BUSINESS FINANCE

Chapter 1: Introduction to Financial

Management
This chapter introduces the students with the overriding objective of managers in
managing a company. It also gives an overview of the financial system which
includes the players and the different financial instruments that are available in the
market. This chapter also discusses organizational chart and highlights the roles of a
Vice President for Finance.
 ACTIVITY
 Students will be group into 4 groups
 Each group will be given 10 minutes to cite their
expectation on the subject as a group.
 Every one is encouraged to contribute on the given task.
 Write your answer on a piece of crosswise paper.
 Select 1 member of the group who will going to present
the finished group task.
Introduction to Financial Management

 Financial management starts with a plan.

 From the perspective of a corporation, financial management deals with
the decisions that are supposed to maximize the value of shareholder’s
wealth. This means maximizing the market value of the shares of stocks.
Shares of stocks represent the form of ownership in a corporation.
 Philippine Stock Exchange (PSE) – Where the shares are actively traded.
 profit maximization should NOT be the overriding objective of company’s
management.
 Introduction to Financial Management

The Changes on the price of a stock can be confluence of

many factors:
 Profitable operation
 Nature of the business
 Prospects of the business  Shares closed at P2,200 on April 25,2016
 Projected earnings and timeframe  Total shares outstanding was
 Ability to meet maturing obligations P132,742,402.00
 Appropriate capital structure  What will be the market value of the shares
 Dividend policies on that date?
 Investing decisions
The market value was computed as follows:
 Management
P2,200 x P132,742,402.00 = P292,033,284,400.00
 Market sentiment
 Introduction to Financial Management

SHAREHOLDER’S WEALTH MAXIMIZATION

 Maximizing shareholder’s wealth through
maximization of stock price should be the overriding
objective of management as it covers the different
facets of operating a company and it considers the
different stakeholders of the company.
 It motivates members of top management to develop a
longer perspective for the company that they manage.
 The interest of the employees has to be considered in
managing a company. They will protect the interest of
the company. In Filipino culture it is called malasakit.
 Introduction to Financial Management
SHAREHOLDER’S WEALTH MAXIMIZATION
 Paying suppliers and creditors on time is a good
business practice that will improve relationships with
these parties.
 Compliance with the requirements of regulatory
agencies also ensures more smooth operations.
 Supporting the community where the company
operates, in whatever capacity it can, increases the
company’s chances of continuous operations in the
area.
FINANCIAL SYSTEM
 Links the savers and users of fund.
 Savings can come from households, individuals,
companies, government agencies, or any other entity
whose cash inflows are greater than their cash
outflows.
 This system, through financial intermediaries provides
a mechanism by which these savings can be channeled
to users of funds, borrowers and investors.
 Corporate bonds and government debt securities can
be traded through the Philippine Dealing &
Exchange Corp. (PDEx).
 Introduction to Financial Management
FINANCIAL SYSTEM

Financial Intermediaries Users of funds

Savers Borrowers/Investors
• Banks
• Households • Households
• Insurance Companies
• Individuals • Individuals
• Stock exchange
• Corporations/Co • Corporations/Compa
• Stock brokerage firms
mpanies nies
• Mutual funds
• Government • Government
• Other financial institutions
Agencies Agencies

Figure 1: Overview of the Financial System

 Introduction to Financial Management
FINANCIAL
Financial intermediaries at its functions
SYSTEM
1. Bank Provide mechanism where savers can put
their excess funds through deposits. Have to be
regulated by Bangko Sentral ng Pilipinas
2. Insurance Companies Offers life and non-life
products. Regulated by Insurance Commission
3. Stock Exchange provides a system for the
trading of equity securities of publicly listed
companies.
4. Stock Brokerage firms includes online brokers
and live brokers
1. Online Brokers – one can trade in stock market
through the internet.
2. Live Brokers – uses telephone to call brokers and
place orders.
5. Mutual Funds investments are pooled and the
funds are invested by professional managers for a
fee.
To invest in a Mutual fund,, he has to buy
shares of the mutual fund and the buying price
depends on the net asset value (NAV) of that fund
when the purchase is made.
6. Other Financial Institutions include pension
funds like GSIS and SSS, investment banks, and
credit unions.
 Introduction to Financial Management
FINANCIAL
INSTRUMENTS
Two major categories:
Equity securities – it includes…
 Common Stocks
 Preferred Stocks
Debt securities
 The Treasury bonds and Treasury bills issued by the
National Treasury are forms of indebtedness of the
National Government.
 Treasury bills – in the tenors of 91 days, 182 days and 360
days are auctioned at the National Treasury every Monday
to accredited dealers.
 Retail treasury bonds – normally in multiplies of P5,000.
coupon interest is paid quarterly.
 Treasury bonds – coupon interest is paid semi-annually.
 Corporate bonds – the tenors are usually 5 yrs., 7 yrs., and
10 yrs. Offers slightly higher interest rates than govt.
securities.
 Introduction to Financial Management
ORGANIZATIONAL CHART AND THE ROLES OF
THE VP FOR FINANCE
Board of
Directors

President

VP for Sales & VP for

VP for Finance VP for Production
Marketing Administration

Figure 2: Organizational Chart

 Introduction to Financial Management
ORGANIZATIONAL CHART AND THE ROLES OF
THE VP FOR FINANCE
Board of Directors – is the highest policy making body in a
corporation.
Responsibilities:
 Setting policies on investments, capital structure and
dividends.
 Approving company’s strategies, goals and budgets.
 Appointing and removing members of the top
management including the president.
 Determining top management’s compensation
 Approving the information and other disclosures
reported in the financial statements.
President – Their roles in a corporation may vary from one
company to another.
Responsibilities:
 Overseeing the operations of the company and ensuring
that the strategies as approved by the board are
implemented as planned.
 Performing all areas of management: planning,
organizing, staffing, directing and controlling.
 Representing the company in professional, social and
civic activities.
 Introduction to Financial Management
ORGANIZATIONAL CHART AND THE ROLES OF
THE VP FOR FINANCE
VP for Sales and Marketing VP for Production
Responsibilities: Responsibilities:
 Formulating marketing strategies and plans  Ensuring production meets customer demands
 Directing and coordinating company sales  Identifying production technology/process that
minimizes production cost and makes the company cost
 Performing market and competitor analysis
competitive.
 Analyzing and evaluating the effectiveness and cost of  Coming up with the production plan that maximizes the
marketing methods applied.
utilization of the company’s production facilities.
 Conducting or directing research that will allow the  Identifying adequate and competitively priced raw
company to identify new marketing opportunities.
material suppliers.
 Promoting good relationships with customers and
distributors
 Introduction to Financial Management
ORGANIZATIONAL CHART AND THE ROLES OF
THE VP FOR FINANCE
VP for Administration VP for Finance
Responsibilities:
 Coordinating the functions of administration, finance Financing
and sales and marketing departments.
 Assisting other departments in hiring employees.
Investing

 Providing assistance in payroll preparation. Operating

 Determining the location and the maximum amount of Dividend Policies
office space needed by the company.
 Identifying means, processes or systems that will
minimize the operating costs of the company. Figure 3: Functions of VP for Finance
 Introduction to Financial Management
ORGANIZATIONAL CHART AND THE ROLES OF
THE VP FOR FINANCE
VP for Finance
Operating decisions
Financing decisions  Deal with the daily operations of the company
 Include making decisions as to how to finance long-term  The role of the VP for finance is determining how to
investments and working capital which deals with the
finance working capital accounts such as accounts
day-to-day operations of the company.
receivable and inventories.
 This responsibility is crucial. The company can get  Short term or long term sources of funds to finance
bankrupt because of too much debt.
accounts receivable and inventories?
Investing decisions
Dividend Policies
 Requires forecasting the cost of investment and the  Two conditions must exist before a company can declare
streams of cashflows expected to be generated from the
cash dividends:
investment.
1. The company must have enough retained earnings to
 Long term investments have to be supported by a capital
support cash dividend declaration.
budgeting analysis.
2. The company must have cash.
 Introduction to Financial Management
ORGANIZATIONAL CHART AND THE ROLES OF
THE VP FOR FINANCE
 Factors to consider in declaring cash dividends:
1. AVAILABILITY OF INVESTMENT
OPPORTUNITIES ANY QUESTIONS?
2. ACCES TO LONG TERM SOURCE OF FUNDS.
3. CAPITAL STRUCTURE.
CLARIFICATIONS?
VIOLENT
REACTIONS?
Get ¼ sheet piece of paper and get ready for a short
quiz.
 Introduction to Financial Management

SHORT QUIZ

1. Philippine Stock Exchange is where the shares are actively traded. True or false?
2. Shareholders and Stockholders are the same. True or false? If false why? All shareholders are stake holders but not all
stakeholders are shareholders.
3. From the perspective of a corporation, financial management deals with the decisions that are supposed to maximize
the value of shareholder’s wealth.
4. Savings can come from households, individuals, companies, government agencies, or any other entity whose cash inflows are
greater than their cash outflows.
5 - 7Enumerate the 3 components of financial system: savers, financial intermediaries and Users of funds
8. Board of Directors – is the highest policy making body in a corporation.
9. This responsibility of VF for Finance is crucial. The company can get bankrupt because of too much debt. Financing
decisions
10. Deal with the daily operations of the company. Operating Decisions