UNIT I: OVERVIEW OF FINANCIAL MANAGEMENT

LEARNING OUTCOMES
1. To be able to define business;
2. Understand the aims and objectives of business;
3. To be able to identify and differentiate the types of business based on nature of
operations and the different forms of business organizations;
4. Know the meaning and objectives of financial management;
5. Identify and explain the roles and functions of financial management;
6. Be familiar with the Philippine Financial System and its organizational structure, and;
7. Know and understand the role of the Bangko Sentral ng Pilipinas in the Philippine
Financial System.

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 MODULE 1: BUSINESS, ITS AIMS AND OBJECTIVES
Business
Business is an undertaking where one seeks to make profit by selling goods or rendering
services. Some enterprises, however, are organized as non-profit organizations to provide
certain benefits to society. It is defined as an organized effort of individuals to produce and
sell goods and services in order to satisfy the needs of society. It is also defined as an
organization of people with varied skills, which uses property or talents, to produce goods
and services, which can be sold to others for more than their cost. In essence, business is
effort primarily geared to meet the interested public’s legitimate needs, at the required time
and place, at an evitable price and for reasonable returns to compensate for the
businessman’s efforts and risks taken.
Business is also known as an enterprise, a company or a firm. Some enterprises
however are organized as non-profit organizations to provide certain benefits to the society.
Aims and Objectives of Business
The aim of a business is the goal it wants to achieve. An aim is where the business
wants to go in the future. It is a statement of a purpose. A primary aim for all business is to
add value and it involves making profit.
Objectives are the stated, measurable targets of how to achieve business aims. They
give the business a clearly defined target. Plans can be made to achieve these targets.
The most effective business objectives meet the following criteria: S-M-A-R-T
S – Specific – objectives aimed at what the business does such as a hotel might have an
objective of filling 60% of its rooms a night during December; an objective specific to that
business.
M- Measurable – the business can put value to the objective such as assigning a certain
percentage or threshold in the target. It must be quantifiable. Example: P1,000,000 revenue
generated from hotel occupancy for two weeks.
A-Attainable – It must be doable, achievable and feasible.
R- Realistic – the objective should be challenging but it should also be able to achieved by
the resources available.
T- Time-specific – they have a time limit of when the objective should be achieved such as
for one week and the like. (It must be restricted as to time.)

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 Aims and objectives are the “ends” that an organization seeks to achieve. It then has
to decide the means it will use to achieve those ends, draw up a plan and devise a strategy.
Most organizations have general or overall claims which they can break down into specific
objectives or targets.
By setting aims and objectives, companies give themselves a sense of purpose and
direction. This provides a framework around which to create their plans. With an overall plan
in place, a company can set particular targets and monitor its progress towards reaching
them.
The main objectives that a business might have are:
1. Profit Maximization. Profit is the amount of money left from the firm’s income
made after all costs of producing, marketing and distributing the goods and services
have been paid. Profit distinguishes business from charity, philanthropy and
government services. To maximize profit, make sure that revenue stays ahead of the
cost of doing business. Try to make enough profit to keep the owners comfortable.
This is referred to as profit satisficing. To maximize profit, it would require optimized
efforts to increase sales. The higher the sales the better the profitability of the firm.
2. Fulfill social responsibilities. This is a concept whereby organizations (business)
consider the interest of society by taking responsibility for the impact of their
activities on customers, suppliers, employees, shareholders, communities and other
stakeholders, as well as environment. It includes the following:
 Produce goods and services
 Conduct business based on the standard of ethics
 Price fixing
 Not giving false or misleading advertisement
 Not practicing direct- attack competitor
 Equal employment opportunities
 Consumer safety
 Participation in social and civic activities contributing to worthwhile causes like
programs, researches.
 Helps in the equal distribution of wealth

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 3. Growth. This leads to the improvement in the company’s ability to compete within
its market. It is planned based on historical data and future projections. It requires a
careful use of resources such as finances and personnel. This means increasing the
total assets, production capabilities and eventually increasing rates of return.
4. Survival of the firm. This refers to the continued existence of the firm. A business
firm tries to attain survival through substantial growth and profitability. Survival
dictates that funds are managed efficiently in such a way that it is always available
when needed, and the excess not needed is productively invested.
5. Productivity. Employee training, equipment maintenance and new equipment
purchases all go into company productivity. The firm’s objective should be to provide
all the resources that the employees need to remain as productive as possible.

A business may change its objectives overtime due to the following reasons:
1. A business may have achieved an objective and will move onto another (i.e. survival
in the first year may lead to an objective of increasing profit in the second year)
2. The competitive environment might change, with the launching of new products from
competitors.
3. Technology might change designs, so sales and production targets might need to
change.

Types of Business Based on the Nature of Operations

A business organization may be classified based on the nature of business operation.
The purpose for which the business was established will determine the nature of activities.
The classifications are service, trading or merchandising, manufacturing and hybrid business.
Service business is one which is engaged in the rendering of services to others for a
fee. Examples are law firms, accounting firms, medical clinics, barber shops, beauty parlors,
stock brokerage firms, recruitment agencies, and the like.
Trading or merchandising business is engaged in the buying and selling of goods
or commodities produced by other businesses which are called merchandise, hence, it is
otherwise called a merchandising business. It is a link in the physical distribution chain
acting as a wholesaler or a retailer firm. They are known as “buy and sell” businesses. They

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make profit by selling products at prices higher than their purchase costs, without changing
the form. Examples are car dealers, grocery stores, supermarkets, cell phone and accessories
traders, gift shops and many more.
Manufacturing business is engaged in the buying of raw materials, converting them
into finished products and selling to traders or final consumers. It combines raw materials,
labor and factory overhead in its production process. Examples are car manufacturers, food
processors, soft drink bottling companies, drug manufacturers, paper mills and many others.
The main difference between a trading and a manufacturing business is that, a trading
business buys goods and sells these goods in the same form while a manufacturing business
buys raw materials and sells goods that were produced or processed out of the raw materials.
Hybrid business is one which is involved in more than one type of business activity
(service, merchandising and manufacturing). A restaurant for example combines ingredients
in making a fine meal (manufacturing), sells cold bottle of wine (merchandising), and fills
customer orders (service).
These companies may be classified according to their major business interest.
Restaurants are more of a service-type they provide dining services.

Forms of Business Organization

A business operates in a complex environment that affects decision-making. Two of
the most important factors making up the firm’s operating environment are the legal form of
business organization and taxes. The accounting procedures depend on which form the
organization takes. The three forms of business organizations are the following:
Single or Sole Proprietorship. This business organization is owned by an individual
who has complete control over business decisions. The owner is called proprietor, who
generally is also the manager. The owner is entitled to all the profits, but absorbs all losses.
He owns all the firm’s assets and is responsible for all the debts of the business.
From a legal point of view, the proprietor is not separable from the business and is
personally liable for all debts of the business. However, from an accounting perspective, the
business has a separate and distinct personality from that of the owner. The owner is neither
paid salaries nor wages from the business but may withdraw funds or properties from the
firm, instead.
Advantages:
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 1. It is easily and inexpensively formed, since no formal charter for operations is
required and it is subject to few government regulations.
2. The business pays no corporate income taxes; however all earnings of the
firm, whether reinvested in business or withdrawn are subject to personal
income taxes.
Disadvantages:
1. The assets of the business are treated in law as part of the owner’s personal
assets, making them liable in case of bankruptcy.
2. It is difficult for a sole proprietor to obtain large sums of capital
3. The proprietor has unlimited personal liability for business debts and can loss
assets beyond those invested in the company.

Partnership is a business owned and operated by two or more persons known as

partners, who bind themselves to contribute money, property or industry to a common fund,
with the intention of dividing the profits among themselves. The Articles of Co-Partnership
which is to be filed at the Securities and Exchange Commission (SEC) is a written agreement
between the partners governing the formation, operation and dissolution of the partnership.
Advantages:
1. It is easy and inexpensive to organize, as it is formed by a simple contract
between two or more persons.
2. The unlimited liability of the partners makes it reliable from the point of view
of creditors.
3. The combined personal credit of the partners offers better opportunity for
obtaining additional capital than does a sole proprietorship.
4. The participation in the business by more than one person makes it possible
for a closer supervision of all the partnership activities.
5. The direct gain to the partners is an incentive to give close attention to the
business.
6. The personal element in the characters of the partners is retained.

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 Disadvantages:
1. The personal liability of partner for firm debts deters many from investing
capital in a partnership.
2. A partner may be subject to personal liability for the wrongful acts or
omissions of his associates.
3. It is less stable because it can easily be dissolved.
4. There is divided authority among the partners.
5. There is constant likelihood of dissension and disagreement when each of the
partners has the same authority in the management of the firm.
Corporation is an artificial being created by the operation of law, having the rights
of succession and the powers, attributes and properties expressly authorized by law or
incident to its existence. The incorporation process is initiated by the filing of the Articles of
Incorporation with the SEC. The owners are called shareholders or stockholders. These
owners are not directly involved in the management of the firm, instead, they select managers
designated by the Board of Directors to run the firm for them. The Corporation Law provides
that the number of directors be not less than five but not more than 15.
Advantages:
1. The corporation’s power of succession enables it to enjoy a continuous
existence.
2. The continuity of corporate existence enables it to obtain a strong credit line.
3. Large scale business undertakings are made possible because many
individuals can invest their funds in the enterprise.
4. The liability of its investors or shareholders is limited to the extent of their
investment in the corporation.
5. The transfer of shares can be done without the need for prior consent of other
shareholders.
6. Its smooth operation is guaranteed because of centralized management.
Disadvantages:
1. It is not easy to organize because of complicated legal requirements and high
costs in its organization.
2. The limited liability of its shareholders may weaken its credit capacity.

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 3. It is subject to rigid governmental control.
4. It is subject to more taxes.
5. Its centralized management restricts a more active participation by
shareholders in the conduct of corporate affairs.
Cooperative. Cooperative has some elements of a large partnership and also many
features of a corporation, although it is distinct from both. The principal theory of
cooperative is elimination of profit.
Advantages:
1. Each member has only one vote which make it impossible for one person to run
the business according to his/her will and democracy will prevail;
2. The cooperative is owned and controlled by the members;
3. It is not based on profit-making principles but rather on service-rendering
principles to its members, and as such members are sure of the highest quality of
quality at the lowest possible prices;
4. The members work together because they have the same needs and goals. They
are united around these goals and needs and management comes from the
members;
5. The cooperative is a voluntary organization and thus easy to form and end.
Disadvantages:
1. Longer decision-making process – decisions to be made can take very long
because of the principle that all members have voting power;
2. People do not work very hard because the incentive to earn a profit is not present;
3. There is a possibility of conflict among the members; and
4. There is a less incentive to invest additional capital.

Micro, Small and Medium Enterprises (MSMEs)

In 2008, Republic Act 9501 was signed into law. This law seeks to address
problems faced by MSMEs particularly the lack of capital and access to credit. It also
updated the definition of MSMEs as: micro enterprises are those with assets, before
financing of P3 million or less and employ not more than nine workers; small
enterprises are those with assets, before financing of above P3 million to P15 million

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 and employ 10 to 99 workers; medium enterprises have assets, before financing of
above P15 million to P100 million and employ 100 to 199 workers. These MSMEs
are registered as any of the legal forms and nature of business. Enterprises with
assets and employees above the MSME threshold are considered large enterprises.

DISCUSSION QUESTIONS
1. Define Business.
2. Enumerate the aims and objectives of business.
3. Explain and discuss, “to fulfill social responsibilities” as one of the aims and
objectives of business.
4. Identify one business organization and discuss how they achieve “to fulfill social
responsibilities” as one of the aims and objectives of business.
5. What are the different types of business based on nature of operations?
6. Differentiate merchandising business from manufacturing business.
7. What are the different forms of business organization?
8. Enumerate and discuss the advantages and disadvantages of the following:
a. Sole Proprietorship
b. Partnership
c. Corporation
9. If you are to establish a business of your own, what would you choose as a form of
business organization? And why?
10. How do you distinguish from each other, Micro, Small and Medium enterprises?

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 MODULE 2: OVERVIEW OF FINANCIAL MANAGEMENT

FINANCIAL MANAGEMENT
Financial Management means planning, organizing, directing and controlling the
financial activities such as procurement and utilization of funds of the enterprise. It means
applying general management principles to financial resources of the enterprise. It denotes
the effective acquisition and use of money. The entrepreneur as financial manager must
determine the best way to raise money. It is also important that the money should be used
effectively in realizing the goals of the enterprise.

Scope of Financial Management

Some scopes of the financial management are:
Investment Decision. This involves the evaluation of risk, measurement of cost of capital
and estimation of expected benefits from a project. Capital budgeting and liquidity are the
two major components of investment decision. Capital budgeting is concerned with the
allocation of capital and commitment of funds in permanent assets which would yield
earnings in the future. A measure of the extent to which a person or organization has cash to
meet immediate and short-term obligations, or assets that can be quickly converted to cash. It
is the ability of current assets to meet current liabilities.
Financing Decision. While the investment decision involves decision with respect to
composition of mix of assets, financing decision is concerned with the financing mix or
financial structure of the firm. The raising of funds requires decisions regarding the methods
and sources of finance, relative proportion and choice between alternative sources as well as
time of floatation of securities. In order to meet its investment needs, a firm can raise funds
from various sources.
Dividend Decision. In order to achieve the wealth maximization objective, an appropriate
dividend policy is to decide whether to distribute all the profits in the form of dividends pr to
distribute a part of the profits and retain the balance.
Working Capital Decision. This is concerned with making decisions related to the
investment in current assets and current liabilities. Current assets are convertible into cash

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within one year. Similarly, current liabilities are those which are likely to mature for paymrnt
within an accounting year.
Functions of Financial Management
Financial management functions in the following areas:
1. Estimation of capital requirements. Estimation have to be made in an adequate
manner which increases the earning capacity of an enterprise.
2. Determination of capital composition. Once the estimation has been made, the capital
structure has to be decided. This involves short-term and long-term debt equity
analysis. This will depend upon the proportion of equity capital a company is
processing and additional funds which is to be raised.
3. Choice of sources of funds. For additional funds needed, a company has many
choices such as issuance of shares of stocks, loans from banks and financial
institutions and issuance of bonds.
4. Investment of funds. The financial manager has to decide to allocate funds into
profitable ventures so that there is safety on investment.
5. Disposal of surplus. This can be through dividend declaration or using the retained
earnings for expansion, innovation and diversification of the company.
6. Management of cash. The financial manager has to make decision as regards cash
management.
7. Financial controls. The financial manager has to exercise control over finances. This
can be done through many techniques like ratio analysis, financial forecasting, cost
and profit control, etc.

Objectives of Financial Management

1. Financial Planning generally refers to the allocation of financial resources. In
accordance with the company’s financial objectives and standards, projects or
activities and operations are carefully planned, evaluated based on certain criteria and
subsequently ranked for the allocation of financial resources.
2. Financing involves the procurement of funds. Procurement function requires
awareness of different sources of funds with varying requirements and conditions.

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 3. Investment entails the effective and efficient utilization of financial resources.
Financial resources must be utilized in a manner that minimizes company costs
arising from wastage and loss of opportunities due to delays in operations and idle
and nonproductive resources. It requires adoption of effective control measures.
Efficient utilization of financial resources refers to their economical use. In
other words, one sees to it that financial resources are actually being used for what
they were intended. Inefficiency in the usag of resources maybe caused by
extravagance in the choice of property or equipment, unnecessary expenditures,
tardiness of personnel and non-productive resources.
Effective utilization of resources refers to their use towards the attainment of
predetermined objectives. This requires a periodic review of operations to determine
whether they are in accordance with plans and whether the plans, as prepared, will
enable the company to attain short term and long term objectives considering the
changes brought about by economic development.

Financial Manager
The financial manager is a member of the firm’s top management with expertise in
the management of financial assets. He participates in the corporate strategic planning,
makes financial decisions to promote the successful operations and growth of the firm. He is
an adviser of the firm regarding advantages and costs in the prevailing market using his
expertise because of his wide imagination and proficiency in costing. He can project to a
certain degree of accuracy the organization’s capital structure based on available statistics.
He supervises the efficient utilization of the firm’s assets in order to achieve adequate profit
as management goal.

The Role of the Financial Manager

1. Analyze and plan the company’s performance. Analyzing and planning
company’s operations occupy much of the financial manager’s time. Company
progress depends on the management’s knowing where the company now and where
in the future it wants the company to be. The financial manager gives opinion on the
consequences of the different alternative courses of action.

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 Assessing the financial strengths and weaknesses of the company requires the
financial manager to work with people from accounting, marketing and production.
Company accountants develop the income statement showing sales revenues and
expenses for a period of time; they also prepare the balance sheet which is a listing of
company assets , liabilities and the owner’s equity. Based on these financial
statements and projected versions of these statements, the financial manager assesses
company strengths and weaknesses, both currently and in the future to a large degree,
the plans of the production department and sales forecasts of the marketing
department.

2. Anticipate the company’s financial needs. The need to anticipate future events is
one of the roles of the financial manager. Forecasting company expenditures for
assets and their required financing avoids surprises and the problems these surprises
create.
 Being involved in the planning process of other departments and top
management.
 Monitoring developments in the economy that impinge on the company’s
products.
 Keeping track of what is happening in the markets for the company’s
securities.

To develop reliable forecasts and plans, a financial manager must understand

not only finance and accounting but company operations as well; product lines,
manufacturing processes, customer groups, potential suppliers of raw materials,
vendors of equipment and so on. A basic understanding of the operations enables
the financial manager to identify and anticipate costs of future asset acquisitions
and needed financing.

3. Procure the funds the company needs. Financial managers procure and manage
funds that a company needs to finance operations. To obtain these funds, the

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 company can issue shares of stocks, borrow money or use a combination of the two.
The company that borrows must repay its debts at maturity.

4. Allocate funds to acquire the most profitable assets. Equally critical as the
financing decision to the success of a company is the investment decision, the process
of allocating funds for investment in competing assets. The investment decision must
not overemphasize one sort of asset and slight another. For instance, it would be
unwise to use so much cash to invest in a building that the company could not pay its
bills when due. The financial manager plays a key role in the allocation of funds to
competing assets. The goal is to select fixed assets that will generate large returns
and minimal risks.

Vital Functions of the Financial Manager

1. Identification and analysis. The financial manager is partly in charge of the
management of the financial assets of the corporation. He is also responsible in
identifying the present strengths and weaknesses of the organization.
2. Financial planning and strategy. The financial manager considers the major
financial factors to make the firm survive or develop, including activities such as fund
raising, maximization of profit, financing and expansion development and many
others. It includes the preparation of different budgets as they form an important part
of financial planning.
3. Capital structure of the organization - The financial manager is an adviser of the
organization regarding the advantages and costs of investments in the financial
markets and any other future plans. With his expertise as an accountant, he has a
wide imagination and proficiency in costing. He can project with a certain degree of
accuracy and based on statistics and costs, expenses of a certain project; the required
capital outlays, any change that may take place in the organization’s assets.
4. Stock price and dividends - The financial manager gives advice to the firm if
dividends should be declared or not. Likewise, when the firm has such highly
profitable undertaking that should retain most of the earnings, stockholders are
properly warned of such a plan, and gives the assurance of possible equivalent

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 appreciation of the price of the stock certificates in their possession.
5. Control of cash and other assets - It is also the intention of the financial manager to
strive to achieve adequate profits as a management goal, done in such a way that cash
is always available when needed. The needed cash should be with the level needed
by the operation of the business. Since cash is a non-productive asset, any excess
cash must be invested into placements that are possibly easily convertible to cash as
an assurance to fill any cash deficiency falling below the minimum cash requirements
of the operation of the business.

The Financial Manager in a Business Organization

The finance manager in a business organization is not always called as such. His title
varies depending on the size of the company and its organizational set up. In small business
firms, the finance functions are discharged by the sole proprietor, the accountant or the
manager. As the organization grows bigger, the organizational set up becomes more
sophisticated so that we may have the finance functions delegated to the controller or the
treasurer. In some cases, there is a vice president for finance to whom the controller and
treasurer reports. The finance functions are usually divided between the controller and
treasurer as follows:
CONTROLLER TREASURER
1. Planning for control which includes 1.Determination of financial
budgeting. requirements and procurement of funds
2. Reporting and interpreting results of 2. Cash management, banking, custody
operations and system installation of funds and foreign exchange problems
3. Evaluation of objectives, policies and 3.Investor relations
procedures in all segments of
management regarding the same
4. Tax administration and government 4.Corporate investments
reporting
5. Protection of assets 5.Credit and collection
6. Economic appraisal ( forward planning) 6.Insurance and employee benefits

From the foregoing distribution of functions, it may be noted that the controller takes
care of the internal finance functions while the treasurer takes care of the external ones.

Overview of Financial System

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 A financial system can be defined at the global, regional or firm specific level. The
firm's financial system is the set of implemented procedures that track the financial activities
of the company. On a regional scale, the financial system is the system that enables lenders
and borrowers to exchange funds. The global financial system is basically a broader regional
system that encompasses all financial institutions, borrowers and lenders within the global
economy. There are multiple components making up the financial system of different levels.
Within a firm, the financial system encompasses all aspects of finances. For example, it
would include accounting measures, revenue and expense schedules and wages and balance
sheet verification. Regional financial systems would include banks and other financial
institutions, financial markets, financial services. In a global view, financial systems would
include the International Monetary Fund, Central Banks, World Bank and major banks that
practice overseas lending.
The Global Financial System (GFS) is the financial system consisting of institutions
and regulators that act on the international level, as opposed to those that act on a national or
regional level. The main players are the global institutions, such as the following:
 International Monetary Fund (IMF). It is an international organization that was
created on July 22, 1944 at the Bretton Woods Conference and came into existence
on December 27, 1945 when 29 countries signed the Articles of Agreement. It
originally had 45 members. The IMF's goal was to stabilize exchange rates and assist
the reconstruction of the world’s international payment system post-World War II.
Countries contribute money to a pool through a quota system from which countries
with payment imbalances can borrow funds temporarily. Through this activity and
others such as surveillance of its members' economies and policies, the IMF works to
improve the economies of its member countries. The IMF describes itself as “an
organization of 188 countries (as of April 2012), working to foster global monetary
cooperation, secure financial stability, facilitate international trade, promote high
employment and sustainable economic growth, and reduce poverty.” The
organization's stated objectives are to promote international economic cooperation,
international trade, employment opportunities, and exchange rate stability, and
making financial resources available to member countries to meet balance of
payments needs. The International Monetary Fund keeps account of international

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 balance of payments accounts of member states. It acts as a lender of last resort for
members in financial distress, e.g., currency crisis, problems meeting balance of
payment when in deficit and debt default. Membership is based on quotas, or the
amount of money a country provides to the fund relative to the size of its role in the
international trading system.
 World Bank. It is an international financial institution that provides loans to
developing countries for capital programs. The World Bank's official goal is the
reduction of poverty. According to the World Bank's Articles of Agreement (as
amended effective 16 February 1989), all of its decisions must be guided by a
commitment to promote foreign investment, international trade, and facilitate capital
investment. The World Bank aims to provide funding, take up credit risk or offer
favourable terms to development projects mostly in developing countries that could
not be obtained by the private sector.
 World Trade Organization (WTO). It is an organization that intends to supervise
and liberalize international trade. The organization officially commenced on January
1, 1995 under the Marrakech Agreement, replacing the General Agreement on Tariffs
and Trade (GATT), which commenced in 1948. The organization deals with
regulation of trade between participating countries; it provides a framework for
negotiating and formalizing trade agreements, and a dispute resolution process aimed
at enforcing participants' adherence to WTO agreements which are signed by
representatives of member governments and ratified by their parliaments. Among the
various functions of the WTO, these are regarded by analysts as the most important:
 It oversees the implementation, administration and operation of the covered
agreements.
 It provides a forum for negotiations and for settling disputes.
Additionally, it is the WTO's duty to review and propagate the national trade
policies, and to ensure the coherence and transparency of trade policies through
surveillance in global economic policy-making. Another priority of the WTO is the
assistance of developing, least-developed and low-income countries in transition to
adjust to WTO rules and disciplines through technical cooperation and training. The
WTO is also a centre of economic research and analysis: regular assessments of the

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 global trade picture in its annual publications and research reports on specific topics
are produced by the organization. Finally, the WTO cooperates closely with the two
other components of the Bretton Woods system, the IMF and the World Bank.

The Philippine Financial System

It composed of different institutions serving different markets and competing each
other in attaining the process of intermediation, providing a link between economic suits with
excess funds and those who use these funds. In the Philippines setting, financial system is
composed of banking institutions and nonbank financial intermediaries, including
commercial banks, specialized government banks, thrift banks and rural banks.   It is also
composed of offshore banking units, building and loan associations, investment and
brokerage houses and finance companies.
1. Commercial Banks. Commercial Banks constitute the bulk of the banking system.
These are institutions that accept deposits, including demand deposits, which are
subject to withdrawal by checks. They also perform other functions like lending,
essentially on a short-term basis, and accept drafts and letters of credit, and can
discount and negotiate promissory notes, drafts, bills of exchange and other forms of
indebtedness. They can also invest in allied undertaking up to a limit, including
trading in bonds and securities.
2. Government Commercial Banks. These serve as banks for the government. The
role of the government in the banking system in the country is to supplement the
credit facilities of the private financial institutions. The Government sector
establishes banks with special lending programs like the socio-economic development
of the small farmers, the Moslem regions, and the rural areas.
3. Thrift Banks. These are institutions designed to accumulate the savings of depositors
(in case of savings and mortgage banks) of their members or stockholders (in case of
stock savings and loan associations). These savings are then invested in various ways
to earn income through loans, interest-bearing deposits, real estate investments,
personal finance and home-building and home development activities. Savings Banks
are the most obvious example of thrift banks.

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4. Small Private Banks. These small banking units were designed to meet the financial
requirements of small rural or town units that do not have the services provided by
normal banking institutions. The first are the rural banks, for short term financial
requirements and the others are the private development banks.
a. Rural Banks. These banks were designed primarily to mobilize rural savings
by accepting savings and time deposits and to provide channel for funds from
urban areas and the government sector for agricultural and individual
activities in the countryside. They also provide credits to small scale farmers
and enterprises in the rural sector. They receive government assistance mainly
for the support of food production program.
b. Private Development Banks. These banks are modeled to serve like the
Development Bank of the Philippines (DBP) at the community or provincial
level. They are allowed to accept time and savings deposits and provide
medium and long term credit to small and medium scale industries. At the
community level, these banks assist the financing of development projects by
providing loan assistance to entrepreneurs.
5. Non-Banking Financial Institutions. These are financial institutions that provide
banking services without meeting the legal definition of a bank, i.e., one that does not
hold a banking license. These institutions are not allowed to take deposits from the
public. Nonetheless, all operations of these institutions are still exercised under bank
regulation.
a. Government Non-Banking Financial Institutions. As the banking system is
evolving, there was a parallel development of other financial institutions. On
the government side, for instance, Government Service Insurance System
(GSIS) for the government employees was developed. In fact insurance for
workers under the GSIS was in operation by 1936. Compulsory social security
insurance in private sector was founded in 1937 with the creation of Social
Security System (SSS). These institutions were created essentially to protect
the welfare of employees. But in consequence, they set up large trust funds
that were generated from the insurance premiums of members and their
counterpart institutions.

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 b. Private Non-Banking Financial Institutions. Other non-bank financial
institutions serve primarily as further intermediaries of units with excess
funds, facilitation of their investments. There is an interaction between the
position of the bank, the most important financial institution, and other
financial institutions.

Role of Bangko Sentral ng Pilipinas (BSP) in the Philippine Financial

System
Central Banks are financial institutions vested by the State with the function
of regulating the supply, cost and use of money with a view to promoting national and
international economic stability and welfare.

Development of The Bangko Sentral ng Pilipinas

The central bank of countries within the region of Southeast Asia were established
mostly only after the end of the Second World War. The Philippines is not an exception. It
established its central bank on January 3, 1949. The concept of a central bank was developed
in 1933 by Miguel Cuaderno, the first governor of the Central Bank of the Philippines. The
Central Bank of the Philippines was patterned after similar central banks established in
Paraguay and Guatemala, two countries which, like the Philippines have the same export
economies. The Central Bank of the Philippines came to existence as a result of the approval
by the former President Elpidio Qurino of Republic Act No. 265, otherwise known as the
“Central Bank Act” on June 15, 1948. However, actual operations did not commence until
January 3, 1949 when the bank opened its doors for business in the old Intendencia Building
located at Intramuros, Manila.
With the accumulation of losses incurred by the Central Bank, P317B as of December
1992, there emerged the CMA bill to transform the Central Bank into Central Monetary
Authority. This bill is also in response to a call of the International Monetary Bank and
World Bank to ease the foreign debt burden and strengthen the credit standing of the
Philippines. And then when the CMA law also known as “The New Central Bank Act” took
effect on June 14, 1993 there is established an independent Central Monetary Authority
which is known as the “Bangko Sentral ng PilipInas” and has a capital of P50billion.

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Objectives of The Bangko Sentral ng Pilipinas (BSP)
1. To maintain price stability conducive to a balanced and sustainable growth of the
economy, and
2. To promote and maintain monetary stability and convertibility of the Philippine peso.
The BSP monitors and compiles various indicators on the Philippine banking system
which is composed of universal and commercial banks, thrift banks, rural and cooperative
banks. As prescribed by the “New Central Bank Act, the main functions of the Bangko
Sentral are:
1. Liquidity management, by formulating and implementing monetary policy aimed at
influencing money supply, consistent with its primary objective to maintain price
stability;
2. Currency issue, the BSP has the exclusive power to issue the national currency. All
notes and coins issued by the BSP are fully guaranteed by the Government and are
considered legal tender for all private and public debts;
3. Lender of last resort, by extending discounts, loans and advances to banking
institutions for liquidity purposes;
4. Financial supervision, by supervising banks and exercising regulatory powers over
non-bank institutions performing quasi-banking functions;
5. Management of foreign currency reserves, by maintaining sufficient international
reserves to meet any foreseeable net demands for foreign currencies in order to
preserve the international stability and convertibility of the Philippine Peso;
6. Determination of exchange rate policy , by determining the exchange rate policy of
the Philippines. Currently, the BSP adheres to a market-oriented foreign exchange
rate policy, and;
7. Being the banker, financial advisor and official depository of the Government, its
political subdivisions and instrumentalities and GOCCs.

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 DISCUSSION QUESTIONS

1. Define Financial Management.

2. Enumerate and discuss the objectives of financial management.
3. Who is a financial manager?
4. What are the different roles of a financial manager in a business organization?
5. Enumerate and discuss the vital functions of the financial manager.
6. Distinguish a controller from a treasurer.
7. What is Global Financial System? And what are the institutions that compose a global
financial system?
8. Differentiate the functions and roles in the global financial system of the following
main players:
a. International Monetary Fund
b. World Bank
c. World Trade Organization
9. What are the different institutions that compose of a Philippine Financial System?
10. Distinguish a commercial bank from a savings bank.
11. Briefly discuss the history of development of the Bangko Sentral ng Pilipinas (BSP).
12. What is the importance of the BSP in the Philippine Financial System?
13. Enumerate and discuss the main functions of the BSP.

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