SENIOR HIGH SCHOOL

BUSINESS FINANCE
Quarter 3 – Module 1:
Introduction to Financial
Management

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Business Finance – Grade 12
Alternative Delivery Mode
Quarter 3 – Module 1: Introduction to Financial Management
First Edition, 2021

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 SENIOR HIGH SCHOOL

BUSINESS FINANCE
Quarter 3 – Module 1:
Introduction to Financial
Management
Introductory Message
For the facilitator:

Welcome to the Business Finance Alternative Delivery Mode (ADM) Module on Introduction
to Finance Management!

This module was collaboratively designed, developed and reviewed by educators both from
public institutions to assist you, the teacher or facilitator in helping the learners meet the
standards set by the K to 12 Curriculum while overcoming their personal, social, and
economic constraints in schooling.

This learning resource hopes to engage the learners into guided and independent learning
activities at their own pace and time. Furthermore, this also aims to help learners acquire the
needed 21st century skills while taking into consideration their needs and circumstances.

In addition to the material in the main text, you will also see this box in the body of the
module:

Notes to the Teacher

This contains helpful tips or strategies that will
help you in guiding the learners.

As a facilitator, you are expected to orient the learners on how to use this module. You also
need to keep track of the learners' progress while allowing them to manage their own
learning. Furthermore, you are expected to encourage and assist the learners as they do the
tasks included in the module.
For the learner:

Welcome to the Business Finance Alternative Delivery Mode (ADM) Module on Introduction
to Financial Management!

This module was designed to provide you with fun and meaningful opportunities for guided
and independent learning at your own pace and time. You will be enabled to process the
contents of the learning resource while being an active learner.

This module has the following parts and corresponding icons:

This will give you an idea of the skills or

What I Need to Know competencies you are expected to learn in the
module.
This part includes an activity that aims to check
what you already know about the lesson to take.
What I Know
If you get all the answers correct (100%), you
may decide to skip this module.
This is a brief drill or review to help you link the
What’s In current lesson with the previous one.

What’s New In this portion, the new lesson will be introduced

to you in various ways; a story, a song, a poem, a
problem opener, an activity or a situation.
This section provides a brief discussion of the
What Is It lesson. This aims to help you discover and
understand new concepts and skills.
This comprises activities for independent practice
to solidify your understanding and skills of the
What’s More
topic. You may check the answers to the
exercises using the Answer Key at the end of the
module.
This includes questions or blank
What I Have Learned sentence/paragraph to be filled in to process
what you learned from the lesson.
This section provides an activity which will help
What Can I Do you transfer your new knowledge or skill into real
life situations or concerns.
This is a task which aims to evaluate your level of
Assessment mastery in achieving the learning competency.

Additional Activities
 In this portion, another activity will be given to
you to enrich your knowledge or skill of the
lesson learned.
This contains answers to all activities in the
Answer Key
module.

At the end of this module you will also find:

References This is a list of all sources used in developing this
module.

The following are some reminders in using this module:

1. Use the module with care. Do not put unnecessary mark/s on any part of the module.
Use a separate sheet of paper in performing the exercises.
2. Don’t forget to answer What I Know before moving on to the other activities included
in the module.
3. Read the instruction carefully before doing each task.
4. Observe honesty and integrity in doing the tasks and checking your answers.
5. Finish the task at hand before proceeding to the next.
6. Return this module to your teacher/facilitator once you are through with it.
If you encounter any difficulty in answering the tasks in this module, do not hesitate to
consult your teacher or facilitator. Always bear in mind that you are not alone.
We hope that through this material, you will experience meaningful learning and gain
deep understanding of the relevant competencies. You can do it!
 What I Need to Know

This module was designed and written with you in mind. It is here to help you the basics of
finance. The scope of this module permits it to be used in many different learning situations.
The language used recognizes the diverse vocabulary level of students. The lessons are
arranged to follow the standard sequence of the course. But the order in which you read
them can be changed to correspond with the textbook you are now using.

The module has only two lessons, namely:

 Lesson 1 – Explaining the major role of financial management and the different
individuals involved.
 Lesson 2 – Distinguishing a financial institution from financial instrument and financial
market.

After going through this module, you are expected to:

1. explain the major role of financial management and the different individuals
involved. (ABM_BF12-IIIa-1)
2. distinguish a financial institution from financial instrument and financial
market. (ABM_BF12-IIIa-2)
 What I Need to Know

The following multiple-choice items are for you to answer. Choose the letter of the correct
answer and write your answers in your answer sheet.

1. The main aim of financial management is to increase _________.

a. sales revenue c. shareholders’ wealth
b. market share d. profit

2. Who is the one responsible in making investment, financial and dividend

policy-making decisions of the firm?
a. Creditors c. Employees
b. Finance manager d. Supplier

3. One right goal for managers is to _________.

a. maximize their own remuneration and perks c. maximize shareholders’ wealth
b. improve working condition of employees d. increase the market share

4. Which is concerned with allocating, raising and controlling of the funds of the
firm?
a. Finance c. Financial Management
b. Budgeting d. Accounting

5. Which is one of the ultimate goals of the finance manager?

a. Maximize market price of shares of stocks c. Maximize profit
b. Maximize liabilities d. Maximize asset

6. Which of the following is part of financial decision making?

a. financing decision c. investment decisions
b. dividend decisions d. all of the above

7. Which is concerned with allocating, raising, and controlling of the funds of the firm?
a. finance c. financial management
b. budgeting d. accounting

8. Which is an efficient allocation of funds to specific assets?

a. financing c. dividends
b. assets d. investing

9. The finance manager is responsible in maximizing the value of the utility owned by
a. creditors c. board of directors
b. investors d. banks
 10. Who is the one responsible in making investment, financial, and dividend policy-
making decisions of a firm?
a. creditor c. employees
b. finance manager d. supplier

Lesson Explaining the Major Role of

1
Financial Management and the
Different Individuals Involved.

This module will help you will learn what is finance and explain the major role of financial
management and the different individuals involved. It aims to build basic concepts defining
finance, the activities of the financial manager and other individuals involved. So, ready your
working space to make this lesson more meaningful.

What’s In

Recently, the world has been affected with the pandemic, COVID-19. During this time most
of the households are quarantined and are not allowed to get out. How were your family able
to manage the needs of the family? Below is an inventory form of the need and wants of
your family during this time. List down all your needs and wants and the amount in a monthly
basis

Needs Amount in Pesos

1
2
3
TOTAL
Wants Amount in Peso
1
2
3
TOTAL
Net Amount

Guide Questions:
1. What are the needs of your family during the pandemic? How about the wants?
2. What are the sources of income of your parents?
 3. Did your parents manage the resources they have? How can you say so?

What’s New

Most of the families during the pandemic received assistance from the government as a help
to affected areas. Assuming your family received an amount of PhP 8,000. Based on the first
activity we had, using the same needs and wants and listed amounts. Answer the following
questions:

1. How much is the total peso amount for needs? How about for wants?
2. How much is the excess?
3. If you are to cross-out an item to cover the given amount, what will you cross-out?
4. If you are to purchase all the items on the list including the ones you crossed-out, how
much cash would you need to support all the expenses?
5. What other sources of cash you know?

? What Is It

To fully understand the concepts in finance, read and understand carefully the concepts that
will be presented to you.

FINANCE IN DAILY LIFE

Based on the activity that we have previously, you were

able to separate the needs and wants of your family. You
as well decided on what to prioritize based on the given
amount. You were also able to determine whether you
need to have more funds or cross-out some items to cover
the amount given. Mostly, your activities at home involves decisions on how to use your
funds, thus it is called a finance decision.

In business, finance decision deals with racing or acquiring of funds from outside sources
and not from the ordinary results of business operation. In other words, financing decisions
are made when the business needs to borrow money.
Finance, on the other hand is defined as the science and art of managing money. (Gitman &
Zutter, 2012). It is also defined as the management of money and includes activities such as
investing, borrowing, lending, budgeting, saving, and forecasting.
(https://corporatefinanceinstitute.com)

Income Allocation of a Household in a Month

13% 3% 13%
10%

63%

Electricity Water Foods Internet Savings

Table 1. Income Allocation of a Household in a Month

Given an allowance cap of PhP 8,000 in our previous activity, you were able to list down
expenses (needs and wants) and accumulated a certain amount. If you exceed with the
given amount you tend to drop some items from the list until such time that your will meet the
needed required amount to buy all your family’s needs and wants. What you did is called
budgeting.
Budgeting is the act of estimating revenue (in from the allowance cap) and expenses over a
period of time (in our case, in a monthly basis).
In our case you have savings or excess of cash as shown in Table 1, you can use them to
purchase other items that will arise on the next day or you can have it saved. Take note that
these excess money presents opportunity for investments. Investments come in many forms
that will generate more income or appreciate in the future. Instead of hiding your cash under
your bed or in the piggy banks have it deposited in the bank to earn interest.
In some instances, family’s needs exceed to the allowance cap for the month. Therefore,
your parents would tend to seek for other ways to suffice the needed amount. Your parents
would either borrow from neighbors, private individuals, from a lending institution or pawn a
jewelry, thus this is called sources of funds. When faced with financial difficulties, we look
for people or institutions that will give us the money we need.
Take note that finance is mostly concerned with decisions about:

 How much of their earnings the spend

 How much they save of how much they need
 How much they invest their savings
 How they raise additional funds they need (Gitman)
Furthermore, some families have their own businesses as a source of additional income for
the family. These businesses could be in different forms:

 Sole Proprietorship – a business owned by one person and operated for his or her
own profit.
 Partnership – a business owned by two or more people and operated for profit.
 Corporation – an entity created by law owned by shareholders.

In this lesson, we will mainly focus on

corporation. Corporations may either be
privately owned or publicly owned. Privately
owned corporations are often owned by
family members whose stocks may not be
offered to outsiders unless consent by the
family members secured. Companies which
are publicly listed are owned by unrelated
investors and are traded in organized
exchanges like the Philippine Stock
Exchange. While there are many
stockholders, there is generally a group of investors or a family which controls each listed
company. For example, in the case of BPI, the biggest stockholder is Ayala Corporation and
in the case of Banco de Oro, it is SM Investment Corporation. Prices of stocks of listed
corporations are driven by several factors such as the earnings of the companies, the
prospects of the industry where these companies operate, general market sentiment, and
the economic prospects of the country, among others.
Buying stocks from a corporation will make you a shareholder of the company. According to
Investopedia, a shareholder, also referred to as a stockholder, is a person, company, or
institution that owns at least one share of a company’s stock, which is known as equity.
Because shareholders are essentially owners in a company, they reap the benefits of a
business’ success. These rewards come in the form of increased stock valuations, or as
financial profits distributed as dividends. Conversely, when a company loses money, the
share price invariably drops, which can cause shareholders to lose money, or suffer declines
in their portfolios’ values.
Being an owner of the company, one of the objectives that one wants to achieve is of course
to be profitable and have a lot of cash. Can success be attributed to profitability alone?
Profits can be a metric of measuring business’ success but there are other factors to
consider. Remember in the first year of operation, business is not earning profit but it can
still be considered successful. What is essential is that it can survive even the business is
not earning profit.
Having a lot of cash has also an advantage for a business, it also signals unhealthy
company practices. It may entail that the management has not been putting the company’s
resources into good use. Also, keeping too much cash in the books is like hiding your extra
money under your bed. They will be missing out on investment opportunities.
So, as a shareholder your overall objective is wealth maximization.
Let us go over with the sample situations below to fully understand wealth maximization.

Sample Problem 1:
Fina, a Grade 12 ABM student bought 10 shares of Globe Telecom at PHP2,510 each on
September 9, 2019. This bring her investments to PHP25,100. What happens to the value
of her investment if the price goes up to PHP2,600 per share or it goes down to PHP2,300
per share?

An increase of the share price to PHP2600 per share means that people are willing to buy
the shares for that amount. If Fina were to sell her share at this point, it will result to a profit
of PHP90 per share or PHP900 on their whole investment. Hence, the value of 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 the shares for PHP2,300. If Fina were to sell her investment at this
point, she will receive PHP23,000 which would result to a loss of investment leads to a loss
of PHP2,100. The decrease in value of her investment leads to decrease in shareholder’s
wealth.

FACTORS THAT INFLUENCE MARKET PRICE

There are two factors that affects market price and it can be grouped into factors that the
management can control and external factors that cannot be controlled by the management.

Controllable by Management Uncontrollable External Factors

 Profitability  Macroeconomic conditions
 Having a good liquidity and
 Political stability
reasonable leverage position
 Prospects od the industry where the
 Dividends
company operates
 Competent management which
affects the company’s operating  General market sentiment
efficiency
 Coming up with corporate plans that
 Flow of foreign funds invested in the
improve the business prospects of
Philippine stock market
the company.

Profitability
Profit is a measure of the financial performance of a company for a period of time. Although
it is a major driver for increasing the value of stock, an investor should not rely on profits
alone. As discussed earlier, it is possible that the company has profits but its cash flow is
negative. Let us try the sample problem below.
Sample Problem 2
Suppose the following Income Statements and Cash Flow Statements of companies A, B
and C were presented to you. Which do you think is a more attractive company?
Company A

Income Statement Cash Flows

Sales P 100,000 Collection from Customers P 0
Less: Costs 50,000 Payment of Expenses 50,000
Profits P 50,000 Net Cash Flow (P 50,000)

Company B

Income Statement Cash Flows

Sales P 100,000 Collection from Customers P 100,000
Less: Costs 150,000 Payment of Expenses 50,000
Profits (P 50,000) Net Cash Flow P 50,000

Company C

Income Statement Cash Flows

Sales P 100,000 Collection from Customers P 100,000
Less: Costs 70,000 Payment of Expenses 70,000
Profits P 30,000 Net Cash Flow P 30,000

Company A is profitable but generated negative cash flows which resulted from the
uncollected accounts receivable of PHP100,000. Without adequate cash inflows to meet its
obligations, the company will face liquidity problems, regardless of its level of profits.
Company B on the other hand has a positive cash flow but is unprofitable. This is a result of
the company’s delay in payment of its costs. Accordingly, the Company will soon have to
pay the remaining PHP100,000 liability and its cash will no longer be sufficient. Again,
without adequate cash inflows to meet its obligations, the company will face liquidity
problems.
Company C is profitable and has a positive cash flow. Based on the information provided,
Company C seems to be the best.

Good liquidity and reasonable leverage position.

Liquidity and leverage refer to the company’s management of the type and amount of assets
and liabilities that it will hold in the course of its operations.
Dividends.
Holders of shares receive dividends from a corporation as returns on their investments in
form of cash or other properties. Companies which have better dividend policies are
generally more attractive than companies who do not pay out dividends. Note that there may
be times that companies do not pay out dividends because of future expansions. Same with
the other factors affecting share price, dividend policies should go hand in hand with other
factors in determining market price.
Competent management.
Competent managers may have any of the following attributes:
1) visionary
2) decisive
3) people-oriented,
4) inspiring,
5) innovative,
6) respected and
7) experienced/seasoned manager

A competent management looks attractive for it builds trust and confidence that the money
invested is in the good hands of the persons involved in the company.

Corporate Plans that Improve the Business Prospects.

Sample Problem 3:

Company A which is in the business of selling Halo-halo in the Brgy. Robles area for 5
years. Company A is consistently earning profits and has a positive cash flow. When asked
how Company A sees itself after 5 more years, Company A answered that it would continue
to sell Halo-halo in Brgy. Robles.

On the other hand, Company B sells Buko Juice in Brgy. Cabacungan area for 5 years.
Company B is consistently earning profits and has a positive cash flow. When asked how
Company B sees itself after 5 more years, Company B answered that it has generated
enough cash to expand its business to La Granja area to take advantage of the growing
demand of Buko Juice in La Granja.

Which of the two company’s would you invest?

Between Company A and Company B, which would be a better investment? Company B.

Since it has more concrete future prospects allowing investors to hope for better revenues
and net income.

External Factors

These factors influence the general reaction of investors in making an investment decision.
Its effect is not only to a specific company but on all companies or a group of companies
under similar circumstances. Such factors are a result of the environment a company
operates in rather than the decisions of the company’s management.

Given the factors that influence market price the next challenge that shareholders will face is
on how they are going to achieve their objectives, thus it can be made true through financial
management.
Financial Management

Financial management deals with the decisions that are supposed to maximize the value of
shareholders’ wealth. (Cayanan) These decisions will ultimately affect markets perception
of the company and influence the share price. The goal of financial management is to
maximize the value of shares of stocks. It also is focused on capital budgeting decision or
investment decision on acquisition of assets and its corresponding financing scheme.
The Role of Financial Management

 To ensure regular and adequate supply funds.

 To ensure returns to shareholders through capital gains which is which are
dependent upon the earning capacity and the market price of the share.
 To ensure optimum funds utilization at least cost.
 To ensure investment of funds in safe venture so that adequate rate of return can be
achieved.
 To design a sound capital structure by maintaining a fair composition of capital
through a balance between debt and equity capital. (De Guzman, A.A., 2019)

Individuals Involved in Financial Management

1. The senior leaders of an organization are responsible for all aspects of its financial
health. They are the ones understands the unit’s financial situation and do not allow
unintended deficits to occur. They are accountable for the resources entrusted to
them that includes the funds, facilities and recruitment of employees, even if the
control and tasks have been delegated to their staff, under command of
responsibilities. Example: Shareholders, and Board of Directors.

2. Unit heads are responsible for their internal financial management and to develop
budgeting, financial reporting and management practices. Units are encouraged to
develop an oversight process that builds on best practices. (De Guzman, 2019)
Managers of the corporation are responsible for making the decisions for the
company that would lead towards shareholders’ wealth maximization.
Example: Chief Executive Officer, VP for Production, Marketing, Finance,
Administration and the likes.

On the next lessons you will fill in the shoes of a Chief Financial Officer (CFO) and every
problem that you will encounter for this course should be dealt with having shareholders
wealth maximization in mind.

What’s More

Read and understand the following situation and answer it in your answer sheet.

Company D has been operating in La Castellana for 7 years now by selling coffee. It is
consistently earning profit and has a positive cash flow. It plans to expand its operation to a
nearby town since it has enough cash and trying to venture out to new menus using coffee
to add variety to its offerings.
Company E is in the business for 10 years now. It is a leading company in selling face
masks. Due to the current situation, they should increase the production to meet current
demand for the said product. The company earns profit and has a positive cash flow but
having problems with the tax regulation authority due to poor management.

Company F is a company that is planning to invest for a new business venture considering
Company D and Company E as a future investment.

Questions:
1. If you are the owner of Company F:
a. What factors will you consider in investing with:
1. Company D?
2. Company E?
b. Which company would you choose to invest? Why?

What I Have Learned

Finance is defined as the science and art of managing money. (Gitman & Zutter, 2012). It is
also defined as the management of money and includes activities such as investing,
borrowing, lending, budgeting, saving, and forecasting.
(https://corporatefinanceinstitute.com)
Financial management deals with the decisions that are supposed to maximize the value of
shareholders’ wealth. (Cayanan). The goal of financial management is to maximize the
value of shares of stocks.
The Role of Financial Management

 To ensure regular and adequate supply funds.

 To ensure returns to shareholders through capital gains which is which are
dependent upon the earning capacity and the market price of the share.
 To ensure optimum funds utilization at least cost.
 To ensure investment of funds in safe venture so that adequate rate of return can be
achieved.
 To design a sound capital structure by maintaining a fair composition of capital
through a balance between debt and equity capital. (De Guzman, A.A., 2019)

Individuals Involved in Financial Management

1. The senior leaders of an organization are responsible for all aspects of its financial
health (De Guzman, A.A., 2019). Example: Shareholders, and Board of Directors.

2. Unit heads are responsible for their internal financial management and to develop
budgeting, financial reporting and management practices (De Guzman, A.A., 2019).
Example: Chief Executive Officer, VP for Production, Marketing, Finance,
Administration and the likes.
 What Can I Do

The following are attributes of a certain company, identify whether the .

1.
2.