business finance

• Financial management deals with decisions that maximize the value of shareholders' wealth
• These decisions affect the market's perception of the company and influence the share price
• Managers of a corporation are responsible for making decisions that lead towards shareholders' wealth maximization
• Shareholders elect the Board of Directors (BOD) with each share held equal to one voting right
• The Board of Directors is the highest policy-making body in a corporation
• The board's primary responsibility is to ensure that the corporation operates in the best interest of the stockholders
• Responsibilities of the board of directors include:

  • Setting policies on investments, capital structure, and dividends
  • Approving company strategies, goals, and budgets
  • Appointing and removing members of top management, including the president
  • Determining top management's compensation
  • Approving information and other disclosures reported in financial statements
• President (Chief Executive Officer) responsibilities:

  • Overseeing company operations and ensuring approved strategies are implemented
  • Performing management functions like planning, organizing, staffing, directing, and controlling
  • Representing the company in professional, social, and civic activities
• VP for Sales and Marketing responsibilities:

  • 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
  • Conducting research to identify new marketing opportunities and promote good relationships with customers and distributors
• VP for Production responsibilities:

  • Ensuring production meets customer demands
  • Identifying production technology processes that minimize costs 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
• VP for Administration responsibilities:

  • 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 and identifying means, processes, or systems that minimize operating costs
• Four functions of a VP for finance (CFO) are: Financing, Investing, Operating, and Dividend Policies
• Financing decisions involve funding long-term investments and working capital for day-to-day operations
• The role of the VP for Finance is to determine the appropriate capital structure of the company, balancing debt and equity financing
• Investing decisions can be short term or long term
• Short term investments are made when the company has excess cash
• Long term investments require a capital budgeting analysis
• Operating decisions focus on financing working capital accounts like accounts receivable and inventories
• The company can choose to finance working capital needs through long-term or short-term sources
• Financial Managers need to choose between short-term and long-term sources of financing
• Short-term sources include short-term loans with banks and suppliers' credit
• Short-term bank loans have lower interest rates compared to long-term loans
• Suppliers' credit is interest-free but must be paid on time to maintain good relationships
• Short-term sources pose a trade-off between profitability and liquidity risk
• Long-term sources have higher interest rates but give the company more time to accumulate cash
• The choice between short and long-term sources depends on the risk and return trade-off that management is willing to take
• Cash dividends are paid to shareholders based on their shareholdings
• Financial managers determine when the company should declare cash dividends
• Conditions for declaring cash dividends include having enough retained earnings and cash
• Factors considered in declaring cash dividends include availability of investment opportunities, access to long-term funds, and capital structure
• Small and medium enterprises heavily rely on internally generated funds for expansion
• Companies with better access to long-term funds can afford to declare cash dividends even with significant investments
• Capital-intensive companies may be more conservatively financed and the amount of cash dividends declared depends on the impact on the company's capital structure