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Finance can be defined as the science and art of managing money.

(Gitman & Zutter, 2012)

Budgeting is the act of estimating revenue (in the form of their allowance) and expenses over a
period of time (in this case, on a daily basis).

 Sole Proprietorship - A business owned by one person and operated for his or her own profit.
 Partnership - A business owned by two or more people and operated for profit.
 Corporation – An entity created by law owned by shareholders.

 Corporations may either be privately owned or publicly owned.


 Privately owned corporations are often owned by family members whose stocks may not be
offered to outsiders unless consent by the family members is secured.
 Companies which are publicly listed are owned by unrelated investors and are traded in
organized exchanges like the Philippine Stock Exchange. While there are many stockholders,
there is generally a group of investors or a family which controls each listed company. For
example, in the case of BPI, the biggest stockholder is Ayala Corporation and in the case of
Banco De Oro, it is SM Investment Corporation. Prices of stocks of listed corporations are
driven by several factors such as the earnings of the companies, the prospects of the industry
where these companies operate, the general market sentiment, and the economic prospects of
the country, among others.
 Shareholders’ wealth is measured based on the current market price of the corporation’s
stocks. The market price changes across different periods. Hence, the value of your
investment changes in different points on time based on the market value at that time.

Controllable by Management
•profitability
•having a good liquidity and reasonable leverage position
•dividends
•competent management which affects the company’s operating efficiency
•coming up with corporate plans that improve the business prospects of the company

Uncontrollable External Factors


•macroeconomic conditions
•political stability
•prospects of the industry where the company operates
•general market sentiment
•flow of foreign funds invested in the Philippine stock market

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Good liquidity and reasonable leverage position.

Liquidity and leverage refers to the company’s management of the type and amount of assets and
liabilities that it will hold in the course
of its operations. This will further be discussed in Lesson 2.
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Dividends.

Holders of shares receive dividends from a corporation as returns on their investments in form of
cash or other properties. Companies
which have better dividend policies are generally more attractive than companies who do not pay out
dividends.

Note that there may be times that companies do not pay out dividends because of future expansions.
Same with the other factors
affecting share price, dividend policies should go hand in hand with other factors in determining
market price.
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Competent management.

Competent managers may have any of the following attributes: 1) visionary 2) decisive 3) people-
oriented, 4) inspiring, 5) innovative, 6)
respected and 7) experienced/seasoned manager.
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Corporate plans that improve the business prospects.

Example: Company A which is in the business of selling Halo-halo in the Dapitan area (or any other
area) for 5 years. Company A is
consistently earning profits and has a positive cash flow. When asked how Company A sees itself
after 5 more years, Company A answered
that it would continue to sell Halo-halo in Dapitan (or any other area).

On the other hand, Company B sells Buko Juice in Katipunan area (or any other area different from
Company A’s area) for 5 years.
Company B is consistently earning profits and has a positive cash flow. When asked how Company B
sees itself after 5 more years,
Company B answered that it has generated enough cash to expand its business to Cubao area (or
any other area) to take advantage of
the growing demand of Buko Juice in Cubao.

Between Company A and Company B, which would be a better investment? Company B. Since it has
more concrete future prospects
allowing investors to hope for better revenues and net income.

External Factors
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These factors influences the general reaction of investors in making an investment decision.
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Its effect is not only to a specific company but on all companies or a group of companies under
similar circumstances.
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Such factors are a result of the environment a company operates in rather than the decisions of the
company’s management.
3.
Role of Financial Management

Ask the learners, given the factors that influence market price, how will the company ensure that
such objectives will be achieved? Reveal the answer that this is achieved through financial
management.

Financial management
deals with
decisions
that are supposed to maximize the value of
shareholders’ wealth. (Cayanan)
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These decisions will ultimately affect the markets perception of the company and influence the
share price.
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The goal of financial management is to maximize the value of shares of stocks.
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Managers
of a corporation are responsible for making the decisions for the company that
would lead towards shareholders’ wealth maximization.

A Financial Manager is part of a management team whose ultimate goal is to maximize


shareholders wealth.

Shareholders:
The shareholders elect the Board of Directors (BOD). Each share held is equal to one voting right.
Since the BOD is elected
by the shareholders, their responsibility is to carry out the objectives of the shareholders otherwise,
they would not have been elected in
that position. Ask the learners again what the objective of the shareholders is just to refresh.

Board of Directors:
The board of directors is the highest policy making body in a corporation. The board’s primary
responsibility is to
ensure that the corporation is operating to serve the best interest of the stockholders. The following
are among the responsibilities of the
board of directors:
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Setting policies on investments, capital structure and dividend policies.
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Approving company’s strategies, goals and budgets.
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Appointing and removing members of the top management including the president.
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Determining top management’s compensation.
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Approving the information and other disclosures reported in the financial statements
(Cayanan, 2015)

President (Chief Executive Officer):
The roles of a president in a corporation may vary from one company to another. Among the
responsibilities of a president are the following:
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Overseeing the operations of a company and ensuring that the strategies as approved by the board
are implemented as planned.
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Performing all areas of management: planning, organizing, staffing, directing and controlling.
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Representing the company in professional, social, and civic activities.

T
ell the learners that although the president carries out the decision making for all functions, it would
be difficult for him/her to do this
alone. The president cannot manage the company on his own, especially when the corporation has
become too big. To assist him are the
vice presidents of different functional areas: finance, marketing, production and administration.

Determine from the list of roles written on the board the functions that pertain to the respective VPs.
Add the following functions if needed:

VP for Marketing:
The following are among the responsibilities of VP for Marketing
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Formulating marketing strategies and plans.
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Directing and coordinating company sales.
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Performing market and competitor analysis.
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Analyzing and evaluating the effectiveness and cost of marketing methods applied.
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Conducting or directing research that will allow the company identify new marketing opportunities,
e.g. variants of the existing
products/services already offered in the market.
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Promoting good relationships with customers and distributors. (Cayanan, 2015)
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VP for Production:
The following are among the responsibilities of VP for Production:
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Ensuring production meets customer demands.
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Identifying production technology/process that minimizes production cost and make the company cost
competitive.
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Coming up with a production plan that maximizes the utilization of the company’s production facilities.
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Identifying adequate and cheap raw material suppliers. (Cayanan, 2015)

VP for Administration:
The following are among the responsibilities of VP for Administration:
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Coordinating the functions of administration, finance, and marketing departments.
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Assisting other departments in hiring employees.
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Providing assistance in payroll preparation, payment of vendors, and collection of receivables.
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Determining the location and the maximum amount of office space needed by the
company.Identifying means, processes, or systems
that will minimize the operating costs of the company. (Cayanan, 2015