FINANCIAL MANAGEMENT (MOD 1)
return.
FINANCE
- “money”
- Study and management of investments,
capital and other money matters.
- Entails computations and decision
making.
 PURPOSE OF FINANCE
a. Marketing - provides the marketing with
data that will help in preparation of the
marketing research. Finance provide
them data to minimize cost while
optimizing the result of a better
FINANCIAL MANAGEMENT
marketing strategy.
b. Accounting- Accounting deals with the
recording while finance deals with
execution of financial-related matters.
c. Management - since the management is
the major decision-making body of a
corporation, they should understand the
concept of financial management in
order to make proper decisions when it
comes to investing, raising capital and
managing their finances.
 4 BASIC AREAS OF FINANCE
1. Corporate Finance- This division of
finance deals with how corporation
deal with funding sources, capital
structuring, and investment
decisions. Primarily concerned with
maximizing shareholder value
through long and short-term
financial planning and the
implementation of various
strategies.
2. Investments - Work with financial
assets such as stocks and bonds.
Value of financial assets, risk versus
return, and asset allocation. Deals
more with assessing securities,
when to buy or sell share of stocks
and how to manage a portfolio of
investment
3. Financial Institutions – Banks
(commercial and investment, credit
unions, savings and loans).
Insurance companies. Brokerage
firms.
4. International Finance - Need to be
familiar with exchange rates and
political risk.
 4 BASIC PRINCIPLES
1. Money has a time value – a peso
today is more valuable than before,
due to inflation or interest.
2. There is a risk-return trade-off. -
One shall take extra risk only if one
expects to be compensated for extra
3. Cash flows are the source of value. -
Profit is an accounting concept
designed to measure a business’s
performance over an interval of
time.
4. Cash flow is the amount of cash that
can actually be taken out of the
business over this same interval. -
Market prices reflect information. -
Investors respond to new
information by buying and selling
their investments.
- Also referred to as “managerial
finance”, “corporate finance”, and
“business finance”
- A decision-making process concerned
with planning, acquiring and utilizing
fund in a manner that achieves the
firm’s desired goals.
- Applying general management concepts
to the cash/money of the company.
- Preparing, directing and managing the
money activities of a company such as
buying, selling and using money to its
best result to maximize wealth.
- KEY OBJ: to create wealth for the
business, generate cash, provide an
adequate return on investment.
- An integration to accounting.
- Accounting mostly provides the
financial report while financial
management deals with analyzing such
report. After the analysis comes the
recommendation and decision making.
 AREAS COVERED OF FM
(1) Evaluation of investments,
(2) Identification of sources of finances,
(3) determining optimum capital
structure, and
(4) Management of operational finances.
 STRATEGIC FINANCIAL MGMT
- Long-range in scope and has its focus on
the organization as a whole.
- Involves financial planning, financial
forecasting, provision of finance and
formulation of finance policies which
should lead the firm’s survival and
success.
- “A company’s strategic or business plan
reflects how it plans to achieve its goals
and objectives.”
 GOAL OF FINANCIAL MGMT
- “The goal of financial management is to
maximize the current value per share of
 the existing stock or ownership in a
business firm.”
 SHORT-TERM AND LONG-TERM
FINANCIAL OBJECTIVES OF A
BUSINESS ORGANIZATION
1. Short and Medium term
 Maximization of return on
capital employed or return on
investment
 Growth in earnings per share
and price/earnings ratio through
maximization of net income or
profit and adoption of optimum
level of leverage
 Minimization of finance charges
 Efficient procurement and
utilization of short-term,
medium-term, and long-term
funds
2. Long Term
 Growth in the market value of
the equity shares though
maximization of the firm’s
market and sustained growth in
dividend to shareholders
 Survival and sustained growth
of the firm
 SCOPE OF FINANCIAL MGMT
1. Procurement of short-term as well as
long-term funds from financial
institutions
2. Mobilization of funds through financial
instruments such as equity shares,
preference shares, debentures, bonds,
notes, and so forth.
3. Compliance with legal and regulatory
provisions relating to funds
requirement, use, and distribution as
well as coordination of the finance
function with the accounting function.
 Financial management includes the
analyzation of the following:
1. The total fund requirements of the
firm
2. The asset or resources to be
acquired
3. The best pattern of financing assets
 TYPES OF FINANCIAL DECISIONS
1. Investment Decisions – includes
investment in fixed assets (called
capital budgeting). Investment in
current assets are also part of the
investment decisions called as
working capital decisions.
2. Financial Decisions – they relate to
the raising of finance from various
resource which will depend upon
decision on type of source, period of
financing, cost of financing and the
returns thereby.
3. Dividend Decisions – decisions with
regards to the net profit distribution.
Net profit is generally divided into
two:
a.) Dividend for shareholders –
dividend and the rate of it has to be
decided
b.) Retained profits – amount of
retained profits has to be finalized
which will depend upon expansion
and diversification plans of the
enterprise.
 SIGNIFICANCE FINANCIAL MGMT
1. Broad Applicability - Financial
management is equally applicable to
all forms of business like sole
traders, partnerships, and
corporations. It is also applicable to
nonprofit organizations like trust,
societies, government organizations,
public sectors and so forth.
2. Reduction of Chances of Failure -
Finance function enables the other
functions like production,
marketing, purchase, and personnel
to be effective in the achievement of
organizational goal and objectives.
3. Measurement of Return of
Investment - Financial management
studies the risk-return perception of
the owners and the time value of
money. It considers the amount of
cash flows expected to be generated
for the benefit of the owners, the
timing of these cash flows and the
risk attached to these cash flows.
 FUNCTIONS OF FINANCIAL MGMT
1. Estimation of capital requirement.-
Estimation shall be made with regards to
capital requirements of the company.
This will depend upon expected costs
and profits and future programs and
policies of the firm. Estimations have to
be made in adequate manner which
increases earning capacity of enterprise.
2. Determination of capital composition. -
Once the estimation has been made, the
capital structure has 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 have to be raised from
outside parties.
3. Choice of source of funds. For
additional funds to be procured, a
company has may choices be like:
 a.) Issue of shares and debentures
b.) Loans to be taken from banks and
financial institutions
c.) Public deposits to be drawn like
bonds
4. Investment of funds - This involves
decision to allocate funds into profitable
ventures so that there is safety on
investment and regular return is
possible.
5. Disposal of surplus - This can be done
in two ways:
a.) Declaration of dividend – it includes
identifying the rate of dividends and
other benefits like bonus
b.) Retained profits – the volume has to be
decided which will depend upon
expansion-al, innovational,
diversification plans of the company
6. Management of cash.
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.
FINANCIAL MANAGER
- Responsible for the financial health of
an organization.
- Produce financial reports, direct
investment activities, and develop
strategies and plans for long-term
financial goals of their organization.
- Accounting professionals who are
responsible for the financial well-being
of the company.
- They advise upper management or
corporate officers to determine how and
where the company’s assets are acquired
and allocated.
- Create detailed financial reports and
statements using a wide array of skills.
 ROLE OF FINANCIAL MANAGER
1. Investing
- What long-term investments should
the firm undertake? (Capital
budgeting decisions – how to spend
the money?).
- The finance manager is
responsible for determining how
scarce resources of funds are
committed to projects. The investing
functions deals with managing the
firm’s assets. This task requires both
the mix and type of assets to hold.
The asset mix refers to the amount
invested in current and fixed assets.
The investment decisions should
aim at investments in assets only
when they are expected to earn a
return greater than a minimum
acceptable return which is also
called a hurdle rate.
 The following areas are examples of
investing decisions of a finance
manager:
a) Evaluation and selection of capital
investment proposals
b) Determination of the total amount of
funds that a firm can commit for
investment
c) Prioritization of investment
alternatives
d) Funds allocation and its rationing
e) Determination of the levels of
investments in working capital (i.e.
inventory, receivables, cash, marketable
securities and its management)
f) Determination of fixed assets to be
acquired
g) Asset replacement decisions
h) Purchase or lease decisions
i) Restructuring reorganization mergers
and acquisition
j) Securities analysis and portfolio
management
2. Financing
- How should the firm fund these investments?
(capital structure decisions -- How to get the
money?)
- The finance manager is concerned with the
ways in which the firm obtains and manages the
financing it needs to support its investment. The
financing objectives asserts that the mix of debt
and equity chosen to finance investments should
maximize the value of investment made.
- This role focuses on identifying sources of
fund. As we’ve learned in the definition of
finance, sources of fund usually come from
borrowing or inviting investors. Financial
managers have the responsibility to identify
which source will minimize their cost to better
optimize the return for the company. This will
further be discussed in the proceeding chapters.
 The finance manager will be involved in
the following finance decisions:
a) Determination of the financing
pattern of short-term, medium-term and
long-term fund requirements
b) Determination of the best capital
structure or mixture of debt and equity
financing
c) Procurement of funds through the
issuance of financial instruments such as
equity shares, preference shares, bonds,
long-term notes and so forth.
d) Arrangement with bankers, suppliers,
and creditors for its working capital,
 ADVANTAGES DISADVANTAGES
medium-term and other long-term fund
Easiest to start Limited to life of owner
requirement
e) Evaluation of alternative sources of Least regulated Equity capital limited to
funds owner’s wealth
3. Operating Single owner keeps all the Unlimited liability
- How can the firm best manage its cash flows profit
as they arise in its day-to-day operations? Difficult to sell ownership Difficult to sell ownership
(working capital management decisions – how interest interest
to manage cash (liquid) money?) 2. Partnership – a legal arrangement in
- This responsibility area of a finance manager which to or more persons agree to
concerns working capital management. The contribute capital or services to the
term working capital refers to a firm short-term business and divide the profits and
asset and its short-term liabilities. Managing the losses that may be derived therefrom.
firm’s working capital is a day-to-day
responsibility that ensures that the firm has ADVANTAGES DISADVANTAGES
sufficient resources to continue its operations Relatively easy to start Unlimited liability
and avoid costly interruptions. More capital available Partnership dissolved when
- Working Capital is computed as follows: one partner dies or wish to
sell his share
Working Capital = Current Asset – Current More people to manage Difficult to transfer
Liability ownership
 Some issues that may have to be Taxed once as personal Limitation in raising capital
resolved in relation to managing a income
firm’s working capital are:
a) The level of cash, securities, and 3. Corporation – is an artificial being
inventory that should be kept on hand created by law and is a legal entity
b) The credit policy (should the firm sell on separate and distinct from its owners. It
credit? What terms should be extended?) may on assets, borrow money and
c) Source of short-term financing (if the firm engage in other business entities without
would borrow in the short-term, how and directly involving the owners.
where should it borrow?)
d) Financing purchases of goods (i.e., ADVANTAGES DISADVANTAGES
should the firm purchase its raw materials Limited liability Separation of ownership and
or merchandise on credit or should it management
borrow in the short-term and pay cash?) Unlimited life Double taxation
Separation of ownership and Most regulated
 SKILLS OF FINANCIAL MANAGER management
Finance managers should be able to: Transfer of ownership is easy Complexity in formation
 Understand and evaluate cash flow Easier to raise capital
scenarios
 Analyze financial data  IMPORTANT BUSINESS TRENDS
 Forecast future earnings and expenses 1. Increased globalization of business –
 Understand and apply contract investing abroad is highly profitable.
provisions 2. Information Technology (IT) - Firms are
 Oversee vendor or government contracts collecting massive data and using them
 Implement contract compliance policy takes much of the guesswork out of
 Secure financial management systems financial decisions
 Apply advance mathematics 3. Corporate Governance - strong written
 Use and understand statistical modeling code of ethical behavior. Companies
software and spreadsheets also conduct trainings to ensure that the
employees understand proper behavior
 FORMS OF BUSINESS in different situations.
ORGANIZATIONS 4. Outsourcing - occurs when domestic
1. Sole Proprietorship – a business that is firms invest and produce goods in
owned by a single person who has foreign countries or when these firms
control over the business. This choose to rely on imports rather than
individual owns all of the firm’s asset build domestic plans and produce these
and is responsible for all of its liabilities. goods domestically.
These are mostly small stores and
establishments.