ELAINE KRYSTA S.

PONDO, MBA
Subject Instructor
 1

MODULE 1:
OVERVIEW OF FINANCIAL
MANAGEMENT

Lesson
1

4
 2

Lesson 1: Nature, Purpose and Scope of Financial Management

Learning Objectives

After studying Lesson 1, you should be able to:

Describe the nature, goal and basic scope of financial management.

Explain briefly the three major types of decisions that the Finance Manager
makes.
Discuss the importance of significance of financial management.
Describe the relationship between Financial Management and Accounting.
Describe the relationship between Financial Management and Economics.

Introduction

Business concern needs finance to meet their requirements in the economic world.
Any kind of business activity depends on the finance. Hence, it is called as lifeblood of
business organization. Whether the business concerns are big or small, they need finance
to fulfill their business activities.

In the modern world, all the activities are concerned with the economic activities
and very particular to earning profit through any venture or activities. The entire business
activities are directly related with making profit. (According to the economics concept of
factors of production, rent given to landlord, wage given to labor, interest given to capital
and profit given to shareholders or proprietors), a business concern needs finance to meet
all the requirements. Hence finance may be called as capital, investment, fund, etc., but
each term is having different meanings and unique characters. Increase the profit is the
main aim of any kind of economic activity.

NATURE OF FINANCIAL MANAGEMENT

Financial Management

 Referred to as managerial finance, corporate finance, and business finance, is a

decision making process concerned with planning, acquiring and utilizing funds in a
manner that achieves the firm’s desired goals.
 It is also described as the process for and the analysis of making financial decisions
in the business context.
 Financial Management is part of a larger discipline called FINANCE which is a body
of facts, principles, and theories relating to raising and using money by individuals,
businesses and governments.

THE GOAL OF FINANCIAL MANAGEMENT

Assuming that we confine ourselves to for-profit business, the goal of financial

management is to make money and add value for the owners. The financial manager in a
business enterprise must make decision for the owners of the firm. He must act in the owners'
or shareholders' best interest by making decisions that increase the value of the firm or the
value of the stock.

The goal of financial management is to “maximize the current value per share of the
existing stock or ownership in a business firm.”
 3

Because the goal of financial management is to maximize the value of the share(s),
there is a need to learn how to identify investments, arrangements and distribute
satisfactory amount of dividends or share in the profits that favorably impact the value of
the share(s).

The financial manager should best serve the owners of the business by identifying
goods and services that add value to the firm because they are desired and valued in the
free market place.

SCOPE OF FINANCIAL MANAGEMENT

Briefly, the traditional view of Financial Management looks into the following
functions that a financial manager of a business firm will perform:

1. Procurement of short-term as well as long-term funds from financial institutions

2. Mobilization of funds through financial instruments such as equity shares, preference

shares, debentures, bonds, notes and etc.

3. Compliance with legal and regulatory provisions relating to funds procurement, use
and distribution as well as coordination of the finance function with the accounting
function

With the globalization and liberalization of world economy, tremendous reforms in

financial sector evolved in order to promote more diversified, efficient and competitive
financial system in the country.

Globalization has caused to integrate the national economy with the global
economy and has created a new financial environment which brings new opportunities
and challenges to the business enterprise. This development has also led total reformation
of the finance function and its responsibilities in the organization. Financial management
has assumed a much greater significance and the role of the finance managers has been
given a fresh perspective.

In view of modern approach, the Finance Manager is expected to analyze the

business firm and determine the following:

 The total funds requirements of the firm

 The assets or resources to be acquired
 The best pattern of financing the assets

TYPES OF FINANCIAL DECISIONS

The three major types of decisions that the Finance Manager of a modern business
firm will be involved in are:

1. Investment decision
2. Financing decision
3. Dividend decision

All these decisions aim to maximize the shareholders' wealth through maximization
of the firm's wealth.
 4

Investment Decisions

 The investment decisions are those which determines how scarce or limited
resources in terms of funds of the business firms are committed to projects
 Generally, the firm should select only those capital investment proposals whose net
present value is positive and the rate of return exceeding the marginal cost of
capital.
 It should also consider the profitability off each individual project proposal that will
contribute to the overall profitability of the firm and lead to the creation of wealth

Financing Decisions

 Financing decisions asserts that the mix of debt and equity chosen to finance
investments should maximize the value of investments made.
 The finance decisions should consider the cost of finance available in different forms
and the risks attached to it.

Dividend Decisions

 The dividend decision is concerned with the determination of quantum of profits to

be distributed to the owners, the frequency of such payments and the amounts to
be retained by the firm.
 The dividend distribution policies and retention of profits will have ultimate effect on
the firm's wealth. The business firm should retain its profit in the form of appropriations
or reserves for financing its future growth and expansion schemes.

To summarize, the basic objective of the investment, financing and dividend

decisions is to maximize the firm's wealth. If the firm enjoys the stability and growth, its share
prices in the market will improve and will lead to capital appreciation of shareholders'
investment and ultimately maximize the shareholders' wealth.

SIGNIFICANCE OF FINANCIAL MANAGEMENT

The importance of financial management is known for the following aspects:

1. Broad Applicability

Financial management is equally applicable to all forms of business like sole traders,
partnerships and corporations. It is also applicable to non-profit organizations like trust,
societies, government organizations, public sectors and etc.

2. Reduction of Chances of Failure

A firm having latest technology, sophisticated machinery, high caliber marketing

and technical experts, and so forth may still fail unless its finances, are managed on sound
principles of financial management. The strength of business lies in its financial discipline.

Therefore, finance function is treated as primordial which enables the other functions
like production, marketing, purchase and personnel to be effective in the achievement of
organizational goals and objectives.
 5

3. Measurement of Return on Investment

Anybody who invests his money will expect to earn a reasonable return on his
investment. Financial management studies the risk- return perception of the owners and
the time value of money. It considers the amount of cash flows expected to be generated
for the benefit of owners, the timing of these cash flows and the risk attached to these cash
flows.

The greater the time and risk associated with the expected cash flow, the greater is
the rate of return required by the owners.

RELATIONSHIP BETWEEN FINANCIAL MANAGEMENT, ACCOUNTING AND ECONOMICS

Financial Management and Accounting

Accounting function discharges the function of systematic recording of transactions

relating to the firm’s activities in the books of accounts and summarizing the same for
presentation in the financial statements such as the Statement of Comprehensive Income,
Statement of Financial Position, Statement of Changes in Shareholders' Equity and the Cash
Flow Statement.

The finance manager will make use of the accounting information in the analysis
and review of the firm’s business position in decision making. Financial management is the
key function and many firms prefer to centralize the function to keep constant control on
the finance of the firm. Any inefficiency in financial management will be concluded with a
disastrous situation.

Since the accounting information is used in making financial decisions, proper

controls should be exercised in processing of accurate and reliable information to the
needs of the firm. The centralization and decentralization of accounting and finance
functions mainly depends on the attitude of the top level management.

Financial Management and Economics

Financial managers can make better decisions if they apply these basic economic
principles. For example, economic theory teaches us to seek the best allocation of
resources. To this end, financial managers are given the responsibility to find the best and
least expensive sources of funds and to invest these funds into the best and most efficient
mix of assets.

Financial managers do a better job when they understand how to respond

effectively to changes in supply, demand, and prices (firm-related micro factors), as well
as to more general and overall economic factors (macro factors).

Knowledge of economic principles can be useful in generating the highest sales

possible. Understanding and appropriately responding to changes in demand allows
financial managers to take full advantage of market conditions.
 6

Microeconomics deals with the economic decisions of individuals and firms. The
concept of microeconomics helps the finance manager in decisions like pricing, taxation,
determination of capacity and operating levels, break-even analysis, volume-cost profit
analysis, capital structure decisions, dividend distributions and etc.

Macroeconomics looks at the economy as a whole in which a particular business

concern is operating. It provides insight into policies by which economic activity is
controlled. The success of the business firm is influenced by the overall performance of the
economy and is dependent upon the money and capital markets, since the investible
funds are to be procured from the financial markets. The finance manager should also look
into the other macroeconomic factors like rate of inflation, real interest rates, foreign
exchange rates and etc.
 7

ASSIGNMENT

R E V I E W Q U E S T I O N S

Direction: Answer comprehensively the following questions.

1. Explain the shareholder wealth maximization goal of the firm and how it can
be measured. Make an argument for why it is better goal than maximizing
profit.

2. What conflicts of interest can arise between managers and stockholders?

3. Name and describe as many stockholders as you can.

4. State the kinds of assurances that investors and creditors seek from a firm.

5. What are the three types of financial management decisions? For each type
of decision, give an example of a business transaction that would be relevant.
 8

Lesson 2: Relationship of Financial Objectives to Organizational

Strategy and Objectives

Learning Objective

After studying Lesson 2, you should be able to:

Discuss the importance of objective setting in a business enterprise.

Describe the primary financial objectives of a business firm.
Explain the responsibilities of a Finance Manager to achieve the firm's financial
objectives.
Understand the nature of environmental ("green") policies and their implications
for the management of the economy and firm.

Introduction

At one time or another, most people have had occasion to hire agents to take care
of a specific matter. In doing so, responsibility is delegated to another person. The ultimate
guideline is how investors perceive the actions of managers. A good way to motivate
managers is to offer them lucrative share options linked to performance.

Finance permeates the entire business organization by providing guidance for the
firm's strategic (long-term) and day-to-day decisions. For long-range planning and
management control, a business firm establishes its overall objectives. Objective setting is
an important phase in the business enterprise since upon correct objectives setting will the
entire structure of strategies, policies and plans of a company rest.

STRATEGIC FINANCIAL MANAGEMENT

Strategic planning is a long-range in scope and has its focus on the organization as a
whole. The concept is based on an objective and comprehensive assessment of the
present situation of the organization and the setting up of targets to be achieved in the
context of an intelligent and knowledgeable anticipation of changes in the environment.
The strategic financial planning involves financial planning, financial forecasting, provision
of finance and formulation of finance policies which should lead the firm’s survival and
success.

The responsibility of finance manager is to provide a basis and information for

strategic positioning of the firm in the industry. The firm's strategic financial planning should
be able to meet the challenges and competition, and it would lead to firm's failure or
success.

The financial policy requires the deployment of firm's resources for achieving the
corporate strategic objectives. The financial policy should align with the company's
strategic planning. It allows the firm in overcoming its weaknesses, enables the firm to
maximize the utilization of its competencies and to direct the prospective business
opportunities and threats to its advantage.
 9

A company's strategic or business plan reflects how it plans to achieve its goals and
objectives. A plan's success depends on an effective analysis of market demand and
supply. The plan must include competitive analysis, opportunity assessments and
consideration of business threats.

SHORT-TERM AND LONG-TERM FINANCIAL OBJECTIVES OF A BUSINESS ORGANIZATION

Among are the primary financial objectives of a firm are the following:

Short and Medium-Term

 Maximization of return on capital employed or return on investment

 Growth in earnings per share and price/earnings ratio through maximization of net
income or profit and adoption of optimum level of leverage
 Minimization of finance charges
 Efficient procurement and utilization of short-term, medium-term and long-term
funds

Long-Term

 Growth in the market value of the equity shares through maximization of the firm’s
market share and sustained growth in dividend to shareholders
 Survival and sustained growth of the firm

The financial manager must have some goals or objectives to guide decision
involving the management of the firm's assets, liabilities and equity. Hence, priorities must
be set to resolve conflicting goals.

The wealth maximization goal is advocated on the following grounds:

 It considers the risk and time value of money.

 It considers all future cash flow, dividends and earnings per share.
 It suggests the regular and consistent dividend payments to the shareholders.
 The financial decisions are taken with a view to improve the capital appreciation of
the share price.
 Maximization of firm's value is reflected in the market price of share since it depends
on shareholder's expectations regarding profitability, long-run prospects, timing
difference of returns, risk distribution of returns of the firm.

RESPONSIBILITIES TO ACHIEVE THE FINANCIAL OBJECTIVES

Investing

The finance manage is responsible for determining how scarce resources or funds
are committed to projects. The investing function deals with managing the firm’s assets. This
task requires both the mix and type of assets to hold. The asset mix refers to the amount of
pesos invested and in current and fixed assets. The investment decisions should aim at
investments in assets only when they are expected to earn a return greater than a minimum
acceptable return which is also called as hurdle rate.
 10

The following areas are example of investing decisions of a finance manager:

 Evaluation and selection of capital investment proposal

 Determination of the total amount of funds that a firm can commit for investment
 Prioritization of investment alternatives
 Funds allocation and its rationing
 Determination of fixed assets to be acquired
 Asset replacement decisions
 Purchase or lease decisions

Financing

The finance manager is concerned with the ways in which the firm obtains and
manages the financing it needs to support its investments. The financing decisions calls for
good knowledge of costs of raising funds, different financial instruments and obligation
attached to them. The finance manager should keep in view how and where to raise the
money, determination of the debt-equity mix, impact of interest and inflation rates on the
firm.

The finance manager will be involved in the following finance decisions:

 Determination of the financing pattern of short-term, medium-term and long-term

funds requirements
 Determination of the best capital structure or mixture of debt and equity financing
 Procurement of funds through the issuance of financial instruments such as equity
shares, preference shares, bonds, long-term notes and etc.
 Arrangement with bankers, suppliers and creditors for its working capital, medium-
term and other long-term funds requirement
 Evaluation of alternative sources of funds

Operating

This third responsibility area of the finance manager concerns working capital
management. The term working capital refers to a firm short-term asset (i.e., inventory,
receivables, cash and short-term investments) and its short-term liabilities (i.e., accounts
payable, short-term loans). Managing the firm’s working capital is a day-to-day
responsibility that ensures that the firm has sufficient resources to continue its operations and
avoid costly interruptions. This also involves a number of activities related to the firm’s
receipts and disbursements of cash.

Some issues that may have resolved in relation to managing a firm’s working capital are:

 The level of cash, securities and inventory that should be kept on hand
 The credit policy (i.e., should the firm sell on credit? If so, what terms should be
extended?)
 Source of short-term financing (i.e., if the firm would borrow in the short-term, how
and where should it borrow?)
 Financing purchases of goods (i.e., should the firm purchase its raw materials or
merchandise on credit or should it borrow in the short-term and pay cash?)
 11

ENVIRONMENTAL "GREEN" POLICIES AND THEIR IMPLICATIONS FOR THE MANAGEMENT OF

THE ECONOMY AND FIRM

Private property rights can promote prosperity and cooperation and at the same
time protect the environment, but do they protect the environment sufficiently? In recent
years, people have increasingly turned to the government to achieve additional
environmental improvements. Courts help owners protect their property against invasions
by others, including polluters.

Given that stock market investors emphasize financial results and the maximization
of shareholder value, one can wonder if it makes sense for a company to be socially
responsible. Can companies be socially responsible and oriented toward shareholder
wealth at the same time? Many businessmen think so and so do most big business
establishments that they have adopted well-laid environmental-saving strategies that can
observe such as recycling programs, pollution control, tree-planting activities and so forth.
The benefits come a little at a time but one can be sure they will add up. If an investor wants
wealth maximization, management that minimizes wastes might do the other little things
right that make a company well-run and profitable.
 12

ASSIGNMENT

R E V I E W Q U E S T I O N S

Direction: Answer comprehensively the following questions.

1. Suppose you were the financial manager of a not-for-profit business. What

kinds of goals do you think would be appropriate?

2. What kinds of conflicts confront the financial managers as an agent of the

firm? How can a firm attract the best managers?

3. What are some actions that stockholders can take to ensure that
management's and stockholder's interests are aligned?

4. Does knowledge of financial theory and statistical approaches give a

manager all the answers in solving financial problems? Explain.
 13

Lesson 3: Functions of Financial Management

Learning Objectives

After studying Lesson 3, you should be able to:

Describe the role of Finance Manager in achieving the primary goal of the firm.
Understand how finance fits in the organizational structure of the firm.
Enumerate the fundamental activities of the Treasurer and the Controller.
Explain how the finance function relates to the other functional areas of a
business.
Learn the importance of corporate governance in achieving the goals of a
business organization.
Appreciate the importance of ethics in finance.

Introduction

Finance function is one of the major parts of business organization, which involves
the permanent and continuous process of the business concern. Finance is one of the
interrelated functions which deal with personal function, marketing function, production
function and research and development activities of the business concern.

FUNCTIONS OF FINANCE MANAGER

Finance manager is one of the important role players in the field of finance function.
He must have entire knowledge in the area of accounting, finance, economics and
management. His position is highly critical and analytical to solve various problems related
to finance. A person who deals finance related activities may be called finance manager.

Finance manager performs the following major functions:

1. Forecasting Financial Requirements

It is the primary function of the Finance Manager. He is responsible to estimate the

financial requirement of the business concern. He should estimate, how much finances
required to acquire fixed assets and forecast the amount needed to meet the working
capital requirements in future.

2. Acquiring Necessary Capital

After deciding the financial requirement, the finance manager should concentrate
how the finance is mobilized and where it will be available. It is also highly critical in nature.

3. Investment Decision

The finance manager must carefully select best investment alternatives and consider
the reasonable and stable return from the investment. He must be well versed in the field
of capital budgeting techniques to determine the effective utilization of investment. The
finance manager must concentrate to principles of safety, liquidity and profitability while
investing capital.
 14

4. Cash Management

In present days cash management plays a major role in the area of finance because
proper cash management is not only essential for effective utilization of cash but it also
helps to meet the short-term liquidity position of the concern.

5. Interrelation with Other Departments

Finance manager deals with various functional departments such as marketing,

production, personnel, system, research, development, etc. Finance manager should have
sound knowledge not only in finance related area but also well versed in other areas. He
must maintain a good relationship with all the functional departments of the business
organization.

Role of Finance Manager

In striving to maximize owner's or shareholders' wealth, the financial manager makes

decisions involving planning, acquiring and utilizing funds which involve a set of risk-return
trade-offs. These financial decisions affect the market value of the firm's stock which leads
to wealth maximization.

It is the responsibility of financial management to allocate funds to current and fixed

assets, to obtain the best mix of financing alternatives, and to develop an appropriate
dividend policy within the context of the firm's objectives. The daily activities of financial
management include credit management, inventory control, and the receipt and
disbursements of funds. Less routine functions encompass the sale of stocks and bonds and
the establishment of capital budgeting and dividend plans.
 15

THE FINANCE ORGANIZATION

The financial management function is usually associated with a top officer of the firm
such as a Vice President of Finance or some other Chief Financial Officer (CFO).

This is a simplified organizational chart that highlights the finance activity in a large
firm. As shown, the VP of Finance coordinates the activities of the treasurer and controller.
The Controller's office handles cost and financial accounting, tax payments and
management information systems. The Treasurer's office is responsible for managing the
firm's cash and credit, its financial planning and its capital expenditures.

RELATIONSHIP WITH OTHER KEY FUNCTIONAL MANAGERS IN THE ORGANIZATION

Finance is one of the major functional areas of business. For example, the functional
areas of business operations for a typical manufacturing firm are manufacturing, marketing
and finance. Manufacturing deals with the design and production of a product. Marketing
involves the selling, promotion and distribution of a product. Manufacturing and marketing
are critical for the survival of a firm because these products will be sold. However, these
other functional areas could no operate without funds. Since finance is concerned with all
the monetary aspects of a business, the financial manager must interact with other
managers to ascertain goals that must be met, when and how to meet them. Thus, finance
is an integral part of total management and cuts across functional boundaries.
 16

CORPORATE GOVERNANCE

Corporate governance is the process of monitoring managers and aligning their

incentives with shareholders goals. In reality, because shareholders are usually inactive, the
firm actually seems to belong to management. Generally speaking, the investing public
does not know what goes on at the firm’s operational level. Mangers handle day-to-day
operations, and they know that their work is mostly unknown to investors. This lack of
supervision demonstrates the need for monitors.

The monitors inside a public firm are the board of directors, who are appointed to
represent shareholders' interest. The board hires the CEO, evaluates management, and can
also design compensation contracts to tie management's salaries to firm performance.

The monitors outside the firm include auditors, analysts, investment banks and credit
rating agencies. External auditors examine the firm’s accounting systems and comment in
whether financial statements fairly represent the firm’s financial position. Investment
analysts keep track of the firm’s performance, conduct their own evaluations of the
company’s business activities and report to the investment community. Investment banks,
which help firms access capital markets, also monitor firm performance. Credit analysts
examine a firm’s financial strength for its debt holders. The Government also monitors
business activities through Securities and Exchange Commission (SEC), Bureau of Internal
Revenue (BIR) and Bangko Sentral ng Pilipinas (BSP).

ETHICAL BEHAVIOR

Ethics are of primary importance in any practice of finance. Finance professionals

commonly manage other people’s money. These fiduciary relationships oftentimes create
tempting opportunities for finance professionals to make decisions that either benefit the
client or benefit the advisors themselves. Strong emphasis on ethical behavior and ethics
training and standards are provided by professional associations such as the Finance
Executives of the Philippines (FINEX), Bankers Association of the Philippines, Investment
Professionals, and so forth.
 17

Governments all over the world have passed laws and regulations meant to ensure
compliance with ethical codes of behavior. And if professionals do not act appropriately,
governments have set up strong punishment for financial fraud and abuse. Ultimately,
financial manager must realize that they owe the owners/shareholders the very best
decisions to protect and further shareholder interests, but they also have a broader
obligation to society as a whole.
 18

ASSIGNMENT

R E V I E W Q U E S T I O N S

Direction: Answer comprehensively the following questions.

1. Why should corporate governance be in place?

2. In a large corporation, what are the two distinct groups that report to the
chief financial officer? Which group is the focus of corporate finance?

3. Would our goal of maximizing the value of the equity shares be different if we
were thinking about financial management in a foreign country? Why or why
not?
 19

Lesson 4: Business Organizations and Trends

Learning Objectives

After studying Lesson 4, you should be able to:

Explain the basic legal forms of business organizations such as, sole proprietorship,
partnership and corporation.
Know the advantages and disadvantages of adopting the form of business
organization.
Determine the form of business organization most adaptable to an enterprise.
Understand the importance of business trends and how they import a business
firm's business operation.

Introduction

The business firm is an entity designed to organize raw materials, labor and machines
with the goal of producing goods and/or services. Firms:

 Purchase productive resources from households and other firms

 Transform them into a different commodity
 Sell the transformed product or service to consumers

For business firms engaged in retail or trading activities, transforming purchased goods
into a different commodity does not necessarily take place. Every society, no matter what
type of economy it has, relies on business firms to organize resources and transform them
into products. In market economies, most firms choose their own price, output level, and
methods of production. They get the benefits of sales revenues, but they also must pay the
costs of the resources they use.

LEGAL FORMS OF BUSINESS ORGANIZATION

Proprietorship

A sole proprietorship is a business owned by a single person who has complete

control over business decisions. From a legal point of view, the owner of the proprietorship
is not separable from the business and is personally liable for all debts of the business. From
an accounting perspective, however, the business is an entity separate from the owner.
Therefore, the financial statements of the business present only those assets and liabilities
pertaining to the business.

Among the advantages of a sole proprietorship are:

 Ease of entry and exit
 Full ownership and control
 Tax savings
 Few government regulations

Major disadvantages of the proprietorship form include:

 Unlimited liability
 Limitations in raising capital
 Lack of continuity
 20

Therefore, the proprietorship may be an ideal form of business organization when the
following conditions exist:

 The anticipated risk is minimum and adequately covered by insurance.

 The owner is either unable or unwilling to maintain the necessary organizational
documents and tax returns of more complicated business entities.
 The business does not require extensive borrowing.

Partnership

A partnership is an association of two or more partners who agreed to contribute

money, property or industry to a common fund for the purpose of dividing the profits among
themselves. The written agreement of partnership often filed with the Securities and
Exchange Commission (SEC) is called the Articles of Co- Partnership.

Partnership may be either general or limited. A general partnership is one in which

each partner has unlimited liability for the debts incurred by the business. General partners
usually manage the firm and may enter into contractual obligations on the firm's behalf. A
limited partnership is one containing one or more general partners and one or more limited
partners. The personal liability of a general partner for the firm's debt is unlimited while the
personal liability of limited partners is limited to their investments.

Advantages of a partnership include among others the following:

 Ease of formation
 Additional sources of capital
 Management base
 Tax implication

Disadvantages of partnership are:

 Unlimited liability
 Lack of continuity
 Difficulty of transferring ownership
 Limitations in raising capital

Corporation

A corporation is an artificial being created by operation of law, having the right of

succession and the powers, attributes and properties expressly authorized by law or incident
to its existence. The Articles of Incorporation is called the charter of the corporation. It is the
document that establishes the formal organization of the corporation. It is the counterpart
of the Articles of Co-Partnership for the partnership. These two documents correspond to
the birth certificate of a natural person.

After the corporation is legally formed, it will then issue its capital stock. Ownership of
this stock is evidenced by a stock certificate. The corporate by-laws contain the rules and
regulations for the internal government of the corporation and for the government of the
corporate officers and stockholders or members.

Advantages of a corporation are:

 Limited liability
 Unlimited life
 Ease in transferring ownership
 Ability to raise capital
 21

Disadvantages of a corporation include:

 Time and cost of formation
 Regulation
 Taxes

The need of large businesses for outside investors and creditors is such that, the
corporate form will generally be the best for such firms. We focus on corporations in the
chapters ahead because of the importance of the corporate form not only locally but also
in world economies. Also, a few financial management issues, such as dividend policy are
unique to corporations. However, businesses of all types and sizes need financial
management, so the majority of the subjects we discuss bear on any form of business.

IMPORTANT BUSINESS TRENDS

1. Globalization of the Firm

Most large corporations operate on a global basis and with good reasons: investing
abroad has proven to be highly profitable. Decisions to build plants and produce goods
abroad are also motivated by the attraction of low-cost labor and the easy transfer of
highly efficient technology that gives competitive edge to foreign operations.

As domestic demand reached maturity, the search for new markets leads
corporation to invest and sell abroad. The trend to develop a presence abroad is also
motivated by a desire to hedge against risks. Competition is intensified with the emergence
of foreign industrial power, like Japan, South Korea and China because of the opportunities
for local firms to import lower priced goods for sale in the domestic market.

Globalization of the firm will continue to provide highly profitable opportunities to

domestic firms, but this movement requires careful decision making and highly skillful
financial management.

2. Ever-improving Information Technology (IT)

Improvements in IT are spurring globalization, and they bare changing financial

management as it is practiced in North America, Europe, Southeast Asia and elsewhere.
Firms are collecting massive data and using them takes much of the guesswork out of
financial decisions.

3. Corporate Governance

This trend relates to the way the top managers operate and interface with
stakeholders. At the same time, the SEC which has jurisdiction over the shareholders and
the information that must be given has made it easier to activist shareholders to changes
the way things are done within firm. Currently, investors who control huge pools of capital
are constantly looking for under-performing firms and they quickly take control and replace
manager.

Most firms today have strong written coded of ethical behavior and companies also
conduct training programs to ensure that employees understand the proper behavior in
different situations. When conflicts arise involving profits and ethics, ethical consideration
are so obviously important that they dominate.
 22

4. Outsourcing

Outsourcing occurs when domestic firms invest and produce goods in foreign
counties or when these firms choose to rely on imports rather than build domestic plans and
produce these good domestically. One major factor responsible for outsourcing is the ease
with which technology can be transferred abroad. China, India and other Asian countries
including the Philippines can claim technological parity while enjoying low costs of
production. That is why outsourcing is such an attractive investment option.

Outsourcing relieves managers from having to purchase raw materials or to hedge

against the risk that the prices of these raw materials will increase. An outsourcing firm does
not have to incur the high costs of pension plans, health benefits, and pollution control and
worker safety. Some risks such as technological obsolescence and unforeseen changes in
demand become less important with outsourcing. These and other advantages make
outsourcing an attractive option.
 23

ASSIGNMENT

R E V I E W Q U E S T I O N S

Direction: Answer comprehensively the following questions.

1. Between the three basic forms of business ownership, describe the ability of
each form to access capital.

2. In what way can statistics be used to help managers succeed?

3. Why do firms seek global exposure?

4. What are some actions that shareholders can take to ensure that
management's and shareholders' interests are aligned?