FINANCIAL

MANAGEMENT
FIN 152
LEARNING OUTCOMES
• define Finance and Financial Management;
• explain the major role of financial management and the different
individuals involved
• define financial institutions, financial market, and financial
instruments
• identify the types of financial institutions, financial market, and
financial instruments
• explain the flow of funds within an organization – through and from
the enterprise – and the role of the financial manager
 NDEFINITION OF TERMS

FINANCE – science and art of managing money (Gitman and Zutter, 2012)
- A process that includes raising money or resources and allocating the
effectively and efficiently to achieve firm’s goals or objectives.

FINANCIAL MANAGEMENT - deals with decisions that are supposed to maximize the
value of shareholders’ wealth (Cayanan and Borja, 2017)
- a decision-making process that includes planning, organizing, controlling,
analyzing, utilizing, and acquiring of funds in order to achieve the desired goals of
the business.
 1. Profit maximization
OBJECTIVES OF 2. Wealth maximization
3. Maintenance of liquidity
FINANCIAL 4. Proper estimation of Financial Requirements
5. Proper mobilization
MANAGEMENT 6. Proper utilization of financial resources
7. Improved Efficiency
8. Meeting Financial Commitments with
Creditors
9. Creating Reserves
10. Decreases the Cost of Capital
11. Decreases Operating Risk
12. Balance Structure
13. Developing Financial Scenarios
14. Measure Success
15. Optimizing Marketing Activity
16. Business Survival
 SCOPE OF
FINANCIAL
MANAGEMENT 1. Planning
2. Budgeting
3. Managing and assessing risk
- Market risk
- Credit risk
- Liquidity risk
- Operational risk
4. Procedures
 IMPORTANCE OF
FINANCIAL
MANAGEMENT

1. Strategizing – identify need to happen financially for the company

to achieve its short- and long-term goals.
2.Decision-making - helps business leaders decide the best way to
execute on plans
3. Controlling - ensures each department is contributing to the vision
and operating within budget and in alignment with strategy.
Shareholders - elect the Board of Directors (BOD).

Board of Directors - is the highest position in a corporation.

- their responsibilities are providing direction of the
company, setting the policies on investments, approving the
company’s strategies, goals, and budgets, appointing, and removing
members of the top management.

President - supervises the company’s operations and ensures that the

strategies are well executed and planned.
- He/She also performs all areas of management such as
planning, organizing, staffing, directing, controlling, and evaluating.
Vice President for Sales and Marketing - formulates business strategies and
plans, directing and coordinating sales, making environmental scanning or
research that will allow the company to increase sales, or identifying new market
opportunities, analyzing and assessing the effectiveness and efficiency of the
plans, methods and strategies applied and establishing a good relationship with
customers and distributors.

Vice President for Administration - responsible for the coordination of the

different departments, providing assistance to the other department by
determining the staff needed and assisting other departments in hiring
employees and in payroll preparation.

Vice President for Production - makes sure that the production meets the
demand, finds ways to minimize cost in producing a competitive quality product,
maximizes the utilization of the production facilities and solves production issues.
Vice President for Finance - makes decisions including planning, acquiring and utilization of funds. The functions
of the Finance Manager are investing decisions, financing decisions, operating decisions, and declaring dividends.
> Investing decisions deals with managing the assets of the firms. Some of the examples of investment
decisions are the allocation of funds, determination of the funds that a firm can put into investment, evaluation,
and selection of capital investment proposal.
> Financing decisions includes making decisions on how to finance the long-term investments
(expansions or acquisition of new land) and working capital which deals with the day-to-day operations of the
company (payment of rent and utilities, purchase of raw materials). The finance manager must determine the right
capital structure of the company. > Operating decisions deals with working capital management. Working capital
refers to short-term assets and short-term liabilities. Inventory, receivables, cash, and short-term investments are
examples of short- term assets. Accounts payable and short-term investments are examples of short-term
liabilities. Working capital management helps the firm to ensure that the firm has sufficient resources to finance
the day-to-day operations but, if the management is aggressive, they will take the risk to use either long-term or
short-term sources or even the combination of the sources. (Later on, this will be discussed in other modules.)
> Declaration of dividends refers to the determination of how much dividends are to be distributed to
the shareholders, frequency of payments and amounts to be retained by the firm.

Dividend is a portion of profit or payment made by a corporation to its shareholders. There are certain conditions
before a company can declare dividends: (1) The company must have enough retained earnings (accumulated
profits) to support cash dividend declaration. (2) They must have enough cash.
Capital structure refers to how much the total asset is financed by the debt (like
loans) or equity (like stocks or bonds).

Working capital refers to short-term assets and short-term liabilities. Inventory,

receivables, cash, and short-term investments are examples of short- term assets.
Examples: accounts payable and short-term capital
Working capital management helps the firm to ensure that the firm has
sufficient resources to finance the day-to-day operations but, if the
management is aggressive, they will take the risk to use either long-term or
short-term sources or even the combination of the sources.
Dividend is a portion of profit or payment made by a corporation to its
shareholders. There are certain conditions before a company can declare
dividends: (1) The company must have enough retained earnings (accumulated
profits) to support cash dividend declaration. (2) They must have enough cash.
 DIFFERENT TYPES OF FINANCIAL
INSTITUTIONS

BANKING NON-BANKING

1. Universal bank 1. Leasing companies

2. Commercial bank 2. Mutual funds
3. Thrift banks 3. Investment companies
4. Investment companies 4. Insurance companies
5. Private Equity funds
Financial Institutions – act as intermediary between the
depositor who has the money and lender (bank) who
needs money
Financial Instruments - are the tools that help a
business’ daily operations and help the finance
manager handles his/her cash, his/her short-term
operating requirements, and long-term business
requirements.
- assets that can be traded, or they can also be seen
as packages of capital that may be traded
Types of Asset Classes of Financial Instruments

1. Debt-based – Money market instrument ( short-term financing instruments that

can be converted into cash in less than a year)
- long-term debt

(bank deposits and certificate of deposit)

2. Equity based – stocks

The Bottom Line

A financial instrument is effectively a monetary contract (real or virtual), which confers a right or claim against
some counterparty in the form of a payment (checks, bearer instruments), equity ownership or dividends (stocks),
debt (bonds, loans, deposit accounts), currency (forex), or derivatives (futures, forwards, options, and swaps).
Financial instruments can be segmented by asset class, and as cash-based, securities, or derivatives. Depending
on their type, financial instruments may be exchangeable on listed or OTC markets.
 MONEY MARKET DEBTS (SHORT-TERM)

MONEY MARKETS INSTURMENTS - are funds available for a short time (1 year or
less than a year). They are available most of the time and do not provide very
high returns.
FINANCIAL INSTRUMENT CHARACTERISTICS
Treasury bills (T-bills) -issued by the government
-maturity within a year
-not risky, because government must make an effort to pay

Commercial papers -Issued by financially sound business to fund investment in inventories and
receivables.
-maturity is about nine months
-generally low default risk as business has good credit standing
Money market funds -issued by banks or mutual funds companies
-maturity date is not specific
-the degree of default risk is low
-usually invested in money market instruments, commercial papers, and
treasuries
Consumer credit, credit card debt -Issued by banks, credits unions and finance companies
-the maturity date varies
-default risk varies
 LONG TERM DEBTS

NOTE – example of long-term debt that has a longer

term than a money market instrument. Notes are similar
to bonds that have regular interest payments and have a
specified maturity term.

BOND - an example of long-term debt. It is a security

reflecting the debts of a government’s or business’ debt
promising to pay a fixed interest to the bondholder for a
definite time.
 FINANCIAL INSTRUMENTS CHARACTERISTICS
Treasury notes and bonds issued by the government
matures in two, five or ten years or more
no default risk (The government exert effort to pay.)
bonds price usually fall becoming less attractive as interest rates in the
market rise
not applicable in the Philippine setting (a
United States’ type of long-term debt.)
Federal agency debts issued by federal agencies and it is similar to treasuries
long-term maturity (i.e. up to thirty years)
low default risk
Municipal bonds, local issued by local government
government bonds long-term maturity (i.e. up to thirty years)
more risky than government securities
Corporate bonds issued by corporations
mature in forty years
more risky than government securities and rely on the financial soundness
of the company
STOCKS are types of security that represent ownership in a
corporation and a claim on part of the corporation’s assets and
earnings. The two main types of stocks are common and preferred.

COMMON PREFFERED
• units of ownership in a public corporation • issued by corporation in exchange of
ownership
• pays dividend when declared
• has no maturity date
• owners are entitled to vote on the selection
• pay dividends when declared
of directors and other important matters
• more risky than corporate bonds
• common stockholders enjoy potential profits
• has no voting rights
from the capital appreciation of their stock.
• has preference over common stocks in asset
liquidation
FINANCIAL MARKET
Financial Markets are the meeting places of suppliers and users of various types
of funds that can make transactions directly.
1. Primary Market – refers to financial market in which buyers and sellers negotiate
and transact business directly without an intermediary.
 Public offering is the sale of new securities to the general public and the first
offering of stock is called IPO or Initial Public Offering.
 Private placement is the sale of a new security to a private or specific buyer.
 
2. Secondary Market – refers to financial market where previously issued securities
(such as bond, notes and shares) are bought and sold.
3. Money markets are venues wherein securities with short-term maturities (1 year or
less) are borrowed or loaned.
4. Capital markets are financial markets for stocks for a long-term period (one year
or longer).
ROLES OF A
FINANCIAL
MANAGER
FUNCTIONS OF FINANCIAL MANAGER
1. Estimating the Requirements of Funds
2. Determining Capital Structure
3. Deciding the source of funds
4. Investing Funds
5. Distributing Surplus
6. Managing Cash
7. Ensuring Financial Control
8. Financial Analysis
9. Capital Budgeting
10. Corporate taxation
11. Acquisitions and Mergers
12. Fixed Asset Management
13. Cost Volume Profit Analysis or CVP Analysis
14. Project Planning and Evaluation
15. Working Capital Management
16. Dividend Policies
Thank You