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Financial Management



                      Notes         The treasurer’s focus tends to be more external, the controllers’ focus is more internal:

                                                      Figure  1.1:  Organizational  chart  of Finance  function


                                                                    Chief Finance Officer

                                                      Treasurer                          Controller


                                                                             Financial Accounting  Cash Accounting
                                           Cash Manager       Credit Manager
                                                                                 Manager           Manager


                                          Capital Budgeting   Fund Raising     Tax Manager       Data Processing
                                             Manager            Manager                            Manager


                                                   Portfolio Manager                    Internet Auditor

                                    1.3.2  Relation of Finance with Economics
                                    The field of finance is closely related  to economics. Financial managers must be able to use
                                    economic theories as guidance for efficient business operation.


                                           Example: supply-demand analysis, profit-maximizing strategies, and price theory.
                                    The primary economic principle used in managerial function is marginal analysis, the principle
                                    that financial decisions should be made and actions taken only when the added benefits exceed
                                    the added costs. Nearly all financial decisions ultimately come down to an assessment of their
                                    marginal benefits and marginal costs.


                                         !
                                       Caution  Financial managers must understand the economic framework and be alert to the
                                       consequences of varying levels of economic activity and changes in economic policy.
                                    1.3.3  Relation to Accounting

                                    The  firm’s finance (treasurer) and  accounting (controller)  activities are  closely related  and
                                    generally  overlapped.  Normally,  managerial  finance and  accounting  are  not  often  easily
                                    distinguishable. In small firms, the controller often carries out the finance function and in large
                                    firms many accountants  are also involved in various finance activities. There  are two basic
                                    differences between finance and accounting:
                                    1.   Emphasis on cash flows: The accountant’s primary function is to develop and report data
                                         for measuring the performance of the firm, assuming its financial position and paying
                                         taxes using certain standardized and generally accepted principles. The accountant prepares
                                         financial statements based on accrual basis. The financial manager places primary emphasis
                                         on cash flows, the inflow and outflow of cash.

                                    2.   Relating to decision-making: Accountants devote most of their operation to the collection
                                         and presentation  of financial data. The primary activities  of the  financial manager in
                                         addition to ongoing involvement in financial analysis and planning are making investment
                                         decisions and making financing decisions. Investment decisions determine both the mix
                                         and the type of assets held by the firm. Financing decisions determine both the mix and



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