FINANCIAL MANAGEMENT

An Overview
  Scope of Financial Management
 Types of Financial Decisions
 Significance of Financial Management
 Strategic Financial Management
 Primary Financial Objectives
 Responsibilities to Achieve the Objectives

FINANCIAL MANAGEMENT:
AN OVERVIEW
Traditionally, financial management primarily concerned with
acquisition, financing, and management of assets to maximize the
wealth of the firm.

 Procurement of long term funds for financial institution.

 Mobilization of funds through financial instruments such as equity
shares, preference shares, debentures, bonds, notes and many
others.
 Compliance with legal and regulatory provisions relating to funds
procurement, use and distributions as well as coordination of the
finance function with the accounting function.

SCOPE OF FINANCIAL MANAGEMENT

In modern context, the financial manager is expected to analyze
the business firm and determine the following:

 The total funds requirement of the firm

 The assets and requirements to be acquired
 The best pattern of financing the assets

SCOPE OF FINANCIAL MANAGEMENT

 Investment decisions
Financing decisions
Dividend decisions

TYPES OF FINANCIAL DECISION

 Thosewhich determine how scarce or limited resources in terms
of funds
 The firm should select capital investment proposals;
 whose net present value is positive
 the rate of return exceeds the marginal cost of the capital
 the profitability of each proposal that helps in the maximization of the
wealth of the firm

TYPES OF FINANCIAL DECISION

INVESTMENT DECISIONS
 Thesewill assert that the mix of debt and equity chosen to
finance investments should maximize the value of the
investments made
 Finance decision should consider;
 Cost of finance and risks attached to it
 Principle of financial leverage when selecting the debt-equity mix

TYPES OF FINANCIAL DECISION

FINANCING DECISIONS
 Concerned with the determination of quantum of profits to be
distributed to the owners, the frequency of such payments, and
the amounts to be retained by the firm
 Thedividend distribution policies and retention of profits shall
have the ultimate effect on the firm’s wealth.

TYPES OF FINANCIAL DECISION

DIVIDEND DECISIONS
 BROAD APPLICABILITY
Financial management is applicable to all forms of business like sole traders,
partnerships, and corporations. It is also applicable to nonprofit organizations
like trusts, societies, government organizations, public sectors, and others

 REDUCTION OF CHANCES OF FAILURE

The strength of the business lies in its financial discipline. Finance function is
treated as primordial which enables other function such as production,
marketing, purchasing and others.

 MEASUREMENT OF RETURN ON INVESTMENT

Financial management studies the risk-return and time value of money.it
considers the amount of cash flow and the risk associated with each expected
cash flow

SIGNIFICANCE OF FINANCIAL MANAGEMENT

 Long-range in scope and has its focus on the organization as a
whole.
 The concept is based on an objective and comprehensive
assessment of the present situation of the organization and the
setting up of targets to be achieved in the context of an
intelligent and knowledgeable anticipation of changes in the
environment.
 It involves financial planning, financial forecasting, provision of
finance and formulation of finance policies which should lead
the firm’s survival and success.

STRATEGIC FINANCIAL MANAGEMENT

 The financial policy requires the deployment of firm’s resources
for achieving the corporate strategic objectives. It allows the
firm overcoming its weaknesses, enables the firm to maximize the
utilization of its competencies and to direct the prospective
business opportunities and threats to its advantage.
 The
company’s strategic or business plan reflects how it plans to
achieve its goals and objectives

STRATEGIC FINANCIAL MANAGEMENT

 Maximization of return on capital employed or return of
investment.
 Growth in earnings per share and price or earnings ratio through
maximization of net income or profit and adoption of optimum
level of leverage.
 Minimization of finance charges
 Efficient
procurement and utilization of short-term, medium-term
and long-term funds.

PRIMARY FINANCIAL OBJECTIVES OF A FIRM

SHORT AND MEDIUM-TERM
 Growth in the market value of the equity shares through
maximization of firm’s Marie share and sustained growth in
dividend to shareholders
 Survival and sustained growth of the firm

PRIMARY FINANCIAL OBJECTIVES OF A FIRM

LONG-TERM
The wealth maximization goal is advocate on the following
grounds.
 It considers the risk and time value of money
 It considers all future cash flow, dividends and earnings per share
 It suggests the regular and consistent dividend payments to the
shareholders.
 The financial decisions are taken with a view to improve the capital
appreciation of the share price.
 Maximization of firm’s value is reflected in the market price of share
since it depends on shareholder’s expectations regarding
profitability, long-run prospects, timing differences of returns , risk
distribution of returns of the firm
Examples of investing decisions of a finance manager
1. Evaluation and selection of capital investment proposal
2. Determination of the total amount of funds that a firm can
commit for investment
3. Prioritization of investment alternatives
4. Funds allocation and it’s rationing
5. Determination of the levels of investments in working capital
(I.e., inventory, receivables, cash, marketable securities
and its management)

RESPONSIBILITIES TO ACHIEVE THE FINANCIAL OBJECTIVES

INVESTING
The finance manager will be involved in the following finance decisions
1. Determination of the financing pattern of short-term, medium-
term and long-term fund requirements
2. Determination of the best capital structure or mixture of debt
and equity financing.
3. Procurement of funds through the issuance of financial
instruments such as equity shares, preference shares, bonds, long-term
notes and so forth
4. Arrangement with bankers, suppliers, and creditors for its working
capital, medium-term and long-term funds requirement
5. Evaluation of alternative sources of funds.

RESPONSIBILITIES TO ACHIEVE THE FINANCIAL OBJECTIVES

FINANCING
Managing the firm’s working capital is a day-to-day responsibility that ensures
that the firm has sufficient resources to continue its operations and avoid costly
interruptions.
Some issues that may have to be resolved in relation to managing a firm’s
working capital are:
1. A level of cash, securities, and inventory that should be kept on hand
2. The credit policy (I.e., should the firm sell on credit? If so, what terms
should be extended)
3. Source of short-term financing (I.e., if the firm would borrow in the short-
term, how and where should it borrow?)

RESPONSIBILITIES TO ACHIEVE THE FINANCIAL OBJECTIVES

OPERATING
  Role of Finance Manager
 The Finance Organization
 Relationship
with Other Key Functional
Managers in the Organization

FUNCTIONS OF FINANCIAL MANAGEMENT

ROLE OF FINANCE MANAGER
THE FINANCE ORGANIZATION
CORPORATE GOVERNANCE
 Corporate governance aid the process of monitoring managers
and aligning their incentives with shareholders goals. Generally
speaking, the investing public does not know what goes on at
the firm’s operational level. Managers handle day-to-day
operations, and they know that their work is mostly unknown to
investors, thus this needs monitors.

RELATIONSHIP WITH OTHER KEY FUNCTIONAL

MANAGERS IN THE ORGANIZATION
Board of Directors
 Hires the CEO, evaluates management, and can also
design compensation contracts to tie the
management’s salaries to firm performance.

CORPORATE GOVERNANCE
INTERNAL MONITOR
 External auditors
Examine the firm’s accounting systems and comment on whether financial
statements fairly represents the firm’s financial position.
 Investment analysts
Keep tract of the firm’s performance, conduct their own evaluations of the
company’s business activities, and report to the investment community.
 Investment banks
Help firms to access capital markets, also monitor firm performance.
 Credit analysts
Examine the firm’s financial strength for its debt holders.
 Government
Also monitors business activities through the SEC, BIR, and BSP.

CORPORATE GOVERNANCE
EXTERNAL MONITORS
JOBS IN FINANCE

 Finance prepare students for jobs in banking, investments,

insurance, corporations, and the government. Accounting
students need to know finance, marketing, management, and
human resources. They also need to understand finance, for it
affects decisions in all those areas.

RELATIONSHIP WITH OTHER KEY FUNCTIONAL

MANAGERS IN THE ORGANIZATION
ETHICAL BEHAVIOR

 Ethics are of primary importance in any practice of finance.

Finance professionals often mange other people’s money, and
thus, strong ethical behavior and ethics training are needed to
ensure that finance professional would be able to make
decisions that would benefit the client in case of tempting
opportunities.

RELATIONSHIP WITH OTHER KEY FUNCTIONAL

MANAGERS IN THE ORGANIZATION
  Legal Forms of Business Organization
 Important Business Trends

BUSINESS ORGANIZATION AND TRENDS

 Owned by a single person who has complete control over
business decisions
 The owner owns all the assets and responsible for all liabilities
 Form legal point-of-view, the owner is not separable from the
business and is personally liable for all liabilities of the business.
 For accounting perspective, there is a separate personality
between the owner and the business. Thus, the financial
statements pertains only to the business’ assets and liabilities.

LEGAL FORMS OF BUSINESS ORGANIZATION

SOLE PROPRIETORSHIP
 ADVANTAGES DISADVANTAGES
Ease of entry and exit Unlimited liability

Full ownership and control Limitations in raising capital

Tax savings Lack of continuity

Few government regulations

LEGAL FORMS OF BUSINESS ORGANIZATION

SOLE PROPRIETORSHIP
A partnership is a contract whereby two or more persons bind
themselves to contribute money, property, or industry to a
common fund with the intention of dividing profits among
themselves (Art. 1767, Law on Partnership).

LEGAL FORMS OF BUSINESS ORGANIZATION

PARTNERSHIP
General partnership
 Each partner has unlimited liability for the debts incurred by the business
(general partners).
 General partners – can be personally liable for the debts of the business after
all the assets of the business has been exhausted for the payments of debts of
the business.

Limited partnership
 Containing one or more general partners and one or more limited partners.
 Limited partners – only liable for debts insofar as their share in the capital of
the business.

LEGAL FORMS OF BUSINESS ORGANIZATION

PARTNERSHIP
 ADVANTAGES DISADVANTAGES
Ease of formation Unlimited liability

Additional sources of capital Lack of continuity

Management base Difficulty of transferring

ownership
Tax implication Limitations in raising capital

LEGAL FORMS OF BUSINESS ORGANIZATION

PARTNERSHIP
 A corporation is an artificial being created by the operation of law,
having the right to succession and the powers, attributes, and
properties expressly authorized by law or incidental to its existence
(Sec. 2, RA 11232).
 Owners are called stockholders if it is a stock corporation and member
if it would be a non-stock corporation.
 Board of Directors run the business
 The corporation is initiated by filling the articles of incorporation.
 The life of the corporation starts at the issuance of the certificate of
incorporation duly issued by SEC.

LEGAL FORMS OF BUSINESS ORGANIZATION

CORPORATION
 ADVANTAGES DISADVANTAGES
Limited liability Time and cost of formation

Unlimited life Regulation

Ease of transferring ownership Taxes

Ability to raise capital

LEGAL FORMS OF BUSINESS ORGANIZATION

CORPORATION
Globalization of the Firm

 Most large corporations operate on a global basis for it has

proven to be highly profitable. Global operation provides low-
cost labor and easy transfer of efficient technology that gives to
competitive price advantages to foreign corporations.
 Globalization of the firm will provide highly profitable
opportunities to domestic firms, but this movement requires
careful decision making and highly skillful financial
management.

IMPORTANT BUSINESS TRENDS

Ever-improving Information Technology

 Improvements in IT are spurring globalization and they are

changing financial management. Firms are collecting massive
data and using them takes much guesswork out of financial
decisions.

IMPORTANT BUSINESS TRENDS

Outsourcing

 Outsourcing occurs when domestic firms invest and produce

goods in foreign countries or when these firms choose to rely on
import rather than build domestic pans and produce these
goods domestically. Some foreign countries provide lower cost
of production thus makes the product more profitable when
imported.

IMPORTANT BUSINESS TRENDS

Outsourcing

When evaluating the merit of outsourcing a corporate manager is

forced to make central decisions
1. Invest and produce domestically or move a plant overseas.
2. Import cheaper foreign goods to take advantage of low labor and other costs or
shift to more capital-intensive and technologically advanced operations
3. Invest abroad in order to gain access to new rapidly growing foreign markets.

IMPORTANT BUSINESS TRENDS

  Six Elements In Financial Systems
 History Of The Philippine Financial System
 Statutory Reforms In The Financial System
 Structure Of Present Financial System
 The Two Important Specialized Governments
 Financial Institutions And Market

THE PHILIPPINE FINANCIAL SYSTEM

 Financial Institutions
These are organizations that offer financial services.

 Financial Market
The system that allows people to buy and sell goods and services to
each other

 Financial Instruments
These are assets belonging to a person or company. This can include
cash, bonds, or other assets; such as property or item of value

SIX ELEMENTS IN FINANCIAL SYSTEMS

 Financial Services
These are offered by financial institutions. These include such things as
banking, insurance policies, loans and mortgages, as well as pensions.

 Financial Practice
A sort of guideline around how the financial institutions should operate
their business.

 Financial Transactions
These are the actual exchange of assets for goods or services.

SIX ELEMENTS IN FINANCIAL SYSTEMS

 Obras Pias
The first organized institutions in the Philippines which begun
to be established in 1594.

 BANCO ESPANOL-FILIPINO DE ISABEL II

The first bank in the Far East

HISTORY OF THE PHILIPPINE FINANCIAL SYSTEM

THE SPANISH PERIOD
 Postal Savings Bank
Was created as a division of the Bureau of posts to
promote the habit of the thrift among the people and to
bring banking to the Rural Areas.

 American Bank
Included in 1901 and operated for 4 years

HISTORY OF THE PHILIPPINE FINANCIAL SYSTEM

THE AMERICAN PERIOD
 Southern Development Bank (Nampo Kaihatsu Kindo)
Opened a branch in Manila in 1942 and acted as fiscal
agent of the Japanese government in the Philippines.

HISTORY OF THE PHILIPPINE FINANCIAL SYSTEM

THE JAPANESE OCCUPATION
 RCF (Rehabilitation Finance Corporation)
Organized primarily to provide financial and in the
rehabilitation of the country.

 Central Bank of the Philippines

Created under RA No. 265 and was inaugurated in 1949 to
administer both the monetary and the banking system of
the public.

HISTORY OF THE PHILIPPINE FINANCIAL SYSTEM

POST WAR AND INDEPENDENT PERIOD
 The foundation of the financial system where
strengthened with a series of Presidential Decrees
and implementing circulars of the central bank.

STATUTORY REFORMS IN THE FINANCIAL

SYSTEM
 The commercial banks account for 73 percent of the total
resources of the financial system as of 1998

 Thecommercial bank is the largest of the commercial banks

and accounts for one-fifth of the total resources

STRUCTURE OF PRESENT FINANCIAL SYSTEM

 Development Bank of the Philippines (DBP)
was created by the government with the specific function of
providing long-term credit to finance private development
projects

 Philippine Amanah Bank (PAB)

this bank serve the banking needs of the Muslim areas in the
south

THE TWO IMPORTANT SPECIALIZED

GOVERNMENTS
 The capital or securities market is not well developed in the
Philippines and has provided an almost insignificant share of
total funds raised for private investment. Corporate bond issues,
while not unknown, have been insignificant. There has been a
much larger volume of public securities issued, but there have
been only limited private holdings and almost no secondary
trading.

FINANCIAL INSTITUTIONS AND MARKET

CAPITAL MARKET
 In contrast to the capital market, the money market is a
sophisticated and extensive market in short-term instruments. This
provides investors with profitable opportunities for short-term
funds.

FINANCIAL INSTITUTIONS AND MARKET

THE MONEY MARKET
 COMMERCIAL BANKS
Predominant financial institutions in the Philippines holding
roughly three-fifths of the total financial assets

 DEVELOPMENT BANKS
Provide longer term credit for industry. The State-owned
Development Bank of the Philippines was by far the largest of
these banks holding 14 percent of financial system assets.

FINANCIAL INSTITUTIONS IN THE LOANS

MARKET
Villarosa, Ma. Rosavilla M.
Gorospe, Mary Jhonalu M.
Guillermo, Lynette R.
Torres, Luigi Noel P.
Cabugon, Princess Zammire B.
Agcaoili, Jade Berlin
Pagtaconan, Genesis Grace A.
Fernandez, Jhamaica Laine T.
Mapanao, Rogene B.

GROUP