Business-Finance Module 1 PDF

Preview

Summary

Download Business-Finance Module 1 PDF

Description

BUSINESS FINANCE Quarter 1 – Module 1: Major Roles in Financial Management and Individuals Involved

Quarter 1 – Lesson 1: Major Roles in Financial Management and Individuals Involved First Edition, 2020 Republic Act 8293, section 176 states that: No copyright shall subsist in any work of the Government of the Philippines. However, prior approval of the government agency or office wherein the work is created shall be necessary for exploitation of such work for profit. Such agency or office may, among other things, impose as a condition the payment of royalties. Borrowed materials (i.e., songs, stories, poems, pictures, photos, brand names, trademarks, etc.) included in this module are owned by their respective copyright holders. Every effort has been exerted to locate and seek permission to use these materials from their respective copyright owners. The publisher and authors do not represent nor claim ownership over them. Published by the Department of Education, Schools Division of Antique Development Team of the Module Writer:

Necca T. Palcat-Berin

Content Editor:

Kristin M. Cepeda, Danilo J. Salmorin

Illustrator:

Conrad Ladislee B. Tua III

Layout Artist:

Phoenix Allanah Zandria Q. Salcedo-Tordesillas

Management Team: Felisa B. Beriong, CESO VI Corazon C. Tingson, CESE Gaudencio C. Riego PhD Danilo J. Salmorin Schubert Anthony C. Sialongo Phoenix Allanah Zandria Q. Salcedo-Tordesillas Marian Rose B. Sarmiento

Printed in the Philippines by ________________________ Department of Education – Region VI – Schools Division of Antique Office Address: Telefax: E-mail Address:

Binirayan, San Jose de Buenavista, Antique (036) 549=9837 [email protected]

Business Finance Quarter 1 – Module 1: Major Roles in Financial Management and Individuals Involved

1

Aiming at the Target In this lesson, you will learn how to: • explain the major roles of financial management and the different individuals involved; and (ABM_BF12-IIIa-1) • explain the flow of funds within an organization – through and from the enterprise—and the role of the financial manager. (ABM_BF12-IIIa-5)

Trying the Challenge TRUE or FALSE. Direction: On your answer sheet, write TRUE if the statement is correct and FALSE if otherwise. _______1. A Chief Executive Officer (CEO) or President oversees the company’s operation and act as a representative of a company in various activities. _______ 2. In the attempt of maximizing the wealth of the business firm, a financial manager’s decisions must include planning, acquiring, and utilizing of funds involving its risk and return impact. _______ 3. A VP for Marketing has a function that is associated with the finance activity of the firm. _______ 4. A Working Capital refers to a firm’s long-term assets and its long-term liabilities, that deals with the day to day operations of the company. _______ 5. Managing the firm’s working capital to ensure a sufficient funds for its continuous operation and to avoid costly disruptions is known as an Investment Decision of a Finance Manager. _______ 6. The Dividend Policy as one of the financial decisions, deals with identifying the optimal dividend distribution to be issued to owners, the rate of payments made, and the amount retained for the firm. _______ 7. Among the responsibility of a VP for Production is to ensure that customer’s demands and production meet. _______ 8. A VP for Finance deals with the selling, promotion, and distribution of a product. _______ 9. VP for Finance or the Financial Manager has the responsibility to determine an appropriate mix of debt and equity of an organization. _______ 10. A financial decision that deals with level of inventories, cash and securities to be maintained on hand; the credit policy to be offered to customers, and mode of payment when purchasing raw materials or merchandise is an operating decision of a finance manager.

1

Major Roles in Financial Management and Individuals Involved

Lesson

1

Connecting to the Past I. Copy the table on your answer sheet. Write the three levels of management, and give an example/s for each level. Level of Management

Example(s)

1. 2. 3.

Gearing Up to Start Finance is an act or process of raising or providing funds. (www.merriamwebster.com>finance)

Finance is the science and art of managing money. (Gitman & Zutter, 2012)

Hitting the Target

1

An organizational structure shows the roles and functions of the employees in a company. Job descriptions and functions may vary from different companies, depending on its size, and form of organization, but basic and important features of functions are common in nature. For example, in a small business, the president or head of the company can also directly perform the responsibility of the marketing, finance and production managers, while in a big or very large companies, there are Chief Financial Officers (CFO) or VP for Finance that assumes the responsibility that contributes to the good financial decisions and directly reports to the top management; and other VP’s for specific departments. Each line is working for the interest of the person above them, based on the diagram, the managers or VP’s are working for the interest of the board of directors, and the decisions of the board of directors are for the interest of the shareholders, therefore, every individuals goal in an organization must be for the wealth maximization of the shareholders’. Positions and their Roles: Shareholders. Owners of shares in a company. Each share held is equal to one voting right. The shareholders elect the Board of Directors (BOD). Board of Directors. The highest policy making body in a corporation. An elected group of individuals that represent shareholders. Manages the company. Responsibilities of the Board of Directors (BOD):

• 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 (CEO). Oversees the overall operations and resources of the company. Ensures that planned strategies as approved by the board were implemented and executed. Responsibilities of the President or CEO:

• 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. • Carries out the decision making for all functions

2

VP for Marketing. Directing and coordinating company’s sales, promotion, and distribution of products. Responsibilities of the VP for Marketing:

• Formulates 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 reserach that will allow the company identify new marketing opportunities. • Promoting good relationships with customers and distributors. (Cayanan, 2015) VP for Production. Ensures production meets customers demand. Maximizing company’s optimal operating performance. Determines an effective production plan with cost efficient and quality-based output process that maximizes the use of company’s production facilities. Responsibilities of the 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. Oversees the administrative task and functions and develops strategies to enhance staff’s performance. Organize and manage the functions of different departments in the firm. Responsibilities of the 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 company. (Cayanan, 2015) Financial Management Deals with decisions that are supposed to maximize the value of shareholders’ wealth. (Cayanan) • These decisions will ultimately affect the markets perception of the company and influence the share price. • The goal of financial management is to maximize the value of shares of stocks. 3

•

Managers of a corporation are responsible for making the decisions for the company that would lead towards shareholders’ wealth maximization.

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. 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. 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, like sales & marketing and manufacturing departments for example, these departments are crucial for the firm’s survival, but funds are needed in order for them to function effectively and operate properly. 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. 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. Functions of Finance Manager Four (4) Functions of a Financial 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.).

4

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. Accounting Equation is Asset = Liabilities + Owner’s Equity. To be able to acquire assets, there must be a source of funds. If such asset was bought through cash from the firm’s shareholders own money, its then finance by equity. On the other hand, if the money used to buy an asset came from borrowings, it is then finance by debt. To illustrate, refer to the figure below.

From this figure it shows that the capital structure is 60% debt and 40% equity. There is no ideal mixture of debt and equity across corporations. 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. 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. A financial decision that deals with the management of firm’s assets. To determine the real asset of the business and best asset mix or the amount of money invested in current and fixed assets. The assets that generates cash flows that are needed to meet the firm’s operating expenses, interest paid to creditors, taxes, and dividends to shareholders. A financial manager must also ensure that investments in current assets are sufficient to be able to meet or pay its obligations when due.

5

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. 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.

6

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

Remember that investing is one of the finance manager’s function, and investing is where to put its excess cash to make it more profitable, may it be short-term or long-term investment. Some small companies that are expanding may have limited access to long term financing leading to these small companies to reinvest their earnings rather than paying out as dividends. While companies that have access to long term sources of funds may be able to declare dividends even though they have investment opportunities. However, these investment opportunities are 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. This chapter is an adaptation of Teaching Guide for Senior High School, Business Finance by CHED K12, 2016 and is used under a CC-BY-NC-SA 4.0 International license.

Strengthening the Grasp 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 owners?

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.

7

▪ ▪

▪

▪

▪

▪

▪

▪

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.

Checking the Target Choose the letter of the correct answer. Write your answer on your answer sheet. 1. Decision making process that involves planning, acquiring, and utilizing of funds that considers the risk-return trade-offs, to maximize the owners’ or shareholder’s wealth. A. Finance C. Financial Management B. Marketing D. Manufacturing

8

2. Has the role to determine the total fund requirements of the firms; assets to be acquired and best patterns to finance the assets. A. President/ CEO C. VP for Operations B. Board of Directors D. VP for Finance 3. Formulate strategies and plans that deals with selling, promotion and distribution of the goods or product. A. VP for Finance C. VP for Production B. VP for...