Finance and Financial Management

“To finance” means to provide funding.

2 different ways of defining finance depending on the perspective on its use:
Economics
Allocation of scarce resources which includes money.
2. Business

Three basic questions that are addressed by the study of finance:

What type of investments should the firm undertake?
What sources of funds should the firm tap in order to fund these investments?
How can the firm ensure that its cash flows will suffice to support its day-to-day operations?

Financial Management
covers the planning, organizing, leading and controlling of all financial activities of an
organization.
puts emphasis on managing the funds of an organization which includes day-to-day
operations.

Branches of Finance
Subcategories:
1. Public finance
is the field of finance which deals with the collection of tax and budget allocation for
programs design to benefit the general public and the production and distribution of public
goods.
2. Personal Finance
is the field of finance which gain popularity especially among the younger generation of
income earners.

3. Corporate Finance
is primarily concerned with the management of all the financial activities of an
enterprise or a business organization.
the ultimate goal of corporate finance is to maximize shareholder value through sound
financial planning.

Examples of how corporate finance is practiced in organizations.

1. The accounting supervisor is tasked to prepare a cost and benefit analysis on whether it is
more costly to purchase or rent a piece of equipment.

2. The marketing manager meets with the finance officer to discuss how a new product
should be priced before it is launched in the market.

3. The Human Resources manager shows the other members of the management team how
the hiring of the additional manpower will help with productivity but may also impact cost
and profitability.

4. Logistics requested a new vehicle that will be used for delivery. However, the finance
officer stated that the benefits of purchasing a new vehicle will not be enough to justify the
amount to be spent.

5. The marketing officer was advised that the budget for advertising and promotion is not
enough to include billboard advertising.
Interrelated Areas of Corporate Finance
1. Financial market and Institutions
This areas covers banks, insurance companies, finance companies (non bank institutions
which offer both short-term and long-term loans to individual and other firms) and other
financial intermediaries.
Financial intermediaries are also nonbank financial institutions which offer specialized
financial services to business.

2. Investments
this area focuses on investment options and decisions made by both individual and
corporate investors.

3. Financial Services
this area refers to services offered by organizations whose line of business is to help
individuals and other organizations manage money.

4. Managerial (Business) Finance

Cash flows (inflow and outflow)
How to finance the acquisition of assets and other growth plans
Which financing options to access when the supply of cash is deficient
What to do with the firms excess cash
Optimal inventory levels
Accounts receivable and accounts payable management
How much earnings should be paid out of dividend vs. how much should be reinvested in
the firm
Whether to merge or acquire other firms

Relationship Between Accounting and Finance

Accounting
is concerned with recording of business transaction of a company and presenting it in
the form of profit and loss account to show the profit or loss of the company during a year
and also it involves preparation of balance sheet which reflects the financial position of the
company at a particular date

Finance
is a broader concept and it makes use of all the data which is presented in the
accounting like profit and loss, balance sheet, cash flow statement to make finance related
decision like how to raise money for future projects of the company, how to utilize the
resources of the company in order to efficiently and effectively produce the good so that
company makes profit.

Financial Management in Business

Decision makers rely heavily on financial information prepared, processed and analyzed by
financial managers.
Financial information also serves as an effective communication tool across departments.

Examples:
Human resource to accounting
“Dear Ma’am, Please let me know the possible effect of hiring two additional employees in
production in our overall profitability assuming that output will increase by 30%. Thank you”
Accounting to Sales
“Our concern is that the sales department is not achieving sales targets but at the same
time exceeding budgets on promotion.”

One employee to another

“Our manager explained to us that even if we are able to increase sales, it will still not
improve our finances of the company if we are unable to control our expenses.

Importance of finance in the different areas of operation in an organization.

1. Research and Development

Finance assists the Research and Development Department in terms of budget devoted for
the creation of new products or improvements that need to be made on existing products.

2. Employee Relation
The Office of Human Resources will rely on Finance for data on how much the
organization can spend on wages, benefits, learning and development, and activities aimed
at boosting employee morale such as summer camps, subsidized trips, and study-now-pay
later plans and other forms of tuition fee assistance.

3. Marketing Promotion
Finance will help the Marketing Department by determining the optimal amount of
budget that should be spent on marketing activities such as advertising and promotion.

4. Expansion
Finance is in charge of capital budgeting. If decision makers in an organization find it
imperative to expand. Finance will have to supply them with historical financial data to see
whether or not past performance can help predict the financial outlook if additional capital
expenditure is to be made.

5. Meeting Contingencies
Every business faces external factors- natural calamities, major political problems that
may affect the business environment, big fluctuation on the prices of inputs, and diminished
buying capacity of consumers which are commonly beyond one’s control.

6. Government agencies
Finance also serves as liaison between the organization and the government agencies.
Finance are responsible for figuring out how much taxes are due, the licenses and permits
that needs to be processed and paid to continue operations.

7. Assets Management
Finance is tasked to include in the master budget plan the disposal, sale or acquisition
of fixed assets such as machinery or equipment or a building of a new plant.
Finance is also responsible for projecting future cash flows.
In the preparation of financial statements, assets should be properly depreciated to
determine book values.
Depreciation is the decrease in the value on the certain type of assets over its useful
life.

8. Information System
 In order to make sound financial decisions, financial managers rely on information
supply to them by the different department heads, including the accounting supervisors.

Financial Institutions, Financial Instruments and the Financial market

Financial Institution
is an organization that handles financial transactions for individuals, groups, and other
organizations- profit, non-profit, private or government-owned.

Financial transactions:
Savings
Borrowing money
Sending or receiving money to or from abroad
Exchanging currencies

Different types of financial institution

1. Depository institution
manages money that is deposited by individuals and organizations.
Examples: banks, credit unions, and savings and loan associations

2. Nondepository Institution
does not handles deposits, instead such institution serves as intermediaries between
savers and demanders of fund, or individuals, households and other businesses who needs
additional funds to support personal needs or business operation.

Financial institution are also referred to as financial intermediaries.

Financial intermediaries is called as such because at times they facilitate the flow of funds
between savers and demanders of fund in the economy.

Financial products are called financial instruments.

Financial instruments are documents which signifies a legal or binding agreement between
two parties.
Financial instruments typically have monetary values associated with them.

Most Common Types of Financial Institution

1. Commercial Banks
Commercial banks accept deposits from individuals and organizations that have excess
funds and provide loans to those who need or want to borrows money.
Major changes
Technology
Debit Card
Expanded their line of financial products, offering others retirement plans and other
investment plans
Serve as payment partner
Facilitate wire transfer of money between institutions

2. Savings and Loans

Also referred so S&L or thrift banks. Unlike commercial banks, the bulk of the financial
transaction are dedicated to residential mortgages.
3. Credit Unions
Normally associated with or are an offshoot of cooperatives. The way they operate is
similar to an S&L.
Interest rates on savings accounts barriers depending on the type of loans.
Not open to general public
Profit sharing between members

4. Investment banks
Operations of investment banks are different from that of commercial banks. They do
not have dealings with the general public.
Intermediaries for financial transactions of individuals and institutions in investing.
Facilitate buying and selling of stocks

5. Insurance Companies
Provide individuals and organizations a way to manage risk. They operate on the
principle of pooling risks wherein premiums are collected from clients. In exchange clients
are protected from the unexpected.
Those who experience losses can file financial claims if there is coverage under the policy.
Insurance companies make money by investing the premiums collected from policyholders.

6. Brokerage
A financial institution that earns through commissions. Brokerage firms facilitate the
buying and selling of securities.

Types of Brokerage
a. Discount Brokerage firms allow their clients do their own research about investment
options.
The firm simply facilitate the transaction up to its completion.
b. Full service brokerage firms provides clients advice and help them manage their
investment portfolio.

Investment portfolio
is a collection of financial products owned by single investor- either an individual or an
organization.

7. Investment companies
Corporations wherein individuals and other organizations invests in investment
portfolio that are managed by professionals who are task to keep track of market trends and
the performance of different financial products or instruments.
Example: Mutual fund companies

The Financial Market

Financial Market
a means for the buying and selling of stocks, bonds, and other financial instruments.
also a means where individuals and organizations who need funds find investor or
lenders.

Stocks
are shares of a corporation sold to investors.
Bonds
money loaned
Professor Scott Besley and Eugine Brigman, in their book of Principle of Finance
Financial market is sometimes describe to as “mechanism” rather than a physical
location. Given that it is not a physical place, this means that savers and borrowers of funds
are brought together in the financial markets regardless of where they are located.

Money Markets and Capital Markets

Money Markets
are the markets where transactions involving shot-term debt securities take place
Short-term debt
is one that is due and/or demandable within one year or less.
Example of money market securities
1.treasury bills
2. commercial papers
3. negotiable certificate of deposits

Capital Markets
are where transactions involving long term debt, or those maturing in more than one
year take place.
buying and selling of stocks issued by corporation also takes place in capital markets.

Two types of markets within capital market

1. Primary market
new issues of securities are traded
2. Secondary market
previously issued securities are traded

Module 2
The Financial Market
Financial Market
a means for the buying and selling of stocks, bonds, and other financial instruments.
also a means where individuals and organizations who need funds find investor or
lenders.
Stocks
are shares of a corporation sold to investors.
Bonds
money loaned

Professor Scott Besley and Eugine Brigman, in their book of Principle of Finance
Financial market is sometimes describe to as “mechanism” rather than a physical
location. Given that it is not a physical place, this means that savers and borrowers of funds
are brought together in the financial markets regardless of where they are located.

Money Markets and Capital Markets

Money Markets
are the markets where transactions involving shot-term debt securities take place
Short-term debt
is one that is due and/or demandable within one year or less.
Example of money market securities
1.treasury bills
 2. commercial papers
3. negotiable certificate of deposits

Capital Markets
are where transactions involving long term debt, or those maturing in more than one
year take place.
buying and selling of stocks issued by corporation also takes place in capital markets.
Two types of markets within capital market
1. Primary market
new issues of securities are traded
2. Secondary market
previously issued securities are traded

The Role of Financial Intermediaries in Financial Market

1. Reduce Costs
Without intermediaries, it will be harder for savers and borrowers of funds to transact
with each other.

2. Diversification
Intermediaries help savers of funds lower their risk by helping them choose the types of
financial products that they will include in their portfolio.

3. Pooling of funds
Can pool funds from several savers in order to grant a single borrower of a loan
involving a huge sum of money.

4. Financial Flexibility
Intermediaries offer a variety of financial products to both savers and borrowers of
funds

Most Common Financial Instruments

1. Savings
It could either be just a regular account or a time deposit.
Regular account- one where the depositor is issued a passbook.
Time deposit- long term deposit where the depositor is issued a time deposit certificate.
2. Loans
this is how banks earn, deposits made in banks is being loan to individuals and organizations.
Aside from short term and long term loan there are also collateralized and noncollateralized
loans.
Collateral- is an asset, like a piece of real estate or a vehicle which is attached to a loan. In
case of a default in payment, the lending institution may take the ownership of the collateral
in lieu of money.
3. Bonds
Is a loan granted to other organizations by individuals and organizations with excess funds.
4. Security
Means that he or she has a financial instrument signifying ownership of stocks of a publicly
traded company or a bond by a government agency.
Publicly Traded company- is a stock corporation that has opened the selling of shares of
stocks to the general investing public.
5. Treasury bills
Often referred to as T-bills, they yield no interest but are sold a discount.
Risk is very low
6. Insurance Products
Almost everything can be insured.
Bought by policy holders from insurance companies as protection to both life and property.
Policyholder- insured while insurance companies- insurer
7. Mutual Funds
If insurance products are based on pooling risks, mutual funds are based on pooling of funds
from different investors.
Funds are invested into different financial products such as securities, stocks and bonds.

Flow of Funds in a Business Organization

Reasons for needing money:

Personal use
To support families needs
For expansion
Support public programs

Money flows back to suppliers in the form of:

Payments
Withdrawals
Interest
dividends

Flow of funds with financial institutions

Careers in Finance
1. Banker/Investment banker
Banking is the most common career path for a finance professional.
2. Insurance Agent/ Broker
Do not merely sell insurance products, they also give financial advice to their clients.
3. Financial advisor
Companies that are engage in selling of investment products employ financial advisor.
They give financial planning advice both individual and corporate clients.

4. Stockbroker
Similar to financial advisor in the sense that he/she advices his/her clients on matters
pertaining to financial products, market and industry trends and other investment options.
Major difference is that stockbroker is licensed to facilitate the buying and selling of stocks
for investor.
5. Fund Manager
Employed by mutual fund companies.
They managed funds pooled by several investors.
6. Academe
If business professional choses to be in the academe and teach, he or she will be required to
obtain a master’s degree from a Higher Educational Institution offering an accredited
program.
7. Corporate Consultants
Is not employed by a particular organization.
She is commissioned to do a work on a temporary or per project basis.
8. Country Manager
is employed by a multinational firm.
He is tasked to oversee the operations of an affiliate in the host (foreign) country.
9. Corporate Finance Manager/ Officer
The core of its job is financial analysis, which encompasses risk assessment , return on
different investment options, preparation and analysis of financial statements (and reporting
to the top management), ensuring that cost control measures are place in all cross-
functional areas and that those are communicated to other department heads and treasury.
10. Chief Finance Officer
is one of the members of the top management team.
Responsible for managing all the financial aspects of business- investments, capital
expenditures, budget allocation, cost control measures, cash flow and sourcing of funds.
Ultimate role of CFO is to ensure that all financial decisions made will continue to the
achievement of corporate goals and objectives.

Qualities of a Finance Professional

1. Integrity
A strong quality of being honest.
It is a strong adherence to moral standards and uprightness.
Someone has integrity if he/she chooses to do what is right even if no one is watching.
2. Attention to detail
Financial information provided to the stakeholders, especially the decision makers, have to
be complete and accurate.
3. Strong oral and written communication skills
They must generate and prepare reports in format that can be easily understood by the
intended users.
They should be ready to explain these results and answer queries from different
stakeholders.
4. Ability to multitask
Must be capable of wearing many hats and still be focused on key issues that affect the
financial well-being of the organization.
5. Analytical
Is one who has the ability to interpret data and discover underlying reasons that would
explain a particular situation.
6. Ability to think strategically
Strategic thinking entails having the ability to come up with plans that are in line with the
firm’s vision, mission, and objectives.
Strategic thinkers also posses the ability to determine priorities and identify potential risks
and opportunities.
7. Ability to use technology
Technology helps in safeguarding confidentiality and integrity of financial information.
Also it deepen his analysis of data and enhance his reports through visualization techniques.
(Spreadsheet and statistical and accounting software)
8. Team Player
Ability to work in collaborative environment is imperative.
9. Leadership
Capacity to lead people.
Leading people means teaching, sharing knowledge, motivating other employees to meet or
exceed standards, and encouraging everyone to meet standards.
10. Flexibility
Has to adapt, and adapting entails being updated on the current trends in industry practices,
policies and procedures and regulations.