BUSINESS FINANCE

THE CORPORATE ORGANIZATION STRUCTURE

 BUSINESS FINANCE
THE CORPORATE ORGANIZATION STRUCTURE

•Shareholders
The shareholders elect the Board of
Directors (BOD). Each share held is
equal to one voting right. Since the
BOD is elected by the shareholders,
their responsibility is to carry out the
objectives of the shareholders
otherwise, they would not have been
elected in that position.
 BUSINESS FINANCE
THE CORPORATE ORGANIZATION STRUCTURE

•Board of Directors
The board of directors is the highest policy
making body in a corporation. The
board’s primary responsibility is to ensure
that the corporation is operating to serve
the best interest of the stockholders. The
following are among 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 (Cayanan, 2015)
•President (Chief Executive Officer)
- The roles of a president in a corporation
may vary from one company to another.
Among the responsibilities of a president are
the following:
- 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.
 Although the president carries out
the decision making for all functions, it
would be difficult for him/her to do this
alone. The president cannot manage
the company on his own, especially
when the corporation has become too
big. To assist him are the vice
presidents of different functional areas:
finance, marketing, production and
administration.
•VP for Marketing
The following are among the responsibilities of
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. (Cayanan, 2015)
•VP for Production
The following are among the responsibilities
of 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. (Cayanan, 2015)
•VP for Administration
The following are among the responsibilities
of 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
Message from the CFOs
•The following are quotes from the Chief Financial Officers
(CFOs) of the respective corporations:
- Unilever: “Finance plays a critical role across every
aspect of our business. We enable the business to turn our
ambition and strategy into sustainable, consistent and
superior performance” - Jean-Marc Huët (Unilever)
- Jollibee: “It’s very exciting because you are not just
thinking of today but what the company will need in the
future” - Ysmael V. Baysa (Morales, 2013)
- Globe Telecom: “Yesterday’s solutions are never
adequate for the future” - Albert De Larrazabal (Klobucher,
2015)
- SM Corporation: “Now, we don’t go out because we need
funds. We go out because it’s an opportunity.” – Jose T.
Sio
•Reflect on the quotes cited above. How critical and
•VP for Finance
The following are among the
responsibilities of VP for Finance:
--Oversee all financial related matters
where depth and scope is relative to the size
of the company.
--Create financial plans as defined by the
board of directors.
--Direct financing strategies, analysis,
forecasting and budget management.
--Direct all aspects of accounting
operations such as receivables, payables,
payroll and financial reporting.
Functions of a Financial Manager

1. 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.).
•The role of the VP for Finance or the Financial Manager is to
determine the appropriate capital structure of the company.
Capital structure refers to how much of your total assets is
financed by debt and how much is financed by equity. Take a
look at the figure below:
120

100

80

60

40

20

0
ASSETS CAPITAL
STRUCTURE

Table 1: Sample Capital Structure

- To be able to acquire assets, our funds must have
come somewhere. If it was bought using cash
from our pockets, it is financed by equity.
- On the other hand, if we used money from our
borro-wings, the asset bought is financed by debt.
-In the figure above, the total assets is financed by
60% debt and 40% equity. Accordingly, the capital
structure is 60% debt and 40% equity.
-Do you think there is an ideal mix of debt and
equity across corporations?
Answer:
-No. The mix of debt and equity
varies in different corporations
depending on management’s
strategies.
-It is the responsibility of the Financial
Manager to determine which type of
financing (debt or equity) is best for
the company.
2. Investing decisions - investments may
either be short term or long term.
- Short term investment decisions are
needed when the company is in an excess
cash position.
•To plan for this, the Financial Manager
should be able to make use of Financial
Planning tools such as budgeting and
forecasting.
•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.
•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.

3. Operating decisions deal with the daily

operations of the company. The role of the VP for
finance is determining how to finance working
capital accounts such as accounts receivable and
inventories. The company has a choice on whether
to finance working capital needs by long term or
short term sources. 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?
--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.
-- 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.
--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).
-- 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. Hence, the choice between short and long
term sources depends on the risk and return trade-
off that management is willing to take.
•Dividend Policies. Recall that cash dividends are paid by corporations to
existing shareholders based on their shareholdings in the company as a
return on their investment. Some investors buy stocks because of the
dividends they expect to receive from the company. Non-declaration of
dividends may disappoint these investors. Hence, it is the role of a
financial manager to determine when the company should declare cash
dividends.
- 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.
Question: What do you think will affect the decision of management in
paying dividends? Be reminded that dividends come from the company’s
cash and availability of unrestricted retained earnings.
- Answer:
•Availability of financially viable long-term investment
•Access to long term sources of funds
•Management’s Target Capital structure
•One of the functions of a finance manager is investing and its available
cash may be used to invest in long term investments that would increase
the profitability of the company. Some small enterprises which are
undergoing expansion may have limited access to long term financing
(both long term debt and equity). This results to these small companies
reinvesting their earnings into their business rather than paying them out
as dividends.
•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.
- The management usually appropriates a portion of retained earnings for
investment undertakings and this may limit the amount of retained
earnings available for dividend declaration.
- Creditors are not willing to finance entirely the cost of a company’s long term
investment. Hence, the need for equity financing (e.g. internally generated funds
or issuance of new shares).
-Examples of these companies are publicly listed companies such as PLDT,
Globe Telecom, and Petron. PLDT and Globe are two of the Philippine listed
companies which have generously distributed cash dividends for the last five
years (information as of 2014).
•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.

The Financial System

1. Financial Instruments
•When a financial instrument is issued, it gives rise to a financial asset on one
hand and a financial liability or equity instrument on the other.
- A Financial Asset is any asset that is:
•Cash
•An equity instrument of another entity
•A contractual right to receive cash or another financial asset from another entity.
•A contractual right to exchange instruments with another entity under conditions
that are potentially favorable. (IAS 32.11)
•Examples: Notes Receivable, Loans Receivable, Investment in Stocks,
Investment in Bonds
- A Financial Liability is any liability that is a contractual obligation:
•To deliver cash or other financial instrument to another entity.
•To exchange financial instruments with another entity under conditions that are
potentially unfavorable. (IAS 32)
•Examples: Notes Payable, Loans Payable, Bonds Payable
- An Equity Instrumentis any contract that evidences a residual interest in the
assets of an entity after deducting all liabilities. (IAS32)
•Examples: Ordinary Share Capital, Preference Share Capital
•When companies are in need of funding, they either sell debt securities (or
bonds) or issue equity instruments. The proceeds from the sale of the debt
securities and issuance of bonds will be used to finance the company’s plans. On
the other hand, investors buy debt securities of equity instruments in hopes of
receiving returns through interest, dividend income or appreciation in the
financial asset’s price.
•Common examples of Debt and Equity Instruments:
- Debt Instruments generally have fixed returns due to fixed interest rates.
Examples of debt instruments are as follows:
•Treasury Bonds and Treasury Bills are issued by the Philippine government.
These bonds and bills have usually low interest rates and have very low risk of
default since the government assures that these will be paid.
•Corporate Bonds are issued by publicly listed companies. These bonds usually
have higher interest rates than Treasury bonds. However, these bonds are not risk
free. If the company which issued the bonds goes bankrupt, the holder of the
bonds will no longer receive any return from their investment and even their
principal investment can be wiped out.
-Equity Instruments generally have varied returns based on the performance of
the issuing company. Returns from equity instruments come from either dividends
or stock price appreciation. The following are types of equity instruments:
•Preferred Stock has priority over a common stock in terms of claims over the
assets of a company. This means that if a company were to be liquidated and its
assets have to be distributed, no asset will be distributed to common stockholders
unless all the claims of the preferred stockholders have been given.
 Moreover, preferred stockholders have also priority over common
stockholders in cash dividend declaration. Dividends to preferred stockholders are
usually in a fixed rate. No cash dividends will be given to common stockholders
unless all the dividends due to preferred stockholders are paid first. (Cayanan,
2015)
•Holders of Common Stock on the other hand are the real owners of the company.
If the company’s growth is spurring, the common stockholders will benefit on the
growth. Moreover, during a profitable period for which a company may decide to
declare higher dividends, preferred stock will receive a fixed dividend rate while
common stockholders receive all the excess.
2. Financial Markets
- Primary vs. Secondary Markets
•To raise money, users of funds will go to a primary market to issue new
securities (either debt or equity) through a public offering or a private placement.
•The sale of new securities to the general public is referred to as a public offering
and the first offering of stock is called an initial public offering. The sale of new
securities to one investor or a group of investors (institutional investors) is
referred to as a private placement.