Business Finance

Quarter 1 – Module 1:
Major Roles in Financial
Management and Individuals
Involved
Finance is an act or process of raising or
providing funds. (www.merriam-
webster.com>finance)
Finance is the science and art of
managing money. (Gitman & Zutter,
2012)
•Finance is applicable wherever there is
cash flow.
• Cash flow plays a vital role in
determining the firm’s financial health;
its ability to produce sufficient cash to
pay its obligations when due.
• Financial Management refers to strategic planning,
acquiring, directing, and controlling of financial
undertakings in an organization in a way that it achieves
its goal.

• Maximizing the value of the owner(s) share, as a finance

manager, one must need to learn to identify a sound
investment, good planning and allocation of owner(s)
resources in the profits making venture that will
favorably increase the value of the owner(s) share.
 Role of Finance Manager
• Finance Manager’s responsibility includes the allocation of
funds to its current and fixed assets and to strategize an ideal
mixture of debt and equity financing that is suited for the firm as
well as determining the appropriate risk-return trade off in order
to achieve its goal of maximizing its wealth for its shareholders.
Four Functions of Finance Manager
1. Financing
2. Investing
3. Operating
4. Dividend Policies
 •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.
Equity Debt
 •Investment Decisions

• Investing is where to put your excess cash to

make it more profitable.
• Expanding that definition, let us include
cash held taken from funds as a result of
financing decisions. Investments may either
be short term or long term.
Investing
•Short Term Investment – needed
when the company is in an excess
cash position.
•Long Term Investment – visions
profitability in the long run
Budgeting
a spending plan, a tool to put you in
control of your money. It shows how
much money you have, where it needs to
go to meet your needs and wants and
when you will be able to reach your
financial goals.
Forecasting
Forecasting is a technique that
uses historical data as inputs to
make informed estimates that are
predictive in determining the
direction of future trends
Capital Budgeting Analysis
Capital budgeting is the process of making
investment decisions in long term assets. It is the
process of deciding whether or not to invest in a
particular project as all the investment
possibilities may not be rewarding. Thus, the
manager has to choose a project that gives a rate
of return more than the cost financing such a
project.
 • Operating Decisions

Deal with the day-to-day operations

of the company. The VP for Finance
responsibility will include as to
determining how to finance working
capital accounts such as short-term
assets.
•Short term Sources
- Twelve months

Long Term Sources

-mature in longer period
Working Capital is the main
concern of operating decisions.
Managing the working capital of the firm
is a day-to-day activity that ensures
sufficient resources to continue its
operation and to avoid costly disruptions.
Working capital refers to short-term
assets and labilities of a firm.
• In managing the working capital, the following must be taken into
consideration:

1. How much cash, and inventory must be retained on hand?

2. What will be the company’s credit policy and terms when
selling?
3. How and where would a firm borrow to generate its short-term
financing?
4. In purchasing of goods, will the firm pay in cash for its raw
materials
or goods, or should it borrow in short-term, or purchase on credit?
•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 include short-term bank loans and suppliers’ credit
(amount owed to suppliers for products/services provided) are
funds that are payable in at most 12 months. Short-term loans
generally have lower interest rates compared to long-term loans,
heading to lower financing cost.

• Since long-term sources matures in longer periods, creditors/lenders

anticipate more risk and therefore requires higher interest rate as
compared to short term sources. Given the time to mature, long
term sources have longer span of time compared to short term
sources, therefore the company has more time to gather cash to pay
its obligations when due.
 •Dividend Policy
• Shareholders return of investment based on their shareholdings
were paid by companies through cash dividends. Wherein,
investors buy stocks of certain companies with the expectation of
receiving dividends at a certain time. Companies who fail to give
dividends may disappoint these investors.
• Therefore, a finance manager’s responsibility will include the
determination of when the company should declare cash
dividends, the frequency of payment of its dividends, and the
amount to be retained by the by the company in the form of
reserves for financing its future growth or expansion.
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.

Factors that will affect the management’s decision in paying
dividends:

• Availability of financially viable long-term investment

• Access to long term sources of funds

• Management’s Target Capital structure

Wrapping Up to Go
• Maximizing the value of the owner(s) share, as a finance manager, one must need to
learn to identify a sound investment, good planning and allocation of owner(s) resources
in the profits making venture that will favorably increase the value of the owner(s) share
▪ A financial manager is part of a top management team whose ultimate goal is to
maximize the shareholders wealth.
▪ A VP for Finance is one of the top officers of the company that reports directly to the
president. Involves in making financial decisions. Oversees capital structure of the
company and determine the best mix of financing alternatives. Has the role to acquire
necessary funds and ensure its used effectively.
▪ The president alone cannot manage the company on his own, especially when the firm
has become too big to handle. To assist him are the vice presidents of different functional
areas: finance, marketing, production, and administration.
▪ Finance plays a vital role in a business firm that cuts across functional
limitations. There are departments of an organization that are needed for
the company’s survival. Since finance deals with the management of
money, a finance manager must communicate and interact with other
managers to determine their respective goals and ways to achieve them.
▪ The 4 functions of finance manager are financing, investing, operating
and making decisions on dividend policies that aims to achieve the goal
of financial management; to maximize the owner’s wealth by maximizing
the wealth of the firm.
▪ 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).
• 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.

▪ 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.
 Activity
Analyze and answer the questions briefly on your answer
sheet.
• 1. What is the financial manager’s role in achieving the
firm’s goal?
• 2. Why is a sound financing decision of a Finance
manager important in the maximization of the wealth of
the owner