Business Finance

Introduction to Financial
Management
(Part - 1)
Prepared by:
Sir Jecho Baldoza
TOPICS COVERED
1. DEFINITION OF FINANCE
2. ACCOUNTING VS. FINANCE
3. TYPES OF FINANCE
4. SHAREHOLDER’S WEALTH MAXIMIZATION
5. FINANCIAL MANAGEMENT
6. CORPORATE ORGANIZATION STRUCTURE
7. ROLE OF FINANCIAL MANAGER
8. GUIDING PRINCIPLES IN FINANCIAL MANAGEMENT
REFERENCES
• Department of Education Business Finance Teaching Guide
• Florendo, Joselito G (2016). Fundamentals of Accountancy, Business
and Management (1st ed.) Rex Book Store
• https://talentedge.com/articles/role-financial-management-
organization/
• https://www.investopedia.com/terms/c/capitalbudgeting.asp
• https://www.managementstudyguide.com/financial-planning.htm
•https://www.investopedia.com/terms/w/
workingcapitalmanagement.asp
LEARNING COMPETENCIES

The learners should be able to:

1. Define Finance
2. Distinguish a financial institution from financial
instrument and financial market
3. Explain the major role of financial management
and the different individuals involved
LEARNING COMPETENCIES
The learners should be able to:
4. Enumerate the varied financial institutions and their
corresponding services
5. Compare and contrast the varied financial
instruments
6. Explain the flow of funds within an organization –
through and from the enterprise—and the role of the
financial manager
INTRODUCTION:
FINANCE
 Definitions of FINANCE

Finance can be defined The management of The giving of The monetary resources
as the science large amounts of monetary support and affairs of a
and art of managing money for an enterprise government,
money. - especially by organization or person.
governments
(Gitman & Zutter, or large companies;
2012)
https://www.google.com/
ACCOUNTING VS.
FINANCE
 ACCOUNTING VS. FINANCE

-Management of
money, funds, or
-Recordkeeping
resources.
/Bookkeeping
Functions.
-Review, analyze, and
interpret the
-Preparation of
financial statements/
Financial
reports provided in
Reports/
accounting.
Statements.
(Making Financial
Decisions)
https://histatory.com/finance/what-are-the-differences-in-understanding-finance-and-
accounting/
TYPES OF FINANCE
 PERSONAL
TYPES OFFINANCE
FINANCE

CORPORATE PUBLIC
FINANCE FINANCE
 PUBLIC FINANCE
From a Government Perspective, finance includes the management of a country’s
national Budget, treasury department, the central bank, and other government
agencies. It focuses on collecting tax revenue and spending that money on
national services and programs such as roads, hospitals, and social security.

https://www.moneydonut.co.uk/tax/business-tax-rates-and-thresholds/how- https://corporatefinanceinstitute.com/resources/economics/government-spending/
does-tax-affect-a-specific-business
 CORPORATE FINANCE
From a Business Perspective, corporate finance is the management of a company’s
funding, its sources of revenue, use of capital, and the management of its profit
and loss (P&L) statement. The professionals at a business that have the
resposibility for managing this area include accountants, financial analysts,
managers, and executives, such as the Chief Financial Officer (CFO).

https://www.treasurers.org/hub/treasurer-magazine/deals-year-2017-
corporate-finance-winner https://www.investopedia.com/corporate-finance-4689819
 PERSONAL FINANCE
From a Personal Perspective, finance is the management of one’s income,
expenses, investments, and obligations. Individuals often work with a personal
banker, investment advisor, accountant, mortgage broker, and other
professionals to manage their financial situation.

https://www.finance-monthly.com/2019/09/an-in-depth-guide-to-personal-finance/ https://milesopedia.com/en/guide/101-personal-finance-canada/
 HOMEWORK:

On a sheet of paper, answer the following questions:

A. How much is your daily allowance? If not given daily, how much
is your average allowance per day?
B. Write down all the items you spend money on. List the
description and peso amount spent.
C. Compute for the balance of your allowance by deducting the
expenses you listed from your daily allowance.
FINANCIAL
MANAGEMENT
WITHIN AN BUSINESS
ORGANIZATION
 Is an entity formed for the purpose of carrying
on
SOLE
commercial enterprise. (earning profits)
PARTNERSHIP CORPORATION
PROPRIETORSHIP
• Consists of one • Consists of two • Are probably
individual doing or more dominant form may either
the business. individuals in of business be

business organization in privately

together. the Philippines. owned
-owned by 5 or or
more persons.
publicly
(Stockholders) owned
 BUSINESS ORGANIZATION

PROPRIETORSHIP PARTNERSHIP CORPORATION

ADVANTAGES ADVANTAGES ADVANTAGES

• Easy to form • Easy to form • Unlimited Life
• Not Expensive • Less Expensive • Easy transferability
• Low government • Moderate • Limited Liability
regulations government • Easy to raise capital
• No corporate regulations
taxation on the • Limited Liability (LLP)
Firm

DISADVANTAGES DISADVANTAGES
DISADVANTAGES • Difficult to raise • Double Taxation
• Difficult to raise Capital • Complex and time-
Capital • Limited Life taking charter filing
• Limited life of the • Unlimited Liability in process
firm General Partnership

PRINCIPAL FORMS OF BUSINESS ORGANIZATION

What is your Idea?
Assume that you are the biggest shareholder in a corporation.
Question
1 What Objectives you want to achieve as owners of the
corporation?

Question
What do you think of a Company who has very large amount of
2 cash?

Can you say that a “Profitable company” is a successful

Question company? Can success be attributed to profitability only? Is it
3 possible that a company can have profits but still does not have
enough cash to pay its obligations? (i.e. suppliers, lenders)?
 TAKE NOTE:
THE OVERALL OBJECTIVE OF A
SHAREHOLDER SHOULD BE WEALTH
MAXIMIZATION
 MEASUREMENT OF
SHAREHOLDER’S WEALTH
Assume a learner bought
10 shares of Globe Telecom
at PHP2,510 each on
September 9, 2022.
This brings his investments
to PHP25,100. What
happens to the value of his
investment if the price
goes up to PHP2,600 per
share or it goes down to
PHP2,300 per share?
CONCLUSION:
Conclude that shareholders’
wealth is measured based on
the current market price of
the corporation’s stocks.
The market price changes
across different periods.
Hence, the value of your
investment changes in
different points on time based
on the market value at that
time.
FACTOR’S THAT INFLUENCE
MARKET PRICE
FINANCIAL
MANAGEMENT
FINANCIAL MANAGEMENT means....

Therefore: FINANCIAL
To Collect fund for the
MANAGEMENT means to plan
company at a low cost
and control the finance of the
and;
company.

Financial Management deals

To Used this collected
with decisions that are supposed
funds for earning
to maximize the value of
maximum profits.
shareholder’s wealth. (Cayanan)
CORPORATE
ORGANIZATION
STRUCTURE
 ACTIVITY:
Prepare 1/4 sheet of paper and fill-up the ff. box by giving the correct answer.
Corporate Organization Structure
 SHAREHOLDERS
The shareholders elect the Board of
Directors (BOD). Each share held is equal
to one voting right. Anyone who owns
stock in a company has a voting right to
the decisions that the company makes.
BOARD OF DIRECTORS
The board of directors is the highest
policy making body in a corporation.
The board’s primary responsibility is to
ensure that the corporation is operating
to serve the best interest of the
stockholders.
The following are among the
responsibilities of the
board of directors:
- Setting policies on investments,
capital structure and dividend policies.
- 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 (Cayanan, 2015)
 President (CEO)
The roles of a president in a corporation
may vary from one company to another.
Among the responsibilities of a president
are the following:
- Overseeing the operations of a 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.
VP FOR MARKETING
- Formulating marketing strategies and
plans.
- Directing and coordinating company sales.
- Performing market and competitor analysis.
- Analyzing and evaluating the effectiveness
and cost of marketing methods applied.
- Conducting or directing research that will
allow the company identify new marketing
opportunities, e.g. variants of the existing
products/services already offered in the
market.
- Promoting good relationships with
customers and distributors. (Cayanan, 2015)
 VP FOR PRODUCTION
- Ensuring production meets customer
demands.
- Identifying production
technology/process that minimizes
production cost and make the company
cost competitive.
- Coming up with a production plan that
maximizes the utilization of the company’s
production facilities.
- Identifying adequate and cheap raw
material suppliers. (Cayanan, 2015)
VP FOR ADMINISTRATION
- Coordinating the functions of
administration, finance, and marketing
departments.
- Assisting other departments in hiring
employees.
- Aiding in payroll preparation, payment of
vendors, and collection of receivables.
- Determining the location and the
maximum amount of office space needed by
the company.
- Identifying means, processes, or systems
that will minimize the operating costs of the
company. (Cayanan, 2015)
VP FOR FINANCE

FINANCING OPERATING

DIVIDEND
INVESTING
POLICIES
 VP FOR FINANCE
1. FINANCING
• Financing decisions include making decisions on how to fund
long term investments (such as company expansions) and
working capital which deals with the day to day operations of
the company.
(i.e., purchase of inventory, payment of operating expenses,
etc.).

• The role of the VP for Finance of the Financial Manager is to

determine the appropriate capital structure of the company.
 CAPITAL STRUCTURE
- To be able to acquire assets, our funds must
have come somewhere.

- If it was bought using cash from our pockets,

it is financed by equity.

- On the other hand, if we used money from

our borrowings, the asset bought is financed
by debt.

- In the figure above, the total assets is

financed by 60% debt and 40% equity.
TAKE NOTE:
Capital structure refers to how much of your total assets is Accordingly, the capital structure is 60% debt
financed by debt and how much is financed by equity. and 40% equity.
 VP FOR FINANCE
2. INVESTING
- Short term investment decisions are needed when the company
is in an excess cash position.
• To plan for this, the Financial Manager should be able to
make use of Financial Planning tools such as budgeting and
forecasting (which will be discussed in Lesson 3: Financial Planning Tools and Concepts)
• Moreover, the company should choose which type of
investment it should invest in that would provide an most optimal
risk and return trade off. (We will learn more about this on Lesson 6: Introduction to investments.)
 VP FOR FINANCE
2. INVESTING
- Long term investments should be supported by a capital
budgeting analysis which is among the responsibilities of a
finance manager.
• Capital budgeting analysis is a tool to assess whether the
investment will be profitable in the long run. (Chapter 5)
• The lenders should have the confidence that the investments
that management will push through with will be profitable or else
they would not lend the company any money.
 VP FOR FINANCE
3. OPERATING
• Deal with the daily operations of the company.

• The role of the VP for finance is determining how to finance

working capital accounts such as accounts receivable and
inventories.

• The company has a choice on whether to finance working

capital needs by long term or short term sources.
 VP FOR FINANCE
4. DIVIDEND POLICIES
• The role of a financial manager to determine when the company should
declare cash dividends.

• Recall that cash dividends are paid by corporations to existing

shareholders based on their shareholdings in the company as a return
on their investment.

• Some investors buy stocks because of the dividends they expect to

receive from the company. Non-declaration of dividends may
disappoint these investors.
 VP FOR FINANCE
4. DIVIDEND POLICIES
• NOTES:
- Before a company may be able to declare cash dividends, two conditions
must exist:
1. The company must have enough retained earnings (accumulated
profits) to support cash dividend declaration.
2. The company must have cash.
ROLE OF
FINANCIAL
MANAGER/
FINANCIAL
MANAGEMENT
FINANCIAL MANAGER

Is a person who takes care of all

the important financial functions
of an organization.
 Roles of Financial Management
a. Financial decisions and controls: Financial management and financial managers play
a crucial role in making financial decisions and exercising control over finances in the
organization. They make use of techniques like ratio analysis, financial forecasting, profit
and loss analysis, etc.

b. Financial Planning: The finance managers are responsible for the planning of financial
activities and resources in the organization. To this end, they use available data to
understand the needs and priorities of the organization, as well as the overall economic
situation and make plans and budgets for the same purpose.

c. Capital Management: It is the responsibility of financial management to estimate the

capital requirements of the organization from time to time, determines the capital structure
and composition and makes the choice of source of funding for the capital needs.
 Roles of Financial Management
d. Allocation and Utilization of financial resources: Financial management ensures that
all financial resources of the organizations are used and invested effectively and efficiently
so that the organization is profitable, sustainable and viable in the long-run.

e. Cash Flow Management: It is extremely important for organizations to have sufficient

working capital and cash flow to meet their operational expenses and emergencies.
Financial management tracks account payable and receivable to ensure there is sufficient
cash flow available at all times.

f. Disposal of Surplus: The decisions on how the surplus or profits of the organizations is
utilized is taken by the financial managers of the organizations. They decide if dividends
should be distributed and how much as well as the proportion of profits that must be
retained and ploughed back into the business.
 Roles of Financial Management

g. Financial Reporting: Financial management maintains all necessary reports related to

the finance of the organization and uses this as the database for forecasting and planning
financial activities.

h. Risk Management: Sound financial management prepares the organization to forecast

risks, put in place mitigation plans as well as to meet unforeseen risks and emergencies
effectively.
MAIN FUNCTION OF FINANCIAL
MANAGER

RAISING FUNDS ALLOCATION PROFIT UNDERSTANDING

OF FUNDS PLANNING CAPITAL MARKETS
In order to meet
obligation, it is Once funds are
raised, it is When Securities
important to have Proper usage of are traded in
enough cash and important to
the profit stock market,
liquidity. allocate funds in
generated by the there’s a huge
such a manner
firm. amount of risk
A firm can raise that they are
optimally used. involved.
funds by debt or
equity.
GUIDING PRINCIPLES
FOR FINANCIAL
MANAGEMENT
SYSTEMS
GUIDING PRINCIPLES FOR
FINANCIAL MANAGEMENT SYSTEMS
CONSISTENCY INTEGRITY
Financial policies and systems
must remain consistent over
1 4 Must be open with Honesty and
propriety.
time.

ACCOUNTABILITY FINANCIAL STEWARDSHIP

Must be able to explain and 2 5 Must take good care of the financial
demonstrate to all stakeholders how resources it has been given and ensure
you have used your resources and that they are used for the purpose
what you have achieved. intended.

TRANSPARENCY ACCOUNTING STANDARD

Must be open about its work and its 3 6 Systems for keeping records and
finances, making information documentation must observe
available to all stakeholders. accepted external accounting
standards.
 HOMEWORK:
Directions: Below are quotes from CEO’s of business organizations. Give your insights in
every quote based on what you have read. Put it in a 1 Whole paper (PRINTED is okay)
1. Unilever: “Finance plays a critical role across every aspect of our business.
We enable the business to turn our ambition and strategy into sustainable,
consistent and superior performance” - Jean-Marc Huët (Unilever)
2. Jollibee: “It’s very exciting because you are not just thinking of today but
what the company will need in the future” - Ysmael V. Baysa (Morales, 2013)
3. Globe Telecom: “Yesterday’s solutions are never adequate for the future” -
Albert De Larrazabal (Klobucher, 2015)
4. SM Corporation: “Now, we don’t go out because we need funds. We go
out because it’s an opportunity.” – Jose T. Sio (Montealegre, 2015)
PREPARE FOR A QUIZ!
Business Finance End of
Part - 1
THANKS
2 0 2 3