Overview of

Financial
Management
CHAPTER 1
 Expected Learning Outcomes
After studying this chapter, the learner should be able to:
1.Explain the major role of financial management and the
different individuals involved;
2.Distinguish a financial institution from financial
instrument and financial market;
3.Enumerate the varied financial institutions and their
corresponding services;
4.Compare and contrast the varied financial instruments;
5.Explain the role of the financial manager
 AGREE OR DISAGREE
A BUSINESS
DEPENDS ON MANY
FACTORS AND THE
MOST IMPORTANT OF
THEM IS FINANCE.
INTERRELATED MEANINGS OF FINANCE
1.The management of large
amounts of money –
especially by governments or
large companies;
2.The giving of monetary
support for an enterprise and;
3. The monetary resources and
affairs of a government,
organization or person.
 TYPES OF FINANCE
1.PUBLIC FINANCE – it includes tax systems,
government expenditures, budget procedures,
debt issues and other government concerns.
2.CORPORATE FINANCE
- Businesses bring in financing through equity investments and
credit arrangements, and by purchasing securities.
- start ups may receive investments from angel investors or
venture capitalists, and established companies may sell stocks or
bonds.
3. PERSONAL FINANCE
- earning more money and spending less money is the basis
of personal finance.
- individuals may earn more money by starting a business,
taking on additional jobs, or investing.
 FINANCIAL MANAGEMENT WITHIN A
BUSINESS ORGANIZATION
BUSINESS – is an entity where the skills, energy, and
enterprise owners are linked with money, its sources,
and investments, and its success is measured by
wealth, or profit derived from its operation.

BUSINESS ORGANIZATION – is an entity formed for the

purpose of carrying on commercial enterprise.
 FORMS OF BUSINESS ORGANIZATIONS
1.SOLE PROPRIETORSHIP – consists of one individual doing the
business.
ADVANTAGES:
1.Ease of formation and dissolution.
2.Typically, there are low start up costs and low operational
overhead.
3.Ownership of all profits.
4.Typically subject to fewer regulations.
5.No corporate income taxes instead, declared on the
owner’s individual income tax return.
 SOLE PROPRIETORSHIP
DISADVANTAGES:
1.Unlimited liability.
2.Limited life.
3.Difficulty in raising a capital for start up
business. Common funding comes from
personal savings or personal loans.
2.PARTNERSHIP – consists of two or more individuals in business
together.
ADVANTAGES:
1.Synergy. There is clear potential for the enhancement of value
resulting from two or more individuals combining strengths.
2.Relatively easy to form however, considerable thought should
be put into developing a partnership agreement at the point of
formation.
3.Subject to fewer regulations than corporations.
4.There is stronger potential of access to greater amounts of
capital.
5.No corporate income taxes instead, declare income by filing a
partnership income tax return.
PARTNERSHIP
DISADVANTAGES:
1.Unlimited liability. General partners are individually
responsible for the obligations of the business,
creating personal risk.
2.Limited life. A partnership may end upon the
withdrawal or death of a partner.
3.There is real possibility of disputes or conflicts
between partners which could lead to dissolving the
partnership.
3.CORPORATIONS – are probably dominant
form of business organization in the
Philippines.
- it is a legal entity doing business, and is
distinct from the individuals within the entity.
PUBLIC CORPORATIONS – are owned by
shareholders who elect a board of directors
to oversee primary responsibilities.
CORPORATIONS
ADVANTAGES:
1.Unlimited commercial life.
2.Greater flexibility in raising capital through the sale of stock.
3.Ease of transferring ownership by selling stock.
4.Limited liability.

DISADVANTAGES:
1.Regulatory restrictions.
2.Higher organizational and operational costs.
3.Double taxation.
 FINANCIAL MANAGEMENT
FINANCIAL MANAGEMENT means:
1.To collect fund for the company at a low
cost and;
2.To use this collected funds for earning
maximum profits.
Therefore: FINANCIAL MANAGEMENT
means to plan and control the finance of
the company.
 FINANCIAL MANAGEMENT

FROM THE PERSPECTIVE OF THE

CORPORATION:

FINANCIAL MANAGEMENT deals

with decisions that are supposed to
maximize the value of the
shareholders’ wealth.
- This means maximizing the market
value of the shares of stocks.
SHARES OF STOCKS
– represent the form of ownership in a
corporation.
To illustrate:

TELECOM INC shares closed at

P2,200 on April 25, 2016. As of that date,
Globe’s total shares outstanding was P132,742,
402. the market value of the shares as of that
date was more than P292 billion. This amount
represents the value of the shareholders’ wealth.
As the shares are actively traded in the
Philippine Stock Exchange (PSE), the price of the
stocks and the total market value of the shares
may change every trading day.
THE CHANGES IN THE PRICE OF A STOCK MAY VARY DUE TO THE
FOLLOWING:
• Profitable operation
• Nature of the business
• Prospects of the business
• Projected earnings and time frame for the realization of such
projected earnings
• Ability to meet maturing obligations
• Appropriate capital structure
• Dividend policies
• Investing decisions
• Management and market sentiments
 FUNCTIONS of FINANCIAL MANAGEMENT
1. Estimate required capital - Financial managers’ first duty is to
forecast the amount of required capital. There are several
areas for using financial planning and implementation such as
establishment, expansion, and modernization of business,
investment in fixed assets and meet daily working capital
requirements.
2. Determine capital structure - After determining the
requirement of capital funds, a decision has to be made
regarding the type and proportion of different sources of
funds. At this stage, the financial manager has to evaluate the
appropriate mix of debt and equity capital and various short
and long-term debt ratios. The main objective is to maximize
shareholders wealth with a minimum cost of capital.
 FUNCTIONS of FINANCIAL MANAGEMENT
3. Evaluate and select sources of funds - the Financial
manager will have several options from which he can
raise capital for the company. He will choose that option
which will provide greater earning possibility in less cost.
He will compose leverage to maximizing the shareholder’s
value.
4. Allocate and control funds - Financial manager determine
the necessary amount of funds in each of financial area
and allocate the funds accordingly. Any change in the
financial decision that increases or decrease in allocated
amount can be implemented at times. The manager
always tries to keep the standard of the business firm.
 FUNCTIONS of FINANCIAL MANAGEMENT
5. Distribute profits or surplus - After a certain time, the
business experience profits. Here management decides
whether to distribute the profits or retain it for future use.
Business can combine dividend and retain earning to
distribute the profits.
6. Monitoring financial activities - the Financial manager has
to be remaining alert all the time about financial activities
and business position. Any flaws in the financial aspect
can affect the overall business decision. So the manager
should continuously monitor the financial activities of the
firm.
THE FINANCIAL MANAGER

• Is a person who takes care of all the important

financial functions of an organization.
MAIN FUNCTIONS OF A FINANCIAL MANAGER:
1.Raising of funds
2.Allocation of funds
Points to consider in allocating the funds:
The size of the firm and its growth capability
Status of assets whether they are long term or short term
Mode by which the funds are raised
3.Profit planning – proper usage of the profit generated
by the firm
4.Understanding capital markets – shares of the
company are traded on stock exchange and there is a
continuous sale and purchase of securities.
MAIN FUNCTIONS OF A FINANCIAL MANAGER:
5. Investing the capital - Every organization or firm needs to invest
money in order to raise more capital and gain regular returns.
Hence, the financial manager needs to invest the organization's
funds in safe and profitable ventures.
6. Effective management of money - This department is also
responsible for effectively managing the firm’s money. Money is
required for various purposes in the firm such as payment of salaries
and bills, maintaining stock, meeting liabilities, and the purchase of
any materials or equipment.
7. Financial control - Not only does the financial manager have to
plan, organize, and obtain funds, but he also has to control and
analyze the firm’s finances in the short-term and the long-term.
VP for Finance or Chief Financial Officer’ (CFO)
–the Financial Manager VP for Finance or CFO is generally
called a Financial Manager due to the nature of his duties
which is to manage the over-all finances of the company.

The primary roles of a Financial Manager are the following:

• Financing
• Investing
• Operating
• Dividend Policies
• Financing Decisions
- consist of planning and executing decisions regarding
methods on financing long-term acquisitions (such as
business expansions)
- Or working capital that corresponds with the company's
daily operations like product purchase, operating expenses
payment, etc.
• Investing Decisions
- Investing means deciding on where to put your excess cash
to make it more profitable.
- Investments may either be under the category of “short-term
or long-term”.
• Operating Decisions
Operating actions deal with the company's day to day activities. The VP
's task for finance is to decide how work capital accounts such as
receivable accounts and inventories can be funded. The business has
an option of whether “long-term or short-term assets” are used to fund
working capital needs.

• 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 job of a financial manager to
be able to identify when cash dividends’ must be declared or given by
the firm.
GUIDING PRINCIPLES FOR FINANCIAL MANAGEMENT
SYSTEMS
1.CONSISTENCY – financial policies and systems
must remain consistent over time.
2.ACCOUNTABILITY – must be able to explain and
demonstrate to all stakeholders how you have
used your resources and what you have
achieved.
3.TRANSPARENCY – must be open about its work
and its finances, making information available to
all stakeholders.
GUIDING PRINCIPLES FOR FINANCIAL MANAGEMENT
SYSTEMS
4. INTEGRITY – must be open with honesty and
propriety.
5. FINANCIAL STEWARDSHIP – must take good care
of the financial resources it has been given and
ensure that they are used for the purpose
intended.
6. ACCOUNTING STANDARDS – systems for
keeping records and documentation must
observe accepted external accounting standards.