THE GOALS & FUNCTIONS OF FINANCIAL

MANAGEMENT

PART I

THE FIELD OF FINANCE

Are you someone who keeps a tab on monthly expenses? Whether it’s through money
management applications or spreadsheets; if you keep track of the amount, you earn and spend,
then you engage in personal financial management. The process isn’t only limited to mere
calculation of expenses but also helps us plan better for future spending and saving.
In organizations, finance is one of the most important aspects of conducting business. For
successful business outcomes and growth, an organization needs to prioritize good financial
management. 
The field of finance is closely related to economics and accounting, and financial managers need
to understand the relationships between these fields.
 Economics - provides a structure for decision making in such areas as risk analysis,
pricing theory through supply and demand relationships, comparative return analysis, and
many other important areas.
A financial manager must understand the institutional structure of federal reserve system, the
commercial banking system, and the interrelationships between various sectors of the economy.
Economic variables, such as gross domestics product, industrial production, disposable income,
unemployment, inflation, interest rates, and taxes must fit into the financial manager’s decision
model and be applied correctly.
Accounting is sometimes said to be the language of finance because it provides financial data
through income statements, balance sheets, and the statement of cash flows.
The financial manager must know how to interpret and use these statements in allocation the
firm’s financial resources to generate the best return possible in the long run.
Finance links economic theory with the numbers of accounting, and all corporate managers –
whether production, sales, research, marketing, management, or long-run strategic planning –
must know what it means to assess the financial performance of the firm.
EVOLUTION OF THE FIELD OF FINANCE
Financial management emerged as a distinct field of study around 20th century. The field of
finance has developed and changed over time. Its evolution is divided into three broad phases:

CHEREYLL GAY L. ANTE | BM 206B FINANCIAL MANAGEMENT AND ADVANCED CORPORATE

FINANCE
Traditional phase – This phase started from 1920 and lasted till 1940. During this phase focus
was mainly on the aspects of
 Arranging, formation, issuance of funds
 In these early days, they would spend time learning about financial instruments
that were essential to merger and acquisition. Like: Business expansion, merger,
reorganization, and liquidation during the life cycle of the firm
 This phase also focus more on The instruments of financing, the institutions and
procedures used in capital markets, and the legal aspects of financial events for
example: bankruptcy process.
Transitional phase – This phase started from early 1940 and lasted till early 1950. During this
phase focus was mainly on below aspects:
 Nature of financial management was similar to same as Traditional phase
 But more emphasis was put on financial problems faced by managers in day to
day operations hence leading to increased focus on working capital management
Modern phase – This phase started in middle of 1950. Finance moved away from its descriptive
and definitional nature and become more analytical. The accelerated pace of development with
the infusion of ideas from economic theories and applications of quantitative methods of
analysis. During this phase focus was mainly on the aspects of
 The scope of financial management got broadened
 A well-managed Finance department came into existence
 Role of Financial manager got defined, one of the major advances include
acquisition of funds required in the business at the least possible cost for example
buying real properties using financial capital, investing the funds obtained in an
optimum manner so as to maximize returns and taking decisions relating to
distribution of profits i.e. deciding the dividend policy and retention of profits

DEFINITION OF FINANCIAL MANAGEMENT ACCORDING TO EXPERTS

Before we deep dive into the functions, let’s understand the meaning of financial management.
In a simple sense, financial management is an effort to plan, manage, store and control company
assets or funds. Solid financial management enables the CFO or VP of finance to provide data
that supports creation of a long-range vision, informs decisions on where to invest, and yields
insights on how to fund those investments, liquidity, profitability, cash runway and more.
Implementation must also be done carefully so as not to cause problems in the future. Therefore,
the company requires qualified supporting equipment. Accounting Software like ERP, SAP,
Quickbooks, can help finance teams achieve these goals.
Besides, there are also several other definitions from several experts related to financial
management, namely:
1. Harry G. Guthmann and Herbert E. Dougall.
In the view of Guthmann and Dougall through a book entitled Corporate Financial Polis,
Understanding Financial Management is an activity that is closely related to planning,
development, control, and administration of any funds used in business.

CHEREYLL GAY L. ANTE | BM 206B FINANCIAL MANAGEMENT AND ADVANCED CORPORATE

FINANCE
 2. J.F. Bradley.
Meanwhile, J.F. Bradley has different definitions of financial management. In a book entitled
Administrative Financial Management, Bradley revealed that financial management is an aspect
of business management to regulate company capital. Not only that, but financial management
must also consider the selection of sources of wealth to achieve the goals.
3. Joseph L. Massie.
A different definition is explained by Joseph L. Massie, author of The Essentials of
Management. Massie said that financial management is a business activity responsible for
obtaining and using company funds to achieve effective operations.
FUNCTIONS OF FINANCIAL MANAGEMENT
 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.
Financial management functions are critical for fund procurement, allocation of financial
resources and utilization of funds, among others. More practically, a financial manager’s
activities revolve around planning and forecasting and controlling expenditures.
The responsibility typically lies with financial or fiscal managers. Let’s navigate the financial
management functions through the roles of a manager:
1. Decisions And Control
Financial managers shoulder the primary responsibility of making decisions and controlling the
finances. Through various techniques like financial forecasting, ratio analysis and profit and loss
analysis, they prepare for potential threats.
2. Financial Planning
Decision-making also spills into planning financial activities and resources. Managers use
available information to gauge an organization’s priorities and needs. They also analyze the
overall economic situation to plan budgets and make decisions accordingly. It is the process of
taking a comprehensive look at your financial situation and building a specific financial plan to
reach your goals.
3. Resource Allocation
Managers need to make sure that all financial resources are being utilized in appropriate ways.
They oversee whether businesses have invested effectively and efficiently. Proper allocation of
financial resources leads to profitability in the long run. It is the process in which a company
decides where to allocate scarce resources, as well as assigning the assets.
4. Cash Flow Management

CHEREYLL GAY L. ANTE | BM 206B FINANCIAL MANAGEMENT AND ADVANCED CORPORATE

FINANCE
Managers have the responsibility of ensuring cash management. In other words, they need to
make sure that organizations are able to meet operational expenses and emergencies. This is
done by checking if businesses have sufficient working capital and cash flow. The financial
manager must make sure there’s enough cash on hand for day-to-day operations, like paying
workers and purchasing raw materials for production. This involves overseeing cash as it flows
both in and out of the business.
5. Disposal Of Surplus
Decisions regarding the net profits of an organization are taken by fiscal managers. They
calculate the profits at the end of the accounting year. This helps them make pivotal decisions—
whether dividends should be distributed or retained for internal purposes.
6. Acquisitions And Mergers
An organization may take critical strategic turns to maintain relevance in the competitive market.
They can either expand by acquiring new businesses or through mergers, where they enter into a
new business. Such decisions deal with the complex valuation of securities, and financial
managers are the ones who oversee such processes.
7. Capital Budgeting
Capital budgeting refers to decisions that involve investing in shares or bonds, building new
plants and purchasing new equipment, among others. Financial managers need to identify
opportunities and challenges before organizations decide to invest a huge amount of capital.
In short, financial management functions help businesses maximize their wealth. However, it’s a
continuous and interrelated process and financial managers need to be prompt and efficient.
Brief Summary
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. These functions are performed day-to-day basis as
well as through infrequent use of the capital markets to acquire new funds. 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 divided plans. The appropriate risk-return trade off must
determine to maximize the market value of the firm for its shareholders. As indicated in the
figure, all these functions are carried while balancing the profitability and risk components of the
firm to achieved the main goal

Daily Occasional Profitability

Credit management Stock issue Goal:

inventory control Bond issue Maximize
Trade-off shareholder
receipt and Capital budgeting
disbursement of funds Dividend decision wealth

CHEREYLL GAY L. ANTE | BM 206B FINANCIAL MANAGEMENT AND ADVANCED CORPORATE

FINANCE
 Risk

Forms of Organization
The finance function may be carried out within a number of different forms of
organizations. Of primary interest are the sole proprietorship, the partnership, and the
corporation.
Sole proprietorship is a type of business organization which is owned, managed and controlled
by a single owner.
The major drawback is that there is unlimited liability to the owner. In settlement of the firm’s
debts, the owner can lose not only the capital that has been invested in the business but also
personal assets.
The second form of organization is the partnership.
A partnership is a formal arrangement by two or more parties to manage and operate a business
and share its profits.
Multiple ownership makes it possible to raise more capital and to share ownership
responsibilities. For taxing purposes, profit or losses are allocated directly to the parties, and
there is no double taxation. Like SP, the P arrangement carries unlimited liability for the owners.
The third form of organization is the corporation.
A corporation is an artificial being created by operation of law, having the right of succession
and the powers, attributes and properties expressly authorized by law or incident to its
existence.
The corporation may sue or be sued, engage in contracts, and acquire property. A corporation is
owned by shareholders who enjoy the privilege of limited liability. It also has a continual life.
One of the key disadvantages to the corporate form is a potential double taxation of earning.
Corporate Governance
The corporation is governed by the BOD, led by the chairman of the board. In many companies,
the chairman is also the CEO of the company. So, management and owners are usually the same
people.
Many companies went bankrupt due to mismanagement or in some cases, financial statements
did not accurately reflect the financial condition of the firm. Top management often plunders
enormous amounts from the corporate funds. Moreover, such a corporation loses the confidence
of the investors, financiers, auditors, directors, and employees. Such lapses can severely tarnish a
firm’s brand image. 

CHEREYLL GAY L. ANTE | BM 206B FINANCIAL MANAGEMENT AND ADVANCED CORPORATE

FINANCE
Poor Governance can destroy a business all the way to its shutdown. It paves the way
for accounting scandals, lack of internal control, dishonest managers, and non-disclosure of
financial facts.
Without structure, running a business becomes difficult.
Because of these problems encountered by mostly all companies, corporate governance is
created.
Corporate governance is a set of regulations, policies, and procedures that control the
functioning of an organization. It defines the Board of Directors’ role, its composition, the role
of Chairman, the role of CEO, risk management strategies, control mechanisms, and action
plans.
The primary purpose of corporate Governance is the safeguarding of stakeholders’ interests. This
includes the Board of Directors, senior management, creditors, suppliers, shareholders,
customers, employees, government, banks, and society. It ensures the diversity of the board. It
safeguards shareholders’ rights—for example, the right to dividend or the right to vote.
Sarbanes-Oxley Act 
To respond to corporate failures and fraud that resulted in substantial financial losses to
institutional and individual investors. The US Congress passed the Sarbanes Oxley Act in 2002,
to protect and restore the interest of the shareholders.
The Sarbanes-Oxley Act (Sox) of 2002 was enacted by the US Federal Law to increase
corporate governance, strengthen the financial and capital markets at its core, boost the
confidence of general users of financial reporting information, and protect investors from
scandals like that of Enron, WorldCom, and Tyco.
 The Act is mandatory for any company with a US stock exchange listing.
 The Act created a Public Company Accounting Oversight Board (PCAOB) and enhanced
the scope of corporate responsibilities and the role of auditors and audit committees. This
Act require to register the accounting firms that will audit public companies in the US
securities markets.
 Further, this act recommended complete and accurate disclosures in financial
statements and stipulated various penalties in the corporate sector for wrong or fraudulent
financial information. This Act responsible to inspect, investigate and discipline the
registered accounting firms for violations of law or professional standards.
The major focus of the act is to make sure that publicly traded corporations accurately present
their assets, liabilities, and equity and income on their financial statements.

CHEREYLL GAY L. ANTE | BM 206B FINANCIAL MANAGEMENT AND ADVANCED CORPORATE

FINANCE