SUBJECT : BUSINESS FINANCE

STRAND : ACCOUNTANCY, BUSINESS AND MANAGMENT

TOPIC : FLOW OF FUNDS IN A BUSINESS ORGANIZATION
FUNCTIONS OF FINANCIAL MANAGER

TEACHER : MICHAEL D. BACULANTA

FLOW OF FUNDS IN A BUSINESS ORGANIZATION

FUNCTIONS OF FINANCIAL MANAGER

 Financing
 Investing
 Operating
 Dividend Policies

FINANCING

 Financing – to determine the appropriate capital structure of the company and to raise
funds from debt and equity.
 Financing decisions include making decisions on how to fund long term investments
and working capital which deals with the day to day operations of the company.
 The role of the VP for Finance of the Financial Manager is to determine the appropriate
capital structure of the company.

INVESTING

 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. Moreover, the company should
choose which type of investment it should invest in that would provide an most optimal
risk and return trade off.
 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. The lenders should
have the confidence that the investments that management will push through with will
be profitable or else they would not lend the company any money.

OPERATING

 Operating - determine how to finance working capital accounts such as accounts

receivable and inventories (short term vs. long term)
 Short Term sources are those that will be payable in at most 12 months. This includes
short-term loans with banks and suppliers’ credit.
 Suppliers’ credit are the amounts owed to suppliers for the inventories they delivered or
services they provided.
 Short term sources pose a trade-off between profitability and liquidity risk. Because this
source matures in a short period, there is a possibility that the company may not be able
to obtain enough cash to pay their obligation. A trade-off (or tradeoff) is a situational
decision that involves diminishing or losing one quality, quantity or property of a set or
design in return for gains in other aspects.

 There are two types of liquidity risk:

A. Risk that the company will fail to pay its short term obligations.
B. Risk that you will not be able to sell investments in financial assets immediately.
 Long term sources, on the other hand, mature in longer periods. Since this will be
paid much later, the lenders expect more risk and place a higher interest rate which
makes the cost of long term sources higher than short term sources. Hence, the choice
between short and long term sources depends on the risk and return trade off that
management is willing to take.

DIVIDENDS POLICIES

 Dividend Policies - These determine when the company should declare cash
dividends.
 Cash dividends are paid by corporations to existing shareholders based on their
shareholdings in the company as a return on their investment.
 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.