FOUR FUNCTIONS OF A VP FOR

FINANCE (CFO)

•FINANCING •DIVIDEND
•INVESTING POLICIES
•OPERATING
FINANCING DECISIONS
• include making decisions on how to fund
long term investments (such as company
expansions) and working capital which
deals with the day to day operations of
the company (i.e., purchase of inventory,
payment of operating expenses, etc.).
INVESTMENT
• SHORT TERM INVESTMENT
• LONG TERM INVESTMENT
SHORT TERM INVESTMENT
•decisions are needed
when the company is in
an excess cash position.
SHORT TERM INVESTMENT
• To plan for this, the Financial
Manager should be able to
make use of Financial Planning
tools such as budgeting and
forecasting.
SHORT TERM INVESTMENT
• Moreover, the company should
choose which type of investment
it should invest in that would
provide a most optimal risk and
return trade off.
LONG TERM INVESTMENTS
• should be supported by a
capital budgeting analysis
which is among the
responsibilities of a finance
manager.
CAPITAL BUDGETING ANALYSIS
• is a tool to assess whether the
investment will be profitable in the long
run.
• This is a crucial function of management
especially if this investment would be
financed by debt.
LONG TERM INVESTMENTS
• 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
money.
OPERATING DECISIONS

•deal with the daily

operations of the
company.
OPERATING DECISIONS
• The role of the VP for finance
is determining how to finance
working capital accounts such
as accounts receivable and
inventories.
OPERATING DECISIONS
• The company has a choice on
whether to finance working
capital needs by long term or
short term sources.
OPERATING DECISIONS
• 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?
OPERATING DECISIONS
• 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 financing cost.
OPERATING DECISIONS
• Suppliers’ credit are 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. Such
relationships should be nurtured to ensure
timely delivery of inventories.
OPERATING DECISIONS
• Short term sources pose a trade-off
between profitability and liquidity risk.
Because this source matures in a short
period, there is a possibility that the
company may not be able to obtain
enough cash to pay their obligation (i.e.
liquidity risk).
OPERATING DECISIONS
• 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
sources. 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.
DIVIDEND POLICIES
• Cash dividends are paid by
corporations to existing
shareholders based on their
shareholdings in the company as
a return on their investment.
DIVIDEND POLICIES
• Some investors buy stocks because of
the dividends they expect to receive
from the company. Non-declaration
of dividends may disappoint these
investors.
DIVIDEND POLICIES
• Hence, it is the role of a
financial manager to
determine when the company
should declare cash dividends.
DIVIDEND POLICIES
• 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 cash.
DIVIDEND POLICIES
• What do you think will
affect the decision of
management in paying
dividends?
FACTORS
• AVAILABILITY OF FINANCIALLY VIABLE
LONG-TERM INVESTMENT
• ACCESS TO LONG TERM SOURCES OF
FUNDS
• MANAGEMENT’S TARGET CAPITAL
STRUCTURE
DIVIDEND POLICIES
• On the other hand, a company which has
access to long term sources of funds may be
able to declare dividends even if they are
faced with investment opportunities.
• However these investment opportunities are
generally financed by both debt and equity.
DIVIDEND POLICIES
• For companies which have limited access to
capital and have target capital structure, they
may end up with a residual dividend policy.
• This means that when companies are faced
with investment opportunities, internally
generated funds will be used first to finance
these investments and dividends can only be
declared if there are excess funds.
FUNCTIONS OF VP FOR FINANCE
• A. Investing
– Short term investments:
• 1. Plan for expected excess in cash using Financial
Planning tools such as budgeting and forecasting
• 2. Choose which type of investment should it invest
in that would secure the best profits
– Long term investments:
• Prepare a capital budgeting analysis to determine if
the long term investment will be profitable
FUNCTIONS OF VP FOR FINANCE
• B. Operating - determine how to
finance working capital accounts
such as accounts receivable and
inventories (short term vs. long
term)
FUNCTIONS OF VP FOR FINANCE
• There are two types of liquidity risk:
–A. Risk that the company will fail to pay
its short term obligations.
–B. Risk that you will not be able to sell
investments in financial assets
immediately.
FUNCTIONS OF VP FOR FINANCE

• Dividend Policies - These

determine when the
company should declare
cash dividends.