The Financial Role of the

Company

Izaskun Larrieta
 Unit 1. The financial Role of the Company
Week 1
Master class
Task 1

The main objective of this topic is to establish the

objectives of financial management and the
importance of it, as well as the CFO for the
organization.
The financial role of the company
1. The company as a system: the
financial subsystem
2. The financial role. Financial
management
3. Financial Manager
4. Organization of the financial
function
1.The company as a system
• What is a system?

"A set of ordered elements (which means that

any stimulus that acts on any of them affects
the rest) related through an organizational
structure for the achievement of certain
objectives"
1.The company as a system
• What is a company?

A system that carries out a productive activity,

that is, produces goods or services, in order to
create or increase the usefulness of goods
1.The company as a system

E E
N N
Productive Transformation
V V
factors process Outcomes
I I
R Inputs Outputs R
O O
N N
M M
E E
N N
T T
S
1.The company as a system
• The use of a series of productive factors (Inputs)
coordinated through an organizational structure,
such as:
• Financial resources
• Human Resources
• Facilities
• Raw Materials
• Machinery, energy, etc
Financial subsystem

1.The company as a system

Basic processes that take place in the company

ADMINISTRATION SUBSYSTEM
PHYSICAL SUBSYSTEM
Planning
Physical-economic subsystem
Organization
Physical-financial subsystem
Control
2.The financial role

PHYSICAL SUBSYSTEM

ECONOMIC SUBSYSTEM FINANCIAL SUBSYSTEM

Investment Financing
Procurement/Production Sales/Marketing
2.Financial Subsystem
• Mission
▫ Collection of funds or resources, financing
function
▫ Application of the funds in those elements of the
economic structure that are necessary for the
realization of the activity, investment function
2.Financial Subsystem
• The financial function is that within the
company prepares and executes financial
decisions
• It is the area of activity of the company whose
mission is to obtain financial resources and
allocate or manage them to obtain a profitability
higher than the cost thereof
2.Financial Subsystem

•Financial Management
involves:
▫Investment decisions
▫Financing decisions
▫Dividend decisions
2.Financial Subsystem
• It will cover the following aspects:
▫ Financial analysis
▫ Financial forecasts
▫ Long-term operations
▫ Investment and financing decisions
▫ Negotiation of credits
▫ Treasury Management
▫ Result Policy
▫ External financial information
Relationship between
Finance, Economics, and Accounting
• Economics provides broad pictures of economic
environments for decision making
• Accounting provides financial data through
• Income statements
• Balance sheets
• Statement of cash flows
• Finance links economic theory with accounting
numbers
2. Financing function
• The financial function as a science within the
company's economy does not appear until the
20th century. Two steps:
• The Classical Financial Theory
• Modern Financial Theory
2. The Classical Financial Theory
• It ranges from the beginning in the twentieth
century to the middle of the same
• 1900s— Finance emerges as separate field from
economics
• The union by railroad of the East coast with the
West in the US triggered processes of mergers,
acquisitions and corporate takeovers to form
important companies of bigger dimension
• The bigger business dimension led to an increase in
financial requirements and conditioned the financial
theory of the company
2. The Classical Financial Theory
Focus
• It is mainly concerned with raising funds to
carry out the activity
• Focuses attention on fixed liabilities of the
company and obtaining long-term resources
• It is practically based on the corporation
• Does not pay attention to the financial problems
of the growing company
2. The Classical Financial Theory
• Crisis 1929
▫ Overproduction
▫ Sales decline/Drop in sales
▫ Stock increase
▫ Lack of liquidity
• Rebuilding the economy after World War II
(1945)
2. The Classical Financial Theory
• 1930s— Financial practices revolve around such
topics as
• Capital preservation
• Liquidity maintenance
• Reorganization of financially troubled
corporations
• Bankruptcy process
2. The Classical Financial Theory
• At the end of the 50's and the beginning of the
60's there were two events that caused a change
in the orientation of finance
▫ Gradual reduction of unit benefits
▫ Birth of new technologies that enable investment
projects in new sectors
2.Modern Financial Theory

• Oil crisis. Affects the financial structure of the

company
▫ Reduction of expected return on investment
▫ Risks of investments increase
▫ Increase in interest
▫ Markets opt for short-term variable interest
financing
2.Modern Financial Theory

• Focus
▫ It is not enough to focus efforts on obtaining financial
resources, but rather extends them to the allocation of
resources, to look for profitable investment projects
▫ The problem of the optimal financial structure and the
cost of capital of the enterprise is of concern
▫ The decrease in profits provokes interest in
profitability and liquidity
▫ The dividend policy takes on a leading role as it relates
to the optimal financial structure and the cost of
capital
2.Modern Financial Theory

• 1950s— Finance becomes more analytical

• Financial capital (money) used to purchase real
capital (long-term plant and equipment)
• Cash and inventory management
• Capital structure theory
• Dividend policy
2.Modern Financial Theory
• Decade of the 90s
▫ Technological Innovations
▫ Communication networks
▫ Internationalization of companies
▫ Deregulation of financial markets
2.Modern Financial Theory
• Analyze Investment decisions that determine the
size of the company, operating profits, economic
risk and liquidity
• Financing decisions that condition the dividend
policy, financial charges and the financial risk of
the company
2.Modern Financial Theory
• Focus has been on
• Risk-return relationships
• Maximizing return for given risk level
• Portfolio management
• Capital structure theory
• New financial products with focus on hedging
are now widely used
• Inflation – key variable in financial decisions
2.Modern Financial Theory
• The financial function is the study of the
problems involved in the use and acquisition of
funds of a company
• It must answer the following questions
▫ What volume of funds should be invested?
▫ What magnitude of growth should the company
achieve?
▫ What specific assets does the company have to
acquire?
▫ How should the required funds be financed?
2.Modern Financial Theory
• The possibilities of financing the company will
depend on the existing investment projects
• Investments will target promising and less risky
projects. At greater risk, more return will be
required
• The size and growth of the company are
conditioned by the existence of appropriate
investment alternatives whose profitability
exceeds the cost of the resources used to finance
them
Relationship between investment, financing and
company size
Investment Financing
alternatives alternatives

Company size

Liability composition

Cash outflows
Main returns
Interest payment
Equity remuneration

Retained Profits/
Benefits with holding
Risk Management and the Financial
Crisis
• Reasons for recent financial crisis
• Unwarranted extension of credit
• Creation/sale of mortgage-backed securities
• Losses from credit defaults in excess of banks’
capital in many cases
• Creation of complicated, unregulated
financial products like credit default swaps
(CDS)
• Government action and bail-outs
• New regulations for financial institutions
Practice Exercise 1

You hace 6 minutes to

define 6 main
functions of a finance
manager
3.Financial manager
• The financial manager must attend to the
demands of all departments of the company and
know the behavior of the financial markets as
the financial assets are traded in the financial
markets
3.Financial manager

Industrial Financial
goods market 4
1 market
2

3 Financial
management
Consumer
goods 5 8
7
market 6
3.Financial manager
• The responsibility of the financial manager is to
obtain the necessary resources at the right time
and at the lowest possible cost
• From an investment perspective, he/she has to
analyze the investments and make the most
profitable ones
• Must propose profit-sharing to submit to the
Board of Directors
• Must plan short and long-term financial
resources
3.Financial manager
• Responsible for:
▫ Performance and investment selection policy
▫ Debt policy
▫ Self-financing policy
▫ Dividend Policy
▫ Capital increase policy
Functions of the Financial Manager
4. Organization of the financial function

• It depends on the size of the company

▫ In smaller dimensions, it usually depends on the
property or management
▫ In large companies, the financial manager
depends on the general management that in turn
depends on the Board of Directors and this one of
the Shareholders Meeting
4. Organization Chart of Large Companies
Shareholders Meeting

Boards of Directors

General
Management

Plant Commercial
Production Financial Management
Management
4. Organization of the financial function
• There are financial decisions that correspond to
the General Shareholders' Meeting and are non-
delegable
▫ Variations in share capital
▫ Approval of financial statements
▫ Changes in the structure of the company
▫ Determine the distribution of
results/profits/income/loss
4. Organization of the financial function
• In regard to the Board of Directors,
▫ Prepare and propose to the General Meeting of
Shareholders for approval of the financial
statements, distribution of dividends, capital
variations ...
▫ Making important investment decisions that do
not require the approval of the General Meeting
such as mergers, takeovers
4. Organization of the financial function
• There are decisions that the General
Management delegates in the Financial
Management as, to direct the financial
department that will determine its structure
• The most common or simple is that in which
there are two areas with responsibilities
▫ Controller
▫ Treasury
4. Controller
• The most significant functions are:
▫ Economic-financial analysis determining the
profitability of the investments and preparing and
elaborating reports and financial statements
▫ Planning and capital budgeting, giving coherence
to the objectives of the different departments and
forming a yearly one
▫ Internal and external accounting
▫ Tax management preparing tax plans, filing taxes
...
4. Treasury
Functions
• Financial relationships, forecast of funds and
obtaining them in the best conditions of term, cost,
guarantee
• Analysis of credits, those that the company grants to
customers, those granted by supplier companies or
financial entities
• Planning and control of short-term liquidity by
managing needs and financial surpluses
• Recruitment and management of insurance (risk ...)
Maximize the profitability of the asset

4.Integration of the functions of

Treasury and Controller in the company
Treasury Controller
Provide financing Apply/allocate funds

Minimize the cost of the Maximize the

capital profitability of the asset

Financial policy, investment,

liquidity, debt ratio,
depreciation, control

Financial goal
Profitable expansion

General objectives of the company

Activities of Financial Management
 Financial management concerned with
managing entity’s money
 Functions
• Allocate funds to current, fixed assets
• Obtain best mix of financing alternatives
• Develop appropriate dividend policy within
context of firm’s objectives
Financial Function 4.0
Task 1- Jobs offers in Finance
• Search, classify and analyze different offers of finance
professional profile, job position or labor sector.
• Job offers as varied as possible (press, Internet ...),
announcements of personnel request for the development
of different jobs.
• Analyze and compare the professional profiles,
qualifications and training that are requested for the
performance of the different types of jobs. Analyze and
compare equally, if any, both the personal characteristics
that are requested, as well as the demands for involvement,
commitment and availability requested for the position.
• Analyze in all these cases if there is any implicit gender bias
that is characterizing the covert request of a man or a
woman
• Next week (31/01/2024), each group will present the job
offers that they have analyzed and the conclusions obtained
when applying the test to them.
Student comments regarding the oral presentations

• The activity that I have liked the most has been the
presentations because it is something in which I feel that I am
not very good at, so forcing myself and preparing the
presentations has made me see myself in a mirror, know
myself and control my voice, my nerves, all of me.
• In my opinion the presentations I think they are very
necessary to lose fear and learn how to present a topic.
• The different presentations we have made are very beneficial
to improve our public speaking skills.
• It has helped me to realize that, even if you think that you are
going to do a terrible job with effort and attitude, in the end it
turns out better than you think.
• The presentations of each task also seemed interesting and
necessary to me because until now we had basically not had
the "obligation" to present and take into account the time to
speak, our gestures when referring to us in public, our
clothing and similar aspects.