University of San Jose – Recoletos

School of Business and Management

Accountancy and Finance Department

Financial Management
Ms. Hiezelyn F. Delos Santos, CPA

Module 1
INTRODUCTION TO FINANCIAL MANAGEMENT
Nature and Concepts

Financial Management

- Is also referred as managerial finance, corporate finance or business finance.

- Comprises of forecasting, planning, organizing, directing, coordinating and controlling of all
activities relating to acquisition and application of the financial resources of an undertaking
in keeping with its financial objective.

TWO ASPECTS OF FINANCIAL MANAGEMENT

I. PROCUREMENT OF FUNDS

The financial manager should take steps to procure the funds required for the business.

The three main considerations in procuring funds are:

1. Risk associated with each source of funding

2. Cost of obtaining funds from various sources.
3. Control over the funds obtained from various sources.

SOURCES OF FUNDS ARE:

1. EQUITY
a. Less risky in the point of view for the firm.
b. Equity Capital is usually the most expensive source of funds.
2. BONDS/DEBENTURES
a. Comparatively cheaper than the shares because of their tax advantage.
b. Entail a high degree of risk since they must be repaid as per the terms of
agreement, whether or not the company makes profits.
3. FUNDING FROM BANKS & OTHER FINANCIAL INSTITUTIONS
4. INTERNATIONAL FUNDING -

II. EFFECTIVE UTILIZATION OF FUNDS

The funds procured by the financial manager are to be prudently invested in various assets to
maximize the return on investment.
 University of San Jose – Recoletos
School of Business and Management
Accountancy and Finance Department

Financial Management
Ms. Hiezelyn F. Delos Santos, CPA

Some of the aspects of funds utilization are:

1. UTILIZATION OF FIXED ASSETS: The funds are to be invested in the manner so that
the company can produce at its optimum level.
2. UTILIZATION OF WORKING CAPITAL: Firms must enjoy an optimum level of working
capital, but they should not keep too much funds blocked in cash, inventories, etc.

OBJECTIVE OF FINANCIAL MANAGEMENT

Modern managerial finance theory works under the premise that the primary goal of the
firm is to maximize shareholders’ wealth, rather than to maximize profit. The financial manager acts in
the shareholders’ best interests by making decisions that maximize the market value of the company’s
shares of stock.

ROLE OF FINANCIAL MANGERS

The role of a financial manager may include, but is not limited to, the following tasks:

1. Financial analysis and planning. Determining the proper amount of funds to employ in the firm
through liquidity and profitability analysis of the company’s financial statements.
2. Investment decisions. Selecting the best projects in which to invest firm resources, based on
consideration of risks and returns.
3. Risk management. Managing the firm’s exposure to all types of risk.
4. Management of financial resources. Managing the firm’s current assets and source of short-term
credit in the most efficient manner.
5. Financing and capital structure decisions. Outsourcing company funds (mix of debt and equity
financing) to support firm’s operations and investment programs.

No single person is tasked for all the responsibilities of a financial manager. These tasks
are dispersed throughout the firm. In large firms, financial responsibilities are usually carried out by the
treasurer and/or the controller while the chief financial officer (CFO) usually oversees the work of both
treasurer and controller.

THE FINANCE FUNCTION DECISIONS

1. INVESTMENT DECISIONS
- Most important decision (among the three) when it comes to value creation.
- Determines the total amount of assets to be held by the firm.
- Revolves in the left side of the basic accounting equation (ASSETS = LIABILITIES + EQUITY)
 University of San Jose – Recoletos
School of Business and Management
Accountancy and Finance Department

Financial Management
Ms. Hiezelyn F. Delos Santos, CPA
- It deals with the question, “how much of the firm’s total assets be devoted to cash or to
inventory or to receivable

2. FINANCING DECISIONS
- Second major decision
- Right side of the basic accounting equation (ASSETS = LIABILITIES + EQUITY)
- It deals with the question, “If I were to maintain this size of asset or acquire asset, how
should I finance this?

2. DIVIDEND DECISIONS
- These decisions relate to the determination as to how much and how frequently cash can
be paid out of the profits of an organization as income for its owners/shareholders.
- The dividend decision has two elements:
i. The amount paid out
ii. The amount to be retained to support the growth of the organization (also a
financing decision).

BASIC PRINCIPLES IN MANAGERIAL FINANCE

Most techniques and tools in finance are based on the following theoretical axioms or
principles:

• Risk-return trade-off: “We won’t take on additional risk unless we expect to be compensated with
the additional return”
• Time value of money: a peso received today is worth more than a peso received in the future.

• Cash – not profit – is king.

• Incremental cash flows – it’s only what changes that counts
• Tax consideration: virtually all financial decisions are influenced by the effect of taxes
• Ethical behavior – doing the right thing – is always relevant.