INTRODUCTION TO FINANCIAL

MANAGEMENT
FINANCE
The science and art of managing
money
BUDGETING
the act of estimating revenue (in the
form of allowance) and expenses over
a period of time (in this case, on a
daily basis)
INVESTMENT
Financial gain – income generating
Appreciate
SOURCES OF FUNDS
•When faced with financial difficulties (in this
case, the lack of funds to meet current
expenses) we look for people or institutions
that will give us money we need.
FINANCE
• How much of their earnings they spend
• How much they spend or how much they need
• How they invest their savings
• How they raise additional funds they need
FORMS OF BUSINESS
ORGANIZATION
• 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
• Privately owned – often owned by family members
whose stocks may not be offered to outsiders unless
consent by the family members is secured.
• Publicly owned – owned by unrelated investors and
are traded in organized exchanges like the Philippine
Stock Exchange.
 WEALTH MAXIMIZATION
Paul bought 10 shares of Globe Telecom at P2,510
each on September 9, 2010. This brings his investments
to P25,100. What happens to the value of his
investment if the price goes up to P2,600 per share or it
goes down to P2,300 per share?
Controllable by Management
- Profitability
- Having a good liquidity and
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
PROFITABILITY
•Profit is a measure of the financial performance
of a company for a period of time
•Although it is a major driver for increasing the
value of stock, an investor should not rely on
profits alone.
COMPANY A
Income Statement Cash Flows

Sales P100,000 Collection from Customers P0

Less: Costs P50,000 Payment of Expenses P50,000

Profits P50,000 Net Cash Flow (P50,000)

COMPANY B
Income Statement Cash Flows

Sales P100,000 Collection from Customers P100,000

Less: Costs P150,000 Payment of Expenses P50,000

Profits (P50,000) Net Cash Flow P50,000

COMPANY C
Income Statement Cash Flows

Sales P100,000 Collection from Customers P100,000

Less: Costs P70,000 Payment of Expenses P70,000

Profits P30,000 Net Cash Flow P30,000

GOOD LIQUIDITY AND REASONABLE
LEVERAGE POSITION
•Refers to the company’s management of the
type and amount of assets and liabilities that
it will hold in the course of its operation
 DIVIDENDS
Holders of shares receive dividends from a
corporation as returns of their investments in
form of a cash or other properties.
CORPORATE PLANS THAT
IMPROVE THE BUSINESS
PROSPECTS
• Example:
• Company A which is in the business of selling Halo-Halo in the Dapitan area for 5 years. Company
A is consistently earning profits and has positive cash flow. We asked how Company A sees itself
after 5 more years, Company A answered that it would continue to sell Halo-Halo in Dapitan are.
• On the other hand, Company B sells Buko Juice in Katipunan area for 5 years. Company B is
consistently earning profits and has positive cash flow. We 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 to take advantage of the growing demand for Buko Juice in Cubao.
• Between Company A and B, which would be a better investment? Company B. Since it has more
concrete future prospects allowing investors to hope for better revenue and net income.
EXTERNAL FACTORS
• These factors influences the general reaction of investors in making
investment decisions
• Its effect is not only to a specific company but on all companies or
a group of companies under similar circumstances.
• Such factors are as a result of the environment a company
operates in rather than the decisions of the company’s
management
ROLE OF FINANCIAL
MANAGEMENT
• Financial management deals with decisions that are supposed to maximize the value
of the shareholder’s wealth
• These decisions will ultimately affect the markets perception of the company and
influence the share price.
• The goal of Financial Management is to maximize the value of shares of stocks
• Managers of a corporation are responsible for making the decisions for the company
that would lead towards the shareholder’s wealth maximization.
CORPORATE ORGANIZATION STRUCTURE
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.
 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:
- Setting policies on investments, capital structure and dividend policies.
- Approving company’s strategies, goals and budgets.

- Appointing and removing members of the top management including the president.
- Determining top management’s compensation.
- 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:
- Overseeing the operations of a company and ensuring that the strategies as
approved by the board are implemented as planned.
- Performing all areas of management: planning, organizing, staffing, directing
and controlling.
- Representing the company in professional, social, and civic activities.
VP FOR MARKETING:
• The following are among the responsibilities of VP for Marketing
• - Formulating marketing strategies and plans.
• - Directing and coordinating company sales.
• - Performing market and competitor analysis.
• - Analyzing and evaluating the effectiveness and cost of marketing methods applied.
• - 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.
• - Promoting good relationships with customers and distributors. (Cayanan, 2015)
VP FOR PRODUCTION:

• The following are among the responsibilities of VP for Production:

• - Ensuring production meets customer demands.
• - Identifying production technology/process that minimizes production cost and
make the company cost competitive.
• - Coming up with a production plan that maximizes the utilization of the
company’s production facilities.
• - Identifying adequate and cheap raw material suppliers. (Cayanan, 2015)
VP FOR ADMINISTRATION:

• The following are among the responsibilities of VP for Administration:

• - Coordinating the functions of administration, finance, and marketing departments.
• - Assisting other departments in hiring employees.
• - Providing assistance in payroll preparation, payment of vendors, and collection of
receivables.
• - 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)
ROLE OF FINANCIAL
MANAGEMENT
• Financial management deals with decisions that are supposed to maximize the value
of the shareholder’s wealth
• These decisions will ultimately affect the markets perception of the company and
influence the share price.
• The goal of Financial Management is to maximize the value of shares of stocks
• Managers of a corporation are responsible for making the decisions for the company
that would lead towards the shareholder’s wealth maximization.
FUNCTIONS OF A FINANCIAL MANAGER

Identify the four functions of a VP for finance (CFO) as follows:

• Financing
• Investing
• Operating
• Dividend Policies
FINANCING DECISIONS

include making decisions on how to fund long term

investments (such as company expansions) and working
capital which deals with the day to day operations of the
company (i.e., purchase of inventory, payment of operating
expenses, etc.).
The role of the VP for finance of the financial manager is to
determine the appropriate capital
structure of the company. Capital structure refers to how
much of your total assets is financed by
debt and how much is financed by equity.
INVESTMENTS MAY EITHER BE SHORT TERM OR
LONG TERM.
-Short term investment decisions are needed when the company is in an excess
cash position.
• To plan for this, the Financial Manager should be able to make use of
Financial Planning tools such as budgeting and forecasting
• Moreover, the company should choose which type of investment it should invest
in that would provide an most optimal risk and return trade off.
INVESTMENTS MAY EITHER BE SHORT TERM OR
LONG TERM.
- Long term investments should be supported by a capital budgeting analysis
which is among the responsibilities of a finance manager.
• Capital budgeting analysis is a tool to assess whether the investment will be
profitable in the long, Basic Long Term Financial Concepts. This is a crucial
function of management especially if this investment would be financed by
debt.
• The lenders should have the confidence that the investments that management
will push through with will be profitable or else they would not lend the
company any money.
OPERATING DECISIONS

• deal with the daily operations of the company. The role of the VP for finance
is determining how to finance working capital accounts such as accounts
receivable and inventories.
• The company has a choice on whether to finance working capital needs by
long term or short term sources.
DIVIDEND POLICIES

• Recall that cash dividends are paid by corporations to existing shareholders

based on their shareholdings in the company as a return on their investment.
Some investors buy stocks because of the dividends they expect to receive
from the company. Non-declaration of dividends may disappoint these
investors. Hence, it is the role of a financial manager to determine when the
company should declare cash dividends.
DIVIDEND POLICIES

Before a company may be able to declare cash dividends, two conditions must
exist:
1. The company must have enough retained earnings (accumulated profits) to
support cash dividend declaration.
2. The company must have cash.
FINANCIAL INSTRUMENTS

Due to the increased need for security for the performance

of obligations arising from these transactions and due to the
growing size of the financial system, the transfers of funds
from one party to another are made through Financial
Instruments.
FINANCIAL INSTRUMENTS
When a financial instrument is issued, it gives rise to
a financial asset on one hand and a financial liability
or equity instrument on the other
FINANCIAL INSTRUMENTS
- A Financial Asset is any asset that is:
• Cash

• An equity instrument of another entity

• A contractual right to receive cash or another financial asset from another entity.
• A contractual right to exchange instruments with another entity under conditions that are potentially
favorable. (IAS 32.11)

• Examples: Notes Receivable, Loans Receivable, Investment in Stocks, Investment in Bonds

FINANCIAL INSTRUMENTS
- A Financial Liability is any liability that is a contractual obligation:
• To deliver cash or other financial instrument to another entity.
• To exchange financial instruments with another entity under conditions that are potentially
unfavorable. (IAS 32)
• Examples: Notes Payable, Loans Payable, Bonds Payable
- An Equity Instrument is any contract that evidences a residual interest in the assets of an entity
after deducting all liabilities. (IAS 32)
• Examples: Ordinary Share Capital, Preference Share Capital
FINANCIAL INSTRUMENTS

When companies are in need of funding, they either sell debt

securities (or bonds) or issue equity instruments. The proceeds from
the sale of the debt securities and issuance of bonds will be used to
finance the company’s plans. On the other hand, investors buy debt
securities of equity instruments in hopes of receiving returns through
interest, dividend income or appreciation in the financial asset’s
price.
DEBT INSTRUMENTS GENERALLY HAVE FIXED RETURNS DUE
TO FIXED INTEREST RATES. EXAMPLES OF DEBT
INSTRUMENTS ARE AS FOLLOWS:
Treasury Bonds and Treasury Bills are issued by the Philippine government.
These bonds and bills have usually low interest rates and have very low risk of
default since the government assures that these will be paid.
Corporate Bonds are issued by publicly listed companies. These bonds usually
have higher interest rates than Treasury bonds. However, these bonds are not
risk free. If the company which issued the bonds goes bankrupt, the holder of
the bonds will no longer receive any return from their investment and even their
principal investment can be wiped out.
EQUITY INSTRUMENTS GENERALLY HAVE VARIED RETURNS
BASED ON THE PERFORMANCE OF THE ISSUING
COMPANY. RETURNS FROM EQUITY INSTRUMENTS COME
FROM EITHER DIVIDENDS OR STOCK PRICE APPRECIATION.
THE FOLLOWING ARE TYPES OF EQUITY INSTRUMENTS:
Preferred Stock has priority over a common stock in terms of claims over the assets of a company.
This means that if a company were to be liquidated and its assets have to be distributed, no asset
will be distributed to common stockholders unless all the claims of the preferred stockholders have
been given. Moreover, preferred stockholders have also priority over common stockholders in cash
dividend declaration. Dividends to preferred stockholders are usually in a fixed rate. No cash
dividends will be given to common stockholders unless all the dividends due to preferred stockholders
are paid first. (Cayanan, 2015)
•Holders of Common Stock on the other hand are the real owners of the company. If the company’s
growth is spurring, the common stockholders will benefit on the growth. Moreover, during a profitable
period for which a company may decide to declare higher dividends, preferred stock will receive a
fixed dividend rate while common stockholders receive all the excess.
FINANCIAL MARKETS

Financial Markets are classified into 2 comparative groups:

1. Primary vs. Secondary Markets
• To raise money, users of funds will go to a primary market to issue new securities (either debt or equity)
through a public offering or a private placement.
• The sale of new securities to the general public is referred to as a public offering and the first offering of
stock is called an initial public offering. The sale of new securities to one investor or a group of investors
(institutional investors) is referred to as a private placement.
• However, suppliers of funds or the holders of the securities may decide to sell the securities that have
previously been purchased. The sale of previously owned securities takes place in secondary markets.
• The Philippine Stock Exchange (PSE) is both a primary and secondary market.
FINANCIAL MARKETS

2. Money Markets vs. Capital Markets

• Money markets are a venue wherein securities with short-term maturities (1 year or less) are
sold. They are created because some individuals, businesses, governments, and financial
institutions have temporarily idle funds that they wish to invest in a relatively safe, interest-
bearing asset. At the same time, other individuals, businesses, governments, and financial
institutions find themselves in need of seasonal or temporary financing.
• On the other hand, securities with longer-term maturities are sold in Capital markets. The key
capital market securities are bonds (long-term debt) and both common stock and preferred
stock (equity, or ownership).
FINANCIAL INSTITUTIONS
Examples of Financial Institutions:
- Commercial Banks - Individuals deposit funds at commercial banks, which use the
deposited funds to provide commercial loans to firms and personal loans to individuals,
and purchase debt securities issued by firms or government agencies.
- Insurance Companies - Individuals purchase insurance (life, property and casualty,
and health) protection with insurance premiums. The insurance companies pool these
payments and invest the proceeds in various securities until the funds are needed to
pay off claims by policyholders. Because they often own large blocks of a firm’s stocks
or bonds, they frequently attempt to influence the management of the firm to improve
the firm’s performance, and ultimately, the performance of the securities they own.
FINANCIAL INSTITUTIONS

- Mutual Funds - Mutual funds are owned by investment companies which enable small investors to
enjoy the benefits of investing in a diversified portfolio of securities purchased on their behalf by
professional investment managers. When mutual funds use money from investors to invest in newly
issued debt or equity securities, they finance new investment by firms. Conversely, when they invest in
debt or equity securities already held by investors, they are transferring ownership of the securities
among investors.
- Pension Funds - Financial institutions that receive payments from employees and invest the proceeds
on their behalf.
- Other financial institutions include pension funds like Government Service Insurance System (GSIS)
and Social Security System (SSS), unit investment trust fund (UITF), investment banks, and credit unions,
among others.
FINANCIAL INSTITUTIONS