance. Finance professionals
commonly manage other people's money. For instance, corporate managers control the
stockholders' firm, bank employees perform cash receipts and disbursements functions and
investment advisors manage people's investment portfolios.
These fiduciary relationships oftentimes create tempting opportunities for finance
professionals to make decisions that either benefit the client or benefit the advisors themselves.
Strong emphasis on ethical behavior and ethics training and standards are provided by
professional associations such as the Finance Executives of the Philippines (FINEX), Bankers
Association of the Philippines, Investment Professionals, and so forth. Nevertheless, as with any
profession with millions of practitioners, a few are bound to act unethically. In a number of
instances, the corporate governance system has created ethical dilemmas and has failed to
prevent unethical managers from stealing from firms which ultimately means stealing from owners
or stockholders.
Governments all over the world have passed laws and regulations meant to ensure
compliance with ethical codes of behavior. And if professionals do not act appropriately,
governments have set up strong punishment for financial fraud and abuse. Ultimately, financial
manager must realize that they owe the owners/shareholders the very best decisions to protect
and further shareholder interests, but they also have a broader obligation to society as a whole.