Overview of Financial Management

Process:
A BUSINESS DEPENDS ON MANY FACTORS AND THE - Reserve, secure & register name from DTI
MOST IMPORTANT OF THEM IS FINANCE. - Present accomplished forms/docs for processing and evaluation
- Get certificate from DTI
INTERRELATED MEANINGS OF FINANCE - Secure business registration from local government of chosen
1. The management of large amounts of money – especially by location of business (i.e. Barangay Certificate, Mayor's Permit &
governments or large companies; Licenses)
2. The giving of monetary support for an enterprise and; - Register business in Bureau of Internal Revenue (BIR)
3. The monetary resources and affairs of a government, - If with employees, register with the following: Social Security
organization or person. - System (SSS)
- Philippine Health Insurance Corporation (Phil Health)
TYPES OF FINANCE - Home Development Mutual Fund (HDMF)
1. PUBLIC FINANCE Examples of Sole Proprietorship
– it includes tax systems, government expenditures, budget • Direct or online selling
procedures, debt issues and other government concerns. • freelance writers and consultants
2. CORPORATE FINANCE • run a bookkeeping business, landscape artist or graphic
- Businesses bring in financing through equity investments and designers
credit arrangements, and by purchasing securities. • computer repair shops
- start ups may receive investments from angel investors or • local restaurants and shops, and home-based
venture capitalists, and established companies may sell stocks or
bonds. PARTNERSHIP
3. PERSONAL FINANCE - An association of two or more people who co-own a business for
- earning more money and spending less money is the basis of the purpose of making a profit.
personal finance. - The Philippine Civil Code provides for a definition of a
- individuals may earn more money by starting a business, taking partnership as follows: Art. 1767. By the contract of partnership
on additional jobs, or investing. two or more persons bind themselves to contribute money,
property, or industry to a common fund, with the intention of
FINANCIAL MANAGEMENT WITHIN A BUSINESS dividing the profits among themselves.
ORGANIZATION
• BUSINESS Characteristics of Partnership
– is an entity where the skills, energy, and enterprise owners are - membership
linked with money, its sources, and investments, and its success is - unlimited liability
measured by wealth, or profit derived from its operation. - sharing of profit & loss
• BUSINESS ORGANIZATION - mutual agency
– is an entity formed for the purpose of carrying on commercial - voluntary registration
enterprise. - continuity
- contractual relationship
3 basic forms of business ownership - transfer of interest
Your choice depends on your needs and goals
• Sole proprietorship Types of Partnership
• Partnership • General partners
• Corporation - Take an active role in managing a business.
- Have unlimited liability for the partnership’s debts.
SOLE PROPRIETORSHIP - Every partnership must have at least one general partner.
- is a business owned by ONE person who is known as the • Limited partners
proprietor/owner. The business is prevalent in retail industry, - Cannot participate in the day-to-day management of a company.
handicrafts, agriculture, forestry, fishery, other service or family - Have limited liability for the partnership’s debts
workshops
- single ownership, no sharing of profit and loss, one man’s capital, How to register a partnership business in the Philippines?
unlimited liability, less legal formalities, one man control 1. Register Your Business Name at the Securities and Exchange
Commission (SEC)
How can I start one? 2. Obtain a Barangay Clearance
- Few legal requirements 3. Register with the Social Security System (SSS)
- Can be run at home, garage, or van 4. Obtain Permit from the Mayor’s Office
5. Register Your Business with the Bureau of Internal Revenue
Requirements: (BIR)
- Create name of business to be registered in DTI Business Name
Registration System (BNRS) Additional requirements
- Applicant's TIN number - Endorsement/clearance from other government agencies, if
- Provide copy of identification of citizenship (government issued applicable
IDS- Driver's License, Voter's ID, Passport, etc.) - For partnership with a foreign national as a partner (FIA Form -
- Provide signed copy of undertaking from DTI BNRS 105)
- Prepare payment for application
CORPORATION (individual merchant) is granted the right to market a product or a
- Small portions of corporate ownership that are owned publicly service under a marketing plan or a system that uses the trademark,
are called stocks or shares. Individuals who own shares of a name, logo and advertising owned by the franchisor (company
Corporation are called shareholders and become owners of the owned or Mother company).
business. Shareholders have limited liability. A board of directors
runs a corporation that is owned by shareholders. Franchisor / Franchiser - the person or mother company that
- A publicly traded corporation that makes a profit may pay out grants the franchisee the right to do business under their
dividends to shareholders. trademark or trade name.
• PUBLIC CORPORATIONS Franchisee - the person or company that gets the right from the
- are owned by shareholders who elect a board of directors to franchisor to do business under the franchisor’s trademark or trade
oversee primary responsibilities. name and benefits from it.
Franchise Agreement - the legal, written contract between the
Advantages and Disadvantages of Corporations franchisor and franchisee which tells each party what each is
• Advantages: supposed to do
Limited liability
- Transfer of ownership Types of Franchising
- Perpetual life 1. Product franchising
- External sources of funds - Also known as trade name franchising.
- Expansion potential - Type of franchising wherein a manufacturer grants a franchisee
• Disadvantages the right to sell its products, but with no method of doing business.
- Double taxation - Examples of this type of franchising are car dealerships and
- Forming a corporation service stations.
- Disclosure of information - Toyota, shell, apple
- Employee-owner separation 2. Business Format Franchising
- Also identified as a name and process franchise.
Double Taxation - Aside from granting the right to use the name and market the
Owner of organization (Also employee of that organization) products and services of the franchisor, the franchisee is also
get taxed .. provided a complete plan for managing and operating the business
• When he receives the salary – a transfer of the proven way of doing business that has been
• If he receives dividend from company being a developed by the franchisor
shareholder - This plan often includes a full range of services, including site
selection, training, product supply, marketing plans and even
Other Ways to Organize a Business assistance in obtaining financing.
• Nonprofit organization - Mcdo, pizza hut, dunkin donuts
• Franchising
FINANCIAL MANAGEMENT
NONPROFIT ORGANIZATION - To collect fund for the company at a low cost and;
- A nonprofit organization does not pay taxes because it does not - To collect fund for the company at a low cost and;
make a profit. - to plan and control the finance of the company.
- a type of business that focuses on providing a service, not
making a profit FROM THE PERSPECTIVE OF THE CORPORATION:
- financial management deals with decisions that are supposed to
Examples: maximize the value of the shareholders’ wealth.
• SM Foundation - This means maximizing the market value of the shares of stocks.
- WE CARE for the education of our youth
- We give college and technical-vocational scholarships to • Shares of stocks
deserving and qualified students, and build school buildings for – represent the form of ownership in a corporation
underserved communities.
• Childhope Asia The changes in the price of a stock may vary due to the
- An international, non-sectarian organization advocating for the following:
cause of street children throughout the world. • Profitable operation
• Philippine Red Cross • Nature of the business
- The PRC provides six major services: Blood Services, Disaster • Prospects of the business
Management Services, Safety Services, Community Health and • Projected earnings and time frame for the realization of such
Nursing Services, Social Services and the Volunteer Services. projected earnings
• Haribon Foundation • Ability to meet maturing obligations
- Protecting nature. Protecting Life. Committed to nature • Appropriate capital structure
conservation through community empowerment, and scientific • Dividend policies
excellence. • Investing decisions
• Management and market sentiments
FRANCHISING
- refers to the method of practicing and using another’s perfected
business concept. In a franchise relationship, the franchisee
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.
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.
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.
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.
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.
FINANCIAL SYSTEM
- is the process by which money flows from savers to users.

5 Basic Functions of Financial System

1. Savings function
- As already stated, public savings find their way into the hands of
those in production through the financial system. Financial claims
are issued in the money and capital markets, which promise future
income flows. The funds, in the hands of the producers, resulting
in the production of better goods and services and an increase in
society's living standards. When savings flow decline, however,
the growth of investment and living standards begins to fall
2. Liquidity Function
- Money in the form of deposits offers the least risk of all financial
instruments. But its value mostly eroded by inflation. That is why
one always prefers to store funds in financial instruments like
stocks, bonds, debentures, etc. However, in such investments (i) a
greater level of risk is involved, (ii) and the degree of liquidity
(i.e., conversion of the claims into money) is less. The financial
markets provide the investor with the opportunity to liquidate the
investments. The Financial System: A Global Perspective
3. Payment Function • The financial system is more connected.
- The financial systems offer a very convenient mode of payment • Financial institutions are more global.
for goods and services. The check system, credit card systems et • Only 3 of the 30 largest banks in the world are US institutions.
al are the easiest methods of payment in the economy; they also • Most nations have a central bank.
drastically reduce the cost and rime of transactions.
4. Risk Function The Financial System
- The financial markets provide protection against life, health, and • The financial system is the collection of institutions that
income risks. These are accomplished through the sale of life, facilitate the flow of funds between lenders and borrowers.
health, and property insurance policies. Overall, they provide
immense opportunities for the investor to hedge himself/herself The Financial System: Saving
against or reduce the possible risk involved in various instruments. •When people earn income, they typically don’t want to consume
5. Policy Function their entire income all at once.
- Most governments intervene in the financial system to influence •But they may have no idea what to do with the unconsumed
macroeconomic variables like interest rates or inflation. For income.
example, the federal bank or a central bank does indulge in • This unconsumed income is called saving
several cuts in CRR and try to force the interest rates down and
increase the availability of credit-at cheaper rates to the corporates. The Financial System Makes Saving Equal Investment
•The financial system makes it easier for lenders (those who have
Understanding the Financial System the saving funds) and borrowers (those who need funds for
• Financial System investment) to find each other
• Savers •Both groups benefit when the financial system does its job well
• Users •When the financial system fails, both groups suffer
• Financial Institutions
• Financial Markets Financial System Participants
• Savings is a function of many variables. • Households or consumers are generally described as that group
• Funds can be transferred between users and savers directly or receiving income, majority of which typically come from wages
indirectly. and salaries.
• Financial institutions channel the funds from lenders to
borrowers. They can also be the lenders and borrowers themselves.
If they buy securities they are lenders but if they are the ones
issuing the securities, they are borrowers.

Role of Financial Institution

- Regulation of Monetary Supply
- Banking Services
- Insurance Services
- Capital Formation
- Act as A Government Agent for Economic Growth
- Financing the Small and Medium Scale Enterprises
- Investment Advice
- Pension Fund Services
- Trust Fund Services
- Investment Advice
6 Parts of the Financial System
1. Money
- is the start of the financial system and the means for making
purchases. Accumulating money is a determining factor in
defining wealth. Those who store more money are wealthier than
those who do not.
• Money in the Philippines: Banks, ATMs, cards & currency
exchange like coins, bank notes
2. Financial Instruments
- are also known as securities, though the layman's terms are
stocks, bonds, mortgages and insurance.
3. Financial Markets
- are trading houses that are dedicated to the purchase and sale of
stocks and bonds, such as the New York Stock Exchange or
Philippine Stock Exchange (PSE). Buyers and sellers gather at the
market to determine buying and selling prices for securities,
typically with assistance from a stockbroker. Markets continually
fluctuate, resulting in inherent risks in the process.
4. Financial Institutions
- The common term for financial institutions is banks. Though
once a brick and mortar building that held money in vaults,
modern financial institutions offer a variety of products and
services including mortgages, insurance and brokerage
accessibility. .
- Financial institutions now compete in the financial market by
offering one-stop shopping for financial transactions and advice.
5. Regulatory Agencies
- were introduced by the government to monitor the activities of
financial institutions and markets. Through examination and
enforcement of strict guidelines, regulatory agencies supervise
members of the financial system to ensure the safety of the
public's money and investments. Government examiners review
the systems in place at financial institutions and markets, and they
teach and encourage best practices.
6. Central Banks
- almost every country in the world has a central bank that is
integral to each country's government. The founding of central
banks was originally a means to finance wars, but today's central
banks control the availability of money and credit. They are
integral to the stability of the country's financial system as they
oversee national currency and its value.
•Non-Financial Institutions are businesses such as trading,
manufacturing, extractive industries, construction and genetic
industries. Non-financial institution can also be the lender and
borrowers just like financial institution.
• They are also a financial institutions that offer various banking
services but do not have a banking license. Generally, these
institutions are not allowed to take traditional demand deposits—
readily available funds, such as those in checking or savings
accounts—from the public.
• The Government - is the national, provincial, city and towns
comprising the Philippines as a whole.
• The Central Bank - is an institution that manages a state’s
currency, money supply and interest rate. Central banks also
usually oversee the commercial banking system of their respective
countries.
• Foreign participants refers to the participants from the rest of the
world such as households, government, financial and nonfinancial
firms, and central bank.
• They exchange goods and services across national boundaries.
International trade and international finance are parts of
globalization.
Types of Non-Financial Institutions
1. Insurance Companies
• Risk-pooling institutions like insurance companies work with
economic risks such as death, damage and risks of loss to make a
return. The two main types of insurance companies are general
insurance and life insurance. General insurance is more of a short
term contract while life insurance is long term and is active until
the insurer’s death.
2. Payday Lenders
• Specialized sectorial financiers like payday lending companies
and real estate financiers provide short term loans and limited
financial services to a targeted demographic.
• They can help with unsecured business loans and are a quick fix
for borrowers. Those struggling to get credit or with limited
recourse to funds are more likely to use a payday lender when
securing a loan.
3. Financial Service Providers
• are made up of management consultants, security and mortgage
brokers and financial advisors. They operate on a fee-for-service
basis and offer advice to investors and brokers. They improve
informational efficiency for investors and offer a transactions
service for investors to liquidate their assets.
4. Institutional Investors
• are organizations that trade securities in volumes that qualify for
lower commissions. This kind of non-bank financial institution
can be found working with pension funds and mutual funds.
What does the financial system do?
The financial system serves multiple purposes:
1. It helps entrepreneurs find the money needed to turn business
ideas into reality
2. It helps entrepreneurs pursue business projects without having
to personally carry too much of the risks associated with their
projects
3. It helps to protect lenders from irresponsible borrowers
4. It helps to foster economic growth by channeling savings to the
most valuable projects and cutting off funds for the less valuable
projects
FINANCIAL MARKETS AND INSTITUTIONS
Why study Financial Markets and Institutions?
•They are the cornerstones of the overall financial system in
which financial managers operate
•Individuals use both for investing
•Corporations and governments use both for financing
The Financial Institutions and The Financial Markets
• Is an establishment that conduct transactions such as investments,
loans, and deposits.
• Provide a mechanism for those with excess funds (savers) to
lend to those who need funds (borrowers).
Flow of Funds
• Financial system provides a transmission mechanism between
saver-lenders and borrowers-spenders.
• Channels funds from person or business without investment
opportunities (i.e., “Lender-Savers”) to one who has them (i.e.,
“Borrower-Spenders”)
• Savers benefit – earn interest
• Investors benefit – access to money otherwise not available
• Economy benefit – efficient means of bringing savers and Flows of Funds Through the Financial System
borrowers together.

Importance of Financial Markets

The Financial System Makes Saving Equal Investment
• The financial system makes it easier for lenders (those who have
the saving funds) and borrowers (those who need funds for
investment) to find each other
• Both groups benefit when the financial system does its job well
• When the financial system fails, both groups suffer
Functions of Financial Markets
• This is important. For example, if you save $1,000, but there are
no financial markets, then you can earn no return on this - might
as well put the money under your mattress.
• However, if a carpenter could use that money to buy a new saw
(increasing her productivity), then she is willing to pay you some
interest for the use of the funds.
• Financial markets are critical for producing an efficient
allocation of capital, allowing funds to move from people who
lack productive investment opportunities to people who have them.
• Financial markets also improve the well-being of consumers,
allowing them to time their purchases better.

Structure of Financial Markets

It helps to define financial markets along a variety of dimensions
(not necessarily mutually exclusive). For starters…

Flow of Funds
•Funds flow indirectly from ultimate lenders (households) through
financial intermediaries (banks or insurance companies) or
directly through financial markets (stock exchange, bond markets)
to ultimate borrowers (business firms, government or other
Financial Markets Funds Transferees households.
• Lender-Savers
1.Households Major Categories of Financial Institutions and Their Roles in
2.Business firms The Financial Systems
3.Government • Commercial Banks
4.Foreigners - accepts deposits and provide security and convenience to their
• Borrower-Spenders clients.
1.Business firms - they also make loans that individuals and businesses use to buy
2.Government goods and expand business operations.
3.Households - they also served often under-appreciated roles as payments
4.Foreigners within the country and between nations, eg. Debit cards, credit
cards and cheques.
Segments of Financial Markets
1. Direct Finance
• Borrowers borrow directly from lenders in financial markets by
selling financial instruments which are claims on the borrower’ s
future income or assets
2. Indirect Finance
• Borrowers borrow indirectly from lenders via financial
intermediaries (established to source both loanable funds and loan
opportunities) by issuing financial instruments which are claims
on the borrower’ s future income or assets

• Investment Banks
- is a financial intermediary that performs a variety of services for
businesses and government.
- these services include underwriting debt and equity offerings,
facilitating mergers and other corporate reorganizations, and
acting as a broker for institutional clients.
• Insurance Companies
– they pool risk by collecting premiums from a large group of
people who want to protect themselves and/or their loved ones
against a particular loss such as a fire, car accident, illness, lawsuit,
disability or death.
- they help individuals and companies manage risk and preserve
wealth.
• Brokerages
- acts as an intermediary between buyers and sellers to facilitate
securities transactions.
- they are compensated via commission after the transaction has
been successfully completed.
• Investment Companies
- is a corporation or a trust through which individuals invest in
diversified, professionally managed portfolios of securities by
pooling their funds with those of other investors, eg. Mutual funds.
- they help individuals and companies manage risk and preserve
wealth.
• Non Bank Financial Institutions
A. Savings and Loans
– typically offers lower borrowing rates than commercial banks
and higher interest rates on deposits.
B. Credit Unions
– typically higher rates on deposits and charge lower rates on
loans in comparison to commercial banks. - memberships are not
open to public, but rather restricted to a particular membership
group.
Financial Markets and Financial Instruments
• Financial Markets
- is a market in which people trade financial securities,
commodities and other fungible items of value at low transaction
costs and at prices that reflect supply and demand.
- some are relatively small with only few participants, while
others like the Philippine Stock Exchange (PSE) and the Makati
Stock Exchange (MSE) markets trade trillions of Pesos daily.
Primary Markets Vs Secondary Markets
• Primary Markets
– also known as “new issue markets”, are facilitated by
underwriting groups, which consists of investment banks that will
sell a beginning price range from a given security and then
oversee its sale directly to the investors.
• Secondary Markets
– is where investors purchase securities or assets from other
investors, rather than from issuing companies themselves.
• The Over-The-Counter (Otc) Markets
– refer as a dealer market. These are stocks that are not trading on
a stock exchange like PSE but instead from very small companies.
• Capital Markets
– is one in which individuals and institutions trade financial
securities. They are intended for long- term finance.
• Stock Markets
– allow investors to buy and sell shares in publicly traded
companies.
• Bond Markets
– is a debt investment in which an investor loans money to an
entity (corporate or governmental), which borrows the funds for a
defined period of time at a fixed interest rate.
• Money Markets
- are also called as cash investments because of their short
maturities.
• Foreign Exchange (Forex) And The Interbank Market
– facilitate the trading of foreign exchange.
Financial Instruments
• These are assets that can be traded.
Types of Financial Instruments
1. Cash Instruments
- are directly influenced and determined by markets.
- these are securities that are easily transferable.
2.Derivative Instruments
- is a financial contract with a value that is derived from an
underlying asset.
Asset Classes
1. Equity- based Financial Instruments
- represent ownership of an asset
- Returns from equity instruments come from either dividends or
stock price appreciation
- include common stocks and preferred stocks.

2. Debt-Based Financial Instruments

A. Short Term Debt Based
– last for one year or less.
• Treasury Bills or T-Bills
– a short dated government security, yielding no interest but
issued at a discount on its redemption price.
• Commercial Papers
– promissory notes issued by financial institutions or large firms
with very short to short maturity period; usually 2 to 30 days, and
not more than 270 days, and secured only by the reputation of the
issuer.
• Cash Equivalents
- investments securities that are for short term investing and they
have a high credit quality for loans.

B. Long Term Debt Based

– last for more than a year
• Corporate Bonds
- borrowers issued bonds to raise money from investors willing to
lend them money for a certain amount of time.