FINANCIAL PLANNING AND CONTROL

Chapter I: An Overview of Finance Management

1. Accounting cannot be considered as an exact science since rules and principles
are constantly changing and improving. The same with finance, it is not, since
you are going to employ approximation (e.g. forecasting, budgeting, etc.)
2. Financial Management is analogous to digging a deep well.
a. We keep on digging and digging the ground to look for signs of water.
b. But before we start digging, we have to look first for a suitable to dig.
c. Are you going to choose the arid soil in the dessert, or the humus soil in
the farm?
d. And once we will discover the water, we will use this water in:
i. Nourishing the resources of the organization
ii. Making the organization grows
iii. Stabilizing the roots of the organization
iv. Ultimately, in letting the organization bears it fruit or achieves its
goals? But what are these goals?
3. Usually, most of us will say “profit maximization” or “yielding the highest
possible profit for the firm.”
a. With this orientation, our decision will be directly related to the amount
of income generation. Thus, in evaluating proposals, we will choose
“highest income generating proposals” as the best choice over the
“higher or high income generating proposals”.
b. This orientation is simple and highly desirable, but it has some
serious disadvantages and drawbacks:
i. Changes in Profit may also mean changes in risk. It doesn’t
account the element of risk. Show illustration.
c. It does not consider the timing of receipt of the profit/gain.
i. Illustration refer to page 2
ii. Which is a better choice? Underscore the importance of time value
of money. The earlier, the better.
4. Maximizing the profit is important but it is not primordial, it is not fundamental, it is
not primary. The goals of the financial management should be geared towards:
a. Maximizing of the value of the firm (Valuation Approach).
i. The objective measure is not the income yielded/earned but on how
the yield are being valued by the owners of the company.
ii. This means that the main goal of financial management is to
maximize not the profit alone, but the overall value of the firm, thus,
it is called valuation approach.
iii. It is holistic. It is all encompassing. It does not only confine to the
profit but to the value of the organization as a whole.
 iv. Things to consider aside from profit.
1. Risks attached to the investment proposal or to the
company’s operations;
2. Time design as to when and how the profits will flow to into
the company;
3. The quality and reliability of the profits reports by the firm
(Show Illustration)
b. Maximization of Shareholder’s Wealth
i. Expansive goal of the firm
ii. But this is not an easy task. Why? Since managers have no
direct control of the market value of the firm.
iii. Even if the company is profitable or stable, it does
automatically translate to higher market value of the stocks of
the firm because of ECONOMIC, POLITICAL, SOCIAL
FACTORS IN THE ENVIRONMENT
1. Cite example. Mining industries are high earning
businesses. These businesses are accruing big
amounts of profits. But when the late DENR Secretary,
Gina Lopez, decided to close come of the biggest
mining companies of the country because of violation of
environmental laws, the prices of the shares of these
mining companies as listed in the Philippine Stock
Exchange plunged to a very low level. This is a
manifestation that a high earning company does not
automatically have high share price in the market.
iv. The focus is not only on the short-term wealth but on the long term
wealth of the shareholders.
v. In maximizing shareholders’ wealth, we need to consider PROFIT
versus EARNINGS PER SHARE. (Show illustration)
vi. We can conclude in the illustration that:
1. Profit maximization does not necessarily mean stock value
maximization
2. If the company is concerned with the welfare of the
stockholders, it should focus on EPS rather than on total
company profits, but how?
5. To answer this, we need to scrutinize the formula of Earnings Per Share or Basic
Earnings per Share which is (Net Income – Preferred Dividends) / Ordinary
Shares Outstanding. This shows how much money a company makes for each
share of its stock. A higher EPS indicates more value because investors will pay
more for a company with a EPS. How to increase EPS?
a. Increase Net Income
i. Revenue Increase by increasing sales volume or sales price
 ii. Cost Decrease by reducing cost of goods sold and operating
expenses or otherwise known as Margin Expansion
b. Limit issuance of preferred shares
c. Share count decrease through Share Repurchase or Share Buybacks. A
lower share count is equal to higher EPS.
6. Social Responsibility.
a. NEED OF THE FIRM FOR WEALTH MAXIMIZATION versus NEED OF
THE FIRM TO BE SOCIALLY RESPONSIBLE
i. Can a firm become socially responsible while focusing on
maximizing the shareholder’s wealth or maximizing the over-all
value of the firm?
ii. Can we reconcile these targets?
1. If value of the firm increases, its capital will increase,
thus, they can hire more workers; they can diminish
unemployment and give continued services to the
community.
iii. However, this is not always the case. There are issues such as:
1. Salary Distribution. There was an issue with regards to
the implementation of Salary Standardization Law (SSL)
2016 since those employees belonging to higher salary
grades have enjoyed the highest margin of increase.
Percentage wise, the rate of increase is varied across all
salary grades. This is the reason why the planned Salary
Standardization Law 5th Tranche which will be effective
next fiscal year 2020, according to the DBM Secretary,
will be fixed across all salary grades, and that is 10%
increase across all salary grade levels.
There are several employees in the private sector who
are earning below the minimum wage.
The Philippines experienced that having policies that
biased on workers’ welfare and protection may hinder
employment creation.

Another reason why most companies are hesitant to

implement increases to the salaries of the employees is
that it will increase the cost of labor, and considering
that labor forms part of the cost in producing the
products and in rendering the services (cost of sales or
cost of services), it will affect the price of the products
of the company, it will result to higher prices of
company’s products/services. Thus, the prices of the
 company’s products will not be competitive compared
to other competitors.
iv. Hiring practices
v. Product safety (product recall because of contamination of
salmonella bacteria)
vi. Minority Training
vii. Anti-Pollution Measures: What are the reasons why the government
decided for the closure of the business in El Nido, Palawan and
Boracay? Because most business establishments are not socially
responsible in protecting the environment. Because of high
concentration/level of coliform. The coliform level in some of
the beaches in El Nido reached as high as 3.4million (Most
Probable Number)/100ML. The safe level for swimming is only
100 MPN/100ML. Did you know that household and industry
sewages and wastes is the major culprit in the contamination
of rivers and seas? There are several non-compliant resorts
and establishments in El Nidos. President Duterte described
Boracay as “cesspool”.
To resolve issues like these, companies belonging to the same
industry must do a concerted effort in being socially responsible.
Concerted because, if only one company opts to be socially
responsible that “martyr” would not survive. For instance, if
company X opts to acquire the anti-pollution device which is costly,
the price of the products sold by Company X needs to be
increased. Company Y and Z, both without the anti-pollution device,
can sell their products at a lesser price. Company X will be at a
disadvantage.
Government Agencies should make these measures as
COMPULSORY RATHER THAN VOLUNTARY.
viii. What other socially responsible actions that you would be willing to
propose to the management?
1. Anti-Age Discrimination in Employment

7.
Liabilities Funds coming from
ASSETS
creditors
(Current or
Non-Current
Assets)
Equity
Funds coming from investors
8. Functions of Financial Management
a. Assets. Prudent allotment and spreading of company funds to current
assets and non-current assets.
i. Cash Management
ii. Inventory Management
iii. Credit Management
iv. Fund Receipt
v. Disbursement Management
b. Liabilities and Equity. Well balanced financing activities and suitable
dividend policy.
i. Stock and bond-issuance
ii. Capital Budgeting
iii. Dividend Policies
9. It is important to note that while daily and irregular activities are managed, the
financial manager must be able to balance making income and considering the
inherent risks on decisions made. This balancing act between income and
risk is referred to as risk-return tradeoffs. The financial manager must
strike a balance between the highest possible income with the most
reasonable amount of risk. NO RISK, NO REWARD

INCOME RISKS

Risk appetite is the amount and type of risks an individual or wider

organization is willing to accept in pursuit of its goals.

DETECTION. PREVENTION. MITIGATION.

10. Responsibilities of a Financial Manager

a. Maintain and sustain the economic capability of the enterprise. This
is challenging because right now, financial managers are not only
dealing with domestic economic affairs but also with global
economic affairs such as interest rates, currency exchange rates,
etc. There is interweaving connection of the local and global
economy. Example: When the prices of petroleum in the world
market increases, our local economy will also suffer. This was one of
the contributory factors of the inflation that occurred in Philippines
last year. Some of the specific responsibilities of the Financial
Managers are the following:
i. Forecasting and Planning
 ii. Making Crucial Investment and Financing Decisions. Increasing
sales or demands for services needs investment ether by acquiring
PPEs, and inventories. The Financial Manager must help decide on
the appropriate amount of PPE to be acquired and determine the
source of funds for such acquisition.
iii. Coordinating and Controlling. Like in Leyte Normal University,
every time there is a proposal with financial component, it should
undergo to the Local Finance Committee (University President, VP
Admin for Finance, CAO Finance, CAO Admin, Planning Officer,
Budget Officer and the Accountant) for deliberation before it will be
elevated to the Board of Regents (Chairperson of CHED, University
President, NEDA, Faculty Regent, Student Regent, Senate
(Chairman of Committee on Education), Congress (Chairman of
Committee on Education), President of the Alumni Association,
Private Sector Representative) for approval. In the same way, if in
case there is fund surplus or if there is available/unrestricted
fund, the Finance Unit will inform the management a proposal
to utilize the fund.

There is coordination since the crafting and implementation of the

proposals passes through dual levels and channels of management.
Achieving the goals of the organization is not a one-man show. It is a
collaboration and synergy of all the resources (specially the human
resources) of the organization.

There is control since there is check and balance. In the case of

Leyte Normal University, there are three stations for checking: one is
being done by the proponent, by Local Finance Committee, and
by the Board of Regents.

iv. Trading in Financial Markets. Trading of debt and equity securities

in the financial market. It is crucial for the financial managers to
have their hands on dealings with the financial markets. The effect
is that the investors are either making or losing money in trading.

v. Risk Management. No business is free from risks.

1. Financial Risks
a. Prices of commodities, currency exchange rates, and
interest rates fluctuate
b. The effects of these risks can be deterred by hedging
the in the derivatives market.

Hedging through Derivatives

 Derivatives are securities that move in correspondence to one or
more underlying assets. They include options, swaps, futures,
and forward contracts. The underlying assets can be stocks,
bonds, commodities, currencies, indices or interest rates.

Hedging through Diversification

Invest in a company for luxury goods, and invest also in company
selling basic commodities
vi. Natural Calamities
1. Floods, fires, and earthquakes
a. Adequate insurance. Like during the Super Typhoon
Yolanda, we were able to get an indemnification for
the damages sustained by the buildings and
properties of the University because of the
comprehensive insurance that the University availed
at the GSIS.