INTRODUCTION

TO FINANCIAL
MANAGEMENT

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 JOSE TEODORO LIMCAOCO-
CFO AYALA GRP.

AMY MOOD- CFO MICROSOFT

Kathy Waller
CFO- The Coca-Cola Company
LEARNING OUTCOMES
Discuss the importance of Finance
Identify the three primary business
decisions of financial managers
Differentiate the three major forms of
business
Describe the role of the financial
manager within the firm and the goal for
making financial decisions
Explain the four principles of financial
management
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FINANCE IN YOUR
PERSONAL LIFE

WHAT DO YOU
CONSIDER?

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Where How to
to get spend
the the
money?
money?

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What is Finance?

Finance is the study of

how people and
businesses evaluate
investments and raise
capital to fund them

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Three Basic Questions in the
study of Finance:
What long term investments should
be undertaken (Investment decisions
i.e. Capital Budgeting)
How should the firm raise money to
fund these investments (Financing
decisions ie Capital structure)
How can the firm manage its day to
day cash flow (Working capital
management)

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 Importance of Financial
Management

Finance deals with decisions

concerning cash inflows and cash
outflows.
Emphasis is on cash flows rather
than income because most
liabilities—that is, debts—must be
paid with cash.
 Importance of Financial
Management in
NonfinanceAreas
Most decisions cannot be made
without considering the impact on
the financial well-being of the firm.
Must determine whether the funds
needed to implement decisions are
available.
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 Career Opportunities in Finance

Financial Markets and

Institutions
Investments
Managerial Finance
 Career Opportunities
in Finance
Financial Markets and Institutions:
Relates to the financial services
industry, which includes banking,
insurance, estate planning, and so
forth.
 Career Opportunities
in Finance
Investments:
Involves evaluating financial assets,
such as stocks and bonds, and
determining which investments to
include in a portfolio of financial assets.
 Career Opportunities
in Finance
Managerial Finance:
Involves decisions regarding
investments in real assets, such as
plant and equipment, and how such
investments should be financed (i.e.,
stocks or bonds), whether dividends
should be paid, and so forth.
Alternative Forms of Business
Organization

Proprietorship
Partnership
Corporation
Proprietorship

Advantages:
 easy and relatively inexpensive to form
 affected by few regulations
 business is taxed as an individual
Disadvantages
 unlimited personal liability
 firm’s life is limited
 ownership transfer can be difficult
 firm’s credit and its ability to raise funds
Partnership

Advantages:
 fairly easy and relatively inexpensive to form
 affected by few regulations
 business is taxed as an individual
Disadvantages
 unlimited personal liability
 firm’s life is limited
 ownership transfer can be difficult
 firm’s credit and its ability to raise funds—
better than for a proprietorship, however
Corporations

Advantages:
 unlimited life
 transfer of ownership is relatively simple
 limited liability of owners
Disadvantages:
 earnings can be taxed twice
 setting up a corporation is more difficult than
either a proprietorship or a partnership
 What is the ultimate
goal of a corporation?

LOGO
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Goals of the Corporation
Maximize wealth—should be the
primary goal of the financial manager.
Social Responsibility—firms should be
socially responsible at the same time
they earn “normal” profits.
Wealth Maximization/Social
Responsibility—actions that maximize
the value of the firm also are beneficial
to society; wealth maximization
improves the standard of living.
Agency Relationships
An agency relationship exists when
owners do not manage the firm’s day-to-
day operations.
An agency “problem” exists if managers
attempt to satisfy interests that differ
from the best interests of the firm’s
owners.
Two important agency relationships that
exist are between managers and
stockholders and stockholders and
creditors.
Stockholders versus Managers

An agency problem is possible if

owners do not run the company.
An agency problem can be
mitigated by the following means:
 threat of firing
 takeover threat
 reward managers for acting in the
best interests of owners
 make managers owners
Stockholders versus Creditors

If stockholders approve actions

that harm the positions of the
firm’s creditors, it is likely that the
firm will find it difficult to borrow
funds in the future.
 Financial Manager’s
Responsibilities
 Forecasting and Planning—financial decisions
impact the future of the firm.
 Investment and Financing Decisions—determine
which assets to purchase and how to finance
them.
 Coordination and Control—financial decisions
must be made in coordination with other
functional areas, such as marketing, accounting,
and so forth.
 Dealing with Financial Markets—the firm must go
to the financial markets to raise needed funds.
Financial Management Functions
CEO
CFO
CONTROLLER / TREASURER
Figure 1.1
CONTROLLER TREASURER
 Financial  CASH & M/S

Accounting Management
 Cost accounting  Capital Budgeting

 Taxes  Financial Planning

 Data processing  Credit Analysis

 Investor relations

 Pension fund

management
FINANCIAL MANAGEMENT
ACCOUNTING ACCOUNTING
 Involves systematic  Is concerned with

recording of business providing financial

transactions information to
governed by a body
persons within the
of generally accepted
accounting principles firm for effective
 Financial statements
decision making
for external and  For internal use

internal use
Table 1.1
The Four Basic Principles Of
Finance
1.Money has a time value
2.There is a risk-return trade-off
3.Cash flows are a source of value
4.Market prices reflect information

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Principle 1: Money has time
value
A dollar received today is
more than a dollar
received in the future and
vice versa

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Principle 2: There is a risk-return
trade-off
We won’t take additional
risks unless we are paid
with additional return
The higher the risk, the
higher the return vice
versa

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Principle 3: Cash flows are the
source of value
Cash flow is the amount of
cash that can be taken out of
the business within a specific
period of time
Actual money that can be
spent from an investment
Determines the investment’s
value
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Principle 4: Market prices reflect
information
Investors respond to new
information buy buying and
selling investments
The speed to which investors
respond reflects the
efficiency of the market.

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ACTIVITY
 Think pair Share: “How can this course help
me in my personal and professional life.”

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Assignment:
 Use the internet or newspapers classified
ads to find jobs in the field of Finance. What
are the requirements for the job?
 Find the organizational chart of a major
corporation. Research the background of its
CFO/Treasurer/ Finance manager.
 Quiz

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Assignment
 Identify the different financial
markets and financial institutions
 Explain how is capital transferred
between savers and borrowers
 Distinguish the different financial
intermediaries.
 Discuss the importance of market
efficiency