Financial Institutions

Banks
Thrift banks – These are deposit-taking financial
institutions that also extend credit to the consumer
market. They usually cater to the countryside or rural
areas.
Commercial banks – These are deposit-taking
financial institutions that extend credit to the retail
and consumer markets. They collect and safely keep
the funds of savers and depositors. Savings and
checking accounts provide a fast and efficient way for
clients to access their money. They also lend to small-
medium enterprises that will pay them an interest
regularly for the use of their funds.
Banks
– Universal banks – Universal banks lend to
multinational companies. Their transactions are
larger than commercial banks and are
denominated in multi-currencies, not just
limited to the local currency. They also have an
expanded line of services compared to
commercial banks.
– Investment banks – These banks focus on
raising funds for big corporations and
governments through bond issuances and initial
public offerings.
•
Nonbanks

– Leasing companies – Leasing companies are not

banks and are not governed by a central bank.
However, they also extend credit or financing to
companies.
– Investment companies – These are institutions
regulated by the Securities and Exchange
Commission and perform similar functions as banks.
– Mutual funds – These are collective investments or
funds of small investors pooled together and
managed to be able to reach maximum returns.
Mutual funds, though small individually, are big
collectively.
– Insurance companies – These companies sell
insurance coverage to provide a guarantee of
compensation for specified death, illness, accident,
loss, or damage to property in exchange for
payment of a premium. They may sell life and non-
life insurance products. The premiums collected is
entrusted to a portfolio manager who takes cares of
the funds.
– Private equity funds – These entities are not
regulated by the government or any other
regulatory body.
Financial Instruments and Financial Markets
 Money market instruments
– An inexpensive way for governments and
financial institutions to raise funds. These funds
are usually available for only a short period of
time, therefore their rates are generally lower
than funds which are available for use. They also
earn a higher interest. People avail money
market funds because of their liquidity. They are
available most of the time when the person
needs them.
Some examples of the money market funds are:
–Treasury bills – These are issued by
the Treasury/ Government. They
mature within one year and are
generally free from default risks
because the government will exert all
effort to pay.
–Commercial papers – These are issued
by financially sound businesses to fund
inventories and receivables. They
mature in less than one year and have
low default risk because businesses
usually have good credit standing.
–Money market funds – These are issued by
banks or mutual fund companies. They have
no specific maturity date. The default risk is
low, and they are usually invested in money
market instruments, treasuries, and
commercial papers.
–Consumer credit/credit card debt – These
are issued by banks, credit unions, or
finance companies. The maturity rate and
default risk both vary.
 Long-term debts
• – The interest rates on long-term debts is
higher than the money market instruments
and are usually locked in over the entire life of
the debt.
Examples of long- term debts are:
– Treasury notes and bonds – These are issued by the
government. Treasury notes mature in 2, 5, or 10
years, while bonds mature longer (10 years or more).
They have no default risk because governments will
exert all efforts to pay. However, the price of bonds
usually falls, becoming less attractive as the interest
rates in the markets rise.
– Municipal bonds / local government bonds – They
are issued by local governments and matures longer
than treasury notes and bonds (i.e, up to 30 years).
They are riskier than government securities.
– Corporate bonds – These are issued by the
corporation and have a maturity date of more than 30
years. They are riskier than government securities and
rely on the financial soundness of the company.
The Role of Financial Manager
Goals of the Financial Manager (The Flow of
Money)

Acquisition of funds with the least cost from the

right sources at the right time – It is important
to use networking to find the rough sources of
funds. Funds can come from banks, nonbanks or
individual and corporate investors.
Effective cash management – To manage cash
effectively, companies need a detailed cash flow
budget. The cash flow budget can also be used to
take advantage of cash discounts in paying trade
payables, prioritizing the use of cash, and other
similar strategies to manage cash.
Goals of the Financial Manager (The
Flow of Money)
Effective investment decisions – Any excess cash needs to be
invested to earn income, either in the form of interest or
dividends. Too much cash lying in the bank or checking
accounts is not advisable.
Proper asset selection – Selecting the right machinery and
equipment needed is important to attain its production goal
and attain sales.
Proper risk management – The financial manager must also
be able to evaluate the risks associated with certain business
decisions. Buying stocks or investing in something needs risk
analysis and assessment. In general, the riskier the project,
the higher the return.
Goals of the Financial Manager (The
Flow of Money)
Effective working capital management – Current
assets and current liabilities are used in current
operations. Managing the right combination of
assets and liabilities allows the company to have
a good capital position that will enhance the
firm’s stability and liquidity.
Effective inventory management – Overstocking
and understocking are undesirable for the
management. Maintaining the right inventory
gives the company an edge over its competitors.
 Tools of Financial Managers
Financial policy-making – This involves selection of
financial goals, development of financial policies, and
designation of the finance department in the
organization to accomplish the finance function. It is
important that the financial goals are clear, especially
to managers and employees.
Financial planning and budgeting – Forecasting is an
integral part of the planning process. A company
forecasts future demand for its product, and based
on this forecast, prepares a budget. Then, actual
performance is compared to these budgets to
determine which actions need correction.
 Tools of Financial Managers

• Financial analysis – This is the process of

evaluating business performance, projects,
investment options, and other finance-related
activities to determine feasibility and
profitability. A business is considered
profitable if it attains a consistent rate of
return on all its investments, including the
company’s operations.