Lesson 3: Functions of Financial Management

Learning Objectives

After studying Lesson 3, you should be able to:

Describe the Finance Manager's role in achieving the firm's primary goal.
Understand how finance fits in the organizational structure of the firm.
Enumerate the fundamental activities of the Treasurer and the Controller.
Explain how the finance function relates to the other functional areas of a business.
Learn the importance of corporate governance in achieving the goals of a business organization.
Appreciate the importance of ethics in finance.

Introduction

The finance function is one of the major parts of a business organization, which involves the
permanent and continuous process of the business concern. Finance is one of the interrelated functions that
deal with personal function, marketing function, production function, and research and development activities
of the business concern.

FUNCTIONS OF FINANCE MANAGER

The finance manager is one of the important role players in the field of finance function. He must
have complete knowledge in the areas of accounting, finance, economics, and management. His position is
highly critical and analytical in solving various problems related to finance. A person who deals with finance-
related activities may be called a finance manager.

The finance manager performs the following major functions:

1. Forecasting Financial Requirements

It is the primary function of the Finance Manager. He is responsible for estimating the financial
requirements of the business concern. He should estimate, how much finances are required to acquire fixed
assets and forecast the amount needed to meet the working capital requirements in the future.

2. Acquiring Necessary Capital

After deciding the financial requirement, the finance manager should concentrate on how the finance is
mobilized and where it will be available. It is also highly critical.

3. Investment Decision

The finance manager must carefully select the best investment alternatives and consider the reasonable
and stable return from the investment. He must be well versed in the field of capital budgeting techniques to
determine the effective utilization of investment. The finance manager must concentrate on principles of
safety, liquidity, and profitability while investing capital.
4. Cash Management

In present days cash management plays a major role in the area of finance because proper cash
management is not only essential for effective utilization of cash but also helps to meet the short-term
liquidity position of the concern.

5. Interrelation with Other Departments

The finance manager deals with various functional departments such as marketing, production,
personnel, systems, research, development, etc. Finance managers should have sound knowledge not only in
finance-related areas but also well versed in other areas. He must maintain a good relationship with all the
functional departments of the business organization.

Role of Finance Manager

In striving to maximize the owner's 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.

Financial management is responsible for allocating funds to current and fixed assets, obtaining the best
financing alternatives, and developing 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 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).
 This is a simplified organizational chart that highlights the finance activity of a large firm. As shown, the VP
of Finance coordinates the activities of the treasurer and 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 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 products will be
sold. However, these other functional areas could not operate without funds. Since finance is concerned with
all the monetary aspects of a business, the financial manager must interact with other managers to ascertain
goals and 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 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.

The monitors inside a public firm are the board of directors, who are appointed to represent
shareholders' interests. 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 track of the firm’s performance,
conduct their 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), and Bangko
Sentral ng Pilipinas (BSP).
ETHICAL BEHAVIOR

Ethics are of primary importance in any practice of finance. Finance professionals commonly manage
other people’s money. 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.

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
punishments for financial fraud and abuse. Ultimately, financial managers 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.

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