FINANCIAL MANAGEMENT:

CHAPTER 1.

FINANCIAL MANAGEMENT – the process of planning decisions in order to maximize wealth, which is the
primary goal of a business enterprise. (purpose of financial management)
- Role is given to financial manager whose function: cash management, acquiring of
funds, raising and allocating of financial capital, manages the trade-offs between risks
and returns. (nature and scope of financial management).
- Adequate knowledge in accounting and financial data

Scope of Financial Management:

1.Procurement of Short term and long term funds from financial institutions.
2. Mobilization of funds through financial instruments such as equity shares, preference shares,
debentures shares, bonds, notes and so fourth.
3. Compliance with legal and regulatory provisions relating to funds procurement, use and distribution as
well as coordination of the finance function with accounting function.

FUNCTIONS:
1. Record keeping
2. Performance evaluation
3. Variance analysis
4. Budgeting
5. Utilization of resources

GOALS:
1. Shareholders wealth maximization
2. Profit maximization
3. Managerial reward maximization
4. Behavioral goals
5. Social responsibility

Shareholders wealth maximization is the primary goal of the business because it increases the value of
the company’s share capital.

It mentions two views of maximization as goal of business:

Profit maximization:
- Short term goal normally one year or within a given period of time
- Large profits
- Easy to calculate
- Ignores risks and uncertainties
- Requires immediate resources or may mean postponement of long term goal to achieve
wealth maximization
Wealth maximization:
- Emphasizes wealth for the long term
(highest market value of share capital)
- Recognizes risk or uncertainty (shareholders expect greater returns from investments
with higher risk and they will demand a sufficiently large return to compensate for the
greater level of risk. This is called the risk-return trade off.
Risk refers to the variability of expected returns in terms of sales, earnings or cashflows
Typical forms of risk: economic risk(includes time value of money) , political
uncertainties, industry problems.
- Recognizes the timing returns (the earlier the return is received the better since a quick
return reduces the certainty about receiving the return and the money received can be
invested sooner
- Considers shareholders returns (it requires big or high returns of investment)

FINANCIAL MANAGEMENT has two fields of functions which help achieve its goals:
1. MANAGERIAL/MANAGEMENT ACCOUNTING which provides financial data to be used in making
decisions about the future of the business enterprise. It is future oriented and emphasizes
making right decisions today to ensure future performance. It is usually headed by a comptroller
or accounting manager which has the control features of the finance functions.

Role of a controller (internal nature):

1. Record keeping
2. Controlling and tracking the financial effects of prior and current operations
3. Taxes compliance
4. Controlling (internal control for check and balance)
5. Audit
6. Budgeting and forecasts
7. Asset and inventory management

2. FINANCIAL ACCOUNTING records the financial history of the business and involves the
preparation of reports for use of external parties like investors and creditors. It uses
information from management accounting to improve decisions affecting the business
enterprise wealth. It is usually headed by a financial manager or treasurer.

Role of financial manager (external nature):

1. Financial analysis and planning
2. Making investment decisions
3. Making financing and capital structure decisions
4. Managing financial resources
5. Managing risks
6. Credit and collections
>The financial and operating environment wherein the business enterprise operates (in acquiring and
allocating/investing of funds) is the FINANCIAL MARKET.
FINANCIAL MARKET is where financial assets and financial liabilities are created. It is where the financial
manager obtains funds and at the same time invest fund surplus. This is regulated by BSP and SEC.
Its composition:
1. Money markets are the markets for short term debt securities (maturities with less than one
year like treasury bills, commercial paper and negotiable certificate of deposit issued by the
government, in business and financial institutions.
2. Capital markets are the markets for long-term debt (with maturities of more than one year) and
corporate capital. The SEC which handles the share capital of large corporations is a prime
example of capital market.
a. Primary market- as the source of new securities for the secondary market (IPO or initial
public offering) where new issues of securities are traded
b. Secondary market- where previously issued securities are traded

The boundaries between the money markets and capital markets are blurred because most financial
institutions deal with both kinds of financial instruments.

Review the basic forms of business organization: single proprietorship, partnership and corporation –
its characteristics, advantages and disadvantages