ST.

JOHN PAUL II INSTITUTE OF TECHNOLOGY

TRAINING ASSESSMENT AND LEARNING CENTER, INC
FRA Building, Carmen West, Rosales, Pangasinan/
Aguila Road, Brgy. Sevilla, San Fernando City, La Union

Business Finance
Quarter I – Module 1:
Introduction to Financial
Management
(Week 1)

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 Subject: Business Finance
Grade & Section: Grade 12-ABM
Module No. 1
Week No. 1
Instructor: Ms. Camille N. Cornelio

Objectives:

At the end of the lesson, students should be able to:

1. define finance;
2. describe who are responsible for financial management within an organization;
3. describe how the financial manager helps in achieving the goal of the organization; and
4. describe the role of financial institutions and markets.

Lesson Introduction to Financial

1 Management

Business Finance is a specialized subject of Accounting, Business and Management

strand, which introduces the basic concepts of corporate finance and personal finance.
The lessons have been designed to give learners the opportunity to explore the content
and performance standards set for Business Finance. It will prepare learners in applying
such learnings in real life situation.

What is Finance and Financial Management?

Finance is always of great importance, be it in a business or in one's everyday life.
It is important to manage risks in business, it is equally important to manage risks in life
as well. Risk is nothing but an uncertain event that might damage your assets and when
it is financial risks, it creates loss of Finance. Some books define Finance as the science
and art of managing money. (Gitman & Zutter, 2012)
Financial Management deals with that decisions that are supposed to maximize
the value of shareholder’s wealth (Cayanan). These decisions will ultimately affect the
markets perception of the company and influence the share price. The goal of Financial
Management is to maximize the value of shares of stocks. Managers of a corporation are
responsible for making the decisions for the company that would lead towards
shareholder’s wealth maximization.
Organizational structure of the company is important especially in the financial
aspect of the business and the particular set of people, each play a role in the decision
making of the company. See diagram below.

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 SHAREHOLDERS
OWNERS
elects

Board of Directors

appoints

President

MANAGERS

Vice President Vice President Vice President Vice President

for Marketing for Finance for Production for
Administration

From the diagram presented, emphasized that each line is working for the interest of the
person on the line above them. Since the managers of the company are making decisions
for the interest of the board of directors and the board of directors do the same for the
interest of the shareholders, it follows the goal of each individual in a corporate
organization should have an objective of shareholder’s wealth maximization.

The roles of each position identified.

1. Shareholders: The shareholders elect the Board of Directors (BOD). Each share held
is equal to one voting right. Since the shareholders elect the BOD, their responsibility is
to carry out the objectives of the shareholders. Otherwise, they would not be elected in
that position. Ask the learners again, what objective of the shareholders is, just to refresh.
2. 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:
a. Setting policies on investments, capital structure and dividend policies.
b. Approving company’s strategies, goals and budgets.
c. Appointing and removing members of the top management including the
president.
d. Determining top management’s compensation.
e. Approving the information and other disclosures reported in the financial
statements (Cayanan, 2015)

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 3. President (Chief Executive Officer): The roles of a president in a corporation may
vary from one company to another. Among the responsibilities of a president are the
following:
a. Approving the information and other disclosures reported in the financial
statements. Overseeing the operations of a company and ensuring that the
strategies as approved by the board are implemented as planned.
b. Performing all areas of management: planning, organizing, staffing, directing
and controlling.
c. Representing the company in professional, social, and civic activities.

4. VP for Marketing: The following are among the responsibilities:

a. Formulating marketing strategies and plans. Directing and coordinating
company sales.
b. Performing market and competitor analysis.
c. Analyzing and evaluating the effectiveness and cost of marketing methods
applied.
d. 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.
e. Promoting good relationships with customers and distributors. (Cayanan, 2015)

5. VP for Production: The following are among the responsibilities:

a. Ensuring production meets customer demands.
b. Identifying production technology/process that minimizes production cost and
make the company cost competitive.
c. Coming up with a production plan that maximizes the utilization of the
company’s production facilities.
d. Identifying adequate and cheap raw material suppliers. (Cayanan, 2015)

6. VP for Administration: The following are among the responsibilities:

a. Coordinating the functions of administration, finance, and marketing
departments.
b. Assisting other departments in hiring employees.
c. Providing assistance in payroll preparation, payment of vendors, and collection
of receivables.
d. 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)

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 The role of the VP for Finance/Financial Manager is to determine the
appropriate capital structure of the company. Capital structure refers to how much of
your total assets financed by debt and how much is financed by equity.
To be able to acquire assets, our funds must have come somewhere. If it has bought
using cash from our pockets, it has financed by equity. On the other hand, if we used
money from our borrowings, the asset bought has financed by debt.

What are the functions of Financial Managers?

1. Financing decisions - include making decisions as to how to finance long-term
investments and working capital-which deals with the day-to-day operations of the
company.
2. Investing Decisions - To minimize the probability of failure, long-term investments
have supported by a capital budgeting analysis.
3. Operating Decisions – deal with the daily operations of the company especially on
how to finance working capital accounts such as accounts receivable and inventories.
4. Dividend Policies – Dividend is a part of profits that are available for distribution,
to equity shareholders. The Finance manager must decide whether the firm should
distribute all the profits or retain them or distribute a portion and retain the balance.

OVERVIEW OF THE FINANCIAL SYSTEM

SAVERS Financial Intermediaries Users of Funds

(Borrowers/ Investors)
-Households -Banks
-Individuals -Insurance Companies -Households
- -Stock Exchange -Individuals
Corporations/Companies -Stock brokerage firms -Corporations/Companies
-Government Agencies -Mutual Funds -Government Agencies

The financial system links the savers and the users of funds. Savings can come from
households, individuals, companies, government agencies, or any other entity whose cash
inflows are greater than their cash outflows. The financial system through financial
intermediaries provides a mechanism by which these savings can be channeled to users
of funds, borrowers, and investors.
Some of the financial instruments issued by users of funds such as the shares of
stocks and corporate bonds of publicly listed companies and the debt securities issued by
the National Government has traded.

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Differentiate the Financial instruments, financial institutions and financial markets
1. Financial institutions are companies in the financial sector that provide a broad
range of business and services including banking, insurance, and investment
management. Identify examples of financial institutions/Intermediaries:
a. Commercial Banks - Individuals deposit funds at commercial banks, which
use the deposited funds to provide commercial loans to firms and personal loans to
individuals, and purchase debt securities issued by firms or government agencies.
b. Insurance Companies - Individuals purchase insurance (life, property and
casualty, and health) protection with insurance premiums. The insurance
companies pool these payments and invest the proceeds in various securities until the
funds needed to pay off claims by policyholders. Because they often own large
blocks of a firm’s stocks or bonds, they frequently attempt to influence the management
of the firm to improve the firm’s performance, and ultimately, the performance of
the securities they own.
c. Mutual Funds - Mutual funds owned by investment companies that enable
small investors to enjoy the benefits of investing in a diversified portfolio of
securities purchased on their behalf by professional investment managers. When
mutual funds use money from investors to invest in newly issued debt or equity
securities, they finance new investment by firms. Conversely, when they invest in debt or
equity securities already held by investors, they are transferring ownership of the
securities among investors.
d. Pension Funds - Financial institutions that receive payments from employees
and invest the proceeds on their behalf.
Other financial institutions include pension funds like Government Service
Insurance System (GSIS) and Social Security System (SSS), unit investment trust fund
(UITF), investment banks, and credit unions, among others.

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2. Financial Instruments - is a real or a virtual document representing a legal
agreement involving some sort of monetary value. These can be debt securities like
corporate bonds or equity like shares of stock. When a financial instrument issued, it gives
rise to a financial asset on one hand and a financial liability or equity instrument on the
other.
a. A Financial Asset is any asset that is:
• Cash
• An equity instrument of another entity
• A contractual right to receive cash or another financial asset from another entity.
• A contractual right to exchange instruments with another entity under
conditions that are potentially favorable. (IAS 32.11)
• Examples: Notes Receivable, Loans Receivable, Investment in Stocks,
Investment in Bonds

b. A Financial Liability is any liability that is a contractual obligation:

• To deliver cash or other financial instrument to another entity.
• To exchange financial instruments with another entity under conditions that are
potentially unfavorable. (IAS 32)
• Examples: Notes Payable, Loans Payable, Bonds Payable

c. An Equity Instrument is any contract that evidences a residual interest in the assets of
an entity after deducting all liabilities. (IAS 32)
• Examples: Ordinary Share Capital, Preference Share Capital
• Identify common examples of Debt and Equity Instruments.

d. Debt Instruments generally have fixed returns due to fixed interest rates. Examples of
debt instruments are as follows:
• Treasury Bonds and Treasury Bills issued by the Philippine government.
These bonds and bills have usually low interest rates and have very low risk of
default since the government assures that these has been paid.
• Corporate Bonds issued by publicly listed companies. These bonds usually
have higher interest rates than Treasury bonds. However, these bonds are not risk free. If
the company issued the bonds goes bankrupt, the holder of the bonds will no longer
receive any return from their investment and even their principal investment has wiped
out.

e. Equity Instruments generally have varied returns based on the performance of the
issuing company. Returns from equity instruments come from either dividends or stock
price appreciation. The following are types of equity instruments:
•Preferred Stock has priority over a common stock in terms of claims over the
assets of a company. This means that if a company has liquidated and its assets have to

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be distributed, no asset be distributed to common stockholders unless all the
claims of the preferred stockholders has given. Moreover, preferred stockholders have
also priority over common stockholders in cash dividend declaration. Dividends to
preferred stockholders are usually in a fixed rate. No cash dividends given to
common stockholders unless all the dividends due to preferred stockholders paid
first. (Cayanan, 2015)
• Holders of Common Stock on the other hand are the real owners of the
company. If the company’s growth is encouraging, the common stockholders will
benefit on the growth. Moreover, during a profitable period for which a company may
decide to declare higher dividends, preferred stock will receive a fixed dividend rate
while common stockholders receive all the excess.

3. Financial Market - refers to a marketplace, where creation and trading of

financial assets, such as shares, debentures, bonds, derivatives, currencies, etc. take
place.
Classify Financial Markets into comparative groups:
- Primary vs. Secondary Markets
• To raise money, users of funds will go to a primary market to issue new
securities (either debt or equity) through a public offering or a private placement.
• The sale of new securities to the public referred to as a public offering and the
first offering of stock named an initial public offering. The sale of new securities
to one investor or a group of investors (institutional investors) is referred to as a
private placement.
• However, suppliers of funds or the holders of the securities may decide to sell the
securities that have purchased. The sale of previously owned securities takes place in
secondary markets.
• The Philippine Stock Exchange (PSE) is both a primary and secondary market.

- Money Markets vs. Capital Markets

•Money markets are a venue wherein securities with short-term maturities (1 year
or less) are sold. They have created because some individuals, businesses,
governments, and financial institutions have temporarily idle funds that they wish to
invest in a relatively safe, interest bearing asset. At the same time, other individuals,
businesses, governments, and financial institutions find themselves in need of seasonal
or temporary financing.
• On the other hand, securities with longer-term maturities sold in Capital markets.
The key capital market securities are bonds (long-term debt) and both common stock
and preferred stock (equity, or ownership).

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 Role of Financial Role of Financial Role of Investors
Managers Markets
The financial markets
provide a forum in which
Financial managers make Investors provide the
firms can issue securities
financing decisions that funds that are to be used
to obtain the funds that
require funding from by financial managers to
they need and in which
investors in the financial finance corporate
investors can purchase
markets. growth.
securities to invest their
funds.

How do we measure wealth maximization?

For example, assume that Mr. Y bought 10 shares of Globe Telecom at PHP2, 510 each on
September 9, 2010. 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?
Explanation: An increase of the share price to PHP2, 600 per share means that people
are willing to buy the shares for that amount. If the learners were to sell their shares at
this point, it will result to a profit of PHP90 per share or PHP900 on their whole
investment. Hence, the value of their investment increased from PHP25, 100 to PHP26,
000. Therefore, there is an increase in shareholder’s wealth.
On the other hand, a decrease in the share price to PHP2, 300 per share means that
people are only willing to buy shares for PHP2, 300. If the learners were to sell their
investment at this point, they will receive PHP23, 000 which would result to a loss of
PHP2, 100. The decrease in value of their investment leads to a decrease in shareholder’s
wealth.

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 Activity:
Directions. Write T if the statement is true and F if the statement is false.
_____ 1. Financial management itself involves planning, organizing, controlling, and
monitoring your financial resources in order to achieve your business objectives.
_____ 2. Financial institutions are companies in the financial sector that provide a broad
range of business and services.
_____ 3. One of the functions of financial manager is to assist other departments in
hiring employees.
_____ 4. Stockholders expect to earn higher rates of returns on investments of lower risk
and lower rates of return on investments of higher risk.
_____ 5. Financial management’s goal is to minimize the value of shares of stocks.
_____ 6. Financial markets are intermediaries that channel the savings of individuals,
businesses, and government into loans or investments.
_____ 7. The role of the VP for Marketing is to determine the appropriate capital
structure of the company.
_____ 8. Mutual fund is an example of financial institutions that enables small investors
to invest in securities purchased on their behalf by professional investment
managers.
_____ 9. The shareholders have the right to elect the Board of Directors (BOD).
_____ 10. If you bought an asset using cash from your pocket, it has finance by equity.

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