BUSINESS FINANCE

LESSON 1
ROLES OF FINANCIAL MANAGEMENT AND THE DIFFERENT
INDIVIDUALS INVOLVED
Background Information for Learners

Financial management deals with decisions that are supposed to maximize the shareholders’ wealth (Cayanan
2015). These decisions will ultimately affect the market’s perception of the company and influence the share
price. Financial management also refers to the effective and efficient planning, organizing, directing and
controlling of financial activities and processes of an organization. This includes but is not limited to fund
procurement, allocation of financial resources, utilization of funds, etc. With the definition of financial
management provided by different authors financial management role in an organization is very much
important.

Roles of Financial Management

a. Financial decisions and controls: Financial management and financial managers play a crucial role in making
financial decisions and exercising control over finances in the organization. They make use of techniques like
ratio analysis, financial forecasting, profit and loss analysis, etc.

b. Financial Planning: The finance managers are responsible for the planning of financial activities and
resources in the organization. To this end, they use available data to understand the needs and priorities of
the organization, as well as the overall economic situation and make plans and budgets for the same purpose.

c. Capital Management: It is the responsibility of financial management to estimate the capital requirements
of the organization from time to time, determines the capital structure and composition and makes the choice
of source of funding for the capital needs.

d. Allocation and Utilization of financial resources: Financial management ensures that all financial resources
of the organizations are used and invested effectively and efficiently so that the organization is profitable,
sustainable and viable in the long-run.

e. Cash Flow Management: It is extremely important for organizations to have sufficient working capital and
cash flow to meet their operational expenses and emergencies. Financial management tracks account payable
and receivable to ensure there is sufficient cash flow available at all times.

f. Disposal of Surplus: The decisions on how the surplus or profits of the organizations is utilized is taken by
the financial managers of the organizations. They decide if dividends should be distributed and how much as
well as the proportion of profits that must be retained and ploughed back into the business.

g. Financial Reporting: Financial management maintains all necessary reports related to the finance of the
organization and uses this as the database for forecasting and planning financial activities

h. Risk Management: Sound financial management prepares the organization to forecast risks, put in
place mitigation plans as well as to meet unforeseen risks and emergencies effectively.
The goal of financial management is to maximize the value of shares of stocks. Managers of a corporation
are responsible for making the decisions for the company that would lead towards shareholders’ wealth
maximization. The need on who will act such a role in the financial management in an organization is a
must. Therefore, the diagram below shows a corporate organizational structure where you can picture the
different individuals involved in the organization.
The table above shows the roles of different Roles/Functions/Responsibilities
individuals involved in the Financial
Management People Involved

Shareholders The owners or investors in the firm.

Board of Directors It is the highest policy making body in a

corporation. Its primary responsibility is to
ensure that the corporation is operating to
serve the best interest of the stockholders.
Hence, 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
President - 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, directing and
controlling
- Representing the company in professional,
social, and civic activities
VP for Marketing - 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

VP for Production - 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
VP for Administration - 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
VP for Finance - Funding long term investments (such as
company expansions) and working capital
which deals with the day to day operations of
the company
- Determining the type of investment for the
firm
- Dealing with the daily operations of the
company
- Developing policies on dividends
 LESSON2
FINANCIAL INSTITUTION, FINANCIAL INSTRUMENT AND
FINANCIAL MARKET
Background Information for Learners

Financial institutions/ intermediaries are organizations that perform certain financial and monetary
transactions/activities such as deposits, accepts investments currency exchange and provide loans to
businesses. These are the firms that bridge the gap between surplus units (SUs) or investors/lenders and
deficit units (DUs) or borrowers. They channel funds from lenders to borrowers and include depository and
non-depository institutions.

Other than being a channel, they are lenders and borrowers at times. When they underwrite securities or act
as brokers or dealers, they are intermediaries. If they buy securities, they are investors or lenders, and when
they are the ones issuing securities, they are borrowers.

Some of the major categories of financial institutions are Commercial Banks, Investment Banks, Insurance
Companies, Brokerages, Investment Companies and Nonbank Financial Institutions.

Financial Instrument. Monetary contract between parties or any contract that gives rise to a financial asset of
one entity and a financial liability or equity instrument of another entity. They can be created, traded,
modified and settled.

TYPES OF FINANCIAL INSTRUMENTS:

-Deposits

-SDRs (Special Drawing Rights)

-Borrowings

-Loans

-Shares and other equity

-Debentures or bonds

-Other account receivables & payables

-Financial derivatives

-Letter of guarantee

-Letter of credit

-Financial commitments

-Pledged financial assets

In finance, financial instruments are classified as to their term or maturity date. They can either be short- term
(with maturity of one year or less) or long- term (with maturity of more than one year). Short- term
instruments belong to the money market, while long- term instruments belong to the capital market.

Financial Market refers to a marketplace, where creation and trading of financial assets, such as shares,
debentures, bonds, derivatives, currencies, etc. take place. It plays a crucial role in allocating limited
resources, in the country’s economy. It acts as an intermediary between the savers and investors by
mobilizing funds between them.
The financial market provides a platform to the buyers and sellers to meet for trading assets at a price
determined by the demand and supply forces.

Financial markets are classified as either (1) primary or secondary market or (2) money or capital market.
Although we have other classifications of financial markets, these two are the basic classifications of financial
markets.

Money Market: The market where monetary assets such as commercial paper, certificate of deposits,
treasury bills, etc. which mature within a year, are traded is called money market. It is the market for short-
term funds. No such market exists physically; the transactions are performed over a virtual network, i.e. fax,
internet or phone.

Capital Market: The market where medium and long term financial assets are traded in the capital market. It
is divided into two types:

(a) Primary Market: A financial market, wherein the company listed on an exchange, for the first time, issues
new security or already listed company brings the fresh issue.

(b) Secondary Market: Alternately known as the Stock market, a secondary market is an organized
marketplace, wherein already issued securities are traded between investors, such as individuals, merchant
bankers, stockbrokers and mutual funds.