Lesson 2: Role Of The Finance Manager PDF

II. ROLE OF THE FINANCE MANAGER LEARNING OBJECTIVES 1. Explain the role of the Finance Manager in achieving the primary goal of the business firm 2. Describe the typical organization of the finance Department and its relationship with other key functional Managers 3. Explain briefly the...

II. ROLE OF THE FINANCE MANAGER LEARNING OBJECTIVES 1. Explain the role of the Finance Manager in achieving the primary goal of the business firm 2. Describe the typical organization of the finance Department and its relationship with other key functional Managers 3. Explain briefly the major types of decisions that the Finance Manager makes  ROLE OF THE FINANCE MANAGER Financial Manager Makes Decisions involving Analysis Acquisition Utilization & Planning of Funds of Funds Impact on Risk and Return Affect the Market Value of the Business Firm Lead to Shareholder’s Wealth Maximization  The Finance Organization BOD Chairman of the Board and Chief Executive Officer President and Chief Operations Officer (COO) VP Marketing VP Finance CFO VP Production Treasurer Controller Cash Credit Tax Cost Mgr. Mgr. Mgr. Acctg. Capital Financial Fin. Acctg. Data Proc Exp. Planning Mgr. Mgr.  Finance Organization  In a SMALL BUSINESS – the head of the firm (President or General Manager) often assumes direct responsibility for marketing, production, finance and other functions such as human resource, management, security., etc.  In a MEDIUM-SIZE – a separate department headed by an officer with the title as Finance Manager may assigned primary responsibility for the narrower funds supply aspects of the finance function.  Finance Organization  In a LARGE COMPANY – both the treasurer and the controller report to a Chief Financial Officer (CFO) who often has the title, Vice-President – Finance. The CFO usually is one of the senior officers of the firm reporting directly to the President or Executive Vice President or Chief Operating Officer and is an important member of the “top-management team” MSME  Finance Organization The top-management team of the company usually consists of the ff: a. Board of Directors b. President c. Vice President d. Vice Presidents and Top Management Committees.  Finance Organization The financial management function is usually associated with a top officer of the firm such as a Vice President of Finance or the Chief Financial Officer. VP for Finance – coordinates the activities of the Treasurer and the Controller.  Controller ‘s office – handles cost and financial accounting, tax payments, and management information systems.  Treasurer’s office – 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 a business. The functional areas of business operations for a typical manufacturing firm are: a. Manufacturing – deals with the design and production of product. b. Marketing – involves the selling, promotion and distribution of product. *Manufacturing and marketing are critical for the survival of a firm. What will be  Relationship with other Key Functional Managers in the Organization However, these other functional areal could not operate without funds. Finance is concerned with all of the monetary aspects of a business. The financial manager must interact with other managers to ascertain the goals that must be met, when and how to meet them. Thus, finance is an integral part of total management and cuts across functional boundaries.  TYPES OF FINANCIAL DECISIONS Four major types of decisions that the Finance Manager of a modern business firm will be involved: 1. Investment Decisions 2. Financing Decisions 3. Operating Decisions 4. Return of Capital Decisions *All these decisions aim to maximize the owner’s wealth though maximization of the firms wealth.  1. Investments Decisions - are those which determine how scarce or limited resources in terms of funds of the business firms are committed to projects. It deals with managing the firm’s assets. Asset Mix – refers to the amount of money invested in current and fixed assets. The investment decision should aim at investments in assets only when they are expected to earn a return greater than a minimum acceptable return  2. Financing Decisions Financing decisions assert that the mix of debt and equity chosen to finance investments should maximize the value of investments made. These decisions should consider the cost of finance available in different forms and the risks attached to it. 3. Operating Decisions This third responsibility area of the finance manager concerns working capital management.  Cont. – Operating decisions The term WORKING CAPITAL – refers to a firm short-term assets (i.e., inventory, receivables and short- term investments) and its short- term liabilities (i.e., accounts payable, short-term loans). Managing the firm’s working capital is a day-to-day responsibility that ensures that the firm has sufficient resources to continue its operations and avoid costly interruptions. It also involves a number of activities Issues on managing a firm’s Working Capital a. The level of cash, securities and inventory that should be kept on hand. b. The credit policy (i.e., should the firm sell on credit? If so, what terms should be extended?) c. Source of short-term financing (i.e., if the firm would borrow in the short- term, how and where should it borrow?) d. Financing purchases of goods (i.e., should the firm purchase its raw 4. Return of Capital Decisions The return of capital (or dividend distribution to corporate owners) decisions is concerned with the determination of quantum of profits to be distributed to the owners, the frequency of such payments and the amounts to be retained by the firm. *The basic objective of the investment, financing, operating and return of capital (or dividend distribution) is to maximize firms’