Lesson Discussion: Functions of Financial Management
Introduction
Financial management is more than just “handling money.” It’s a core function that ensures a
business uses its resources effectively to achieve its primary goal—maximizing shareholder
wealth while maintaining long-term sustainability. This requires strategic decision-making,
coordination across departments, and a strong commitment to ethics and governance.
1. Role of the Financial Manager in Achieving the Primary Goal of the Firm
Primary Goal: To maximize the value of the firm for its owners (shareholders). In
practice, this means increasing the stock price for corporations or increasing the overall
worth for privately-owned businesses.
Key Responsibilities of a Financial Manager:
1. Investment Decisions – Choosing the right projects or assets to invest in (capital
budgeting).
2. Financing Decisions – Determining the best sources of funds (debt, equity,
retained earnings).
3. Dividend Decisions – Deciding how much profit to return to owners and how
much to reinvest.
How They Achieve This Goal:
o Ensuring profitability through wise investment.
o Managing risk to protect the firm’s value.
o Maintaining sufficient liquidity for operations.
Example: A financial manager at a manufacturing company may decide to invest in new
machinery that increases efficiency, boosting profits and company value.
2. How Finance Fits in the Organizational Structure of the Firm
The Finance Department is a core functional area alongside Marketing, Operations,
and Human Resources.
In most organizations:
o The Chief Financial Officer (CFO) heads the finance function and reports
directly to the CEO.
o The finance team works closely with other departments to align financial
resources with company objectives.
Finance’s Place in the Structure:
o Strategic Partner – Supports long-term planning.
o Resource Allocator – Ensures each department has the funds needed for projects.
o Performance Monitor – Tracks how well the organization uses its resources.
3. Fundamental Activities of the Treasurer and the Controller
Position Key Functions
- Manages the firm’s cash and liquidity.
- Oversees investments and financing.
Treasurer
- Handles relationships with banks and investors.
- Manages risk through hedging and insurance.
- Oversees accounting and financial reporting.
- Ensures compliance with tax laws.
Controller
- Prepares budgets and monitors performance.
- Develops and maintains internal controls.
Analogy: Think of the treasurer as the “cash strategist” and the controller as the
“scorekeeper” who ensures accurate and lawful financial records.
4. How Finance Relates to Other Functional Areas of a Business
Finance interacts with:
1. Marketing – Provides budget for advertising campaigns, analyzes return on investment.
2. Operations/Production – Funds equipment purchases, monitors production costs.
3. Human Resources – Allocates budgets for salaries, training, and benefits.
4. Research and Development – Funds innovation projects and tracks cost-effectiveness.
Key Point: No department can function without financial resources. Finance enables
other functions to achieve their goals effectively.
5. Importance of Corporate Governance in Achieving Business Goals
Corporate Governance: The system of rules, practices, and processes by which a
company is directed and controlled.
Why It Matters:
o Protects shareholders’ interests.
o Builds trust with investors, employees, and the public.
o Reduces risks of fraud and mismanagement.
Example: Transparent financial reporting by the controller’s office ensures investors can
make informed decisions.
Philippine Context: The Securities and Exchange Commission (SEC) requires public
companies to follow a Code of Corporate Governance to promote accountability.
6. Importance of Ethics in Finance
Ethics in Finance: Applying moral principles when making financial decisions.
Why Ethics Is Crucial:
o Prevents fraud and corruption.
o Enhances the company’s reputation.
o Builds long-term sustainability by maintaining stakeholder trust.
Examples of Unethical Practices to Avoid:
o Manipulating financial statements.
o Insider trading.
o Misusing company funds.
Philippine Example: The “Pork Barrel Scam” damaged public trust due to misuse of
funds—highlighting the need for ethics in all financial dealings.
Summary
The functions of financial management are at the heart of any business’s success. A skilled
financial manager:
Aligns decisions with the primary goal of maximizing firm value.
Works within an organizational structure that fosters cooperation across departments.
Oversees the specialized roles of treasurers and controllers.
Ensures finance supports other business functions effectively.
Upholds corporate governance and ethical practices.
Classroom Activity
Role Simulation:
Students will be divided into small groups. Each group represents a company’s top management
team (CEO, CFO, Marketing Head, Operations Head).
Scenario: The company has ₱10 million to invest. Decide:
How much to allocate to marketing, production upgrades, R&D, and savings.
Justify decisions based on the firm’s goal and corporate governance principles.