Business Finance

At the end of this session, the learners will be

able to:

1. Define Finance;

2. Explain the major role of financial management

and the different individuals involved; and

3. Distinguish a financial institution from financial

instrument and financial market.
 INTRODUCTION TO
FINANCIAL MANAGEMENT
Senior High School Training Schedule
What comes into your
mind, when you hear the
word FINANCE?

DEPARTMENT OF EDUCATION – BUREAUOF CURRICULUM DEVELOPMENT

 What is Finance?

FINANCE
▪ The study of how individual or businesses
evaluate investments, business proposals
and business projects and raise capital to
fund them.

▪ A field that deals with the allocation of

assets and liabilities over time under
conditions of certainty and uncertainty.

▪ The science and art of money

management. (Gitman & Zutter, 2012)
▪ This is the way in which money is used and
handled.

▪ Concerned with making decisions about which

investments the business should make and how
best to finance those investments.

▪ It is a term for matters regarding the

management, creation and study of money and
investments. Specifically, it deals with a term or
broadly describing the study and system of money,
investments and other financial instruments.
 Why Do Businesses Need Finance?

Why Do Businesses Need Finance?

For starting Everyday bill

up payments

Businesses
Expansion Take over bid
need
money
for…

Internal Replace
Growth machinery/equip
ment
 Areas of Finance
A.Relate to decisions concerning
stocks and bonds and include
➢ Financial security, portfolio and market
Management B. Focuses on decisions relating
to how much and what types
of assets to acquire, how to
➢ Capital
raise the capital needed to
Market purchase assets and how to
run the firm so as to maximize
➢ Investment its value.
C. Relate to markets, interest
rates, along with stock and
bond prices.
 3 Categories of Finance
a. Public Finance includes tax systems, government
expenditures, budget procedures stabilization
policy and instruments, debt issues and other
government concerns. Federal government helps
prevent market failure by overseeing the allocation
of resources, distribution of income and
stabilization of money.
b. Corporate Finance involves managing assets,
liabilities, revenues and debt for a business.
Business obtain financing through a variety of
means ranging from equity investments to credit
arrangements.
 3 Categories of Finance

c. Personal Finance defines all financial decisions

and activities of an individual or households
including budgeting, insurance, mortgage
planning, savings and retirement planning.
Personal finance depends largely on one’s
earnings, living requirements, and individual
goal desire. As a specialized field, personal
finance is a recent development, through the
forms it has been taught in universities and
school as “home economics” or “consumer
economics”.
 What is Financial Management?
➢ Planning, organizing, directing
and controlling the financial
activities such as procurement
and utilization of funds of the
enterprise.

➢ It means applying the general

management principles to
financial resources of the
enterprise.
DEPARTMENT OF EDUCATION – BUREAU OF CURRICULUM DEVELOPMENT
Financial Management

➢ handling of all financial matters and

this includes analyzing financial
statements, evaluating investment
opportunities which happens before one
actually starts investing, and raising
capital or funds from different sources.
 What are Financial Management
Decisions?
▪ INVESTMENT DECISIONS include investment in
fixed assets (called as capital budgeting),
investment in current assets are also a part of
investment decision called as working capital
decisions.
▪ FINANCIAL DECISIONS – they relate to the raising
of finance from various resources which will
depend upon decision on type of resource, period
of financing, cost of financing and the returns
thereby.
▪ DIVIDEND DECISION – the finance manager has to
take decision with regards to the net profit
distribution. Net profits are generally divided into
two:
▪ Dividend for Shareholders
▪ Retained Earnings – for expansion and
diversification plans of the enterprise,
 What are Financial Management
Decisions?
▪ Capital budgeting
✓ What long-term investments or
projects should the business take
on?
▪ Capital structure
✓ How should we pay for our assets?
✓ Should we use debt or equity?
▪ Working capital management
✓ How do we manage the day-to-day
finances of the firm?
Finance Within an Organization
 What are the Objectives of Financial
Management?
The objectives can be –

➢ To ensure regular and adequate supply of funds to the

concern.

➢ To ensure adequate returns to the shareholders which will

depend upon the earning capacity, market price of the
share, expectations of the shareholders.

➢ To ensure optimum funds utilization. Once the funds are

procured, they should be utilized in maximum possible
way at least cost.

DEPARTMENT OF EDUCATION – BUREAU OF CURRICULUM DEVELOPMENT

➢ To ensure safety on investment, i.e. funds
should be invested in safe ventures so
that adequate rate of return can be
achieved.

➢ To plan a sound capital structure – there

should be sound and fair composition of
capital so that a balance is maintained
between debt and equity capital
 What are the functions of Financial
Management?
1. ESTIMATION OF CAPITAL REQUIREMENTS. A
finance manager has to make estimation with regard to
capital requirements of the company. This will depend
upon expected costs and profits and future programs and
policies of a concern. Estimations have to be made in an
adequate manner which increases earning capacity of
enterprise.

2. DETERMINATION OF CAPITAL COMPOSITION.

Once the estimation have been made, the capital structure
have to be decided. This involves short-term and long-
term debt equity analysis. This will depend upon the
proportion of equity capital a company is possessing and
additional funds which has to be raised from outside
parties.
 What are the functions of Financial
Management?
3. CHOICE OF SOURCE OF FUNDS. For additional funds to be
produced, a company has many choices like –
a. Issue of shares and debentures
b. Loans to be taken from banks and other financial institutions
c. Public deposits to be drawn like in the form of bonds.
4. INVESTMENT OF FUNDS. The finance manager has to decide to
allocate funds into profitable ventures so that there is safety on
investment and regular returns is possible.
5. DISPOSAL OF SURPLUS. The net profit decision have to be made
by the finance manager. This can be done in two ways:
a. Dividend declaration – includes identifying the rate of
dividends and other benefits like bonus.
b. Retained Profits – the volume has to be decided which will
depend upon expansions, innovations. diversification plans
of the company.
 What are the functions of Financial
Management?

6. MANAGEMENT OF CASH. Finance manager has to make

decisions with regard to cash management. Cash is
required for many purposes like payment of wages and
salaries, electricity, water bills, purchase of raw
materials, etc.

7. FINANCIAL CONTROLS. The finance manager has not

only to plan, procure and utilize the funds but he also
has to exercise control over finances. This can be done
through many techniques like ratio analysis, financial
forecasting, cost and profit control, etc.
What are the Roles of Financial Manager?

1. RAISING OF FUNDS. In order to meet the obligation of

the business it is important to have enough cash and
liquidity. A firm can raise funds by the way of debt and
equity. It is the responsibility of a financial manager to
decide the ratio between debt and equity. It is important
to maintain a good balance between equity and debt.
2. ALLOCATION OF FUNDS. Once the fund are raised
through different channels the next important
function of a financial manager is to allocate the
funds. In order to allocate funds in the best
possible manner the following point must be
considered –
▪The size of the firm and its growth capability.
▪Status of assets whether they are short or
long-term
▪Mode by which the funds are raised.
3. PROFIT PLANNING. Profit earning is one
of the prime functions of any business
organization. Profit earning is important
for the survival and sustenance of any
organization. Profit planning refers to
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. Hence a
clear understanding of capita market is an
importance function of financial manager. When
securities are traded on stock market there involves a
huge amount of risk involved. Therefore a financial
manager understands and calculates the risk involved
in this trading of shares and debentures.
IMPORTANT SKILLS FOR FINANCIAL MANAGER
Analytical Skills- Financial mangers increasingly assist
executives in making decisions that affect the
organization, a task for which they need analytical
ability.
Communication Skills- Excellent communication are
needed to explain and justify complex financial
transactions.
Attention Detail- in preparing and analyzing report
such as balance sheet and income statements,
financial manager must pay attention to detail.
IMPORTANT SKILLS FOR FINANCIAL MANAGER

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 respectively.
LEARNING COMPETENCY OBJECTIVES

1. Define financial institution, financial

instrument and financial market; and

2. Distinguish a financial institution from

financial instrument and financial
market
 Financial instrument is the written legal
obligation of one party to transfer something of
value usually money to another party at some future
date under certain condition such as stocks, loans, or
insurance. It is a monetary contract between parties.
Financial instrument serves as a means of payment
(like money) store of value (like money) allow for the
trading of risk.
Examples: bank loans stocks
future contracts mortgages
bonds insurance
 Financial Markets offer liquidity to borrowers
and savers. Refer broadly to any market place where
the trading of securities occurs, including the stock
market, bond market, forex market and derivative
market.

Types of Financial Market

a. Over-the-counter Market- doesn’t have
physical location and trading is
conducted electronically
b. Bond Market -Sells securities such as
notes and bills
c. Money Market – trade in products with
highly liquid short-term maturities and high
degree of safety and a relatively low return
in interest
d. Derivatives Market- trades in future and
option contracts and other advanced
financial products that derive their value
from underlying instrument
 Financial Institution is a company engaged in
business of dealing with financial and monetary
transactions such as deposits loans, investments
and currency exchange. Financial institution
encompasses a broad range of business operations
with in the financial services sector including banks,
trust companies, brokerage firms and investment
dealers. Financial institution can vary by size scope
and geography.
Examples: Commercial and Investment bank
Insurance companies
Brokerage firm
FINANCIAL INSTITUTION, FINANCIAL
INSTRUMENT and FINANCIAL MARKET
What is Financial Instrument?
Financial instrument are assets that can be
traded, or they can also be seen as packages of
capital that may be traded. Most types of financial
instrument provide efficient flow and transfer of
capital all throughout the world’s investors. These
assets can be cash, a contractual right to deliver or
receive cash or another type of financial instrument,
or evidence of one’s ownership of an entity.
 Financial instrument can be divided into
two types cash instrument and derivative
instrument.
a.) Cash Instrument The values of cash
instruments are directly influenced and
determined by the markets. Cash
instrument may also be deposits and loans
agreed upon by borrowers and lenders.
b.) Derivative Instrument The value and
characteristics of derivative instruments
are based on the vehicles underlying
components such as assets, interest rates
or indices. An equity option contract, for
example, is a derivative because it derives
its value from the underlying stock.
What is Financial Institution?
Financial institution is a company engaged in
the business of dealing with financial and monetary
transaction such as deposits, loans, investments and
currency exchange. Financial institution
encompasses a broad range of business operations
within the financial service sector including banks,
trust companies, insurance companies, brokerage
firms and investment dealers.
Types of Financial Institutions
Types of Financial Institutions

a.) Commercial Bank- is a type of financial institution

that accepts deposits, offer checking account
services, makes business, personal, and
mortgage loans, and offer basics basic financial
products like certificate of deposits and savings
account to individuals and small businesses. A
commercial bank is where people do their
banking, as opposed to an investment bank
b.) Investment Banks – Investment Bank
specialized in providing services designed
to facilitate business operations, such as
capital expenditure financing and equity
offerings, including Initial Public Offerings
(IPOs).
c.) Insurance Companies- Among the most
familiar non-bank financial institutions are
insurance companies. Providing insurance,
whether for individuals or corporations.
d.) Brokerage Firms- Investment companies
and brokerages, such as mutual fund and
Exchange Traded Fund (ETF) provide
investment services that include wealth
management and financial advisory
services.
What is Financial Market?
Financial market refers broadly to any market
place where the trading of securities occurs,
including the stock market, bond market, forex
market and derivatives market among others.
Financial market is vital to the smooth operation of
capitalist economies.
Types of Financial Markets
a.) Over-the-counter Market- it is a decentralized
market-meaning it does not have physical
locations, and trading is conducted electronically-
in which market participants trade securities
directly between two parties without a broker.
b.) Bond Markets- A bond is a security in which an
investor loans money for a defined period at a pre-
established interest rate. The bond market sells
securities such as notes and bills.
c.) Money Market- typically the money markets
trade in products with highly liquid short- term
maturities (of less he one year) and are
characterized by high degree of safety and a
relatively low return in interest. At the wholesale
level, the money markets involved large volume
trades between institutions and traders. At the
retail level, they include money market mutual
funds bought by individual investors and money
market accounts opened by bank customers.
LEARNING COMPETENCY

1. Explain the flow of funds within an

organization – through and from the
enterprise—and know the role of the
financial manager (ABM_BF12-IIIa-5).
 Flow of funds (FOF) are financial
accounts that are used to track the net
inflows and outflows of money to and
from various sectors of a national
economy. Macroeconomic data from
flow of funds accounts are collected
and analyzed by a country's central
bank
Draw two boxes and label with names of learners A
and B. Below [A], write “Saver”, and below [B],
write “users of funds”.

If A knows that B needs funds, or if B knows that A

is willing to invest funds, A and B may agree to
make a Private Placement.

*Private Placements - the sale of a new security

directly to an investor or group of investors.
However, if these facts are unknown to them, A and B
can go to a Financial Market which is an organized
forum that lets A, along with other suppliers of funds,
and B, along with other users of funds, meet and make
transactions. Once A and B have met in the Financial
Market, they can now agree to make a Private
Placement.
If A and B do not want to try to find a counterpart in
the Financial Markets, A and B may go to a Financial
Institution. A Financial Institution will receive A’s supply
of funds and match it with B’s demand of funds. Unlike
the Financial Markets were A and B knows to whom the
fund went and from whom the funds came, Financial
Institutions serve as an intermediary to the suppliers
and users of funds.
Moreover, Financial institutions actively participate in
the financial markets as both suppliers and users of
funds.
Financial System:

*Note that on the diagram presented, the solid lines represent the flow of cash/funds,
while the colored lines represent the flow of financial instruments which represent
obligations to transfer cash or other assets in the future
At this point, we will further discuss the composition of
the Financial System and that you will identify the types
of Financial Markets, Financial Institutions and Financial
Instruments.
1. 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.
- A Financial Asset is any asset that is:
• Cash
• An equity instrument of another entity
• A contractual right to receive cash or another financial asset from another
entity.
• 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
- A Financial Liability is any liability that is a
contractual obligation:

• To deliver cash or other financial instrument to

another entity.
• To exchange financial instruments with another
entity under conditions that are potentially
unfavorable. (IAS 32)
• Examples: Notes Payable, Loans Payable, Bonds
Payable
- An Equity Instrument is any contract that evidences
a residual interest in the assets of an Entity after
deducting all liabilities. (IAS 32)
• Examples: Ordinary Share Capital, Preference
When companies need funding, they either sell debt
securities (or bonds) or issue equity instruments. The
proceeds from the sale of the debt securities and
issuance of bonds will be used to finance the
company’s plans. On the other hand, investors buy
debt securities of equity instruments in hopes of
receiving returns through interest, dividend income
or appreciation in the financial asset’s price.
• Identify 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:

•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.
 •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:
•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,
2017)
• 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
2. Financial Markets
• Classify Financial Markets into comparative groups:
- 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 that have previously
been purchased. The sale of previously
owned securities takes place in
secondary markets.
• 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 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
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).
3. Financial Institutions
• Identify examples of financial institutions:
- 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.
- 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.
- 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.
- Pension Funds - Financial institutions that
receive payments from employees and
invest the proceeds on their behalf. - 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.
Figure 2: How Financial Institutions Provide Financing for
Firms (Gitman & Zutter, 2012)

• The figure above illustrates how the key financial institutions serve
as intermediaries for suppliers and users of funds.