Business Finance

Chapter 1
Introduction to Financial Management
Finance – Two perspectives
 From the perspective of an economist, Finance is the allocation of scarce resources which
includes money.
 In business, it is the function or area which is responsible for managing the operations which
deals with money matters. It is concerned not just the allocation of funds but also with the
sources of those funds.
- Is concerned with the sourcing and allocation of scarce resources which includes money.
- Is the study of how people and businesses evaluate investments and raise capital to fund them.( How
to get and use money)

Three basic questions that are addressed by the study of finance:

1. What types of investment should the firm undertake?
2. What sources of funds should the firm tap in order to fund these investments?
3. How can the firm ensure that its cash flow will suffice to support its day-to-day operations?

Financial Management – covers the planning, organizing, leading and controlling of all financial activities of an
organization. Financial Management puts emphasis on managing the funds of an organization which includes
day-to-day operations, investment decisions, and financing those investments.

Three Branches of Finance

1. Public Finance- deals with the collection of taxes and budget allocation for programs designed to benefit
the general public and the production and distribution of public goods.
2. Personal Finance- pertains to personal financial planning, including coming up with a budget that matches
one’s short- and long- term needs, creating a savings plan for contingencies, etc.
3. Corporate finance- primarily concerned with the management of all the financial activities of an
enterprise or a business organization. The ultimate goal of corporate finance is to maximize shareholder
value through sound financial planning.
Four interrelated areas :
a. Financial Markets and Institutions- covers banks, insurance companies, finance companies and other
intermediaries (nonbank financial institutions which offers specialized financial services to
businesses).
b. Investments- focuses on investment options and decisions made by both individual and corporate
investors.
c. Financial Services- refers to the services offered by organizations whose line of business is to help
individuals and other organizations manage money.
d. Managerial (Business) Finance- focuses on:
 Cash flows (inflow and outflow)
 How to finance the acquisition of assets and other growth plans
 Which financing options to access when the supply of cash is deficient
 What to do with the firm’s excess cash
 Optimal inventory levels
 Accounts receivable and accounts payable management
 How much of the earnings should be paid out to dividends vs. how much ahould be
reinvested in the firm
 Whether to merge or acquire other firms

Relationship between Accounting and Finance

 Managerial Accounting information is the vital role of the financial manager. Managerial accounting is one of
the main features of finance which involves the preparation of reports which intended to aid internal users in
decision making. It relies heavily on the historical financial data but focuses on the decisions that are future-
oriented. Financial accounting keeps track of all the historical transactions of a business which will then be used in
the preparation of reports intended for the external parties such as government agencies, investors, and creditors.

Financial Management in Business

Decision makers rely heavily on financial information prepared, processed and analyzed by financial
managers. Financial managers are involved in planning wherein they contribute in identifying goals and objectives,
setting targets and establishing control measures in order to monitor performance. They also tasked to provide the
members of the top management or board of directors with information that will help them make informed
decisions on matters that involve huge amounts of money. Some are examples of these tasks:
 Borrow money from a financial institution or put in additional investment for a major project that requires
capital expenditures
 Cost-benefit analysis in a buy or lease decision
 Push through with a product line that provides a lot of cash but with relatively low profit margin or one
that does not sell as much units but has higher profitability.
Financial information is generated by the different departments and also serves as an effective communication
tool across departments. The overall financial plan (measurable goals) includes the detailed budgets for the
different programs and a basis for evaluating organizational performance.
 When financial results matched with the goals, they serve as a guide for decision makers as to the next
steps that are necessary in order to endure the success of the business.

Important of Finance on the different areas of operation in an organization- (REMEMGAIn)

1. Research and Development- Finance assists the Research and Development Department, which in some
cases, falls under Marketing, in terms of budget devoted for the creation of new products or
improvements on existing products.
2. Employee Relations- Human Resource Department relies on Finance for data on how much the
organization can spend on wages, benefits, learning and development and activities aimed at boosting
employee morale such as team building, summer camps, field trips, etc.
3. Marketing Promotion- Finance helps the Marketing Department by determining the optimal amount of
budget that should be spent on marketing activities such as advertising and promotion, determining the
prices that are charged on products introduced to the markets and monitoring how much cash is
generated in order to ensure the sustainability of the business.
4. Expansion- Finance is in charge of capital budgeting. Finance supplies historical financial data to the
business organization in determining whether the business needs to expand or not. Past performance can
help predict the financial outlook id additional capital expenditure is to be made.
5. Meeting Contingencies- Finance helps the organization by including budget provisions for external factors
like natural calamities, big fluctuation on prices of inputs, or anything that are commonly beyond one’s
control.
6. Government Agencies- Finance serves as the liaison between the organization and the government
agencies. Finance is responsible for figuring out how much taxes are due, payment for licenses and
permits,etc.
7. Asset Management- Finance is tasked to include in the master budget plan the disposal, sale, or
acquisition of fixed assets such as machinery and equipment or buiiding of a new plant.
8. Information System- These are the Information gathered, stored, processed from the different
departments and made available for decision makers that will contribute to the overall profitability of the
firm.
Financial Institutions, Financial Instrument and Financial Markets

Financial Institutions -organizations that handle financial transactions for individuals, groups, and other
organizations (profit, nonprofit, private or government-owned). It can either be:
a. Depository institutions- manages money that is deposited by individuals and organizations.
b. Nondepository institution- does not handle deposits instead it serves as intermediaries between
savers and demanders of funds, or individuals, household and other businesses who need
additional funds to support personal needs or business operations.
Most common types of Financial Institution
1. Commercial Banks
2. Savings and Loans
3. Credit Unions
4. Investment Banks
5. Insurance companies
6. Brokerage
7. Investment Companies

Financial Instrument- financial products

- A document which signifies a legal or binding agreement between two parties
Most common Financial Instruments
1. Savings
2. Loans
3. Stock
4. Bonds
5. Security
6. Treasury Bills
7. Insurance Products
8. Mutual Funds

Financial Markets- a means for the buying and selling stocks, bonds and other financial instrument.
- According to the official website of the Bangko Sentral ng Pilipinas or BSP, Financial market is where
the exchange of funds between people and organizations with surplus funds and those who want to
borrow or need money takes place.
- According to the book Principles of Finance (S. Besley & E. Brigham), Financial market is sometimes
described as a “ mechanism” rather than a physical location or a specific type of organization or
structure.
Classification of Financial Market
1. Money Markets- where transactions involving short-term debt securities takes place.
2. Capital Markets- where transactions involving long-term debt, or those maturing in more that one year,
takes place.
Two types of markets within the capital markets:
a. Primary Markets- where new issues of securities are traded
b. Secondary Markets- where previously issued securities are traded

The Role of Financial Intermediaries in Financial Markets

1. Reduce cost
2. Diversification
3. Pooling of Funds
4. Financial Flexibility
Flow of funds in Business Organization

Career in Finance
1. Banker/ Investment Banker
2. Insurance Agent/ Broker
3. Financial Advisor
4. Stockbroker
5. Fund Manager
6. Academe
7. Corporate Consultant
8. Country Manager
9. Corporate Finance Manager/ Officer
10. Chief Finance Officer

Qualities of a Finance Professional

1. Integrity
2. Attention to detail
3. Strong oral written communication skills
4. Ability to multitask
5. Analytical
6. Ability to think strategically
7. Ability to use technology
8. Team player
9. Leadership
10. Flexibility