Business Finance Chapter 1

PALAWAN STATE UNIVERSITY
College of Business and Accountancy

Puerto Princesa City
CHAPTER 1:
INTRODUCTION TO BUSINESS FINANCE
FIN 2001 - BUSINESS FINANCE
2nd Semester - S.Y. 2022 - 2023
Prepared by:
ZIEDWRICK A. DICAR
Instructor I
FIN 2001: BUSINESS FINANCE | Module 1: Introduction to Business Finance
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LESSON 1:
THE CONCEPT AND
DEVELOPMENT OF MONEY
Overview
Money is the most important invention of modern times. It has undergone a long
process of historical evolution. Human beings passed through a stage when money was not in
use and goods were exchanged directly for one another. This chapter will discuss the evolution
Overview
of money starting with barter in the early years, to the use of different form of money. In our
country we use coins and bills.
Some countries use polymer or plastic money. If we study the history of money, we shall
find that all sorts of commodities like rice, fish meat, coconut, sugar or coffee have been used as
a medium of exchange. It is called commodity money. Inadequacy of commodity money led to
the evolution of metallic money (gold and silver). The problem of uniformity of weight and
purity of precious metals led to private and public coinage. This process was finally taken over
by the state as one of its essential features and ultimately commodity money gave way to paper
money which means currency notes. Nowadays, use of paper money has almost become
universal along with coins made of copper, bronze or nickel, etc.
The process of evolution of some better medium of exchange still continues. As the
volume of transactions increased, even paper money started becoming Inconvenient because
of time involved in its counting and space required for its safe keeping. This led to introduction
of plastic money (or credit money) in the form of cheques, drafts, bills of exchange, credit cards,
etc. These days plastic money in the form of debit cards are becoming popular. Thus, plastic
money has become the most important form of money in modern times because it is not only a
very convenient form of money for large payments, but also eliminates risks and is durable.
Course Outcomes
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At the end of this course, you can:

 Interpretbasic finance knowledge.
 Communicate effectively using standard business terminology.
 Discuss the importance of finance knowledge.
 Apply best practices in financial management to make plans and provide
financial leadership.
Learning Outcomes
At the end of this module, you can:
 Discuss the PSU Mission, Vision and Quality Policy
 Define terminologies related to finance.
 Explain barter and coinage process.
 Discuss different types of plastic money.
 Discuss the different functions of money.
Discussion
LESSON 1: THE CONCEPT AND DEVELOPMENT OF MONEY

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INTRODUCTION
Money is defined by Merriam Webster as something generally
accepted as a medium of exchange, a measure of value, or a means of
payment. Money is commonly defined as anything authorized by law to
be generally accepted as a legal tender, as a medium of exchange, and a
standard of value in payment of goods and services without reference to
the general standing of the person who offers it. So long as the money
being tendered is genuine and not counterfeit, it is accepted as payment
without regard as to who is making the payment. What matters is the
authenticity of the money being tendered as payment. In short, money is the lawful token used in our
society to pay goods, services, and debt.
As the word money is used in everyday conversation, it can
mean many things, but to economists, it has a very specific meaning. To
avoid confusion, we must clarify how economists’ use of the word
money differs from conventional usage. Economists define money (also
referred to as the money supply) as anything that is generally accepted
in payment for goods or services or in the repayment of debts.
Currency, consisting of dollar bills and coins, clearly fits this definition
and is one type of money. When most people talk about money, they’re
talking about currency (paper money and coins). If, for example,
someone comes up to you and says, “Your money or your life,” you
should quickly hand over all your currency rather than ask, “What exactly do you mean by
‘money’?” To define money merely as currency is much too narrow for economists. Because checks
are also accepted as payment for purchases, checking account deposits are considered money as well.
An even broader definition of money is often needed, because other items such as savings deposits
can in effect function as money if they can be quickly and easily converted into currency or checking
account deposits.
Origin of the Word “Money”

Money is derived from the Latin word moneta, surname of the Roman
goddess Juno, Moneta refers to a mint or a place for coining money.
According to the etmonline.com, it also comes from the Old French
monole and the Modern French monnale, meaning money coin, currency
or change. Relative to the attribute of Juno Moneta as the guardian of the
finances of the Roman Empire, it could also have been from the Latin
monere, meaning advise or warn. In ancient Greece, the word moneta
meant advisor, one who warns, or makes people remember.
Barter Trade
In the old times, people were basically self-
sufficient. They did simple farming or planting, fishing
and hunting. They provided the food that they needed
in order to survive. There was very little need for
exchanges as they lived very simple lives during those
times.

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As society evolved, the habits and ways of life of men changed. Men found the need to
exchange what they produced for what they needed. Thus, barter came into practice. Barter is
defined as the exchange of things for other things. For example, rice was traded for fish or meat;
coconut was traded for sugar or coffee. Barter was the system used by mean to get the goods they
wanted in exchange of what they had before money was developed. It is the exchange of a good or
service for another good or service.
A barter system is an old method of exchange. This system has been used for centuries and
long before money was invented. People exchanged services and goods for other services and goods
in return. Today, bartering has made a comeback using techniques that are more sophisticated to aid
in trading; for instance, the Internet. In ancient times, this
system involved people in the same area, however today
bartering is global. The value of bartering items can be
negotiated with the other party. Bartering doesn't involve
money which is one of the advantages. You can buy items by
exchanging an item you have but no longer want or need.
Generally, trading in this manner is done through online
auctions and swap markets.
Coinage
In 6th Century BCE Greek poet Xenophanes,
quoted by the historian Herodotus, ascribed the invention
of metal coinage to the Lydians. In 600 BCE, Lydia's King
Alyattes minted what is believed to be the first official
currency, the Lydian stater.
In August 2021, Chinese archaeologists with
the State University of Zhengzhou discovered the world’s
oldest known, securely dated coin minting site. The
facility, located in Guanzhuang in Henan Province, China,
began striking spade coins sometime around 640 BCE, one
of the first standardized forms of metal coinage.
The use of metals as money proved to be insufficient for the needs of society. One of the
problems was determining the purity of metal used as money. For gold, the use of touchstone helped.
The simplest and oldest tool to determine the purity of gold was the touchstone used in the 16 th
century. A gold coin (of unknown purity) is rubbed
against a dark stone creating a steak. Then more
steaks are made with pieces of gold with known
amounts of silver (or copper), and the colors of the
steaks are compared until an exact color matched to
the unknown is obtained.
This match indicates that both are of the same

purity. The discovery of the touchstone, a machine used
to test the purity of metal and the total content of a
particular lump paved the way to metal-based commodity
for money and coinage. As a result, the concept of using
standard coinage was developed.
Coinage is the conversion of metals into coins.
The place where metals are made into coins is known as
mint. With coinage, metals were made into coins of a

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fixed weight. Money in the form of coins became a convenient commodity for exchange transactions
and, later, a convenient tool for comparing and storing values. Still, at a later period as provided in
the Philippine Constitution (Miranda 2004), it became an exclusive prerogative of the Government of
the Republic of the Philippines and hence, the symbol of the state or government issuing the said
coin.
Coin is an ingot of metal, the weight and fineness of which are certified by the integrity of
the design on its surface or by the power of the issuing authority.
Only the government, specifically the central bank of a country, is
given the power to mint coins and print bills or paper money. In the
Philippines, Bangko Sentral ng Pilipinas, which has its own mint, is
the only government agency solely vested with the power to mint
coins.
It means the process of manufacturing metals in to certain
shapes to maintain the uniformity in all the coins of same kind. In the
old ages gold and silver metals were commonly used as a media of
exchange. There were many problems in the transactions of metals.
So to remove these problems the government has taken over the sole
power of coinage money. Now government converts the metal into standard coins. Now a days it is
very easy medium of exchange and tempering with the metallic currency is very difficult.
Kinds of Coinage
1. Free Coinage or Gratuitous Coinage - This system whereby metals be bought to the government
mint and converted into standard money without any change for minting except for the delay
involved in the process.
2. Brassage - A charge made to an individual under a system of free coinage for the minting of
any gold or silver brought to the mint and usually calculated to cover various costs
3. Seigniorage - This is the kind of coinage where the fee charge by the government is more than the
cost minting so the government earns a profit. The government defines the size, shape. Design, and
weight of coins. The government allows people to bring their precious metals like gold (gold bullions
or bars) to be minted. The government revenue from the manufacture of coins calculated as the
difference between the face value and the metal value of the coins
4. Limited Coinage - This type of coinage is one wherein the government converts metals into coins
only at its option. There is no privilege of free coinage in such a case. The government buys precious
metals in the open market and mints them as coin money or the standard medium of exchange at face
value higher than the material content to facilitate trade
Paper Money
Paper bills were first used by the Chinese, who
started carrying folding money during the Tang
Dynasty (A.D. 618-907) — mostly in the form of
privately issued bills of credit or exchange notes —
and used it for more than 500 years before the practice
began to catch on in Europe in the 17th century. While
it took another century or two for paper money to
spread to the rest of the world,
China was already going through a fairly
advanced financial crisis: the production of paper notes
had grown until their value plummeted, prompting
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inflation to soar. As a result, China eliminated paper money entirely in 1455 and wouldn't adopt it
again for several hundred years. Another not-so-well-known fact: the word cash was originally used
to describe the type of round bronze coins with square holes commonly used in the Tang Dynasty,
called kai-yuans.
Mongolia was the second country to begin using paper money in the 11 th century. The use of
paper money developed much later in Europe than the Asia and in Arab countries because Europe
did not use paper then. It was in the 12thcentury that the Moors established the first paper mill in
Europe in what is now known as Spain. Introduced by the heathen Moors, paper was less preferred
by Christian officials who favored the use of parchment or vellum. However, convenience made
paper the medium of choice for money. The Bank of Sweden issued the first paper money in Europe
in the 17th century. In the same period, the Bank of England was founded, which began issuing
promissory notes, originally handwritten but later printed.
The use of paper money alleviated the problem of scarcity of the precious metal used in
mitting of coins. Moreover, paper money is lighter than coins, making it more portable. To facilitate
exchange, the government issued paper money to prepare certain quantities of gold or silver kept by
the government to cover what has been issued. As such, paper money can be called representative
paper money, following the long use of commodity money (referring to use of commodities like gold
and silver which have intrinsic value. Representative money was later replaced by what is termed fiat
money.
Paper bills were first used by the Chinese, who started carrying folding money during the
Tang Dynasty (A.D. 618-907) — mostly in the form of privately issued bills of credit or exchange
notes — and used it for more than 500 years before the practice began to catch on in Europe in the
17th century. While it took another century or two for paper money to spread to the rest of the world,
China was already going through a fairly advanced financial crisis: the production of paper notes had
grown until their value plummeted, prompting inflation to soar. As a result, China eliminated paper
money entirely in 1455 and wouldn't adopt it again for several hundred years. Another not-so-well-
known fact: the word cash was originally used to describe the type of round bronze coins with square
holes commonly used in the Tang Dynasty, called kai-yuans.
HISTORY OF MONEY IN THE PHILIPPINES

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Pre-Hispanic Era (10th - 11th Century)
Long before the Spaniards came to the Philippines, trade among the early Filipinos and with
traders from the neighboring lands like China, Java, Borneo, and Thailand was conducted through
barter. The inconvenience of the barter system led to the adoption of a specific medium of exchange
– the cowry shells. Cowries produced in gold, jade, quartz and wood became the most common and
acceptable form of money through many
centuries.
Since the Philippines is naturally
rich in gold, it was used in ancient times
for barter rings, personal adornment,
jewelry, and the first local form of
coinage called Piloncitos. These had a
flat base that bore an embossed
inscription of the letters “MA” or “M”
similar to the Javanese script of the 11th century. It is believed that this inscription was the name by
which the Philippines was known to Chinese traders during the pre-Spanish time.
Spanish Era
The cobs or macuquinas of colonial mints were the earliest coins brought in by the galleons
from Mexico and other Spanish colonies. These silver coins usually bore a cross on one side and the
Spanish royal coat-of-arms on the other.
The Spanish dos mundos were circulated extensively not only in the Philippines but the world
over from 1732-1772. Treasured for its beauty of design, the coin features twin crowned globes
representing Spanish rule over the Old and the New World, hence the name “two worlds.” It is also
known as the Mexican Pillar Dollar or the Columnarias due to the two columns flanking the globes.
Due to the shortage of fractional

coins, the barrillas, were struck in the
Philippines as ordered by the Royalty of
Spain. The barrilla, a crude bronze or
copper coin worth about one centavo,
was the first coin struck in the country.
The Filipino term “barya”, referring to
small change, had its origin in barrilla.
Coins from other Spanish colonies also reached the Philippines and were counterstamped to
legalize their circulation in the country. Gold coins with the portrait of Queen Isabela were minted in
Manila. Silver pesos with the profile of young Alfonso XIII were the last coins minted in Spain. The
pesos fuertes, issued by the country’s first bank, the El Banco Espanol Filipino de Isabel II, were the
first paper money circulated in the country.
Revolutionary Period
Asserting its independence,
the Philippine Republic of 1898
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under General Emilio Aguinaldo issued its own coins and paper currency backed by the country’s
natural resources. At the Malolos arsenal, two types of two-centavo copper coins were struck. One
peso and five peso revolutionary notes printed as Republika Filipina Papel Moneda de Un Peso and
Cinco Pesos were freely circulated. These were handsigned by Pedro Paterno, Mariano Limjap and
Telesforo Chuidian. With the surrender of General Aguinaldo to the Americans, the currencies were
withdrawn from circulation and declared illegal currency.
American Period
With the coming of the Americans
1898, modern banking, currency
and credit systems were instituted
making the Philippines one of the
most prosperous countries in East
Asia. The Americans instituted a
monetary system for the
Philippine based on gold and pegged the Philippine peso to the American dollar at the ratio of 2:1.
The US Congress approved the Coinage Act for the Philippines in 1903. The coins issued under the
system bore the designs of Filipino engraver and artist, Melecio Figueroa. Coins in denomination of
one-half centavo to one peso were minted. The renaming of El Banco Espanol Filipino to Bank of
the Philippine Islands in 1912 paved the way for the use of English from Spanish in all notes and
coins issued up to 1933. Beginning May 1918, treasury certificates replaced the silver certificates
series, and a one-peso note was added.
The Japanese Occupation
The outbreak of
World War II caused
serious disturbances in the
Philippine monetary
system. Two kinds of notes
circulated in the country
during this period. The
Japanese Occupation
Forces issued war notes in high denominations. These war notes had no back up reserves, thus,
Filipinos dubbed it “Mickey Mouse” money. During the worst inflation in Philippine history,
Filipinos would go to the market laden with bayongs of Mickey Mouse bills, since one duck egg cost
75 pesos, and a box of matches more than 100 pesos.
On the other hand, Guerrilla Notes or Resistance Currencies which are in low denominations,
were issued by different provinces and, in some instances, municipalities through their local currency
boards to show resistance against the Japanese occupation.
The Philippine Republic

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A nation in command of its destiny is the message reflected in the evolution of Philippine
money under the Philippine Republic. Having gained independence from the United States following
the end of World War II, the country used as currency old treasury certificates overprinted with the
word “Victory”.
With the establishment of the Central Bank of the Philippines in 1949, the first currencies
issued were the English series notes printed by the Thomas de la Rue & Co., Ltd. in England and the
coins minted at the US Bureau of Mint. The “Filipinization” of the Republic coins and notes began in
the late 60’s and is carried through to the present. In the 70’s, the Ang Bagong Lipunan (ABL) series
notes were circulated, which were printed at the Security Printing Plant starting 1978. A new wave of
change swept through the Philippine coinage system with the Flora and Fauna Coin Series initially
issued in 1983. The New Design Series of banknotes issued in 1985 replaced the ABL series. Ten
years later, a new set of coins and notes were issued carrying the logo of the Bangko Sentral ng
Pilipinas.
Plastic Money
Plastic money is a term used to represent the hard-plastic cards used in day to day life in place of
actual banknotes. They come in several forms such as debit cards, credit cards, store cards and pre-
paid cash cards. The plastic cards began to be used widely after 1970 when the specific standards
were set for a magnetic strip. In 1981, the concept of Credit
cards was introduced in India and was on the verge of an
exceptional boom. Today the domestic card industry is applied
with different types of cards from gold, silver, global, smart to
secure, co-branded credit cards, etc. the list is endless. There is
enormous growth potential in the domestic card industry.
Credit Card
Allows owner to buy products on credit from different
stores and establishment, in lieu of cash or money, except that is has a credit limit, that is, the
maximum amount that can be charged to the credit card. Holders of a credit card are not allowed to
charge anything beyond their credit limit. For example, the credit limit of a credit card is up to P10,
000 only; the credit card holder can buy on credit only up to said amount and not more than that.
Credit card can also be used to pay for services if the company rendering the service has a credit card
terminal, a machine needed to execute the transaction. It bears relatively higher rate of interest, but if
the cardholder pays his balance in full each month (on or before due date), no interest is charged.
Debit card

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The bank that the account is maintained issues the debit card. Unlike credit card, payments using
a debit card are immediately charged to the cardholder’s bank account, instead of paying the card at a
later date. The holder can purchase goods or services up to the amount that is in the account to where
it is linked. In some instances, if the bank gives an overdraft line, the holder can purchase up to the
extent of the overdraft line given him.
The debit card is an encoded plastic card which is issued by banks and has replaced with the
cheques. It allows the customers to pay in exchange for goods and services without carrying cash. It
is a multipurpose card, as it can be used as an ATM to withdraw the money and check the balance of
the bank account. It is issued by bank free of cost with the savings or current account. It is one of the
best online-payment tools where the amount of purchase is immediately subtracted from the account
of the customer and credited to the merchant’s account. It has overcome the delay in the payment
process.
Cash card
Cash card only allows withdrawal of money through an Authorized Teller Machine (ATM).
In short, it is used for ATM transactions only. A cash card can be used as a debit card as well, it is
convenient in that the holder need not stay in line inside the bank to withdraw money. ATM
machines are located in various locations, such as outside or inside the bank, at department stores,
and alongside roads. Banks put up ATM's in locations where depositors go, including entertainment
centers, for easy access to their deposited money. ATM car can also be used for depositing money to
the account supporting the card in an ATM machine.
Functions of Money
From the definition of money, it is evident that the basic function of money is a medium of
exchange and standard of value to facilitate exchange transactions of goods and services. Following
are the uses or functions of money:
1. Medium of Exchange
The use of money to facilitate the transfer of goods and services and settle obligations has
made money the basic medium of exchange. In the history of
money, various commodities had been used as a medium of
exchange. Therefore, we can say that in those times, whatever
commodity was used to effect transfer could be considered
“money”-cowries, wampum, and cattle. Money as a medium of
exchange, can be used for exchange of goods and services. You
buy goods, you pay money, you have a haircut; you pay money.
Money serves as a medium of exchange because people
will accept it in exchange for goods and services. Because
people can use money to buy the goods and services that they
want, everyone’s willing to trade something for money. The laborer will take money for clearing
your fields because he can use it to buy food. You’ll take money as payment for his food because
you can use it not only to pay him but also to buy something else you need (perhaps seeds for
planting crops).
2. Standard of Value
Money is our measuring stick to measure the value or
worth of something. Goods, services, assets, liabilities and net
worth (equity or capital) are all measured in terms of money. As a

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standard of value, money measures the relative worth of goods and services. In short, money is the
common denominator, the basis of comparison.
3. Store of Value
The excess of income over expenses is usually saved.
Our savings, usually in the form of money, is stored either in the
bank or at home for future use-that is the idea of store value.
The value needed in the future stored. When we make
investments in the form of stocks, bonds, or other securities and
fixed assets like land, our excess money is stored in these assets.
In case we need money in the future, we can sell them and
produce the money we need.
Money serves as a store of value. Because people are confident that money keeps its value
over time, they’re willing to save it for future exchanges. Under a bartering arrangement, the laborer
earned three meals a day in exchange for his work. But what if, on a given day, he skipped a meal?
Could he “save” that meal for another day? Maybe, but if he were paid in money, he could decide
whether to spend it on food each day or save some of it for the future. If he wanted to collect on his
“unpaid” meal two or three days later, the farmer might not be able to “pay” it; unlike money, food
could go bad.
4. Means of Deferred Payment

As a legal tender, money is acceptable in
payments of debts or liabilities. If payment is to be made
in the future, money becomes a means of deferred
payment. Deferred means postponed or held for the
future use. So long as prices remains stable, the amount
owned is what is paid, and the creditor is able to buy the
same amount of goods or services. However, when
prices rise, the amount owned will be able to buy less (creditors lose); when prices go down, the
amount owned will be able to buy more (creditors gain).
5. Conveyance
Conveyance refers to the means of transport or transfer. In
law (which finance uses) conveyance means the process of or the
document affecting the transfer of property from one owner to
another. The said document is the money because it facilitates
transfer of ownership, while the process is the transfer of title or
ownership. The seller owns the goods he is selling, will exchange
his money with the goods. After the transactions is consummated,
the goods now belong to the buyer, and the money belongs to the
seller. This is similar t the functions of medium of exchange. Money conveys or transfers title or
possession.
Other Characteristics of Money

On the basis of experience of countries with the use of a medium of exchange, such medium
of exchange ought to possess certain characteristics such
as:
Scarcity

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Scarcity means rare or hard to find. This is based on basic economic law of supply and
demand. The harder a thing is to find, the more valuable that thing becomes. This is the reason why
precious metals, especially gold and silver, were deemed a good choice as a medium of exchange.
However, limited supply makes these, metals impractical or too expensive to use.
Divisibility
Divisibility refers to the quality of being broken down
into smaller units. The property of malleability of metals
makes them desirable for coinage because they can be melted
and formed into different shapes and sizes and different
denominations.
Divisibility is one reason why metals, such as gold,
silver, copper, and nickel, have been widely used
as money throughout history.
Portability
Ease in handling or carrying makes one thing
desirable as a medium of exchange. This allows people
to bring it with them anywhere they go to enter into
transactions.
People need to be able to take money with them
as they go about their daily business (small and light)
divisibility. To be useful, money must be easy divided
into smaller denominations, or units of value.
Durability
Another factor to consider in determining the desirability of an item as a medium of
exchange for a long time. Durability means that money must be strong enough to be used over and
over again

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LESSON 2:
INTRODUCTION TO FINANCE
Overview
Finance plays a very important role in any business activities, whether public or
private sector. Its management is the pillar upon which all economic activities stand. No
business can survive or be sustained without finance. In this first unit of this course, we will
you will be introduce the nature of finance in a buy & sell enterprise, define finance; explain
the role and field of finance.
According to Webster, finance maybe defined as a noun and a verb. As a noun, finance
means management of money, the monetary support for an enterprise, or the money resources
of a government, company, or a person. As a person, finance means to provide capital for a
person or enterprise.
Finance plays a very important part in people’s and business enterprise lives. No organization
and no household can live or exist without finance. People need funds. Organization need
funds. This chapter will introduce finance and how important it is in business. The different
types of finance, business organization, and their formation will be discussed as well. A basic
understanding of the corporation as a form of business as well. A basic understanding of the
corporation as a form of business organization will be tackled including the different classes of
stock a corporation may issue.

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Course Outcomes
At the end of this course, you can:
 Interpretbasic finance knowledge.
 Communicate effectively using standard business terminology.
 Discuss the importance of finance knowledge.
 Apply best practices in financial management to make plans and provide
financial leadership.
Learning Outcomes
At the end of this module, you can:
 Discuss the importance of finance to the business world
 Distinguish the classses of finance
 Develop strategies on how to avoid the identified financial risks.

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Discussion
LESSON 2: INTRODUCTION TO FINANCE
Finance Defined
Oyekanmi (2003) defined finance “as money
affairs or money matters”. All forms of money or near
money e.g. debt, cash equity certificates would be implied.
In certain usage, however, not only are liquid funds
subsumed in the term finance, but all forms of assets,
which are capable of being expressed in monetary terms.
On the other hand, . According to Hornby (2001), finance
is the money need or needed to support an activity,
project, programme etc. and or the management of money.
The word “finance” is derived from the Latin word
finer meaning “to end” to “to pay”. When a person pays
his bill, the financial matter is ended. Finance and financial decisions are part of our daily lives.
Economic activities, like business transaction, personal investment, or even simple borrowing entail
finance or have financial implications. Even the government need to be financed for a country -to
survive. Government deficits in most countries have been a perennial problem. How to finance
small- and medium scale industries to boost economy and encourage business formation is a
particular problem faced by the Philippine government. Budgeting government spending has been a
challenge to most countries. Securing additional capital to finance expansion is a problem besetting
competing companies. Moreover, a very simple survival problem for most families is how to provide
for the family due to inflation, with expenses generally higher than their income.
First is, that it’s the study of managing the money. And secondly, it’s the actual process of the
funds required by some individual or business to get their work or business grow, or we can say, that
finance is a field dealing with capital funds and credit funds invested in the business. It can be
defined as planning, raising, managing and controlling all the money used in the business. In simple
words, Finance is the management of money which can include investing, renting, saving, lending,
budgeting, etc. It is giving its requirements for managing wealth and investing money. It is not just
about shifting of money. But it is more about the management or control of money, how well are we
managing the funds. Because our main motive is to develop the business with a limited expense
possible.
Nature of Finance
Finance may be defined as the provision of money at the time it is required. Every person
responsible for finance, whether it is for a corporate organization or private household, money is

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confronted with prospects of inflow receipts on the one hand, and outflow payments on the other.
The inflows are expected to be arranged in such a way that fund (money) is always available to make
necessary payments as they arise.
Brief Evolution of Finance

Finance evolved from economics as its branch in the early part of the 20th century; but later
became a separate discipline. It graduated in response to the complexity of business from sole
proprietorship to corporate organization. Finance was initially concerned mainly with the keeping of
records of receipts and payments; dealings simply on bonds, debentures, banks. Nowadays, it has
extended the ‘coast’ to various aspect or aspects of company survival, introduction of new
technologies in operation, the application of computers and its closeness to economy.
Field of Finance
The field of finance originally covered mainly:
 Instruments of finance (e.g. bonds, debentures etc.)
 Institutions / intermediaries (e.g. banks, finance coys etc.)
 Capital markets (e.g. exchange etc.)
The finance is related to economics as every individual, organizations and government

operate within the economy. So understanding economic setting is paramount to you. You need the
knowledge and alertness of each level of economic activity and the related consequences. It is
associated with accounting as both are interested in cash flows and accounting and financial data
necessary for taking basic decisions.
Role of Finance
Without money (finance), an enterprise cannot function; hence, understanding the role of
finance and its ability to measure the progress of a business is essential for effective management.
Finance can be likened to a lubricant. Too little of it (finance) can make a business grind to a halt;
while too much of it may lead the business having to grapple with all types of projects not minding
their usefulness.
Common Denominator of Finance

Money is the common denominator for the full range of activities performed in the business.
Yes, there are other factors which are common to business like man-hours, which are all the same
length but don’t have the same value in term of quantity of work done or skill and expertise
displayed. Money also presents its problems, particularly when inflation sets in, resulting in changes
in the purchasing power of a unit of currency. This notwithstanding, for the moment, this fact has not
affected its role as a common denominator, so long as it remains the medium in which business is
conducted.
CLASSIFICATION OF FINANCE
Finance can be classified into different types, the
most common of which are:
1. As to Form of Negotiations
a. Direct Finance
Direct finance is a finance involve in direct
borrowing. A company going to a bank to obtain a loan is a
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direct finance. Similarly, a friend borrowing money from another is a direct finance. A corporation
selling shares to its incorporation is a direct finance.
Direct involve lending to ultimate borrowers. A person may obtain a loan from another
person to serve his needs. You may borrow money from your brother, your aunt, or your neighbor. A
person may borrow from a bank to buy a car or a house. A business may borrow from a bank to -
finance expansion or buy equipment or machinery.
Securities, like stocks and bonds that are directly sold to the buyer/investor by the issuers
/borrowers, are generally referred to as primary securities as they arise from a direct finance
transaction. The companies issuing these securities are, in effect, the users of fund or borrowers and
the buyers of these securities are, in effect, the provider of funds, as owners in case of stock, and as
creditors in case of bonds. In the forgoing examples of direct finance, the borrower or deficit unit
borrows directly from the lender or surplus unit. The market where direct finance happens is termed
direct market. This is when somebody borrows money directly from the financial markets, instead of
using an intermediary or third-party service. This is usually done to avoid high borrowing costs of
indirect finance, where interest rates can raise the overall
cost of loan
b. Indirect Finance
It involves financial intermediaries in the real
sense of the word. This means that financial
intermediaries act as middlemen when they buy securities
for resale or simply facilitate the sale from the original
issuers to the final buyers. In some cases, they buy for
their own account, they own as asset the securities they
buy, they do not resell the securities, in the instance, it is
direct finance. However, in most cases, financial intermediaries act as middlemen and in these
instances, indirect finance is involved. This is when a business borrows money from a third party,
such as a bank, rather than directly from investors. The company pays the third-party interest, which
in turn pays interest to its investors or depositors.
2. As to User
a. Public Finance.
Public finance deals with the revenue and
expenditure pattern of the government. It is concerned
with the government affairs—managing the
government’s sources and uses of funds. Government
expenditure for infrastructure like building street,
schools, bridges among others and payment of
government employees are government spending and
thus public finance. When the Government Issue
treasury securities like treasury bills, notes, and bonds,
the government is in fact borrowing money from the
public, which is also public finance. Like all individuals
and entities, the government is both a borrower and a
lender. Public finance is concerned with government revenues, like taxes, and government expenses,

18
like paying salaries of government employees. Government spending and government borrowing are
all public finance.
As its name suggests, public finance is all about the management of finances of the public
authorities or public bodies, such as Central Government, State Government and Local Self
Government, for carrying out their operations, which results in incurring money for providing
subsidies, public utility services, and welfare payments to the residents. Public utility services
include education, health, sanitation, transportation, infrastructure, electricity, communication, food,
etc. The basic source of revenue to provide the services are taxes, duties, fees, foreign aid, sale of
goods and services, borrowing, creation of new money, etc.
b. Private Finance
All finance, other than public, is private finance. All individual
borrowing from money from another individual is doing
private finance. A company borrowing from a financial
institution is doing private finance. A company issuing shares
of stock and or bonds, whether to direct buyers, like
incorporation, or financial intermediaries, is doing private
finance. On spending, when individuals and private entities
spend either for current operations or for capital investments, like buying fixed assets or investing in
certain capital projects, they are doing private finance transactions. Medina stated that private
finance is that which deals with the area of general finance not classical another public finance. He
derived private finance into:
c. Personal finance
Refers to finance conducted by individual
consumers. A family spending for their food,
clothing, shelter, recreation, education, among others is
personal finance. A father giving his son allowance, a
sister borrowing money from another sister and an aunt
supporting his niece in her studies are all examples of
personal finance. Individuals borrowing from financial
institution do personal finance. Individuals depositing money in the bank engage in personal finance.
d. Finance of nonprofit organizations

Involves those conducted by charitable, civic, religious
organizations, among others. These organizations are not for profit,
meaning they do not aim to gain profit increase wealth. They could
be for charitable purposes like the thrift stores, for religious
purposes like the Catholic Church, for civic purposes like the Rotary
Club, among others. They spend for their operations and buy long-
term assets and invest any extra money that they have. They
construct buildings and spend for whatever activities they conduct.
Everything that they do that involves funding is finance of non-
profit organizations.

19
e. Business finance
Deals with financing for business firms or for
commercial use, the goal of which is to make profit.
Business either produce goods and services for sale
or buy goods and sells the same. Where to obtain
capital for a particular company and where to use it
are concerns of business finance. When a certain
company buys stocks of another company because it
has excess funds, or borrows money from the bank to
buy land, building, or machinery, business finance
come into play. The funds are used to earn profit and
increase the value of the firm and the wealth of the
owners.
FINANCE IN THE BUSINESS WORLD

Business-is any lawful economic activity that involves rendering service, buying and selling
goods, converting raw material into finished products and selling the same, borrowing and lending
money, acquiring funds and investing the same, extracting mineral resources constructing buildings,
road, and infrastructure, providing insurance for a sense of peace, and serving the public like public
utilities, transportation, and communication entities. In all of these activities, effectively and
efficiently acquiring and utilizing funds make the difference and that business finance in all about.
Efficiency-is all about saving time, money, or effort. It is the relationship between input and
output. One of the efficient if he able to get something done or accomplished at the least cost.
Efficiency is a measure of quality. It is all about getting the job done and attaining objectives.
Effectiveness is a measure of quality. It is, at times, used interchangeably with efficacy. Producing
the desired result is effectiveness, thus the old cliché, “Effectiveness is doing the right things and
efficiency is doing things right.” If we combine efficiency and effectiveness, we obtain productivity,
thus: Efficiency + Effectiveness=Productivity.
Almost all business exists for profit. In a free enterprise system, economic growth is
dependent on people and entities to achieve economic objectives. The growth of wealth is usually
achieved through profit-making activities.
Whatever kind of business, whether service,
commerce, or industry, the basic goal is the
same-to make profit to increase owner’s
wealth.
In the quest for profit, entities seek
financing needed to fuel the business
activities that will produce profit. A new
business project requires initial capital. An
expanding business need additional capital.
Capital is needed to buy assets, pay
liabilities and pay expenses. All business
activities involve fund. Finance is therefore,
indispensable in the business world.
SCOPE OF FINANCE
20
In the past lesson, money (finance)
was presented as a common denominator in
doing business (trading). The other two
elements that will combine to strike a
balance in order to enhance the optimum
utilization of resources of the business are:
production and marketing. The business
cycle explains financial (fund) activities and
how they are related to the enterprise’s other
activities. Manufacturing /operation
activities provide goods/services to
customers. They sell their goods or services
to earn profit. They raise funds to acquire
manufacturing and other facilities. A firm generates whatever capital it needs and utilizes it (finance
activity) in activities which generate returns on invested capital (production and marketing
activities).
Internal and External Finance

There are two types of financing an enterprise can apply.
1. Internal Finance – also known to as equity fund/finance is referred to as Equity. This is
solely owned/contributed by the stakeholders (within) and is referred to as an internally-
generated fund.
2. External Finance – This is called borrowed fund/finance and referred to also as debt. The
stakeholders source this from outside. This could be through direct loan, shares, etc. A
firm/business can sell shares to acquire equity funds. Shares represent ownership rights of
their holders. Buyers of shares are called shareholders/stockholders and they are the legal-
owners of the business whose shares they hold. For example, recruitment and promotion of
employees in an organization, payment of their wages and salaries etc. involves finance.
The involvement of sales promotion/advertisement policies is within marketing preview. All
these activities require cash budgeting, hence they affect financial resources. Shareholders
invest their money in the shares of a company in the expectation of a return on their invested
capital. The return consists of dividend and capital gain.
Finance and Management Function

There is a relationship between finance and other functions in business enterprises. You
should know that all business activities, directly or indirectly, involve the acquisition and utilization
of funds. All the activities and decisions undertaken in respect of the day-to-day financing of a
business make finance and management functions interrelated. For example, decisions on the
following finance issues are taken by management upon recommendation of the Financial Controller:
Preference shareholders receive dividend at a fixed rate and they enjoy a priority over ordinary
shareholders.
The dividend rate for ordinary shareholders is not fixed and can vary from year to year
depending on the board of directors. A company can also obtain equity funds by retaining earnings
available for shareholders. This is known as retained earnings (an internal equity) undistributed
profits of equity capital.
 Rights Shares – after a company distributes all earnings to shareholders, it can re-acquire
new capital from the same source (existing shareholders) by issuing new shares.

21
 Public Issue – may be made to attract new (and the existing) shareholders to contribute
equity capital.
 Creditors/Lenders (External Finance) – They are not owners of the company. They provide
money to enterprises as loan which are debt. The loans are furnished for a specific period of
time at a fixed rate of interest. The business can borrow fund from many sources like banks,
financial companies, public or issuing bonds.
THE FINANCE FUNCTIONS

Finance functions have been acknowledged as major in most
organizations. They are identified as raising funds, investing
them in assets and distributing returns earned from assets to
shareholder/owners. This exercise is known as financing
decision, investment decision and dividend decision.
These finance phenomena which will be treated extensively
later; were expressed in figure 1, Unit 1, Module 1 of this
course. When a firm endeavour to balance the cash inflows
and outflows while performing the above functions, it is called
liquidity decision. Hence, the list of important finance
functions includes:
 Long term asset-mix or investment function
 Capital-mix or financing function
 Profit allocation or dividend function
 Short-term asset-mix or liquidity function
1. Investment Function
Investment decisions involve capital expenditures
which are referred to as capital budgeting decision. This is the
decision of allocating capital to long-term assets that will
bring in beneficial yield (cash inflow) in the future.
There are two important aspects of investment
decisions:
 The evaluation of the prospective profitability of new
investment; and
 The measurement of a rate against the prospective
return of new investments could be compared.
2. Financing Function
This is another vital function in an enterprise. The
financial manager has to identify the time, place and the
technique for acquiring adequate funds to meet the enterprise’s
investment needs. The central issue here is the determination of
appropriate proportion of internal (equity) and external (debt)
finance required by the enterprise. The mix of the two is known
as the capital structure of the business organization.
The Financial Manager strives to obtain and sustain the best financing mix, to optimize the
capital structure, which forms the base of financing. The capital structure is said to be optimum when
the market value of shares is maximized.

22
3. Dividend Function
This is the other major financial decision which
affects the shareholders and the business as a whole – the
decision to distribute all profits or retain same. The
proportion of distribution of profit and the balance retained is
subject to the firm’s policy, decision of the board of director
or economic situation as applied.
The proportion of profits distributed as dividend is
called the dividend-payout ratio. The retention ratio is the
retained portion of profits. The dividend policy is determined
by its impact on the shareholder’s value.
4. Liquidity Function
Liquidity and profitability affect investment in current assets in business organizations.
Liquidity of an enterprise is affected by the level of management of current asset. Risk of illiquidity
(lack of liquidity), in extreme situations, can lead to a business insolvency.
Current assets if properly/efficiently managed would safeguard the business organization
against risk of illiquidity. The firm needs to invest sufficient
funds in current assets in order to become liquid. It would lose
profitability, if more of available current assets are not utilized to
earn any revenue.
To sum it up, financial decisions is concerned with the
acquisition or disposal of assets through commitment or re-
commitment of funds on a continuous basis. This is why finance
function affects the size, growth, profitability and risk of the
firm, and ultimately, the value of the business/enterprise.
Financial Procedures
Financial procedures involve a lot of measures to achieve effective execution of finance
function. Some important routine finance functions are:
 Supervision of cash receipts and payments and cash balances safeguarding.
 Custody and safeguarding of securities, insurance policies and other valuable papers.
 Taking care of the mechanical details of new outside financing.
 Record keeping and reporting.
RISKS OF FINANCE
To function properly in business,

you should consider the risk taken;
especially in the sourcing and usage of
fund.

23
If the investor believes that there is some chance, however small, that in the long run he may
earn a small return (profit), he would extra effort than he could obtain on a risk-less investment. He
will not invest unless he can expect a higher return if the investment does succeed. Though in the
course of event, he will not necessarily expect this higher return to become available at once.
This allowance for risk, in greater or less degree, is made whenever the yield of the
investment is anywhere dependent on the satisfactory result of the undertaking of work for which the
full fruits are reaped only after a delay. It is pertinent to note that there can never be a certainty that
the fruits, when reaped would be commensurate with the cost of resources (labour, capital etc)
expended in the production/marketing. Hence, there is always some chance that part or all of the
resources employed may prove to have been wasted.
The risk that threatens the complete or partial loss of the postponed fruits of effort can be
classified under four main headings:
1. Physical Risks and Finance

These are risks that some accident may destroy or spoil some
physical goods created by the work financed. For example:
 A stock of food may go bad or be eaten up by insects or
animals
 A house (premises) may be destroyed by fire
 A ship may be wrecked or sunk.
Dangers from fire, flood, storm, theft etc. have always
threatened and still threaten the benefit of the fruits of business
enterprise.
2. Technical Risks and Finance

These are those risks that arise from the fact that
the producer’s skill or that of the subordinates may not
be up to the expected level for the plan, hence it may fall
short of achieving the intention. If at all it is achieved, it
may fall below the standard; i.e. the end -product, at
disposal may consume, in its construction, more
resources than permitted in making the plans.
For example, a farm entrepreneur in a new
environment may try to grow crops unsuited to the soil or climate. A new technical process,
successful in the laboratory or in small-scale plant, may encounter unforeseen difficulties when tried
in large-scale production. Wherever experience of the exact process is lacking, whether because the
process itself is only newly developed or because of the lack of experience of the people using it, a
high degree of technical risk is always present.
This is one of the reasons why the early stage of enterprise venturing into new areas of
producing goods/services, using newly processes are nearly always less satisfactory than anticipated.
Experience (know-how) gained by the organization of its particular technical process which often
constitutes its most valuable possession. Thus,
unforeseen technical risk in finance renders the
whole months of intensive work completely
wasteful; except for the obtaining of valuable
experience.
3. Economic Risks and Finance

24
This category of risks is usually the greatest and closely related to finance. They remain; even
though the physical object created suffer no unexpected damage. It is found possible to construct
these physical objects with the resources assumed to be available. There are four main kinds of this
risk:
 The risk of an inadequate supply of the resources needed to make the product planned so
that it costs more to make than had been expected or even cannot be made at all; and
 The risk of fall in demand for the product once it has been made.
 The risk of a failure of the demand for a product is increased when that product is itself
highly durable, for them to the other risk.
 The risk that potential purchasers may be prevented from buying by a shortage of finance.
4. Political Risk and Finance

These are risks of losses as the result of
unforeseen intervention by governments. These
risks may particularly affect the enterprise
operating in or exporting to, a foreign country,
where government laws discriminate. This may
have untold frustration in the quest for
achievement of the expected return on capital
investment. Example includes Rent Act, which
can affect the status of workers who are tenants
if it is not favourable; corporate tax can affect the profit margin of an enterprise and this may in turn
have effect on the finances of the organization.
Avoidance of Risk
There are three ways of avoiding or reducing risk.
These are as follows:
 Appropriate measures involving additional
expenditure;
 Turn into regular costs by pooling them with
large numbers of similar risks; and
 Combing them with other risks operating in the
opposite direction.
Almost every kind of risk can be reduced, to some extent, by increasing expenditure on
precautions as follows:
 A building can be made more resistant to fire if more fund is spent on it to add value to it.
 The risk of financial failure of a new method of production can be reduced at the cost of
increased expenditure of time and money; if a thorough testing in a small-scale plant is
made before being introduced into large-scale production (project).
 The risk of production being held up for lack of an important component can be removed
and the cost of an immediate loss of output avoided; if adequate reserve stocks are built up.
Even the risk of miscalculating consumers’ demand can be reduced by expenditure on
market research, advertisement and sales promotion.
 The great difficulty is usually to determine how large an increase in costs is justified in
order to achieve an uncertain degree of reduction in an uncertain risk.

25
Distribution of Risks
After eliminating all the risks which can
be reduced by taking precautions, pooled by
insurance or offset by hedging (the term used for
reducing risk by using derivatives – debt
capacity enhancement, increased focus on
operations and isolating managerial performance
which we tried to explain earlier).
There remain a very large number of
risks that must be borne by whoever provides the
finance for a productive operation. It is with
these various methods of sharing such risks
among various classes of providers of capital
that this unit is mainly concerned with.
The simplest form of finance is where the whole of finance required by a particular enterprise
is provided by an Entrepreneur (a single person). In this business, the person pays all expenses, takes
all receipts and makes the whole of any profit or loss which results from the activities of the
business. When the business requires more assets than he can afford to provide personally
(expansion) then, there arises the problem of how to distribute the risk inherent in the business.
Hence, different contributors to the finance of the business will be required to share the risk as
shareholders.
The number of possible ways in which the risks and profits can be shared between the
different people who jointly contribute to the finance of a business is also infinite. The following
ways are frequently adopted.
 A full share of all risk and profits.
 A prior claim on any profits the enterprise can earn up to a certain limited amount, with or
without some share in the remainder.
 A loan of money on payment of a fixed amount of interest which must be paid whether the
concern is earning a profit or not.
 The renting of land or other durable good is return for fixed money (rent), payable whether
or not the enterprise is able to earn a profit (leasing).
 Partnership and Limited Liability Company are two main institutional forms under which
people join together on equal terms to provide the finance needed for an enterprise, sharing
fully in both risks and profits.
References
|
Norma Dy Lopez-Mariano, Ph.D. (2014), Elements of Finance

https://www.calltutors.com/blog/what-is-finance-definition-overview-types-of-finance/
https://corporatefinanceinstitute.com/resources/knowledge/finance/public-finance/
https://www.britannica.com/technology/manufacturing
https://www.investopedia.com/terms/s/soleproprietorship.asp
https://courses.lumenlearning.com/wmopen-introbusiness/chapter/partnerships/

26
https://www.bing.com/images/search?view=bigstock-Businessman-dream-at-coffee-br-
52366627.jpg&exph=900&expw=900&q=Thinking+about+goals+in+life+ClipArt&simid.
https://www.bsp.gov.ph/Pages/CoinsAndNotes/HistoryOfPhilippineMoney/
HistoryOfPhilippineMoney.aspx
https://mobiosolutions.com/logistic-app-development-solutions/
https://www.istockphoto.com/illustrations/late-payment
https://alirezamehrabi.com/bours/capital-market-expressions/what-is-money
https://www.google.com/search?
q=STANDARD+OF+VALUE+CLIPART&tbm=isch&ved=2ahUKEwjGs_r4hpT9AhVNq1YBHfhS
ANQQ2-
https://www.clipartmax.com/middle/m2H7Z5H7H7Z5N4m2_deferred-payment-convenience-store/
https://www.inc.com/rhett-power/5-simple-strategies-to-help-your-company-succeed-when-money-
is-scarce.html
https://www.freepik.com/premium-photo/philippine-money-peso-black-wallet_21082309.htm
https://coconuts.co/manila/news/change-is-gonna-come-philippine-central-bank-to-replace-php20-
banknote-with-coin/

27

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PALAWAN STATE UNIVERSITY

College of Business and Accountancy

FIN 2001 - BUSINESS FINANCE

2nd Semester - S.Y. 2022 - 2023

At the end of this course, you can:

FIN 2001: BUSINESS FINANCE | Module 1: Introduction to Business Finance

Origin of the Word “Money”

FIN 2001: BUSINESS FINANCE | Module 1: Introduction to Business Finance

This match indicates that both are of the same

FIN 2001: BUSINESS FINANCE | Module 1: Introduction to Business Finance

HISTORY OF MONEY IN THE PHILIPPINES

FIN 2001: BUSINESS FINANCE | Module 1: Introduction to Business Finance

Due to the shortage of fractional

The Japanese Occupation

FIN 2001: BUSINESS FINANCE | Module 1: Introduction to Business Finance

FIN 2001: BUSINESS FINANCE | Module 1: Introduction to Business Finance

FIN 2001: BUSINESS FINANCE | Module 1: Introduction to Business Finance

4. Means of Deferred Payment

Other Characteristics of Money

FIN 2001: BUSINESS FINANCE | Module 1: Introduction to Business Finance

FIN 2001: BUSINESS FINANCE | Module 1: Introduction to Business Finance

FIN 2001: BUSINESS FINANCE | Module 1: Introduction to Business Finance

FIN 2001: BUSINESS FINANCE | Module 1: Introduction to Business Finance

FIN 2001: BUSINESS FINANCE | Module 1: Introduction to Business Finance

Brief Evolution of Finance

The finance is related to economics as every individual, organizations and government

Common Denominator of Finance

FIN 2001: BUSINESS FINANCE | Module 1: Introduction to Business Finance

d. Finance of nonprofit organizations

FIN 2001: BUSINESS FINANCE | Module 1: Introduction to Business Finance

FINANCE IN THE BUSINESS WORLD

Internal and External Finance

Finance and Management Function

FIN 2001: BUSINESS FINANCE | Module 1: Introduction to Business Finance

THE FINANCE FUNCTIONS

FIN 2001: BUSINESS FINANCE | Module 1: Introduction to Business Finance

To function properly in business,

FIN 2001: BUSINESS FINANCE | Module 1: Introduction to Business Finance

1. Physical Risks and Finance

2. Technical Risks and Finance

3. Economic Risks and Finance

4. Political Risk and Finance

FIN 2001: BUSINESS FINANCE | Module 1: Introduction to Business Finance

Norma Dy Lopez-Mariano, Ph.D. (2014), Elements of Finance

FIN 2001: BUSINESS FINANCE | Module 1: Introduction to Business Finance

FIN 2001: BUSINESS FINANCE | Module 1: Introduction to Business Finance

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