Business Finance

Quarter 3 – Module 1.2:

Introduction to Financial
Management
Business Finance – Grade 12
Alternative Delivery Mode
Quarter 3 – Module 1.2: Introduction to Financial Management
First Edition, 2020

Republic Act 8293, section 176 states that: No copyright shall subsist in any work of
the Government of the Philippines. However, prior approval of the government agency or office
wherein the work is created shall be necessary for exploitation of such work for profit. Such
agency or office may, among other things, impose as a condition the payment of royalties.

Borrowed materials (i.e., songs, stories, poems, pictures, photos, brand names,
trademarks, etc.) included in this module are owned by their respective copyright holders.
Every effort has been exerted to locate and seek permission to use these materials from their
respective copyright owners. The publisher and authors do not represent nor claim ownership
over them.

Published by the Department of Education

Secretary: Leonor Magtolis Briones
Undersecretary: Diosdado M. San Antonio
SENIOR HS MODULE DEVELOPMENT TEAM

Author : Esmeralda P. Zulueta

Co-Author – Language Editor
Co-Author – Content Evaluator
Co-Author – Illustrator
Co-Author – Layout Artist
: Lovella C. Atienza
: Arjay O. Serrano
: Ferdianne Antonie B. Bermudo
Esmeralda P. Zulueta
: Esmeralda P. Zulueta

Team Leaders:
School Head : Reynaldo B. Visda
LRMDS Coordinator : Melbourne L. Salonga

SDO-BATAAN MANAGEMENT TEAM:

Schools Division Superintendent : Romeo M. Alip, PhD, CESO V
OIC- Asst. Schools Division Superintendent : William Roderick R. Fallorin, CESE
Chief Education Supervisor, CID : Milagros M. Peñaflor, PhD
Education Program Supervisor, LRMDS : Edgar E. Garcia, MITE
Education Program Supervisor, AP/ADM : Romeo M. Layug
Education Program Supervisor, Senior HS : Danilo S. Caysido
Project Development Officer II, LRMDS : Joan T. Briz
Division Librarian II, LRMDS : Rosita P. Serrano

REGIONAL OFFICE 3 MANAGEMENT TEAM:

Regional Director : May B. Eclar, PhD, CESO III
Chief Education Supervisor, CLMD : Librada M. Rubio, PhD
Education Program Supervisor, LRMS : Ma. Editha R. Caparas, EdD
Education Program Supervisor, ADM : Nestor P. Nuesca, EdD

Printed in the Philippines by the Department of Education –

Schools Division Office of Bataan

Office Address: Provincial Capitol Compound, Balanga City, Bataan

Telefax: (047) 237-2102
E-mail Address: bataan@deped.gov.ph
Business Finance
Quarter 3 – Module 1.2:
Introduction to Financial
Management
Introductory Message
This Self-Learning Module (SLM) is prepared so that you, our dear learners,
can continue your studies and learn while at home. Activities, questions, directions,
exercises, and discussions are carefully stated for you to understand each lesson.

Each SLM is composed of different parts. Each part shall guide you step-by-
step as you discover and understand the lesson prepared for you.

Pre-tests are provided to measure your prior knowledge on lessons in each

SLM. This will tell you if you need to proceed on completing this module or if you
need to ask your facilitator or your teacher’s assistance for better understanding of
the lesson. At the end of each module, you need to answer the post-test to self-check
your learning. Answer keys are provided for each activity and test. We trust that you
will be honest in using these.

In addition to the material in the main text, Notes to the Teacher are also
provided to our facilitators and parents for strategies and reminders on how they can
best help you on your home-based learning.

Please use this module with care. Do not put unnecessary marks on any part
of this SLM. Use a separate sheet of paper in answering the exercises and tests. And
read the instructions carefully before performing each task.

If you have any questions in using this SLM or any difficulty in answering the
tasks in this module, do not hesitate to consult your teacher or facilitator.

Thank you.
 What I Need to Know

This module is written and designed to help you understand the definition of
finance, the activities of the financial manager, and the financial institutions
and markets.

After accomplishing this module, you are expected to:

1. distinguish a financial institution from a financial instrument and a
financial market (ABM_BF12-IIIa-b-2)
a. define financial institutions, financial market, and financial
instruments; and
b. identify the types of financial institutions, financial market, and
financial instruments.
2. explain the flow of funds within an organization – through and from the
enterprise – and the role of the financial manager (ABM_BF12-IIIa-b-5)

1
 What I Know

Directions: Match column A with column B. Write the letters of your answers on a
separate sheet of paper.

A B
______ 1. Their cash inflows are greater than their A. money market
cash outflows. B. common stock
______ 2. It is the meeting place of suppliers and C. financial
users of various types of funds where institutions
transactions can be made directly. D. savers
______ 3. It is a venue wherein securities are E. financial market
borrowed for less than a year.
______ 4. It is a security that represents ownership
in a corporation.
______ 5. These channel the savings of individuals,
businesses, and governments into loans
or investments.

Directions: Write True if the statement is correct and False if the statement is
incorrect. Write your answers on a separate sheet of paper.
______ 6. Common stock shareholders typically do not hold any
voting rights.
______ 7. Direct financing is when a borrower borrows money from lenders in
the financial market by issuing securities.
______ 8. The dividend for preferred stocks is fixed.
______ 9. Treasury bonds are issued by the Philippine government.
______ 10. Capital market involves the buying and selling of securities with
maturities for more than one year.
______ 11. Common stocks have a priority over preferred stocks in terms of claims
over the assets of a company in case of bankruptcy.
______ 12. IPO stands for Interest Private Offering.
______ 13. Secondary market is where previously issued securities (such as bond,
notes, and shares) are bought and sold.
______ 14. Treasury bonds are issued by publicly listed companies that usually
have higher interest rates than corporate bonds.
______ 15. Mutual fund pools money from investors and invest these in the stock
market, bonds, treasury notes, and other money market instruments
like T-bills.

2
 Lesson Financial Institutions,
2 Financial Instrument, and
Financial Market

What’s In

Directions: Arrange the following jumbled letters to form the correct word or phrase
based on the given clues. Write your answers on a separate sheet of paper.

1. __________________________
It is a sum of money saved or made available for a particular purpose.

2. __________________________
It is a regular gathering of people for the purchase and sale of provisions,
livestock, and other commodities.

3. __________________________
It is an establishment, foundation, or organization created to pursue
an endeavor.

4. __________________________
It is a document that has a monetary value or it represents a legally
enforceable agreement between two or more parties regarding a right to
payment of money.

Notes to the Teacher / Facilitator

As the students work in this module, they will encounter
some unfamiliar words, you can ask them to write those words in
a separate sheet of paper and look for the meaning or definition to
enhance their vocabulary skills.

3
 What’s New

Directions: Answer the following questions in two (2) to three (3) sentences. Write
your answers on a separate sheet of paper.

1. If you want to start a small business, what will you do to have a capital?

_______________________________________________________________________
_______________________________________________________________________

2. If you are going to save money, where will you keep it? Why?

_______________________________________________________________________
_______________________________________________________________________

Scoring Rubrics:

5 points The answer is well-written, organized and the idea is very relevant
to the question and has no grammatical or spelling errors.
4 points The answer is fairly written, and the idea is almost relevant to the
question and has one grammatical or spelling error.
3 points The answer is somewhat relevant to the questions and has two to
three grammatical or spelling errors.
2 points The answer is unclear and has four grammatical or
spelling errors.
1 point The answer does not address the question and has more than five
grammatical or spelling errors.

These questions are related to our next topic. A finance manager needs to
look for funds to finance the company. If the company has extra cash, he/she will
make a decision where to put it.

4
 What is It

The Financial Institutions

The role of financial institutions in the money flow is shown below. See Figure 3.

Figure 3: The Role of Financial Institutions in the Money Flow

(Source: Exploring Small Business and Personal Finance, Yumang, et al., 2016)

The flow of money begins with the depositor who opens a bank account and
earns interest from the account. In exchange, these funds are lent by the banks to
businesses. They are borrowers who want to start up a new business, a new product,
expand a business, or find another investment opportunity. When the business earns
profit, the borrower of the funds will pay interest on the loan, and the depositor
receives an interest in his/her bank account.

The financial institution’s role is to act as a financial intermediary. A financial

intermediary serve as a link between the depositor who has the money and the
lender who needs money. Financial institutions include commercial banks,
universal banks, investment banks, investment companies, finance companies, life
and non-life insurance companies, mutual fund companies, and private equity firms.

Most funds, especially public funds, are looking for investment opportunities
that will sustain their requirements for about five years or more, that is, long-term,
and this is to separate certain investor requirements from fast returns.

Financial management is managing financial matters including analysis of

statements, assessment, or investment opportunities, which happens before one
starts investing and acquiring funds from different sources.

5
The Key Individual Roles
1. The Depositor Who Has the Funds
The depositor is the person who has the money and puts in a savings account
with a bank that pools this together with the savings from other depositors. He/she
saves money in a bank because he/she wants to achieve things in life, such as a new
house, a new car or even a small business. His/her money also earns interest in the
bank.

2. The Borrower Who Needs the Funds

The borrower is the one who needs funds and borrows it from a bank. He/she
knows where to use the funds such as starting up a new business, purchasing new
equipment, expanding his/her business, or investing in other financial instruments.

Financial Instruments and Financial Markets

Financial instruments are the tools that help a business’ daily operations
and help the finance manager handles his/her cash, his/her short-term operating
requirements, and long-term business requirements.

Money market instruments are funds available for a short time (1 year or
less than a year). They are available most of the time and do not provide very high
returns. Table 1 is a list of the different market instruments and their characteristics.

Money Market Debts

Financial Instruments Characteristics
•
issued by the government
•
maturity within a year
Treasury bills (T-bills)
•
not risky, because government must make an
effort to pay
• issued by financially sound business to fund
investment in inventories and receivables.
Commercial papers • maturity is about nine months
• generally low default risk as business has
good credit standing
• issued by banks or mutual funds companies
• maturity date is not specific
• the degree of default risk is low
Money market funds
• usually invested in money market
instruments, commercial papers,
and treasuries
• issued by banks, credits unions and
Consumer credit, finance companies
credit card debt • the maturity date varies
• default risk varies
Table 1. The Different Money Market Instruments and their Characteristics
(Source: Exploring Small Business and Personal Finance, Yumang et al., 2016)
The borrower can also use long-term debts for his/her business needs.
However, the interest rates are higher than money market instruments. Bond is an
example of long-term debt. It is a security reflecting the debts of a government’s or
business’ debt promising to pay a fixed interest to the bondholder for a definite time.

6
A note is another example of long-term debt that has a longer term than a money
market instrument. Notes are similar to bonds that have regular interest payments
and have a specified maturity term.

Long-Term Debts
Financial Instruments
Treasury notes and bonds
Federal agency debt
Municipal bonds, local
government bonds
Corporate bonds
Table 2. Long-term Debt Instrument
(Source: Exploring Small Business and Personal Finance by Yumang et al., 2016)
Characteristics
• issued by the government
• matures in two, five or ten years or more
• no default risk (The government exert effort
to pay.)
• bonds price usually fall becoming less
attractive as interest rates in the
market rise
• not applicable in the Philippine setting (a
United States’ type of long-term debt.)
• issued by federal agencies and it is similar
to treasuries
• long-term maturity (i.e. up to thirty years)
• low default risk
•
issued by local government
•
long-term maturity (i.e. up to thirty years)
•
more risky than government securities
•
issued by corporations
•
mature in forty years
•
more risky than government securities and
rely on the financial soundness of
the company

Stocks are types of security that represent ownership in a corporation and a

claim on part of the corporation’s assets and earnings. The two main types of stocks
are common and preferred.

7
 Financial Instruments Characteristics
• issued by corporation in exchange of
ownership
• has no maturity date
Preferred stock • pay dividends when declared
(Preference share) • more risky than corporate bonds
• has no voting rights
• has preference over common stocks in
asset liquidation
• units of ownership in a public corporation
• pays dividend when declared
• owners are entitled to vote on the selection
Common stock
of directors and other important matters
(Ordinary share)
• common stockholders enjoy potential
profits from the capital appreciation of
their stock.
Table 3. Preferred and Common Stock
(Source: Exploring Small Business and Personal Finance by Yumang et al., 2016)

Financial Market
Financial Markets are the meeting places of suppliers and users of various types of
funds that can make transactions directly.

1. Primary Market – refers to financial market in which buyers and sellers

negotiate and transact business directly without an intermediary.
o Public offering is the sale of new securities to the general public
and the first offering of stock is called IPO or Initial Public Offering.
o Private placement is the sale of a new security to a private or
specific buyer.
2. Secondary Market – refers to financial market where previously issued
securities (such as bond, notes and shares) are bought and sold.
3. Money markets are venues wherein securities with short-term maturities
(1 year or less) are borrowed or loaned. Capital markets are financial
markets for stocks for a long-term period (one year or longer). (Source:
Business Finance Teacher’s Guide)

8
Different Types of Financial Institutions

A financial institution can be a bank or nonbank.

Different kinds of banks:

1. Thrift Banks
Thrift banks are deposit-taking financial institutions that extend credit
to the consumer market that is in the countryside or rural areas.

2. Commercial Banks
Commercial banks are mainly deposit-taking financial institutions that
extend credit to the retail and consumer market, and their transactions are
usually many but small, using the local currency.

They collect and secure the funds of the depositors. Savings and
checking accounts provide a fast and efficient way for bank clients to access
their money and use the money to pay bills and other short-term investments
such as utility bills, education fees, and other expenses.

They lend money of the depositors to small and medium businesses in

exchange with interest to be paid regularly for the use of the funds.

The interest paid to depositors and the rate earned from borrowers will
pay the banking cost such as employees’ salaries, office rent, electricity, and
other business-related costs.

3. Universal Banks
Universal banks lend money to multinational companies. The
transactions are larger than commercial banks and denominated in multi-
currencies not just to the local currency. They are like commercial banks but
mostly their clients are larger corporations. They also offer other financial
services due to an expanded license to engage with clients.

4. Investment Companies
Investment banks provide loans to big corporations and governments
and can raise funds through bond issuances and initial public offerings.
Investment banks also provide funds to businesses.

How investment banks raised funds from the public:

a. Identify the business who needs financing.
b. Talk and negotiate with the investors the amount needed to be raised,
kind of denominations to use, investment rate to pay the investing
public, and the fee to charge for putting all the fund raising and
lending together.
c. Execute the fund raising once the agreement is done.
d. Monitor the financial stability of the issuer.
e. Monitor the payments to investor.

9
The nonbank institutions that raise and lend funds:

1. Leasing Companies
Leasing companies extend financing to companies that need funds for
their business. They are not banks and are not regulated by central bank.

2. Investment Companies
Investment companies perform similar functions as banks in the
manner that they can provide financing to companies or raise funds through
bonds or Initial Public Offerings. They are regulated by the Securities and
Exchange Commission (SEC).

3. Mutual Funds
Mutual funds are types of investments or funds of small investors
pooled together and managed to be able to generate maximum returns.

4. Insurance Companies
Insurance companies sell life and non-life insurance products that offer
security during times of death, illness, accident, and damage to property.
Individuals buy insurance protection with insurance premiums. The
insurance companies use these payments to invest in stocks, bonds, real
estate, and mortgages. The proceeds will be the payment to the
insured individual.

5. Private Equity Funds

Private equity funds are managed by private fund managers or
investors, allowing owners to invest more aggressively in the
financial markets.

The Flow of Money and Role of the Financial Manager

The flow of funds to businesses begins with the source of funds, the saver or
lender, who has the money, saves, or deposits with the bank of any financial
institution. The financial institutions or banks look for outlets to increase the money.
The businessman need money for his/her projects, so he/she borrow money from
the depositor. The borrower pays interest. The goal of finance is to maximize profit,
so it is expected that the finance manager will invest the money into new projects or
use this wisely. He/She can use the money to pay the company’s loan, use for the
operation of the business or put it in investments.

What is a worthwhile business?

A worthwhile business is a business that achieves the objective of financial
soundness, sustainability, competitiveness, and nation-building. The financial
manager's role is to ensure that the entire cash flow happens and is completed up to
interest payments on the borrowed loan after money is invested in a
worthwhile business.

10
 There will be an evaluation of the business before the credit will be provided
or extended. See Figure 4.

Figure 4. Evaluation of the Business

(Source: Exploring Small Business and Personal Finance by Yumang et al., 2016)

11
 What’s More

Directions: Identify the following financial instruments. Write LT if it is a long-term

debt and MM if it is a money market debt. Write your answers on a
separate sheet of paper.

1. treasury bonds _____________

2. federal agency debt _____________
3. treasury bills _____________
4. commercial papers _____________
5. local government funds _____________
6. money market funds _____________
7. credit card debt _____________
8. corporate funds _____________

Directions: Identify the following financial institutions. Write B if it is a bank

institution and NB if it is a nonbank institution. Write your answers on
a separate sheet of paper.

9. leasing companies _____________

10. investment companies _____________
11. thrift banks _____________
12. mutual funds _____________
13. private equity funds _____________
14. commercial banks _____________
15. universal banks _____________

12
 What I Have Learned

Directions: Answer the following questions in one (1) to two (2) sentences. Write your
answers on a separate sheet of paper.

In this lesson,

I learned that:

____________________________________________________________________________
____________________________________________________________________________

I did that:

____________________________________________________________________________
____________________________________________________________________________

I realized that:

____________________________________________________________________________
____________________________________________________________________________

Scoring Rubrics:

5 points The answer is well-written, organized and the idea is very relevant
to the question and has no grammatical or spelling errors.
4 points The answer is fairly written, and the idea is almost relevant to the
question and has one grammatical or spelling error.
3 points The answer is somewhat relevant to the questions and has two to
three grammatical or spelling errors.
2 points The answer is unclear and has four grammatical or
spelling errors.
1 point The answer does not address the question and has more than five
grammatical or spelling errors.

13
 What I Can Do

Directions: Answer the following questions. Write your answers on a separate sheet
of paper.

1. Distinguish financial institution from financial instrument and

financial market.
Financial Institution Financial Instrument Financial Market

2. Explain the flow of funds within an organization through and from the
enterprise and the role of financial manager.

Scoring Rubrics:

5 points The answer is well-written, organized and the idea is very relevant
to the question and has no grammatical or spelling errors.
4 points The answer is fairly written, and the idea is almost relevant to the
question and has one grammatical or spelling error.
3 points The answer is somewhat relevant to the questions and has two to
three grammatical or spelling errors.
2 points The answer is unclear and has four grammatical or
spelling errors.
1 point The answer does not address the question and has more than five
grammatical or spelling errors.

14
 Assessment

A. Directions: Write the letter of the correct answer on a separate sheet of paper.

1. He/She opens a bank account and earns interest from the account.
A. borrower C. lender
B. depositor D. none of the above
2. The owners of this instrument have voting rights.
A. preferred stock C. prepared stock
B. common stock D. preference stock
3. These are type of investments or funds of small investors pooled together
and managed to be able to generate maximum returns.
A. insurance premiums C. mutual funds
B. corporate funds D. treasury notes
4. These funds are available for short time.
A. money market debt C. insurance
B. long-term debt D. mutual funds
5. These instruments are issued by financially sound businesses to fund
investments in inventories and receivables.
A. treasury bills C. preferred stock
B. commercial papers D. money market funds

B. Directions: Write True if the statement is correct and False if the statement is
incorrect. Write your answers on a separate sheet of paper.

______ 6. A worthwhile business achieves the objective of financial soundness,

sustainability, competitiveness, and nation-building.
______ 7. Public offering is the sale of new securities to the general public and the
first offering of stock is called IPO or Initial Public Offering.
______ 8. Leasing companies are not regulated by central bank.
______ 9. Investment banks do not provide funds to businesses.
______ 10. A financial intermediary serves as a link between the depositor who has
the money and the lender who needs money.
______ 11. Financial institutions include preferred stock, commercial papers, and
treasury bills.
______ 12. Universal banks lend money to multinational companies.
______ 13. Bonds are examples of long-term debts.
______ 14. Stocks are types of security that represent ownership in a corporation.
______ 15. The two types of stocks are ordinary shares and common stocks.

15
 Additional Activities

Directions: List the financial institutions that you can find in your area. Identify
whether each is a bank institution or a nonbank institution. Write your
answers on a separate sheet of paper.

16
 17
What I Know What’s In What’s New
1. D 1. FUNDS The answer will depend on the
2. E 2. MARKET student.
3. A 3. INSTITUTION
4. B 4. INSTRUMENT
5. C
6. False
7. True
8. True
9. True
10. True
11. False
12. False
13. True
14. False
15. True
What’s More What I Have Learned What I Can Do
1. LT The answer will depend on the The answer will depend on the
2. LT student. student.
3. MM
4. MM
5. LT
6. MM
7. MM
8. LT
9. NB
10. NB
11. B
12. B
13. NB
14. B
15. B
Assessment Additional Activities
A. The answer will depend on the
1. B student.
2. B
3. C
4. A
5. B
B.
6. True
7. True
8. True
9. False
10. True
11. False
12. True
13. True
14. True
15. False
Answer Key
References
"Financial Institution". 2020. Investopedia. Accessed June 23.
https://www.investopedia.com/terms/f/financialinstitution.asp.
"Financial Instrument". 2020. Investopedia. Accessed June 23.
https://www.investopedia.com/terms/f/financialinstrument.asp.
2020. Accessed June 23.
https://www.google.com/search?q=funds+meaning&oq=FUNDS&aqs=chr
ome.1.69i57j0l5j69i60j69i61.3307j0j9&sourceid=chrome&ie=UTF-8.
2020. Accessed June 23.
https://www.google.com/search?q=MARKET+DEFINE&oq=MARKET+DEF
INE&aqs=chrome.0.69i59j0l7.3428j1j4&sourceid=chrome&ie=UTF-8.
Cabrera, Ma. Elenita, and Gilbert Anthony Cabrera. 2017. Business Finance
Principles And Applications. Sampaloc, Manila: GIC Enterprises & Co., Inc.
Cayanan, Arthur, and Daniel Vincent Borja. 2017. Business Finance. 1st ed. Manila:
Rex Book Store.
Teaching Guide For Senior High School Business Finance. 2016. Quezon City:
Commission on Higher Education.
Yumang, Kenneth, Chan Pao, Tyrone, and Patricia Benito. 2016. Quezon City:
Exploring Small Business And Personal Finance. The Phoenix Publishing
House Inc.

18
For inquiries or feedback, please write or call:

Department of Education – Region III,

Learning Resources Management and Development Section (LRMDS)

Provincial Capitol Compound, Balanga City, Bataan

Telefax: (047) 237-2102

Email Address: bataan@deped.gov.ph