INTRODUCTION TO

FINANCIAL
MANAGEMENT
CHAPTER 01 – BUSINESS FINANCE
 ANSWER THE FOLLOWING
QUESTIONS:

What are the What do

How much Where do
things you you do
is your you get
spend your with the
daily money on a additional
money
allowance? daily basis? money?
left?
KEYWORDS
Finance the art and science of managing money
Financial institution is a company engaged in the business of dealing with
financial and monetary transactions such as deposits, loans, investments, and
currency exchange.
Financial markets refer broadly to any marketplace where the
trading of securities occurs, including the stock market, bond
market, forex market, and derivatives market, among others.
Financial instrument is any contract that gives rise to a financial asset of one
entity and a financial liability or equity instrument of another entity
Financial managers actively manage the financial affairs of any type of
businesses—financial and non financial, private and public, large and small,
profit-seeking and not-for-profit.
FINANCIAL MANAGEMENT
Finance - can be defined as the science and art of managing
money. In business, finance is the correct application of the
economic and accounting concepts and principles that define
the system, and process of management, allocation and
utilization of financial resources, investments and expenditures.
FINANCIAL MANAGEMENT
Financial Management – starts with a plan. It is not enough to have
cash and other resources today. Such resources, if not managed
properly, can be wiped out.
- is an operational activity, which is accountable for the effective
utilization of funds necessary for operations. One of the primary
objectives of financial management is to maintain enough money to
meet the necessary current and capital expenditure, apart from
maximizing profits
Nature of Financial Management
▪Financial management is mainly concerned with the proper
management of funds.
▪The financial manager must see that the funds are procured
in a manner that there is risk, cost and control
considerations are properly balanced in a given situation
and there is optimum utilization of funds
Financial Management Process
Assess Current Financial Position
Define and Prioritizing Goals
Financial and Investment Plan
Implementation of the Plan
Monitor, Evaluate and Adjust Performance
 FINANCIAL SYSTEM
Financial
Savers Users of Funds
Intermediaries (Borrowers /
• Households • Banks Investors)
• Individuals • Insurance companies • Households
• Stock exchange • Individuals
• Corporations • Stock brokerage • Corporations /
/ Companies firms Companies
• Government • Mutual funds • Government
Agencies • Other financial Agencies
institutions
Banks
Banks provide mechanism where savers can put their excess
funds through deposits. Banks give the depositors interest on the money
deposited to them. To cover for the interest given to depositors, banks
lend the money to borrowers after performing a credit investigation.

Insurance Companies
Life insurance products protect the insured from loss of life while
non life insurance products protect the insured from the loss of or
damage to properties. In exchange for the protection, the insured pays
premium to the insurance companies.
Stock Exchange
The Philippines Stock Exchange (PSE) provides system for the
trading of equity securities of publicly listed companies. These equity
securities are common stocks and preferred stocks.

Stock Brokerage Firms

Investing in the stock market has to be coursed through stock
brokerage firms.
1. Online brokers – can trade in the stock market through the internet.
2. Live brokers – one needs a telephone to calls brokers and place
orders.
Mutual Funds
Mutual funds provide opportunities for a big and small investors
to invest in financial instruments which they would not have considered
on their own, or they may have considered but do not the time of the
expertise to do it.

Other Financial Institutions

Other financial institutions include pension funds like
Government Service Insurance (GSIS) and Social Security System
(SSS), investment banks and credit unions, among others.
FINANCIAL INSTRUMENTS
Financial instruments are financial contracts of different nature made between
institutional units. These comprise the full range of financial claims and liabilities
between institutional units, including contingent liabilities like guarantees,
commitments, etc.
Financial instruments are contracts that gives rise to financial asset to one
equity, and a financial liability or and equity instrument to another entity.
Financial instruments include primary financial instruments like receivables,
payables loans and advances, debentures and bonds, investment in equity
instruments, cash and bank balances, derivative instruments like options,
futures ,swaps, cap, collar, floor, forward rate agreement(FRA) etc.
 TYPES OF FINANCIAL INSTRUMENTS
❑Deposits
❑SDRs
❑Borrowings
❑Loans
❑Shares and other equity
❑Debentures or bonds
❑Other account receivables
and payables
❑Financial derivatives
DEPOSITS
Deposits include all claims on the central bank and other depository
corporations, represented as bank deposits. In some cases, other
financial corporations may also accept deposits. Deposits of
depository corporations can fall into two categories: transferable
deposits and other deposits (non-transferable deposits). Normally,
separate sub-categories are used for deposits denominated in
national currency and for those in foreign currency
LOANS
Loans are financial assets that are
• created when a creditor lends funds directly to a debtor
(borrower),
• evidenced by non-negotiable documents.
LOANS
Short-term loans – short-term loans normally involve loans with maturity of one
year or less. However, for reconciliation of different practices between the
countries, short-term loans can be defined including loans with maturity of up to
two years. All loans that will mature upon request are classified as short-term,
even if it is expected that these loans will not be repaid within one year.
Medium-term loans - depending on practices applied in countries, loans with
maturity from 1 to 5 years are classified as medium-term loans.
Long-term loans – long-term loans include the loans with maturity that exceeds
those of short- and medium-term loans. According to statistical classification,
repo agreements, financial leasing, factoring operations and other similar
agreements are classified under the category of loans
SHARES AND OTHER EQUITY
Shares are financial instruments that represent or provide evidence on
ownership rights of the holders over enterprises or organizations, including
financial institutions. Shares and other equity comprise all instruments and
records acknowledging, after the claims of all creditors have been met, claims
on the residual value of a corporation (companies, corporations)
Normally, these instruments entitle the holders both of distributed profits of
enterprises or organizations, and the residual value of the assets in the event of
liquidation. Ownership of equity is usually evidenced by shares, stocks,
participation's and similar documents.
SHARES AND OTHER EQUITY
Types of equity are
• ordinary shares that provide for ownership right in an enterprise or corporation;
• preferred shares that provide right for claim over residual value of an enterprise,
• equity participation in limited liability companies.
 FINANCIAL MANAGERS
What is the role of a financial manager?
The role of a financial manager is to oversee the financial health of an organization.
They generate financial reports, direct investment activities and create an
organization's long-term financial goals. They are often responsible for analyzing
fiscal data and advising senior managers on any opportunities to maximize profits. 
Some of their specific ?”responsibilities include:
1. Maintaining cash flow by reviewing banking activity and reconciling monthly
reports
2. Developing and interpreting databases and financial models
3. Managing the company budget to maximize revenue and identify potential areas
for savings
4. Promoting process improvements in specified budget areas
5. Implementing report production, productivity and quality standards
FINANCIAL MANAGERS
Skills
There are several skills necessary to succeed in the role of a financial manager, including:
•Communication skills: Both verbal and written communication skills are essential for financial managers.
You should have the ability to clearly explain complex financial transactions and concepts. You also need to
create written reports and communicate with employees and the senior management via email.
•Analytical skills: Analytical skills refer to the ability to gather and analyze information, problem-solve and
make a decision. Financial managers use these skills when gathering and analyzing data to help executives
make choices or plans that can affect an entire organization.
•Numeracy skills: Basic math skills and the ability to express problems and ideas using numerical
information are important to financial management roles. You must be skilled in math and have an in-depth
understanding of international finance and complex fiscal documents.
•Organizational skills: Financial managers often need to work on multiple projects, data sets and
assignments simultaneously. You should know how to organize your tasks and efficiently use your time,
energy and mental capacity.
•Attention to detail: To reduce the likelihood of errors, you must be precise and attentive as you prepare
reports, income statements and other fiscal documents.
ORGANIZATIONAL CHART AND
THE ROLES OF THE VP FOR
FINANCE
Board of Directors

President

VP for Sales & VP for VP for VP for

Marketing Finance Production Administration
Board of Directors
The board of directors is the highest policy-making body in corporation. The
board primary responsibility is to ensure that the corporation is operating to
serve the best interest of stockholders.

The following are among the responsibilities of the board of directors:

1. Setting policies on investments, capital structures and dividends
2. Approving company’s strategies, goals and budget
3. Appointing and removing members of the top management including the
president
4. Determining top management’s compensation
5. Approving the information and other disclosures reported in the financial
statements
President
Among the responsibilities of a president are the following:
1. Overseeing the operations of a company and ensuring that the
strategies as approved by the board are implemented as planned.
2. Performing all areas of management: planning, organizing,
staffing, directing, and controlling.
3. Representing the company in professional, social, and civic
activities.
 VP for Sales and Marketing
The following are among the responsibilities of VP for Sales and
Marketing:
1. Formulating marketing strategies and plans
2. Directing and coordinating company sales
3. Performing market and competitor analysis
4. Analyzing and evaluating the effectiveness and cost of marketing
methods applied.
5. Promoting good relationships with customers and distributors.
VP for Production
The following are among the responsibilities of VP for Production:
1. Ensuring production meets customer demands.
2. Identifying production technology/process that minimizes
production cost and makes the company cost competitive.
3. Coming up with a production plan that maximizes the utilization
of the company’s production facilities.
4. Identifying adequate and competitively priced raw materials for
suppliers.
 VP for Administration
The following are among the responsibilities of VP for Administration:
1. Coordinating the functions of administrations, finance, and sales and
marketing departments.
2. Assisting other departments in hiring employees.
3. Providing assistance in payroll preparation.
4. Determining the location and the maximum amount of office space
needed by the company.
5. Identifying means, processes, or systems that will minimize the
operating costs of the company.
VP for Finance

• Financing
• Investing
• Operating
• Dividend Policies
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.
• Responsible for determining the appropriate capital structure of the
company, that is, how much of the total assets should be financed by debt
and equity.

Investing Decisions
• To minimize the probability of failure, long term investments have to be
supported by a capital budgeting analysis which is among the
responsibilities of a finance manager.
• Capital budgeting analysis is a technique used to determine the financial
viability of a long-term investment. This requires forecasting the cost of
investment and the streams of cash flows exoected to be generated from the
investment.
Operating Decisions
• Deals with the daily operations of the company.
• The role of VP for Finance is determining how to finance working capital
accounts such as accounts receivable and inventories.
• If the company is more aggressive, then these accounts receivable and
inventories can be substantially finance by short term sources.

Dividend Policies
• Two conditions must exist before a company can declare cash dividends:
1. Must have enough retained earnings to support cash dividend
declaration.
2. The company must have cash.
There are several factors considered in declaring cash
dividends. Listed below are among these considerations:
1. Availability of investment opportunities.
2. Access to long-term sources of funds.
3. Capital structure.