STUDY GUIDE

BUSINESS FINANCE
UNIT 4
Organization Chart and the Roles of the VP for Finance

Table of Contents

Objectives 2

Organizational Chart 2

Board of directors 3

President 3

VP for Sales and Marketing 4

VP for Production 4

VP for Administration 4

VP for Finance 5

Financing Decisions 5

Investing Decisions 5

Operating Decisions 6

Dividend Policies 6

Access to long-term sources of funds 7

Capital structure 8

Self-test Question 8

Figures

Fig. 1 Illustration of the corporate organization structure 2

Fig. 2 Functions of VP for Finance 5

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OBJECTIVES:
Organizational structure is a business' skeleton. Organizations are alive
and breathing, so they require something to give them shape and support
their life functions. Organizational structures help everyone involved in a
company to clarify and understand everyone else's role and scope. They help
facilitate divisions of labor, efficiency and assist in avoiding conflicts and
confusion. In turn, businesses get more done with fewer glitches and less
conflict.

WHAT IS ORGANIZATIONAL CHART

An organizational chart is a graphical representation of the roles,
responsibilities, and relationship between individuals within an organization and
it is a simple way to visualize how workflows within a business. It can be used to
depict the structure of an organization as a whole or broken down by
departments or units.

Shown in Figure 1 is a typical organizational chart.

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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 members of the board who
are called directors are elected by the stockholders. The ability to elect a
director in the board is contingent on the amount of the shares owned and the
number of directors in the board. To illustrate, assume that there are ten
directors in the board. If a stockholder owns 10% of the voting shares of the
company, then this stockholder can elect one director in the board. This is the
reason why some investors want to own the majority shares of a company if
they want control over that company.

The following are among the responsibilities of the board of directors:

1. Setting policies on investment, capital structure, and dividends

2. Approving company’s strategies, goals, and budgets
3. Appointing and removing members of the top management including
the president
4. Determining top management’s compensation
5. Approving the information and other disclosures reported in the
financial statements

PRESIDENT

The roles of a president in a corporation may vary from one company to

another. Among the responsibilities of a president are the following:

1. Overseeing the operations of a company and ensuring that the strategies

as approved by the board are implemented as planned
2. Performing all areas of management: planning, organizing, staffing,
directing and controlling
3. Representing the company in professional, social, and civic activities

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, sales and marketing, production and
administration.

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VP FOR SALES AND MARKETING

The following are among the responsibilities of VP for sales and marketing:

1. Formulating marketing strategies and plans

2. Directing and coordinating company sales
3. Performing market and competitor analysis
4. Analyzing and evaluating the effectiveness and cost of marketing methods
applied
5. Conducting or directing research that will allow the company to identify
new marketing opportunities, for example, variants of the existing
products or services already offered in the market
6. Promoting good relationships with customers and distributors

VP FOR PRODUCTION

The following are among the responsibilities of VP for Production:

1. Ensuring production meets customer demands

2. Identifying production technology/ process that minimizes production
cost and makes the company cost competitive
3. Identifying production technology/ process that minimizes the
utilization of the company’s production facilities
4. Identifying adequate and competitively priced raw materials suppliers

VP FOR ADMINISTRATION

The following are among the responsibilities of VP for Administration:

1. Coordinating the functions of administration, finance, and sales and

marketing departments
2. Assisting other departments in hiring employees
3. Providing assistance in payroll preparation
4. Determining the location and the maximum amount of office space needed
by the company
5. Identifying means, processes, or systems that will minimize the operating
costs of the company.

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VP FOR FINANCE

Shown in Figure 2 are the functions of VP for Finance.

FINANCING
INVESTING
OPERATING
DIVIDEND POLICIES
Fig. 2 Functions of VP for Finance

FINANCING DECISIONS

Financing decisions include making decisions as to how to finance long-term

investments and working capital which deals with the day-to-day operations of
the company.

INVESTING DECISIONS

To minimize the probability of failure, long-term investments have to be

supported by a capital budgeting analysis which is among the responsibilities of
a finance manager. Capital budgeting analysis is a technique used to determine
the financial viability of a long-term investment. This requires forecasting the
cost of investment and the streams of cash flows expected to be generated from
the investment. The investment can only be considered if it satisfies certain
financial parameters that are acceptable to the top management.

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OPERATING DECISIONS

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. Should the company finance these
two accounts substantially by short-term sources of financing or through long-
term sources of financing?

DIVIDEND POLICIES

Some investors buy stocks because of the dividends they expect to receive
PLDT and Globe are two of the Philippine-listed companies which have
generously distributed cash dividends for the last five years.

Two conditions must exist before a company can declare cash dividends.

1. Company must have enough retained earnings to support cash dividend

declaration
2. Company must have cash.

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How much cash dividends a company declares is within the purview of the
VP for Finance? These are several factors considered in declaring cash dividends.
Listed below are among these considerations:

1. Availability of investment opportunities

This is especially true for small and medium enterprises (SMEs) which
access to long-term sources of funds is limited. The decision to declare
cash dividends can be substantially influenced by the availability of
investment opportunities.

Summary – Investment levels are influenced by:

1. Interest rates (the cost of borrowing)
2. Economic growth (changes in demand)
3. Confidence/expectations
4. Technological developments (productivity of capital)
5. Availability of finance from banks.
6. Others (depreciation, wage costs, inflation, government policy)

2. Access to long-term sources of funds

Publicly listed companies like PLDT, Globe, or Petron have better access to
long-term sources of funds. These companies can afford to declare cash
dividends even if they are faced with huge amounts of investments, for as
long as their retained earnings can support such declarations. Why? The
reason is these companies are big, publicly listed, and have much better
access to long-term sources of funds.

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3. Capital Structure
The capital structure of a company can depends largely on the nature of
its business. As previously stated, companies which are capital intensive
have to be more conservatively financed. Therefore, the amount of cash
dividends to be declared depends on how such declaration can affect the
capital structure of a company.

SELF-TEST QUESTIONS:

1. Give at least three important reasons why the board of directors is the
highest policy-making body in a corporation.
2. How is director elected in the board of directors?
3. Identify the four important roles of a finance manager and explain each
function briefly.

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