Business Finance

Quarter 1 – 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

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Business Finance
Quarter 1 – 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.
 Lesson Financial Institutions,
Financial Instrument, and
2 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.

encounter some unfamiliar words, you can ask them to write those words in a separate sheet of paper and look for the meaning o
 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.
 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.
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.
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 Characteristics
 issued by the government
 matures in two, five or ten years or more
 no default risk (The government exert effort
to pay.)
Treasury notes and bonds  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
Federal agency debt
 long-term maturity (i.e. up to thirty years)
 low default risk
 issued by local government
Municipal bonds, local
 long-term maturity (i.e. up to thirty years)
government bonds
 more risky than government securities
 issued by corporations
 mature in forty years
Corporate bonds  more risky than government securities and
rely on the financial soundness of
the company
Table 2. Long-term Debt Instrument
(Source: Exploring Small Business and Personal Finance by Yumang et al., 2016)

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.
 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)
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.
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.
 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)
 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
 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.
 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.
 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.
 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