BUSINESS FINANCE

Module 1 - to
Introduction Quarter 1
Financial
Management
Business Finance
Alternative Delivery Mode
Module 1 - Quarter 1: Introduction to Financial Management
First Edition, 2020

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BUSINESS FINANCE
Module 1 - Quarter 1
Introduction to Financial
 Management

Department of Education ● Republic of the Philippines

 TABLE OF CONTENTS

Page No.

Cover page II

Table of Contents IV

Overview V

General Instructions V

Lesson 1: Introduction to Financial Management 1

What I Need to Know? 1

What I Know 1

What’s In 2

What’s New? 3

What is it? 3

What’s More? 9

What I Have Learned? 10

What Can I Do? 11

Assessment 12

Additional Activities 12

Answer Key 13

References 14
 OVERVIEW
This module created to train learners to familiarize with Business Finance with
the fundamental principles, tools, and techniques of the financial operation involved in
the management of business enterprises. In answering the pre-test, self-check
exercises and post-tests, remind students to use separate sheets.

Business Finance is a specialized subject of Accounting, Business and

Management strand, which introduces the basic concepts of corporate finance and
personal finance. The lessons have been designed to give learners the opportunity to
explore the content and performance standards set for Business Finance. It will
prepare learners in applying such learnings in real life situation.

1
Lesson INTRODUCTION TO FINANCIAL MANAGEMEN
What I Need to Know
After going through this module, you are going to:
 • Define Finance
• Describe who are responsible for financial management within an organization
• Describe the primary activities of the financial manager
• Describe how the financial manager helps in achieving the goal of the
organization
• Describe the role of financial institutions and markets

What I Know
Let us determine how much you already know about the definition of finance, the
activities of the financial manager, and financial institutions and markets. Take this
test.
Direction: Read each question carefully, choose the letter with the correct answer and
write your answer on the space before each number.

_____1. It is a financial intermediary handling individual savings. It receives premium

payments placed in loans or investments to accumulate funds to cover future benefits.
A. life insurance company C. savings bank
B. commercial bank D. credit union
_____2. Which of the following is not a financial institution?
A. A pension fund C. A commercial bank
B. A newspaper publisher D. An insurance company
_____3. It is a set up so that employees of corporations or governments can receive
income after retirement.
A. life insurance company C. Savings bank
B. Pension fund D. credit union
_____4. It is a type of financial intermediary that pools savings of individuals and
makes them available to business and government users. Funds obtained through the
sale of shares.
A. Mutual Funds C. Savings and loans
B. Commercial banks D. Credit Union
_____5. Most businesses raise money by selling their securities in a.
A. direct placement C. public offering
B. stock exchange D. private placement
_____ 6. 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 deposit
D. Lending money to customers
_____7. By definition, the money market involves the buying and selling of.
A. funds that mature in more than one year.
B. flows of funds.
C. stocks and bonds.
D. short-term funds.
_____8. It creates financial relationship between suppliers and users of short-term
funds.
A. financial market C. stock market
 B. money market D. capital market
_____9. Firms that require funds from external sources can obtain them from
A. financial markets. C. financial institutions.
B. private placement. D. All the above.
_____10. The science and art of managing money.
A. Financial Management C. Management
B. Finance D. Personal Finance

What’s In
As a senior high student taking this subject and read this module, you will
learn to become financial literate in all aspect in life. If you are thinking that only
working individuals, entrepreneurs, businesses make financial decisions, then you will
be benefiting more from this subject than the rest. Perhaps, your first lesson is to
know that you do make financial decisions on a daily basis. Finance is every day; I
want to challenge you to get your notebook and answer these questions and give your
honest answer. How much is your monthly allowance or everyday allowance? List all
your expenses when you come in school. How much is your expense? How much is
your extra money? On the other hand, do you experience short of cash? In addition,
why? All of these questions will teach you how to manage your finances.
What’s New
Activity 1.1
Direction: Write the hierarchy of positions according to common organizational
structure of a company.

What is it?

Read and understand the information very well then find out how much you
can remember and how much you learned by doing the activity and assessment.
What is Finance and Financial Management?
Finance is always of great importance, be it in a business or in one's
everyday life. It is important to manage risks in business, it is equally important to
manage risks in life as well. Risk is nothing but an uncertain event that might damage
your assets and when it is financial risks, it creates loss of Finance. Some books
define Finance as the science and art of managing money. (Gitman & Zutter,
2012)
Financial Management deals with that decisions that are supposed to maximize
the value of shareholder’s wealth (Cayanan). These decisions will ultimately affect the
markets perception of the company and influence the share price.The goal of
Financial Management is to maximize the value of shares of stocks. Managers of
a corporation are responsible for making the decisions for the company that would
lead towards shareholder’s wealth maximization.
Organizational structure of the company is important especially in the financial
aspect of the business and the particular set of people, each play a role in the decision
making of the company. See diagram below.

From the diagram presented, emphasized that each line is working for the
interest of the person on the line above them. Since the managers of the company are
making decisions for the interest of the board of directors and the board of directors
do the same for the interest of the shareholders, it follows the goal of each individual
in a corporate organization should have an objective of shareholders wealth
maximization.

The roles of each position identified.

• Shareholders: The shareholders elect the Board of Directors (BOD). Each
share held is equal to one voting right. Since the shareholders elect the
BOD, their responsibility is to carry out the objectives of the shareholders.
Otherwise, they would not be elected in that position. Ask the learners
again, what objective of the shareholders is, just to refresh.
• Board of Directors: The board of directors is the highest policy making body in a
corporation. The board’s primary responsibility is to ensure that the corporation is
 operating to serve the best interest of the stockholders. The following are among the
responsibilities of the board of directors:
• 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)
• President (Chief Executive Officer): The roles of a president in a
corporation may vary from one company to another. Among the
responsibilities of a president are the following:
a. Approving the information and other disclosures reported in the financial
statements. Overseeing the operations of a company and ensuring that the
strategies as approved by the board are implemented as planned.
b. Performing all areas of management: planning, organizing, staffing, directing
and controlling.
c. Representing the company in professional, social, and civic activities.
• VP for Marketing: The following are among the responsibilities:
• Formulating marketing strategies and plans. Directing and coordinating
company sales.
• Performing market and competitor analysis.
• Analyzing and evaluating the effectiveness and cost of marketing methods
applied.
• Conducting or directing research that will allow the company identify new
marketing opportunities, e.g. variants of the existing products/services already
offered in the market.
• Promoting good relationships with customers and distributors. (Cayanan, 2015)
• VP for Production: The following are among the responsibilities:
• Ensuring production meets customer demands.
• Identifying production technology/process that minimizes production cost and
make the company cost competitive.
• Coming up with a production plan that maximizes the utilization of the
company’s production facilities.
• Identifying adequate and cheap raw material suppliers. (Cayanan, 2015)
• VP for Administration: The following are among the responsibilities:
• Coordinating the functions of administration, finance, and marketing
departments.
• Assisting other departments in hiring employees.
• Providing assistance in payroll preparation, payment of vendors, and collection
of receivables.
• Determining the location and the maximum amount of office space needed by
the company. Identifying means, processes, or systems that will minimize the
operating costs of the company. (Cayanan, 2015)

The role of the VP for Finance/Financial Manager is to determine the

appropriate capital structure of the company. Capital structure refers to how much
of your total assets financed by debt and how much is financed by equity.
 To be able to acquire assets, our funds must have come somewhere. If it has
bought using cash from our pockets, it has financed by equity. On the other hand, if
we used money from our borrowings, the asset bought has financed by debt.
What are the functions of Financial Managers?
1. Financing decisions- include making decisions as to how to finance long-term
investments and working capital-which deals with the day-to-day operations of the
company.
2. Investing Decisions- To minimize the probability of failure, long-term investments
have supported by a capital budgeting analysis.
3. Operating Decisions – deal with the daily operations of the company especially on
how to finance working capital accounts such as accounts receivable and inventories.
4. Dividend Policies – Dividend is a part of profits that are available for distribution,
to equity shareholders. The Finance manager must decide whether the firm should
distribute all the profits or retain them or distribute a portion and retain the balance.

OVERVIEW OF THE FINANCIAL SYSTEM

The financial system links the savers and the users of funds. Savings can come
from households, individuals, companies, government agencies, or any other entity
whose cash inflows are greater than their cash outflows. The financial system through
financial intermediaries provides a mechanism by which these savings can be
channeled to users of funds, borrowers, and investors.
Some of the financial instruments issued by users of funds such as the shares
of stocks and corporate bonds of publicly listed companies and the debt securities
issued by the National Government has traded.

Differentiate the Financial instruments, financial institutions and

financial markets
1. Financial institutions are companies in the financial sector that provide a broad
range of business and services including banking, insurance, and investment
management.

Identify examples of financial institutions/Intermediaries:

a. 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.

b. 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
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.

c. Mutual Funds - Mutual funds owned by investment companies that 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.

d. 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.

2. Financial Instruments-is a real or a virtual document representing a legal

agreement involving some sort of monetary value. These can be debt securities like
corporate bonds or equity like shares of stock. When a financial instrument issued, it
gives rise to a financial asset on one hand and a financial liability or equity
instrument on the other.

a. 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

b. 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

c. 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 Share Capital

• Identify common examples of Debt and Equity Instruments.

d. Debt Instruments generally have fixed returns due to fixed interest rates.
Examples of debt instruments are as follows:

• Treasury Bonds and Treasury Bills 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
has been paid.

• Corporate Bonds 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 issued the bonds goes
bankrupt, the holder of the bonds will no longer receive any return from their investment and even their
principal investment has 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 has liquidated and its assets have to be distributed, no asset be
distributed to common stockholders unless all the claims of the preferred stockholders has 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 given to
common stockholders unless all the dividends due to preferred stockholders paid first. (Cayanan, 2015)

• Holders of Common Stock on the other hand are the real owners of the company. If the
company’s growth is encouraging, 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.

3. Financial Market - refers to a marketplace, where creation and trading of

financial assets, such as shares, debentures, bonds, derivatives, currencies, etc. take
place.
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 public referred to as a public offering and the first offering of
stock named 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 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 have 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 sold in Capital markets. The key
capital market securities are bonds (long-term debt) and both common stock and preferred stock
(equity, or ownership).

The role of Financial Managers: make financing decisions that require funding
from investors in the financial markets.

What’s more?

How do we measure wealth maximization?

For example, Assume that Mr. Y bought 10 shares of Globe Telecom at PHP2, 510
each on September 9, 2010. This brings his investments to PHP25, 100. What
happens to the value of his investment if the price goes up to PHP2, 600 per share or
it goes down to PHP2, 300 per share?
Explanation: An increase of the share price to PHP2, 600 per share means that people
are willing to buy the shares for that amount. If the learners were to sell their shares
at this point, it will result to a profit of PHP90 per share or PHP900 on their whole
investment. Hence, the value of their investment increased from PHP25, 100 to
PHP26, 000. Therefore, there is an increase in shareholder’s wealth.

On the other hand, a decrease in the share price to PHP2, 300 per share means
that people are only willing to buy shares for PHP2, 300. If the learners were to sell
their investment at this point, they will receive PHP23, 000 which would result to a
loss of PHP2, 100. The decrease in value of their investment leads to a decrease in
shareholder’s wealth.

Activity 1.2
Direction: Read the problem and answer it correctly. Follow the format above when
you answer.
1. ABC Company bought 10 shares of Jollibee Corporation at PHP2, 000 each on
January 9, 2012. This brings his investments to PHP20, 000. What happens to the
value of his investment if the price goes up to PHP2, 520 per share or it goes down to
PHP1, 500 per share?
What I Have Learned
Activity 1.3
Instruction: Think and create your own bank company name and describe the
function of Finance Manager or describe the Financial Management of your bank.
___________________________________________________________________________
(Bank name)

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What I Can Do
Activity 1.4
Direction: Write three examples of each circle and describe it briefly.
For example: Financial Instruments: My answer is cash-It is used for
exchange of something you want to buy (describe your answer on each circle)
 Assessment

Directions: Write T if the statement is True and F if the statement is False.

Write your answer on the space provided
______1. High cash flow is generally associated with a higher share price whereas
higher risk tends to result in a lower share price.
______2. The wealth of corporate owners has measured by the share price of the stock.
______3. When considering each financial decision alternative or possible action in
terms of its impact on the share price of the firm's stock, financial managers
should accept only those actions that expected to maximize shareholder
value.
______4. Stockholders expect to earn higher rates of return on investments of lower
risk and lower rates of return on investments of higher risk.
______5. Financial markets are intermediaries that channel the savings of individuals,
businesses, and government into loans or investments.
______6. Commercial banks obtain most of their funds from borrowing in the capital
markets.
______7. The money market involves trading of securities with maturities of one year or
less while the capital market involves the buying and selling of securities
with maturities for more than one year.
______8. Primary and secondary markets are markets for short-term and long-term
securities, respectively.
______9. A mutual fund is a type of financial intermediary that obtains funds through
the sale of shares and uses the proceeds to acquire bonds and stocks issued
by various business and governmental units.
______10. Credit unions are the largest type of financial intermediary handling
individual savings.

Additional Activities
Direction: Summarize the roles of individual/position (Organizational structure)
involve in the decision making of the company.

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Answer Key
References
https://businessjargons.com/financial-market.html
https://www.wallstreetmojo.com/financial-institutions/
Arthur S. Cayanan and Daniel Vincent H. Borja, 2017 Business Finance First Edition, Manila Philippines
The Commission on Higher Education in collaboration with the Philippine Normal University: Teaching
guide for Senior High School,