INTRODUCTION TO FINANCIAL MANAGEMENT

FINANCE  The science and art of managing money.

 Is the study of how individuals of businesses evaluate investment opportunities,
business proposal and project and raise capital to fund them.

BUDGETING  Is the act of estimating revenue and expenses over period of time.
 Finance is concerned with decisions about:
o How much money of their earnings they spend
o How much they save of how much they need
o How they invest their savings
o How they raise additional funds they need
FINANCIAL  The efficient and effective management of funds
MANAGEMEN  The goal of financial management is to maximize profit
T  Managers of a corporation- are responsible for making the decisions for the
company that would lead towards shareholders’ wealth maximization.
 Chief Financial Officer (CFO)

SHAREHOLDERS

BOARD OF DIRECTORS (BOD)

PRESIDENT (CEO )

VP for VP FOR VP FOR VP FOR

MARKETING FINANCE PRODUCTION ADMINIST
RATION

SHAREHOLDERS  Elect the Board of Directors (BOD)

 Each share held is equal to one voting right
 (BOD) carry out the objectives of the shareholders.
BOARD OF  Is the highest policy making body in a corporation
DIRECTORS (BOD)  Ensure that the corporation is operating to serve the best interest of the
stockholders
 Approve company’s strategies, goals, and budgets.
 Appoint and remove members
 Determine top management’s compensation
 Approve the information and other disclosures reported in the FS
PRESIDENT (CHIEF  Oversee the operations of a company and ensure that the strategies as approved by
EXECUTIVE the board are implemented as planned.
OFFICER/CEO)  Performs all areas of management: planning, organizing, staffing, directing, and
controlling
 Represent the company in professional, social and civic activities.
VP for  Formulate marketing strategies and plans
MARKETING  Direct and coordinate company sales
 Perform market and competitor analysis
 Analyze and evaluate the effectiveness and cost of marketing methods applied
 Promote good relationships with customers and distributors.
VP for  Ensure production meets customer demands
PRODUCTION  Identify production technology/ process that maximizes production cost and make
the company cost competitive
 Come up with a production plan that maximizes the utilization of the company’s
production facilities
 Identify adequate and cheap raw material suppliers
VP for  Coordinates the function of administration, finance, and marketing departments
ADMINISTRATIO  Assist other departments in hiring employees
N  Provide assistance in payroll preparation, payment of vendors, and collection of
receivable.
 Determine the location and the maximum amount of office space needed by the
company.
VP for FINANCE  Determine the appropriate capital structure of the company
 Treasurer, controller, (under the CFO)
 Capital Structure- refers to how much of your total assets is financed by debt and
how much is finance by equity
 Financing
 Investing
 Operating
 Dividend Policies

FINANCIAL INSTITUTIONS

FINANCIAL  Intermediaries that channel the savings of individuals, businesses, and

INSTITUTIONS government into loans or investments
 Acts as financial intermediary between the suppliers and users of funds
COMMERCIAL  Use the deposited funds to provide commercial loans to firms and personal loans
BANKS to individuals.
INSURANCE  Pool payments and invest the proceeds in various securities until the funds are
COMPANIES needed to pay off claims of policyholders.
MUTUAL FUNDS  Are owned by investment companies which enable small investor to invest in a
diversified portfolio securities purchased on their behalf by professional
investment managers.
INVESTMENT  Raise fund from the “investing public” through bond issuances and initial public
BANKS offerings.
HOW TO RAISE  Identify businesses that needs financing.
FUND FROM THE  Talk and negotiate with the business on the: amount needed, investment rate,
PUBLIC: fee to charge for the service
 Once agreed, execute the fund raising
 Monitor the soundness and viability of the issuer and monitor payments to
investors
PENSION FUNDS  Receive payments from employees and invest the proceeds on their behalf
OTHER FINANCIAL  GOVERNMENT SERVICE INSURANCE SYSTEM )GSIS)
INSTITUTIONS:  SOCIAL SECURITY SYSTEM (SSS)
 CREDIT UNIONS

FINANCIAL INSTRUMENTS

FINANCIAL  Is a real or a virtue document representing a legal agreement involving some sort-
INSTRUMENTS of monetary value
 These can be debt securities like corporate bonds or equity like shares of stock.
 Help finance manager handle his cash, short term and long term operating
requirements
TYPES OF
FINANCIAL
INSTRUMENTS
DEBT  Generally have fixed returns due to fixed interest rates.
INSTRUMENTS
CORPORATE Are issued by corporations
BONDS Matures in forty years (some 100 yrs- walt Disney,
coca cola)
 Usually have higher interest rates but more risky
TREASURY  Are issued by the Philippine government
BONDS AND  Have usually low interest rates and have very low
TREASURY risk of default as government will exert all effort to
BILLS pay
 Matures within one year
EQUITY  Generally have varied returns based on the performance of the issuing company.
INSTRUMENTS
PREFERRED  Issued by corporations in exchange of units of
STOCK ownership
 Has no maturity date, pays dividend when declared
 Has no voting rights
 Priority over a common stock in terms of claims
over the assets of the company
 More risky than corporate bonds
COMMON  Units of ownership in a public corporation
STOCK  Pays dividends when declared
 Has voting rights, are the real owners of the
company
 Less priority in corporate liquidation
 Enjoy potential profits from capital stock
appreciation
 FINANCIAL MARKETS

PRIMARY MARKET  Where the users of funds will go to issue new securities
 Public offering – the sale of new securities to the general public
 Initial public offering – the first offering of stock
 Private placement- sale of new securities to one investor or group of investors
SECONDARY  Where the sale of previously owned securities takes place
MARKET  Philippine Stock Exchange (PSE) is both a primary and secondary market

MONEY MARKETS  A venue wherein securities with short-term maturities (1 year or less) are sold
CAPITAL MARKET  Where securities with longer-term maturities are sold
 Securities are bonds (long-term debt) and both common stock and preferred stock
(equity or ownership)

FINANCIAL MARKETS
 If facts are unknown to them, A and B can go to a
Financial Market that lets A along with other suppliers
of funds, and B, along with other users of funds, meet
and make transactions. Once A and B met in the
Financial Market, they can now agree to make a
private placement.

FINANCIAL INSTITUTIONS
 If A and B do not want to make an effort to find a counterpart in the Financial Markets, A and B may go
to Financial Institutions. A Financial Institutions will receive A’s supply of funds and match it with B’s
demand of funds.

ROLE OF FINANCIAL MANAGER IN FINANCIAL MANAGEMENT

 Invest money in business/ projects that are worthwhile

 Worthwhile business- worth time and effort because it achieves the goal of financial
soundness, liquidity, profitability, and nation building.
 Make financing decisions that require funding from investors in the financial markets
 Evaluate business in term of:
 Capital Structure (A= L + E)
 Liquidity
 Solvency
 Profitability
 Asset Management Efficiency