FIN

BUSINESS FINANCE
Instructor: Buen L. De La Cruz
Facebook account: Buen Logronio Dela Cruz
Email address: bvlognorsu@gmail.com

MODULE 1 INTRODUCTION TO FINANCIAL MANAGEMENT

o COURSE LEARNING OUTCOMES

After reading this module, you should be able to:
1. Explain the major role of financial management and the different individuals involved
2. Distinguish among financial institution, financial instrument and financial market
3. Enumerate the varied financial institutions and their corresponding services
4. Compare and contrast varied financial instruments
5. Explain the flow of funds within an organization through and from the enterprise and the
role of the financial manager

o CONTENTS OF THE MODULE

This module contains the following lessons:
Lesson 1: Major Role of Financial Management and Individuals Involved
Lesson 2: Differences among Financial Instruments, Financial Markets and Financial Institutions
Lesson 3: Basic Types of Financial Instruments
Lesson 4: Role and Main Functions of a Financial Manager

o DIRECTIONS ON HOW TO USE THE MODULE PROPERLY:

In order to benefit profoundly from this module, please be guided by all the key points
presented below.
1. This module contains four (4) lessons. Read, comprehend and analyze the explanations
thoroughly so that could understand the lesson fully.

2. On the first page of each lesson, you will find the specific learning outcomes (SLOs) of each
lesson. SLOs are knowledge and skills you are expected to acquire at the end of the lesson.

3. You must answer the Learning Activities/Exercise (LAEs). The LAEs are designed to help you
acquire the SLOs.

4. Feel to chat, call, and text or send an email message to me if you have questions, reactions,
or reflection about the contents or activities in the module.

5. The Practice Task/Assessment and the Assignment shall be checked by your subject
instructor.

INTRODUCTION

Financial management involves the process of planning, organizing, directing, and controlling
the financial activities of the firm. This includes obtaining and utilizing funds for the operations of the

1
 FIN
BUSINESS FINANCE
Instructor: Buen L. De La Cruz
Facebook account: Buen Logronio Dela Cruz
Email address: bvlognorsu@gmail.com

enterprise. It also deals with the application of general management principles and capitalizes on the
financial resources of the enterprise.

Specifically, financial management utilizes the principles of the time value of money, leverage,
diversification, and an investment’s expected rate of return versus its risk, with the goal of maximizing
the shareholder wealth.

LESSON 1: MAJOR ROLE OF FINANCIAL MANAGEMENT AND INDIVIDUALS INVOLVED

Generally, financial management is concerned with procurement, allocation and control of

financial resources of a business entity with the following objectives:
1. to ensure regular and adequate supply of funds;
2. to ensure adequate returns to the shareholders through capital gains which are dependent
upon the earning capacity and the market price of the share;
3. to ensure optimum funds utilization at least cost;
4. to ensure investment of funds in safe ventures so that adequate rate of return can be achieved;
and
5. to design a sound capital structure by maintaining a fair composition of capital through a
balance between debt and equity capital.

Financial management has the following functions:

1. Estimation of capital requirements – dependent upon expected costs and profits and future
programs and policies of a business entity
2. Determination of capital contribution – after estimation, a decision on the capital structure
follow so this involves short-term and long-term debt equity analysis
3. Choice of sources of funds – for additional funds, choices can be like:
a. Additional issuance of shares of stock and/or issue bonds;
b. Loans from banks or any willing financial institutions; and
c. Investments from the public in the form of bonds
4. Investment of funds – excess funds have to be decided for allocation into profitable ventures so
that there is safety on investment and regular returns are possible
5. Disposal of surplus
a. dividend declaration: includes identifying the rate of dividends and other benefits
like bonus
b. retained earnings: amount of earnings to be retained will depend on the expansion
plans, introduction of innovation, and diversification strategies of the company
6. Management of cash – maintaining enough cash is required for continuous operation and
working capital
7. Financial controls – can de done through many techniques like ratio analysis, financial
forecasting, cost and profit control

Individuals Involved in Financial Management

1. Senior leaders

2
 FIN
BUSINESS FINANCE
Instructor: Buen L. De La Cruz
Facebook account: Buen Logronio Dela Cruz
Email address: bvlognorsu@gmail.com

 responsible for all aspects of tis financial health

 ones who understand the unit’s financial situation and do not allow unintended deficits
to occur
 accountable for the resources entrusted to them that include the funds, facilities and
the recruitment of employees
2. Unit heads
 responsible for internal financial management and to develop budgeting, financial
reporting and management practices

LESSON 2: DIFFERENCES AMONG FINANCIAL INSTRUMENTS, FINANCIAL MARKETS AND FINANCIAL

INSTITUTIONS

 Financial Instruments – recorded evidence of obligations on which exchanges of resources are

founded
 Financial Markets – mechanisms used to trade the financial instruments
 Financial Institutions – ones that facilitate the transfer of resources among those investors who are
involved in buying and selling of financial instruments

Various Financial Institutions and their Services

1. Central Bank
 responsible for the oversight and management of all other banks
 Bangko Sentral ng Pilipinas (BSP) with the primary objective of maintaining the price
stability conducive to a balanced and sustainable economic growth
 promote and preserve the stability and the convertibility of the national currency which is
the Philippine Peso

2. Commercial Banks
 work directly with businesses
 products offered include checking and savings accounts, certificate of deposit, personal and
mortgage loans, credit cards and business banking accounts

3. Credit Cooperatives
 not-for-profit financial institutions that exist to serve its members
 provide products and services to people who shares something in common, such as where
they work or live, or even their nationality
 owned by their members and operate for their benefit although products offered resemble
rural bank services

4. Savings and Loan Associations

 Mutually held and provide no more than 20% of total lending to businesses

5. Investment Banks and Companies

3
 FIN
BUSINESS FINANCE
Instructor: Buen L. De La Cruz
Facebook account: Buen Logronio Dela Cruz
Email address: bvlognorsu@gmail.com

 Investment banks help individuals, business and governments by raising capital through the
issuance of securities instead of accepting deposits
 Investment companies or commonly known as mutual fund companies, pool funds from
individual and institutional investors to provide them access to the broader securities
market

6. Brokerage Firms
 provide services to individuals and institutions who are willing to buy and sell available
investment securities

7. insurance Companies
 help individuals to transfer risk of loss
 provide services of protection against financial loss due to death, disability, accidents,
property damage and other misfortunes of individuals and businesses

8. Mortgage Companies
 provide funds through loans subject to the availability of property used as collaterals

LESSON 3: BASIC TYPES OF FINANCIAL INSTRUMENTS

1. Savings Accounts
 provides easy access to extra money and is generally insured with Philippine Deposit
Insurance Company for maximum amount of P500,000.00.
 interest rates tend to be lower compared with that of other financial instruments

2. Time Deposits
 deposits that cannot be withdrawn over a fixed term or period
 earns higher interest rates compared to savings and checking accounts, depending on
the amount placed and term
3. Money Market Funds
 relatively conservative and low-risk instruments invested in highly marketable and
“near-cash” instruments like short term government securities, money market
securities, and other highly marketable fixed-income instruments

4. Stocks
 stock market gives the opportunity to buy shares of companies under normal
circumstances

5. Bonds
 debt security wherein someone is borrowing money and there’s another one lending it
 a certificate of debt issued by the government or a company with a promise to pay a
specified sum of money at a future date and carries interest at a fixed rate
 government bonds: called retail treasury bonds, treasury notes, T-bills, and others

4
 FIN
BUSINESS FINANCE
Instructor: Buen L. De La Cruz
Facebook account: Buen Logronio Dela Cruz
Email address: bvlognorsu@gmail.com

 corporate bonds: called long-term commercial papers

6. Mutual Funds
 generally a pool of money from a group of investors entrusted to a financial institution
for investment purposes

7. Annuities
 an annuity is an insurance product that pays out income on a predetermined amount
during the lifetime or upon its maturity
 used as part of a retirement strategy
 popular choice for investors who want to receive a steady income stream upon
retirement

Flow of Funds within an Organization

A cash inflow involves a receipt or collection of cash which is the exact opposite of a
cash outflow. Typically, the majority of a company’s cash inflows are payments received from
customers, cash received from borrowing and cash from investors who purchase company’s
shares of stock or equity from the company. Occasionally, cash flows come from other
sources like cash settlements for legal cases or cash generated from the sale of company real
estate or equipment.

LESSON 4: ROLE AND MAIN FUNCTIONS OF A FINANCIAL MANAGER

Financial Manager – the one who takes care of the important and complex activities of a firm
such as financial activities of a firm and also performs all the requisite monetary undertakings.
Main Functions of a Financial Manager
1. Raising of Funds
2. Allocation of Funds
3. Profit Planning
4. Understanding Capital Markets

Reference: Business Finance by Angeles A. De Guzman, DBA, CPA