INTRODUCTION TO BUSINESS FINANCE

1. The Corporate organization Structure

Figure 1: Illustration of the Corporate Organization Structure

• From the diagram presented, each line is working for the interest of the person on the line above them.
Since the managers of the company are making decisions for the interest of the board of directors and the
board of directors does the same for the interest of the shareholders, it follows that the goal of each
individual in a corporate organization should have an objective of shareholders’ wealth maximization.
• 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. Ask the learners again
what the objective of the shareholders is just to refresh.
• 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
company. (Cayanan, 2015)

QUOTATIONS FROM VP FOR FINANCES

- 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 (Montealegre, 2015)

INSTRUCTION

1. Functions of a Financial Manager

- Financing
- Investing
- Operating
- Dividend Policies

• Recall from the previous session that there are situations when we are faced with lack of funds. 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 of 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. To illustrate, show/draw the figure below:
 Assets Liabilities Equity

100%

75%

50%

25%

0%
Total Assets Capital Structure

Table 1: Sample Capital Structure

• Recall that Assets = Liabilities + Owner’s Equity.
- 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 borrowings, 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. • Ask the learners if they 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.

• The advantages of debt and equity financing will be discussed in Lesson 5: Sources and Uses of Funds.

• 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 which will be discussed in Lesson 3: Financial Planning Tools and Concepts.
• Moreover, the company should choose which type of investment it should invest in that would provide an
most optimal risk and return trade off. We will learn more about this on Lesson 6: Introduction to
investments.
- 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
• 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. •
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.

• What do you think will affect the decision of management in

paying dividends?
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• 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.

ENRICHMENT
Integration of Learning
• Ask the learners the following:
- Explain why shareholder wealth maximization should be the overriding objective of management.
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- What other positions can you think of that are related to financial management? Explain
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