Business Finance

3rd Quarter: Module 1

Introduction to Financial Management

Rizaldo J. Caliso Jr.

Module Writer

Content Standards:
The learners demonstrate an understanding of:
1. The definition of finance;
2. The activities of the financial manager;
 3. The financial institutions and markets.
Performance Standards:
The learners will be able to:
1. Define finance.
2. Describe who are responsible for financial management within an organization.
3. Describe the primary activities of the financial manager.
4. Describe how the financial manager helps in achieving the goal of the organization
Learning Competency:
1. Explain the major role of financial management and the different individuals involved (ABM_BF12-IIIa-1)
2. Distinguish a financial institution from financial instrument and financial market (ABM_BF12-IIIa-2)
3. Explain the flow of funds within an organization – through and from the enterprise—and the role of the
financial manager (ABM_BF12-IIIa-5)
Learning Objectives:
At the end of this module the students will be able to:
1. Have an appreciation of what the overall objective of management should be.
2. Understand the key positions in a corporate organization and identify the roles of each.
3. Identify the primary activities of the financial manager.
4. Identify the types of Financial Markets, Financial Institutions and Financial Instruments
To the Learners
This module will guide you to have all important knowledge, skills, and competencies. It deals with the
fundamental principles, tools, and techniques of the financial operation involved in the management of business
enterprises. It covers the basic framework and tools for financial analysis and financial planning and control, and
introduces basic concepts and principles needed in making investment and financing decisions.
Follow carefully all the contents and instructions indicated in this module, perform all the provided activities
in the module, analyze conceptually the post test and apply what you have learned.
This module has the following parts and corresponding icons:
This will give you an idea of the skills or competencies you are
What I Need to Know expected to learn in the module.
This part includes an activity that aims to check what you already
What I Know know about the lesson to take. If you get all the answers correct
(100%), you may decide to skip this module.
This is a brief drill or review to help you link the current lesson with
What’s In the previous one.
In this portion, the new lesson will be introduced to you in various
What’s New ways such as a story, a song, a poem, a problem opener, an activity
or a situation.
This section provides a brief discussion of the lesson. This aims to
What is It help you discover and understand new concepts and skills.
This comprises activities for independent practice to solidify your
What’s More understanding and skills of the topic. You may check the answers to
the exercises using the Answer Key at the end of the module.
This includes questions or blank sentence/paragraph to be filled in
What I Have Learned to process what you learned from the lesson.
This section provides an activity which will help you transfer your
What I Can Do new knowledge or skill into real life situations or concerns.
This is a task which aims to evaluate your level of mastery in
Assessment achieving the learning competency.
In this portion, another activity will be given to you to enrich your
Additional Activities knowledge or skill of the lesson learned. This also tends retention
of learned concepts.
This contains answers to all activities in the module.
Answer Key

Using the dual-learning approach of theory and application, this module will help you to explore all stages of
the learning process from knowledge, analysis, evaluation, and application to preparation and development of
financial plans and programs suited for a small business.
 What I need to Know
In this module you need to have knowledge about the financial management. You will be able to encounter
terminologies such as finance, financial management and budgeting. You are expected to identify and understand
each function of financial manager such as financing, investing, operating and dividend policies. Also, you need to
determine the different the financial institutions and markets.
There are various activities that will help you understand the definition of finance, the activities of the
financial manager, and the financial institutions and markets. It is hope that you will learn to successfully enjoy the
objectives of this module. Have Fun!
Before we start any discussion, we have to determine if you have background knowledge about the topic.

What I Know
Instruction: Write the letter of the best answer.
______ 1. What is the major role of financial manager?
A. Shareholder’s wealth maximization C. Interest of the employees
B. Paying suppliers and creditors D. Supporting the community
______ 2. Who is the highest policy making body in a corporation?
A. Board of Directors C. CEO
B. Shareholders D. VP for Administration
______ 3. What organization provides a system for the trading of equity securities of
publicly listed companies?
A. Philippines Stock Exchange (PSE)
B. Philippine Dealing & Exchange Corp (PDex)
C. Bangko Sentral ng Pilipinas (BSP)
D. Government Agencies
______ 4. Which of the following is an example of a Financial Instrument?
A. Banks C. Common Stock
B. Credit Union D. SSS
______ 5. Which of the following is NOT example of financial institution?
A. Commercial Banks C. Capital Market
B. Insurance Companies D. Mutual Funds
______ 6. Which of the following financial instruments have very low risk of default?
A. Treasury Bonds C. Common Stock
B. Corporate Bonds D. Preferred Stock
______ 7. Which of the following is NOT included as functions of a Financial
Manager?
A. Financing C. Organizing
B. Operating D. Investing
______ 8. Why does a Financial Manager need to choose which source of financing
a company should use?
A. Because the company must have enough retained earnings to support cash dividend declaration
B. Because creditors are not willing to finance entirely the cost of a company’s long term investment
C. Because the choice between short and long term sources depends on the risk and return trade off that
management is willing to take
D. Because companies have limited access to capital and have target capital structure
______ 9. Which of the following is not a service provided by financial institutions?
A. Buying the businesses of customers
B. Investing customers’ savings in stocks and bonds
C. Paying savers’ interest on deposited funds
D. Lending money to customers
______ 10. Where do most businesses selling their securities to raise money?
A. direct placement C. stock exchange
B. public offering D. private placement
You have already discussed in your Grade 11 the Fundamentals of Accountancy, Business and
Management which provides you the knowledge on preparing, analysing and interpreting financial statements. Let’s
do a review for some terms.
 What’s In
Instruction: Categorize the following terms inside the box whether an Asset (A), Liability (L), or Equity (E)
Long Term Debt Inventory Capital Contribution
Land Treasury Stock Retained Earnings
Prepaid Expenses Accrued Liabilities Insurance Reserve
Short Term Investment Paid-In Capital Sales
Accounts Payable Notes Receivables Deferred Revenue

Asset (A) Liability (L) Equity (E)

________________ __________________ __________________
________________ __________________ __________________
________________ __________________ __________________
________________ __________________ __________________
________________ __________________ __________________

What’s New

Finance is part of everyday life. Being financially literate is utmost importance that teenagers should learn to
be successful individuals. Finance can be defined as the science and art of managing money. (Gitman & Zutter,
2012). As a student, most of the activities that involve financial decisions are budgeting of allowance. Budgeting is
the act of estimating revenue and expenses over a period of time. You are responsible where to use your allowance
by identifying the expenses you incurred such as fare, lunch/snack or loads. At a young age, you also need to
appreciate the value of savings and opportunity for investing your money coming from the different sources of funds.
Functions of a Financial Manager
1. 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.

2. Investments may either be short term or long term.

o 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.
o 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 run. 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.

3. 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.
Short Term sources are those that will be payable in at most 12 months. This includes short-term loans with
banks and suppliers’ credit. For short-term bank loans, the interest rate is generally lower as compared to
that of long-term loans. Hence, this would lead to a lower financing cost. Suppliers’ credits are the amounts
owed to suppliers for the inventories they delivered or services they provided. While suppliers’ credit is
generally free of interest charges, the obligations with them have to be paid on time to maintain good
supplier relationship. Such relationships should be nurtured to ensure timely delivery of inventories. Short
term sources pose a trade-off between profitability and liquidity risk. Because this source matures in a short
period, there is a possibility that the company may not be able to obtain enough cash to pay their obligation
(i.e. liquidity risk). Long term sources, on the other hand, mature in longer periods. Since this will be paid
 much later, the lenders expect more risk and place a higher interest rate which makes the cost of long term
sources higher than short term sources. However, since long term sources have a longer time to mature, it
gives the company more time to accumulate cash to pay off the obligation in the future. Hence, the choice
between short and long term sources depends on the risk and return trade off that management is willing to
take.

4. Dividend Policies. 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. 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.

What is it

Since the managers of the company are making decisions for the interest of the board of directors and the
board of directors does the same for the interest of the shareholders, it follows that the goal of each individual in a
corporate organization should have an objective of shareholders’ wealth maximization. Below is the corporate
organization structure

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.
Common Examples of Debt and Equity Instruments.
 Debt Instruments generally have fixed returns due to fixed interest rates. Examples of debt instruments are
as follows:
o 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.
o 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:
o 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)
o 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 organized forums in which the suppliers and users of various types of funds can make
transactions directly.
 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 tha have previously been purchased. The sale of previously owned securities takes place in
secondary market. The Philippine Stock Exchange (PSE) is both a primary and secondary market.
 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 institution 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 I 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).

Examples of Financial Institutions

1. 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.
2. 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.
3. 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.
4. Pension Funds - Financial institutions that receive payments from employees and invest the proceeds on
their behalf.
5. 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.

The figure below illustrates how the key financial institutions serve as intermediaries for suppliers and users
of funds. (Gitman & Zutter, 2012)

What’s More
Activity 1.1 Understating the Role and Position.
A. Direction: Use a line to connect the stars to match the following roles to the right position.

 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.

 carry out the objectives which is wealth

maximization

 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)

B. Direction: List down the roles for each VPs.

_______________________________________________
VP Marketing _______________________________________________
_______________________________________________
_______________________________________________
VP Production _______________________________________________
_______________________________________________
_______________________________________________
VP Administration _______________________________________________
_______________________________________________
_______________________________________________
VP Finance _______________________________________________

What I have learned.

Activity 1.2 Identify the word/phrase that is being described in each item. Write your answer on the space provided.
________1. This is the act of estimating revenue and expenses over a period of time.
________2. This is the science and art of managing money.
________3. It deals with decisions that are supposed to maximize the value of
shareholders’ wealth.
________4. Banks and pawnshop are some examples of ________.
________5. Its purpose is to generate income or appreciate in the future.

What I can Do
Activity 1.3 Budget your Money
 1. Write how much is your daily allowance or average allowance per day?
2. Write down all the items you spend money on. List the description and the exact or estimated peso amount.
3. Compute for the balance of your allowance by deducting the expenses you listed from your daily allowance.
a. If the answer is positive, what do you do with the money left? Or if the answer is negative, where
do you get additional money?
b. Which items do you think should be dropped off from the list of your expenses?

Assessment
Activity 1.4 Write the letter of the correct answer that best complete the sentence.
___1. The ______ is created by a financial relationship between suppliers and users
of short-term funds.
A. financial market C. money market
B. stock market D. capital market
___2. Firms that require funds from external sources can obtain them from _____.
A. financial markets. C. private placement.
B. financial institutions. D. All of the above.
___3. The major securities traded in the capital markets are ____.
A. stocks and bonds. C. commercial paper and Treasury bills.
B. bonds and commercial paper. D. Treasury bills and certificates of deposit.
___4. The primary goal of the financial manager is _____.
A. minimizing risk. C. maximizing profit.
B. maximizing wealth. D. minimizing return.
___5. A financial manager must choose between four alternative Assets: 1, 2, 3, and
4. Each asset costs $35,000 and is expected to provide earnings over a
three-year period as described below. Based on the profit maximization goal,
the financial manager would choose _____.

A. Asset 1. B. Asset 2. C. Asset 3. D. Asset 4.

___6. A ______ is one financial intermediary handling individual savings. It receives premium payments that
are placed in loans or investments to
accumulate funds to cover future benefits.
A. life insurance company C. commercial bank
B. savings bank D. credit union
___7. The key participants in financial transactions are individuals, businesses,
and governments. Individuals are net ______ of funds, and businesses are net ______ of funds.
A. suppliers; users C. purchasers; sellers
B. users; suppliers D. users; providers
___8. A ______ is set up so that employees of corporations or governments can
receive income after retirement.
A. life insurance company C. pension fund
B. savings bank D. credit union
___9. A ______ is a type of financial intermediary that pools savings of individuals
and makes them available to business and government users. Funds are obtained through the sale
of shares.
A. mutual fund C. savings and loans
B. savings bank D. credit union
___10. Long-term debt instruments used by both government and business are
known as _______
A. bonds. B. equities. C. stocks. D. bills
Additional Activity
Activity 1.5 Save and Invest
Direction: Analyze the scenario below and answer the questions.
 Mr. Lim knew that Mrs. Cruz had excess money and approached her to lend him the capital he needs to
expand his business for a 20% interest. Since Mrs. Cruz observed that Mr. Lim’s business has been profitable, she is
willing to lend him the money since she is confident that Mr. Lim can repay his loan. Mrs. Cruz is now expecting to be
20% richer from his lending to him and Mr. Lim can now expand his operations to gain more profit from his business.
1. What happens if they did not meet?
2. What if Mrs. Cruz will not lend him money? Where can Mr. Lim get the additional funding?
3. Aside from lending her money, where would Mrs. Cruz save or invest it? Explain why.

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REFERENCES:
I. The Commission on Higher Education in collaboration with the Philippine Normal University. (2016).
Teaching Guide for Senior High School Business Finance [PDF file]. Commission on Higher Education

II. Borja, Daniel Vincent H. and Cayanan, Arthur S. (2017). Business Finance. Rex Book Store, Inc.

III. Reh F. John, 2019, Glossary of Business Management Terms A Comprehensive Dictionary of
Business Management Term, Dotdash, viewed 15 June 2020,
<https://www.thebalancecareers.com/glossary-of-business-management-terms-2275721>.