Lecture2 Business Finance

Chapter 2
Introduction to
Financial
Management
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McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
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Corporate Organizational Structure
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Function of Each Corporate Organization
• Shareholders – elect the Board of

Directors (BOD)
– Each share equal to one voting rights by
the stockholders
– Responsible to carry out objectives of the
shareholders
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• Board of Directors – highest policy

making body of the corporation
– Ensure that the corporation is operating to
serve the best interest of the stockholders
• Setting policies on investment, capital structure
and dividend policies
• Approving company’s strategies, goals and
budgets
• Appointing and removing members of the top
management including President
• Determining top management’s compensation
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• President (Chief Executive Officer)–
– Overseeing the operations of a company
and ensuring that the strategies as
approved by the board are implemented as
planned
– Perform: Planning, organizing, staffing,
directing and controlling
– Representing the company in professional,
social and civic activities
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• 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 allow
company identify new marketing
opportunities
– Promoting good relationship with
customers and distributors
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• VP for Production
– Ensuring production meets customer
demands.
– Identifying production technology/process
that minimize production cost and make
company cost competitive
– Identifying adequate and cheap raw
material suppliers
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• VP for Production
– Ensuring production meets customer
demands.
– Identifying production technology/process
that minimize production cost and make
company cost competitive
– Identifying adequate and cheap raw
material suppliers
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• VP for Administration
– Coordinating the function of administration,
finance and marketing departments
– Assisting other demands in hiring
employees
– Providing assistance in payroll preparation,
payment of vendors and collection of
receivables.
– Determine location and maximum amount
of space needed by the company.
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Jean-Marc Huet (Uniliver)
Finance plays a critical role

across every aspect of our
business.
We enable the business to run
our ambition and strategy into
sustainable, consistent and
super performance
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Financing
• To determine the
appropriate capital
structure of the company
and to raise funds from
debts and equity.
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• Role of VP Finance of the Financial

Manager
– Determine the appropriate capital structure
of the company.
– Capital Structure refers to how much your
total assets is financed by debt and how
much is financed by equity
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ASSETS = LIABILITIES + OWNERS EQUITY
To acquire assets, our funds

must come somewhere. If it was
bought using cash from our
pocket or financed by equity
Or if we used money from our
borrowings, the assets bought is
financed by debts.
Balance of A = L + OE
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Is there an ideal mix of

debts and equity across
corporations?
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Is there an ideal mix of debts and equity

across corporations?
No?
Mix of debt and equity varies in different
corporations depending on management
strategies
It is the responsibility of the Financial
Manager to determine which type of
financing (debt or equity is best for the
company)
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Investment
• Short Term Investment

• Long Term Investment
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Short Term Investment
1. Plan for expected excess in
cash using Financial Planning
tools such as budgeting and
forecasting
2. Choose which type of
investment should it invest in
that would secure the best
profit
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Long Term Investment
Capital budgeting is a tool to assess
whether the investment will be profitable
in the long run
Lenders should have the confidence that
the investment that management will
push through with will be profitable or
else they would not lend the company
any money
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Operating Decision
Role of VP Finance is to determine how
to finance working capital accounts such
as accounts receivable and inventories.
Company has choice:
Long Term Finance
Short Term Finance
In making Decision Making
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Why Manager need to choose which1-201-20
source of funds in decision making?
Short term sources – payable within at most
12 months.
Short term loans from bank – interest are
lowered in compared with long term loan
Suppliers Credit are the amount owned to
suppliers for inventories they delivered or
services they provided .
Free of interest charge, such obligation is to
paid on time to maintain good relationshiop
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Short term sources pose a trade-off
between profitability and liquidity risk.
Two types of liquidity risk
1.Risk that the company will fail to pay its
short term obligations
2.Risk that will not able to sell investment
in financial assets immediately
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Long term sources, - mature in longer
periods.
Lenders expect more risk and place a
higher interest. Source matures in a
longer period of time, it gives the
company more time to accumulate cash
to pay off the obligation in the future
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Long term sources, - mature in longer
periods.
Lenders expect more risk and place a
higher interest. Source matures in a
longer period of time, it gives the
company more time to accumulate cash
to pay off the obligation in the future
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Two conditions before a company to
declare cash dividends
1.The company must have enough
retained earnings ( accumulated profits)
to support cash dividend declaration
2.Company must have cash
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What they think will affect the decision of
management in paying dividends.
•Availability of financially viable long-term
investment
•Access to long term sources of funds
•Management’s Target Capital Structure
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• Explain why shareholder wealth

maximization should be the overriding
objective of management
• What position are related to financial
management?
– Treasurer, Controler
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Chapter 2

Corporate Organizational Structure

• Shareholders – elect the Board of

• Board of Directors – highest policy

Finance plays a critical role

• Role of VP Finance of the Financial

To acquire assets, our funds

Is there an ideal mix of

Is there an ideal mix of debts and equity

• Short Term Investment

• Explain why shareholder wealth

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