FMGT SO: POINTERS WHAT IS FINANCE? * Finance is the art and science of managing money, * Finance plays an important role in the student's professional and even personal lfe Ia business context... How firms will raise money ‘© How they are going to invest the money How they decide whether to reinvest profit in the business or distribute them back to the investor Fields linked to finance: 1. Accounting ‘* understand the relationship between accounting and finance functions wit ‘how decision-makers rely on the FS © why maximizing the firm’s value is not the same as maximizing profits ‘+ ethical duty when reporting financial results to investors and other stakeholders. 2. Information System ‘* understand why financial information is important to managers in all functional areas ‘© compliance with various regulations 3. Management © need to understand the various legal forms of organization * how to communicate the goal of the firm to employees and other stakeholders 4, Marketing ‘* understand how financial managers evaluate aspects of customer relations such as cash and credit management policies. ‘* whya firm’s brands are an important part of its value to investors 5. Operations ‘* understand the financial benefits of increasing a firm's production efficiency ‘+ how managers act on behalf of investors when operating a corporation In personal level... From simple decisions to complex one * Spend © save © Invest Meaning of Financial Management itisa Itis used to manage = Core life skill ~ Business - Lifeblood of enterprise ~ Personal Financeaning of Financial Management 1. Financial management refers to the part of the management activity, that is concerned with the planning, and controlling of a firm's financial resources. It deals with finding out various sources for raising funds for the firm. 2. Financial management is the application of general management principles in the area of financial decision- making, namely in the areas of investment of funds, financing various activities, and disposal of profits. 3, Financial management is the art of planning, organizing, directing, and controlling the procurement and utilization of the funds and safe disposal of profits to the end that the individual, organizational, and social objectives are accomplished. Key Elements to the Process of Financial Management Financial Planning - Management needs to ensure that enough funding is available at the right time to meet the needs of the business. Financial Control - It helps the business to ensure that objectives are being met. Financial Decision-making — It is the process of making choices regarding the allocation of financial resources in both personal and business contexts. These decisions can have significant implications for an individual's or an organization's financial well-being. Financial Markets Financial Markets: These are essential platforms where a wide array of financial assets are bought and sold, creating the marketplace for capital movement. > Examples: Financial markets include stock exchanges such as the New York Stock Exchange (NYSE), where ‘companies’ shares are traded, bond markets for debt securities, and commodity markets for trading commodities like gold and oil. ‘Types of Financial Markets # Physical vs. Financial Asset Markets: ‘© Physical Asset Market: participants engage in the direct exchange of tangible, physical assets, such as teal estate, commodities, or goods. Transactions involve the transfer of ownership of the physical asset from one party to another. ©. Financial Asset Market: involves the buying and selling of financial instruments, representing ‘ownership or a claim on underlying assets. Examples include stocks, bonds, and derivatives. ‘© Spot vs. Futures Markets: © Spot Market: is where financial instruments, commodities, or currencies are traded for immediate delivery and settlement. Transactions in the spot market occur “on the spot” at the current market prices. (© Futures Market: involves the trading of standardized contracts (futures contracts) that obligate the buyer to purchase or the seller to sell an asset at a predetermined price on a specified future date. ‘¢ Money vs. Capital Markets: © Money Market: a subset of the financial market where short-term, highly liquid financial instruments are traded. It includes instruments like Treasury bills, commercial paper, and certificates of deposit. © Capital Market: deals with the buying and selling of long-term financial instruments, such as stocks and bonds, that are used for capital financing and investment purposes. ‘+ Primary vs. Secondary Markets: © Primary Market: where newly issued securities, such as stocks and bonds, are sold directly from the issuing entity to investors. Its the intial point of sale. © Secondary Market: where existing securities, previously issued in the primary market, are bought and sold among investors. it provides liquidity and facilitates price discovery.* Private vs. Public Markets: © Private Markets: involves the trading of securities that are not offered to the general public. Tis includes transactions in unlisted stocks and private placements. © Public Markets: deals with the trading of securities that are available to the general public. Stocks traded on major stock exchanges, like the New York Stock Exchange (NYSE), are examples of public market securities. Financial Institutions Financial institutions in the Philippines are similar to global financial institutions, providing various financial services and acting as intermediaries. > Examples: In the Philippines, you'll find prominent institutions like Banco de Oro (BDO), one of the largest commercial banks, and Ayala Corporation, a diversified conglomerate that operates as an investment ‘company. Sun Life Philippines and Philam Life are major life insurance companies, offering 9 range of ked products. insurance and investment. Types of Financial Institutions 1. lavestment Banks ~ provide a range of financial services, including underwriting securities, facilitating mergers and ‘acquisitions, and offering advisory services for corporations and government entities. Examples: BPI Capital Corporation, First Metro Investment Corporation. 2. Commercial Banks — are traditional banks that offer various financial services, such as savings and checking ‘accounts, loans, and other banking services to both individuals and businesses. Examples: Banco de Oro (800), Metropolitan Bank and Trust Company (Metrobank), Security Bank. 3, Financial Services Corporations - are diversified companies offering a wide range of financial products and services, including banking, insurance, asset management, and other related services. Examples: Ayala Corporation, San Miguel Corporation, SM Investments Corporation. 4. Credit Unions — are cooperative financial institutions owned and operated by their members. They provide savings, credit, and other financial services to their members. Examples: NATCCO (National Confederation of Cooperatives), CLIMBS (Cooperative, Livelihood, Insurance, Mutual Benefit Services). 5, Pension Funds ~ manage and invest funds for retirement benefits, ensuring that employees have financial security after retirement. These are often linked to the Social Security System (SSS) or private pension funds. Examples: Social Security System (SSS), Government Service Insurance System (GSIS). 6. Life Insurance Companies ~ offer insurance products that provide financial protection and benefits to policyholders and their beneficiaries in the event of death, disability, or other covered events. Examples: Philippine American Life and General Insurance Company (Philam Life), Sun Life of Canada (Philippines), Inc., Insular Life. 7. Mutual Funds ~ pool money from investors to invest in a diversified portfolio of stocks, bonds, or other securities, providing an opportunity for individual investors to access professionally managed investments. , Examples: Philippine Investment Management (Philequity) Funds, Sun Life Prosperity Funds, ALFM Mutual Funds. ‘ 8, Exchange Traded Funds (ETFs) - less common in the Philippines compared to some other markets, they offer investors the opportunity to buy shares that represent a diversified portfolio of assets and are traded on the stock ‘exchange.examples: iShares MSC! Philippines ETF (PHI) is an example of an ETF that tracks the Philippine stock market. 9, Hedge Funds ~ are investment funds that employ various strategies to generate returns for their investors, often using more complex and higher-rsk approaches compared to tracittonal investments They may be less prevalen the Philippines compared to other financial institutions. Examples: Specific hedge fund examples in the Philippines may be limited. 10. Private Equity Companies ~ raise capital to invest in privately held companies, often focusing on growth, restructuring, and improving company performance before exiting or seling the investments for 3 profit. Examples: Specific private equity firms operating in the Philippines may vary and change over time. Emphasis on Cash Flow ‘The accountant’s primary function is to: develop and report data for measuring the performance of the firm assess its financial position comply with and file reports required by secur file and pay taxes = using GAAP, the accountant pret (whether payment has been received or not) and is referred to as the accrual basis primary emphasis on cashflows, the intake and outgo of sh- ities regulators scognize revenue at the time of sale pares financial statements that re ‘ses when they are incurred. This approach recognize expen’ ‘The financial manager places He or she maintains the firm’s solvency by assets needed to achieve the firm’s goals. ‘The financial manager uses this cash basis to recognize the revenues inflows and outflows of cash. planning the cash flows necessary to satisfy its obligations and to acquire ‘and expenses only with respect to actual CASH BASIS recognizes revenues when cash is received recognized expenses when they are paid does not recognize accounts receivable or accounts payable ‘ACCRUAL BASIS revenues are recorded when they are earned expenses are recorded when incurred more commonly used than the cash method Example: Imagine you perform the following transactions in a month of business: Sent out an invoice for P15,000 for a web design project completed this month. 1 2. Received a bill for 10,000 in developer fees for work done this month. 3. Paid ®750 in fees for a bill you received last month. 4, Received 10,000 from a client for a project that was invoiced last month. Cash Basis Accrual Basis Inflows P 10,000 Revenue ® 15,000 Outflows 750 Costs , ——10.000 Net Cash Flow P_9,250 Net Profit p__5,00