FINANCE 4. Must conform to external standards 4.

Not subject to external standards

5. Uses objective data 5. Uses subjective data
The science and art of managing money. (Gitman & Zutter, 2012) FINANCIAL MANAGEMENT
It is the allocation of scarce resources. (Saldana, 1997) Deals with that decisions that are supposed to maximize the value of shareholder’s wealth
(Cayanan).
As a discipline, is concerned with identifying, evaluating and managing sources and use of cash
in order to increase the value of the business enterprise to its present owners. (Saldana, 1997) It is the efficient and effective allocation, acquisition and utilization of funds.
FUNCTIONS OF FINANCE It is concerned with the maintenance and creation of economic value or wealth. (Keown et.
1998)
- Allocating available funds
GOAL OF FINANCIAL MANAGEMENT
- Acquiring Needed Funds
Is to maximize the value of shares of stocks. Managers of a corporation are responsible for
- Utilizing these funds to achieve set of goals making the decisions for the company that would lead towards shareholder’s wealth
maximization.
CLASSIFICATION OF FINANCE
ORGANIZATIONAL STRUCTURE OF THE COMPANY
- As to form of negotiation
Important especially in the financial aspect of the business and the particular set of people, each
- As to Users
play a role in the decision making of the company.
A. DIRECT FINANCE
The managers of the company are making decisions for the interest of the board of directors and
- Is finance involved in direct borrowing. the board of directors do the same for the interest of the shareholders, it follows the goal of each
individual in a corporate organization should have an objective of shareholders wealth
- The security acquired by the surplus unit (lender) is the same security issued by the deficit unit maximization.
(borrower).
ROLES OF EACH POSITION
B. INDIRECT FINANCE
Shareholders – elect the Board of Directors (BOD). Each share held is equal to one voting right.
- Involves financial intermediaries. Their responsibility is to carry out the objectives of the shareholders. Otherwise, they would not
be elected in that position.
A. PUBLIC FINANCE
Board of Directors – highest policy making body in a corporation. The board’s primary
- Deals with the revenue and expenditures patterns of the government. responsibility is to ensure that the corporation is operating to serve the best interest of the
stockholders.
B. PRIVATE FINANCE
RESPONSIBILITIES OF THE BOARD OF DIRECTORS:
- All finance, other than public finance is private finance.
a. Setting policies on investments, capital structure and dividend policies.
- Personal finance; finance for non-profit organization; business finance
b. Approving company’s strategies, goals and budgets.
FINANCIAL ACCOUNTING MANAGEMENT ACCOUNTING
1. Provides economic information useful 1. Provides economic information useful to c. Appointing and removing members of the top management including the president.
to external users internal users
2. Generates general purpose financial 2. Generates specific purpose statements and d. Determining top management’s compensation.
statements reports
e. Approving the information and other disclosures reported in the financial statements
3. Reports on financial effects of past 3. Set up for future oriented reports
(Cayanan, 2015)
events
President (Chief Executive Officer) – roles of a president in a corporation may vary from one
company to another.
RESPONSIBILITIES OF A PRESIDENT:
a. Approving the information and other disclosures reported in the financial statements.
Overseeing the operations of a company and ensuring that the strategies as approved by the
board are implemented as planned.
b. Performing all areas of management: planning, organizing, staffing, directing and controlling.
c. Representing the company in professional, social, and civic activities.
Vice President for Marketing
a. Formulating marketing strategies and plans. Directing and coordinating company sales.
b. Performing market and competitor analysis.
c. Analyzing and evaluating the effectiveness and cost of marketing methods applied.
d. 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.
e. Promoting good relationships with customers and distributors. (Cayanan, 2015)
Vice President for Production
a. Ensuring production meets customer demands.
b. Identifying production technology/process that minimizes production cost and make the
company cost competitive.
c. Coming up with a production plan that maximizes the utilization of the company’s production
facilities.
d. Identifying adequate and cheap raw material suppliers. (Cayanan, 2015)
Vice President for Administration
a. Coordinating the functions of administration, finance, and marketing departments.
b. Assisting other departments in hiring employees.
c. Providing assistance in payroll preparation, payment of vendors, and collection of receivables.
d. 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)
Vice President for Finance/ Financial Manager – determine the appropriate capital structure of
the company.
Make financing decisions that require funding from investors in the financial markets.
CAPITAL STRUCTURE – refers to how much of your total assets financed by debt and how
much is financed by equity.
FINANCED BY EQUITY – if it has bought using cash from our pockets.
FINANCED BY DEBT – if we used money from our borrowings
UTILIZATION OF FUNDS OBTAINED SHOULD BE ABLE TO MAXIMIZE:
- Wealth
- The value of the company
- The value of stakeholders
GOALS OF THE FINANCIAL MANAGER
1. Acquisition of funds with the least cost from the right sources at the right time.
2. Effective cash management.
3. Effective working capital management
4. Effective inventory management
5. Effective investment decision.
6. Proper asset selection
7. Proper risk management
FUNCTIONS OF A FINANCIAL MANAGER
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.). Includes making
decisions as to how to finance long-term investments and working capital-which deals with the
day-to-day operations of the company.
Determine the appropriate capital structure of the company.
Investing decisions as where to put your excess cash to make it more profitable. (Short term
investment of Long-term Investment). To minimize the probability of failure, long-term
investments have supported by a capital budgeting analysis.
Operating decisions deal with the daily operations of the company like on how to finance
working capital accounts such as accounts receivable and inventories.
Dividend Policies 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 is a part of profits that are available for distribution, to equity shareholders. The b. Insurance Companies - Individuals purchase insurance (life, property and casualty, and
Finance manager must decide whether the firm should distribute all the profits or retain them or health) protection with insurance premiums. The insurance companies pool these payments and
distribute a portion and retain the balance. invest the proceeds in various securities until the funds needed to pay off claims by
policyholders. Because they often own large blocks of a firm’s stocks or bonds, they frequently
COMPETENT MANAGERS MAY HAVE ANY OF THE FOLLOWING ATTRIBUTES attempt to influence the management of the firm to improve the firm’s performance, and
ultimately, the performance of the securities they own.
Visionary
c. Mutual Funds - Mutual funds owned by investment companies that enable small investors to
Decisive 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
People-Oriented 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
Inspiring
of the securities among investors.
Innovative
d. Pension Funds - Financial institutions that receive payments from employees and invest the
Respected proceeds on their behalf.

Seasoned/Experienced Manager Other financial institutions include pension funds like Government Service Insurance System
(GSIS) and Social Security System (SSS), unit investment trust fund (UITF), investment banks,
TOOLS OF THE FINANCIAL MANAGER INCLUDE and credit unions, among others.

Financial Policy Making – selecting financial goals, developing financial policies, and designing
the finance organization;
Financial Planning and Budgeting – preparing plans to attain set goals, preparing forecast and
budgets, and comparing actual performance with budgets to determine variances and determine
actions needed to correct such variances.
FINANCIAL MARKET
- Refers to a marketplace, where creation and trading of financial assets, such as shares,
debentures, bonds, derivatives, currencies, etc. take place.
Classify Financial Markets into comparative groups:

Financial analysis – evaluating results of operation and financial condition, investment option - Primary vs. Secondary Markets
and other finance-related activities
• To raise money, users of funds will go to a primary market to issue new securities (either debt
FINANCIAL ENVIRONMENT or equity) through a public offering or a private placement.

Is composed of individuals and entities (financial system participants) who/which need financing • The sale of new securities to the public referred to as a public offering and the first offering of
in one form or the other and the financial markets and financial instruments that play a major role stock named an initial public offering. The sale of new securities to one investor or a group of
in the financial system of a country investors (institutional investors) is referred to as a private placement.

All components of the society that exist in the financial environment are called participants in the • However, suppliers of funds or the holders of the securities may decide to sell the securities
financial system. that have purchased. The sale of previously owned securities takes place in secondary markets.

FINANCIAL INSTITUTIONS • The Philippine Stock Exchange (PSE) is both a primary and secondary market.

Are companies in the financial sector that provide a broad range of business and services
including banking, insurance, and investment management.
Identify examples of financial institutions/Intermediaries:
a. 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.
Money Markets vs. Capital Markets
•Money markets are a venue wherein securities with short-term maturities (1 year or less) are
sold. They have 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 sold in Capital markets. The key c. An Equity Instrument is any contract that evidences a residual interest in the assets of an
capital market securities are bonds (long-term debt) and both common stock and preferred stock entity after deducting all liabilities. (IAS 32)
(equity, or ownership).
Examples: Ordinary Share Capital, Preference Share Capital
Are institutions and system that facilitate transactions in all types of financial claims.
d. Debt Instruments generally have fixed returns due to fixed interest rates. Examples of debt
They act as the bridge between those with excess funds (savings units) and those who need instruments are as follows:
funds (borrowing units)
• Treasury Bonds and Treasury Bills issued by the Philippine government. These bonds and
FINANCIAL MARKETS ARE DIVIDED INTO: bills have usually low interest rates and have very low risk of default since the government
assures that these has been paid.
As to term or maturity
• Corporate Bonds issued by publicly listed companies. These bonds usually have higher
Money market – short term. interest rates than Treasury bonds. However, these bonds are not risk free. If the company
issued the bonds goes bankrupt, the holder of the bonds will no longer receive any return from
Capital market – long term their investment and even their principal investment has wiped out.
As to type of issue e. 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
Primary market – original issue. appreciation.
Secondary market – re acquired or previously owned securities The following are types of equity instruments:
FINANCIAL 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 has liquidated and its assets have to be distributed, no
Is a real or a virtual document representing a legal agreement involving some sort of monetary
asset be distributed to common stockholders unless all the claims of the preferred stockholders
value. These can be debt securities like corporate bonds or equity like shares of stock. When a
has given. Moreover, preferred stockholders have also priority over common stockholders in
financial instrument issued, it gives rise to a financial asset on one hand and a financial liability
cash dividend declaration. Dividends to preferred stockholders are usually in a fixed rate. No
or equity instrument on the other.
cash dividends given to common stockholders unless all the dividends due to preferred
a. A Financial Asset is any asset that is: stockholders paid first. (Cayanan, 2015)

• Cash • Holders of Common Stock on the other hand are the real owners of the company. If the
company’s growth is encouraging, the common stockholders will benefit on the growth.
• An equity instrument of another entity. 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
• A contractual right to receive cash or another financial asset from another entity. all the excess.

• 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
b. A Financial Liability is any liability that is a contractual obligation:
- Are instruments or securities which are paper or electronic evidences of either debt (liability or
obligation)/bonds or equity (ownership)/stock covering financial transactions in the different
markets.
- Like the financial market, financial instruments can be money market instrument or capital
market instruments. They can also be primary instruments or secondary instruments

• To deliver cash or other financial instrument to another entity. MONEY MARKET INSTRUMENTS

• To exchange financial instruments with another entity under conditions that are potentially Cash Management Bills- are government issued securities with maturities with less than 91
unfavorable. (IAS 32) days. They have maturities like 35 days or 42 days.

Examples: Notes Payable, Loans Payable, Bonds Payable Treasury Bills – government issued securities with maturities of 91, 182, and 364 days.
Commercial Papers (CPs) – marketable securities issued by highly financially secure firms T-notes and T-bonds – securities issued by the treasury of the country.
ranging 30-270 days.
Municipal bonds – securities issued by the municipalities.
Banker’s Acceptance – bank drafts issued by banks to help traders and other customers to
raise fund to pay for current expenditures using their (the bank’s) credit; they are short term or Mortgage-backed bonds – bonds issued collateralized by mortgages.
time drafts that mature on a certain date; most banker’s acceptance are used in connection with
letters of credit. FINANCIAL SYSTEM

Negotiable Certificates of deposit – a negotiable time deposit with a definite maturity date up
to 1 year, when the investor receives the face amount, together with the interest.
Repurchase Agreement or repos (RP’s) – agreements involving the sale of securities by one
party to another party with a promise to repurchase the securities at a specified date and price.
Money Market Deposit Accounts (MMDAs) – a type of savings account with check writing
privileges offered by banks and other financial institutions which can pay interest that are
equivalent to and competitive with money market mutual fund.
Links the savers and the users of funds. Savings can come from households, individuals,
companies, government agencies, or any other entity whose cash inflows are greater than their
cash outflows. The financial system through financial intermediaries provides a mechanism by
which these savings can be channeled to users of funds, borrowers, and investors.
Some of the financial instruments issued by users of funds such as the shares of stocks and
corporate bonds of publicly listed companies and the debt securities issued by the National
Government has traded.

Money Market Mutual Funds (MMMFs) – investment pools that buy safe, short-term securities
such as T-bills, CDs, and CPs offered by investment companies; yield is generally a little higher
than those offered by MMDAs;

Securities of Assignment – an agreement that transfer the right of the seller over a security in
favor of the buyer; the underlying security carries a promise to pay a certain sum of money on a
fixed date just like a promissory note; the underlying security is like a collateral to the certificate.

Certificate of Participation – an instrument that gives the buyer a share in a security that
promises to pay a certain sum of money on a fixed date just as in a certificate of assignment; the
underlying security is of big amount and the certificate of participation is only a portion; the
owner of the certificate participants in the bigger amount underlying security

CAPITAL MARKET INSTRUMENTS (NON-NEGOTIABLE OR NON-MARKETABLE)

Loans- result from one-to-one arrangement between a lender or a borrower.

Leases – an arrangement where the owner of the property (lessor) leases/rents the property out
of the user of the property (lessee) for a fixed monthly lease payment. Usually, properties can be
ultimately owned by the lessee if the lease agreement is a lease-to-buy

Mortgages – involve using real properties as collateral for a loan.

Letters of Credit – letters of a bank guaranteeing payment of a transaction like purchase of
merchandise or other items either domestically or internationally.
CAPITAL MARKET INSTRUMENTS (NEGOTIABLE OR MARKETABLE)
Corporate Stocks - evidences ownership in a corporation the benefit of which terms of
dividends.
Corporate Bonds – evidences obligations of the issuing corporation the benefit of which is in
terms of interest paid on such bond.
ROLES OF FINANCIAL MANAGEMENT
Financial decisions and controls: Financial management and financial managers play a
crucial role in making financial decisions and exercising control over finances in the organization.
They make use of techniques like ratio analysis, financial forecasting, profit and loss
analysis, etc.
Financial Planning: The finance managers are responsible for the planning of financial activities
and resources in the organization. To this end, they use available data to understand the needs
and priorities of the organization as well as the overall economic situation and make plans and
budgets for the same.
Capital Management: It is the responsibility of financial management to estimate the capital
requirements of the organization from time to time, determines the capital structure and
composition and makes the choice of source of funding for the capital needs.
Allocation and Utilization of financial resources: Financial management ensures that all
financial resources of the organizations are used and invested effectively and efficiently so that
the organization is profitable, sustainable and viable in the long-run.
Cash Flow Management: It is extremely important for organizations to have sufficient working
capital and cash flow to meet their operational expenses and emergencies. Financial
management tracks account payable and receivable to ensure there is sufficient cash flow
available at all times.
Disposal of Surplus: The decisions on how the surplus or profits of the organizations is utilized
is taken by the financial managers of the organizations. They decide if dividends should be
distributed and how much as well as the proportion of profits that must be retained and ploughed
back into the business.
Financial Reporting: Financial management maintains all necessary reports related to the
finance of the organization and uses this as the database for forecasting and planning financial
activities.
Risk Management: Sound financial management prepares the organization to forecast risks,
put in place mitigation plans as well as to meet unforeseen risks and emergencies effectively.
ROLES OF FINANCIAL INSTITUTION
A financial institution is an institution whose primary source of profits is through financial asset
transactions
A financial institution acts as an agent that provides financial services for its clients.
Financial institutions generally fall under financial regulation from a government authority.
Financial Institutions- act as mobilisers and depositories of saving and as the custodian of
finance.
The primary role of financial institutions is to provide liquidity to the economy and permit a higher
level of economic activity than would otherwise be possible.
According to the Brookings Institute, banks accomplish this in three main ways: offering credit,
managing markets and pooling risk among consumers.
Five Main Types of FINANCIAL INSTITUTIONS
1. Commercial banks
2. Investment Banks
3. Insurance Company
4. Brokerage
5. Investment Company
The financial institution provides varied kinds of financial services to the customers.
The financial institution provides an attractive rate of return to the customers.
Promotes the direct investment by the customers and making them understand the risk
associated with that as well.
It helps in forming the liquidity of the stock in case of an emergency in the financial markets.
The financial institutions provide loans and advances to the customers.
The rate of return is very high in case of investment made in this type of institution.
It also gives a high rated consultancy to the customers for their beneficial investments.
It also serve as a depository for their customers.
It can also make an effort to minimize the monitoring cost of the company.
All the finance related work is done by the financial institution or on behalf of the customers.
ROLES OF FINANCIAL INSTRUMENTS
Financial Asset Markets: Financial asset markets, on the other hand deal with stocks, bonds,
notes, mortgages and other financial instruments.
Spot Markets: Spot markets and future markets the terms that refer to whether the assets are
being bought or sold on the spot delivery or for delivery at some future date. Such as six months
or a year in future.
Money Markets: Are the markets for short term, highly liquid debt securities.
Mortgage Markets: Deals with loan and residential, commercial and real estate and on
farmland.
The Primary Market: When a security is created and sold for the first time in the financial
marketplace, the transaction takes place in the primary market. It is also known as Initial Public
Offering (I PO)
The Secondary Market: Once a security has been issued, it may be traded from one investor to
another.
The Money Market: Short term securities are traded in money market. Network of dealers
operate in this market.
The Capital Market: Long term securities traded in the capital market. Foreign Exchange Market

Security Exchanges: Security exchanges facilitate trading of stock or bond among investors. Market where currencies (foreign exchange) are traded

Six Basic Functions of Financial Markets ROLES OF FINANCIAL MANAGERS

Borrowing and Lending Financial managers perform data analysis and advise senior managers on profit-maximizing
ideas.
Price Determination
Financial managers are responsible for the financial health of an organization.
Information Aggregation and Coordination
They produce financial reports, direct investment activities, and develop strategies and plans for
Risk Sharing the long-term financial goals of their organization.

Liquidity Prepare financial statements, business activity reports, and forecasts,

Efficiency Monitor financial details to ensure that legal requirements are met,

ROLES OF FINANCIAL MARKET Supervise employees who do financial reporting and budgeting,

Six Key Roles of Financial Markets Review company financial reports and seek ways to reduce costs,

To facilitate saving by businesses and households: Offering a secure place to store
money and earn interest
To lend to businesses and individuals: Financial markets provide an intermediary between
savers and borrowers
To allocate funds to productive uses: Financial markets allocate capital to where the risk-
adjusted rate of return is highest
To facilitate the final exchange of goods and services such as contactless payments systems,
foreign exchange etc.
Analyze market trends to find opportunities for expansion or for acquiring other companies,
Help management make financial decisions.
Changing in response to technological advances that have significantly reduced the amount of
time it takes to produce financial reports.
Financial managers’ main responsibility used to be monitoring a company’s finances, but they
now do more data analysis and advise senior managers on ideas to maximize profits.
They often work on teams, acting as business advisors to top executives.

To provide forward markets in currencies and commodities: Forward markets allow agents Financial managers also do tasks that are specific to their organization or industry. 
to insure against price volatility
Types of Financial Managers:
To provide a market for equities: Allowing businesses to raise fresh equity to fund their capital
investment and expansion Controllers: Controllers facilitate the preparation of financial statements that summarize the
organization’s financial position, be it making financial reports, analyzing income and expenses,
Main Financial Markets to Understand structuring the balance sheet etc.

Money Market Credit Managers: Somebody needs to oversee the organization’s credit business, and this
comes under the responsibility of a credit manager. Credit managers monitor the collection of
Market for short term loan finance for businesses and households due accounts, foresee credit ceilings, and set the credit-rating criteria etc. 

Includes inter-bank lending i.e. commercial banks providing liquidity for each other Insurance Managers: Insurance managers oversee losses and shortcomings of the
organization and how best the losses can be reimbursed through insurance policies. Their role is
Capital Market most important during times of risks, or when costs are imposed by a lawsuit against a company.

Market where securities such as shares, and bonds are issued to raise medium to long-term
finance for businesses & government
Treasurers / Finance Officers: Treasurers, also known as finance officers oversee fund
investment of the organization and make sure the budget meets the organizational goals. They
further develop plans to raise capital.

Cash Managers: Cash managers abide by the annual budget that is initially made, and keep
track of the cash flow, in and out of the organization’s business and investments. 

Risk Managers: Risk managers make sure that the company is never exposed to financial
uncertainty. On the off chance that the organization faces risks or financial loss, it is the risk
manager’s responsibility to develop strategies to control the financial risk.

IMPORTANT SKILLS FOR FINANCIAL MANAGERS

Analytical skills. Financial managers increasingly assist executives in making decisions that
affect the organization, a task for which they need analytical ability.

Communication. Excellent communication skills are essential because financial managers must
explain and justify complex financial transactions.

Attention to detail. In preparing and analyzing reports such as balance sheets and income
statements, financial managers must pay attention to detail.

Math skills. Financial managers must be skilled in math, including algebra. An understanding of
international finance and complex financial documents also is important.

Organizational skills. Financial managers deal with a range of information and documents.
They must stay organized to do their jobs effectively.