Page 14 - DMGT405_FINANCIAL%20MANAGEMENT

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.

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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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