BUSINESS FINANCE Chapter 1

Rogationist College
SENIOR HIGH SCHOOL DEPARTMENT
School Year 2019-2020

Chapter 1 – Introduction to Financial Management

FINANCE (Latin word finer, meaning “to end” or “to pay). The study of money and money management;
it explores the allocation of resources.

PRIMARY GOALS
1. To earn profit
2. Increasing the Value of a Business
3. Improving the quality of life in the community (Social Responsibility of Businessmen).

CLASSIFICATION OF FINANCE
A. As to Form of Negotiation
1. Direct Finance. It involves direct borrowing of money (e.g. a company going to a bank
to obtain a loan).
2. Indirect Finance. It involves financial intermediaries in the real sense of the word.

B. As to User
1. Public Finance. It deals with the revenue and expenditure patterns of the
government.
2. Private Finance. All finance other than public finance.
a. Personal Finance. It refers to finance conducted by individual/consumers. A
family spending for their food, clothing, shelter, recreation,
education, and the like.
b. Finance of non-profit organization. It involves those conducted by charitable,
civic, religious organizations, and the like.
c. Business Finance. It deals with financing for business firms or for commercial
use, the goal of which is to make profit.

Primary Activities of Financial Manager

1. Operating Decision
Operating decisions deal with the daily operations of the company. The role of the finance
officer/manager is determining how to finance working capital accounts such as accounts receivables
and inventories
.
2. Investing Decision
This requires forecasting the cost of investment and the streams of cash flows expected to be
generated from the investment. The investment can only be considered if it satisfies certain financial
parameters that are acceptable to the top management.

3. Financing Decision

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Financial decisions include making decisions as to how to finance long-term investments and
working capital which deals with the day-to-day operations of the company.
4. Dividend Policies
How much cash dividends a company declares is within the purview of the finance
officer/manager.

Qualifications of a Finance Officer/Manager

1. Knowledgeable about Accounting and Economics Principles
2. Familiar with the Operations of the Other Functional Areas
3. Technically Equipped in Finance with Professional Judgement
4. With Good Communication Skills
5. With Favorable Relationships with Financial Institutions
6. With Harmonious Relationship with Other Units
7. Ethically and Socially Responsible

Financial System

It is responsible for the flow of money or funds from the lender to the borrower. The financial
system controls, regulates and facilitates the savings, borrowing, lending, and investing activities
happening among the different players in the system.

1. Financial Institutions
Financial Institutions are institutions or organizations that provide financial services, among
others, in the form of loan, credit, fund administration, financing, depository, and safekeeping (Business
Finance in the Philippine Setting, page 23).

a. Depository Institutions
i. Banks They accept deposits and bills payment, provide loans, and facilitates the
transfer of funds domestically or abroad.
(1) Commercial banks
(2) Co-operative Banks
(3) Central Bank
(4) Industrial banks

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(5) Agricultural Banks

(6) Savings Banks
(7) Foreign Exchange Banks
(8) Exchange Banks

(ii) Thrift banks cater to the needs of households, agriculture, and industry. They
encourage the habit of thrift and savings ang provide loans at reasonable rates. They
also provide short-term working capital and medium long-term financing to business
engaged in agriculture, services, industry and housing, and diversified financial ang
allied services, and to their chosen markets and constituencies, especially small and
medium enterprises and individuals.
(1) Savings and Mortgage Banks
(2) Private Development Banks
(3) Saving and Loan Associations
(4) Microfinance Thrift Banks
(5) Credit Unions

2. Financial Intermediaries (Non-Depository Institutions)

Financial Intermediaries is a type of financial institution that acts as the middleperson between
two parties – the investors and the borrowers. Financial Intermediaries do not have depository functions
similar to banks and other institutions though some have a wide range of financial services.

a. Insurance Companies acts as a financial intermediary by pooling together the proceeds of

insurance policies sold to the public and investing the accumulated funds in high-yield
maturing securities from investment houses.
i. Life Insurance Companies
ii. Property/Casualty Insurance Companies
(1) Casualty insurance; (2) Homeowners insurance; (3) Auto or vehicle insurance; (4)
Food insurance; (5) Food insurance; (6) Windstorm insurance; (7) Umbrella liability
policy; (8) Health insurance; (9) Long-term care; (10) Professional liability insurance;
(11) Credit insurance.
b. Fund Manager
i. Pension Fund Companies
ii. Mutual Fund Companies
c. Pawnshops
d. Trust Companies/Department
e. Lending Investors

Financial Markets

Financial markets facilitate the transfer of funds from savers to firms, government, and
individuals who use the funds. Financial markets also facilitate the transfer of existing securities from
sellers to buyers. Financial markets are at the heart of the financial system, determining the
volume of credit available, attracting savings and setting interest rates and security prices.

1. As to term or maturity
(a) Money Markets
(b) Capital Markets

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2. As to type of issue
(a) Primary Markets
(b) Secondary Markets
(c) Public Market

Financial Instruments
Financial Instruments refers to contracts that give rise to the formation of financial assets of one
entity and at the same time the creation of a financial liability or an equity instrument in another entity.

The most common forms of financial instruments are as follows:

1. Cash
2. Check
3. Loan
4. Bond is a financial instrument that represents a contractual debt of the party
issuing the bond.
a. Term Bond
b. Serial Bond
c. Secured Bond
d. Debenture Bond
e. Convertible Bond
f. Callable Bond
5. Stock is a financial security that signifies ownership of the assets of the corporation.
a. Common Stock (Ordinary Stock)
b. Preferred Stock (Preference Stock)
6. Stock Exchange