Organization of the Financial Management Function - Financial Management

Many firms divide the decision -making responsibilities of management among several different officers, which often include those in manufacturing, marketing, finance, personnel, and engineering.

Organisation of Finance Function in Financial Management

A sample organization chart emphasizing the finance function. The finance function is usually headed by a vice president of finance, or chief financial officer (CFO), who reports to the president.

In some corporations the CFO may also be a member of the board of directors. In addition to overseeing the accounting, treasury, tax, and audit functions, today’s CFO often has responsibility for strategic planning, monitoring and trading foreign currencies, managing the risk from volatile interest rates, and monitoring production and inventory levels. CFOs also must be able to communicate effectively with the investment community concerning the financial performance of the company.

The Practice of Financial Management

During the 1980s and 1990s, interest in the ethical dimensions of business practice exploded. Front -page stories of the stock trading scandals involving the use of insider information that led to the downfall of Dennis Levine and Ivan Boesky, the Treasury bond trading scandal at Salomon Brothers that severely damaged Salomon’s reputation and resulted in its top managers being forced to resign, and the billions of dollars of questionable loans made by savings and loan executives that caused the collapse of much of the savings and loan industry have focused attention on the ethical practices followed by business and financial managers. Webster’s defines ethics as “the discipline dealing with what is good or bad, right or wrong, or with moral duty and obligation.”a John J. Casey defines ethics as follows:

“At its best, business ethics is excellence in management applied with fairness and dispatch. It involves hard -headed thought, not a sentimental reaction. It also involves articulate, effective communication to all parties....”b Casey identifies a number of techniques that managers can keep in mind when addressing the ethical dimensions of a business problem.

  • Clarify the parameters of the problem.
  • Involve the right team of participants at the outset.
  • Collect all the facts bearing on the problem.
  • Articulate the harm and benefit that may result from proposed actions.
  • Weigh the consequences of alternatives.
  • Seek equity for those who may be affected.

Other action guidelines that have been suggested for managers include to

  • Ensure that personal interests do not conflict with business decisions being made.
  • Respect the confidentiality of information entrusted to you.
  • Make decisions based on rational, objective business analysis rather than on inappropriate factors, such as race, sex, or religion.
  • Act fairly in dealing with customers while protecting the legitimate interests of the business.c

Ethical considerations impact all kinds of business and financial management decisions. Some financial decisions with important ethical dimensions, such as the loan administration policies apparent in many failed savings and loan institutions, command national attention.

However, financial managers encounter day-today decisions that have important ethical dimensions. For example, as a new bank loan officer, should you recommend approval of a loan to a longtime friend, even though she does not quite meet the normal loan standards of the bank? As an account executive for a brokerage firm, should you recommend to your clients the securities of firms that have poor environmental management records or that deal in such products as alcohol and tobacco? Should you tell your father-in law that your firm is likely to become a candidate for a takeover before this is publicly announced? As a division manager being evaluated in part on a return -onassets calculation, should you lease assets to keep them out of the asset base for evaluation purposes and thereby enhance your apparent performance?

Should your firm aggressively use allowable accounting practices to mask a fundamentally deteriorating level of performance? Should your firm move its plant from the Northeast to the Southeast in an attempt to break the union and save labor costs?

This brief sampling of the areas of business and financial -management decision making that possess important ethical dimensions provides a feel for the breadth of ethical issues facing financial managers. In most cases, the answers to these questions are not clear-cut. Actual decision making is very complex and involves many trade-offs among parties with competing interests. However, explicitly recognizing the costs and benefits associated with each of these decisions and making the decision in an atmosphere of balanced objectivity and fairness can help financial managers avoid apparent or real breaches of their ethical trust.

Sample Organization Chart

Sample Organization Chart

The chief financial officer often distributes the financial management responsibilities between the controller and the treasurer. The controller normally has responsibility for all accounting-related activities. These include such functions as

  • Financial Accounting This function involves the preparation of the financial statements for the firm, such as the balance sheet, income statement, and the statement of cash flows.
  • Cost Accounting This department often has responsibility for preparing the firm’s operating budgets and monitoring the performance of the departments and divisions within the firm.
  • Taxes This unit prepares the reports that the company must file with the various government (local, state, and federal) agencies.
  • Data Processing Given its responsibilities involving corporate accounting and payroll activities, the controller may also have management responsibility for the company’s data -processing operations.
  • The treasurer is normally concerned with the acquisition, custody, and expenditure of funds. These duties often include
  • Cash and Marketable Securities Management This group monitors the firm’s short -term finances forecasting its cash needs, obtaining funds from bankers and other sources when needed, and investing any excess funds in short-term interest -earning securities.
  • Capital Budgeting Analysis This department is responsible for analyzing capital expenditures that is, the purchase of long -term assets, such as new facilities and equipment.
  • Financial Planning This department is responsible for analyzing the alternative sources of long-term funds, such as the issuance of bonds or common stock, that the firm will need to maintain and expand its operations.
  • Credit Analysis Most companies have a department that is responsible for determining the amount of credit that the firm will extend to each of its customers. Although this group is responsible for performing financial analysis, it may sometimes be located in the marketing area of the firm because of its close relationship to sales.
  • Investor Relations Many large companies have a unit responsible for working with institutional investors (for example, mutual funds), bond rating agencies, stockholders, and the general financial community.
  • Pension Fund Management The treasurer may also have responsibility for the investment of employee pension fund contributions. The investment analysis and portfolio management functions may be performed either within the firm or through outside investment advisors.

It should be emphasized that the specific functions of the controller and treasurer shown in Figure are illustrative only and that the actual functions performed vary from company to company. For example, in some companies, the treasurer may have responsibility for tax matters. Also, the board of directors of the company may establish a finance committee, consisting of a number of directors and officers of the firm with substantial financial expertise, to make recommendations on broad financial policy issues.


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