BUSINESS FINANCE

Tue Jan 21

The Major Role of Financial Management and The Different Individuals Involved

Finance

  • is defined as the management of money and includes activities such as investing, lending, borrowing, budgeting, saving and forecasting.

Financial Management

  • It means planning, organizing, directing and controlling the financial activities such as procurement and utilization of funds of the enterprise.

  • It means applying general management principles to financial resources of the enterprise:

Role of Corporate officers in Financial Management

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.

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.

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 company. (Cayanan, 2015)

VP for Finance

It is a person who takes care of all the important financial, functions of an organization. The person in charge should maintain a far sightedness in order to ensure that the funds are utilized in the most efficient manner.

His actions directly affect the Profitability, growth and goodwill of the firm.

Role of a Financial Manager

1. Raising of Funds - a firm can raise funds by the way of equity and debt.

  • It is the responsibility of a financial manager to decide the ratio between debt and equity.

  • It is important to maintain a good balance between equity and debt.

2. Allocation of Funds - a funds should be allocated in such a manner that they are optimally used. In order to allocate funds in the best possible manner the following point must be considered:

  • The size of the firm and its growth capability

  • Status of assets whether they are long-term or short-term

  • Mode by which the funds are raised

These financial decisions directly and indirectly influence other managerial activities. Hence, formation of a good asset mix and proper allocation of funds is one of the most important activity

3. Profit Planning - profit earning is one of the prime functions of any business organization.

  • Profit earning is important for survival and sustenance of any organization. Profit planning refers to proper usage of the profit generated by the firm.

4. Understanding Capital Markets - shares of a company are traded on stock exchange and there is a continuous sale and purchase of securities. Hence a clear understanding of capital market is an important function of a financial manager.

  • 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 sbareholders otherwise they would not have been elected in that position.

Wed Jan 22

Distinguishing Financial Institution from Financial Instrument and Financial Market

1. Financial institution - companies in the financial sector that provide a

broad range of business and services including banking, insurance, and investment management.

Types of Financial Institutions

A. Depository Institutions are allowed to accept monetary deposits from the consumers legally. These include commercial banks, savings banks, credit unions, and savings and loan associations.

  • A.1. Commercial Banks - Commercial banks accept deposits from the public and offer security to their customers. Due to commercial banks, it is no longer required to keep huge large currency on hand.
    Using commercial bank facilities, transactions can be done through checks or credit/debit cards.

  • A.2. Saving Banks - Saving banks perform the function of accepting the savings from the individuals and lending to the other consumers.

Savings & Loan Companies

Provide many of the same services as banks but focus more on residential mortgages

Originally created to provide more economic opportunities to the middle-class

Some are private entities, mutually owned by customers while others are publicly traded companies

Commercial Banks

Focuses more on working with large businesses and unsecured credit services

Owned and operated by a board of directors selected by stockholders

Many services are conducted online exclusively

  • A.3. Credit Unions - Credit unions are the associations that are created, owned, and also operated by the participants who are voluntarily associated with saving their money and then lending it members of their union only.

As such, these institutions are the not-for profit organizations enjoying tax-exempt status.

  • A.4. Saving and Loan Association - These institutions collect the funds of many of the small savers and then lend them to home buyers or other types of borrowers.

They specialize in providing help to the people in getting residential mortgages.

Bank

More advanced mobile apps and technology

Provides more branches and ATMs nationwide

Tends to have stricter rules and less flexibility with customer service

Offers more options for banking, retirement and investments

Makes a profit off of its customers and investors

Credit Union

Non-profit institution owned by members collectively

Offer less options in commercial banking

Lower fees and better interest rates on loans and saving accounts

Provides thousands of shared CO-OP branch locations and surcharge-free ATMs

B. Non-Depository Institutions - institutions serve as the intermediary between the savers and the borrowers, but they de not accept the time deposits. Such institutions perform their activities of lending to the public either by way of selling securities or through the insurance policies.

  • B.1. Insurance Companies - Individuals purchase insurance (life, property and casualty, and health) protection with insurance premiums. The insurance companies pool these payments and invest the proceeds in various securities until the funds needed to pay off claims by policyholders. Because they often own large blocks of a firm's stocks or bonds, they frequently attempt to influence the management of the firm to improve the firm's performance, and ultimately, the performance of the securities they own.

Ex. PHILAM LIFE, Manulife, Sun Life Financial, FINANCE MD, GENERAL PILIPINAS, Insular Life

  • B.2. Mutual Funds - Mutual funds owned by investment companies that enable small investors to enjoy the benefits of investing in a diversified portfolio of securities purchased on their behalf by professional investment managers. When mutual funds use money from investors to invest in newly issued debt or equity securities, they finance new investment by firms. Conversely, when they invest in debt or equity securities already held by investors, they are transferring ownership of the securities among investors.

Types: Money Market, Bond Funds, Equity Funds, Balanced Funds, Equity Index Funds

  • B.3. Pension Funds - Financial institutions that receive payments from employees and invest the proceeds on their behalf. Other financial institutions include pension funds like Government Service Insurance System (GSIS) and Social Security System (SSS), unit investment trust fund (UITF), investment banks, and credit unions, among others.

2. Financial Instrument - is a real or a virtual document representing a legal agreement involving some sort of monetary value. These can be debt. securities like corporate bonds or equity like shares of stock. When a financial instrument issued, it gives rise to a financial asset on one hand and a financial liability or equity instrument on the other.

2.A. Financial Asset

  • 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.

Examples: Notes Receivable, Loans Receivable, Investment in Stocks, Investment in Bonds

2.B. 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.

Examples: Notes Payable, Loans Payable, Bonds Payable

2.C. An Equity Instrument is any contract that evidences a residual interest in the assets of an entity after deducting all liabilities.

  • Examples: Ordinary Share Capital, Preference Share Capital

  • Identify common examples of Debt and Equity Instruments

2.D. Debt Instruments generally have fixed returns due to fixed interest rates.

Examples: Treasury Bonds and Treasury Bills issued by the Philippine

government, Corporate Bonds issued by publicly listed companies

2.E. 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.

Types of Equity Instrument

  • Preferred Stock- holders have priority over a common stock in terms of claims over the assets of a company.

  • Common Stock- holders are the real owners of the company

3. Financial Market - refers to a marketplace, where creation and trading of financial assets, such as shares, debentures, bonds, derivatives, currencies, etc. take place.

Types of Financial Market

3.A. Stock market - trades shares of ownership of public companies. Each share comes with a price, and investors make money with the stocks when they perform well in the market. It is easy to buy stocks. The real challenge is in choosing the right stocks that will earn money for the investor.

3.B. Bond market - offers opportunities for companies and the government to secure money to finance a project or investment. In a bond market, investors buy bonds from a company, and the company returns the amount of the bonds within an agreed period, plus interest.

3.C. Commodities market - traders and investors buy and sell natural resources or commodities such as corn, oil, meat, and gold. A specific market is created for such resources because their price is unpredictable. There is a commodities futures market wherein the price of items that are to be delivered at a given future time is already identified and sealed today.