TOPIC 01: INTRODUCTION

TO FINANCIAL MANAGEMENT
ACT1124 | FINANCIAL MANAGEMENT

DANA DANIELLE F. UGANIZA, CPA

AGENDA
01 04
OVERVIEW OF FINANCIAL FINANCIAL AND MANAGEMENT
MANAGEMENT ACCOUNTING

02 05
PURPOSE OF FINANCIAL
CLASSIFICATIONS OF BUSINESS
MANAGEMENT

03 06
RESPONSIBILITIES OF A FINANCIAL MANAGERIAL INCENTIVES TO
MANAGER MAXIMIZE SHAREHOLDER WEALTH
AGENDA
07 BUSINESS ETHICS
09 FINANCIAL ENVIRONMENT

08 10
GLOBAL TRENDS IN MANAGEMENT
TIME VALUE OF MONEY
ACCOUNTING
OVERVIEW OF FINANCIAL
MANAGEMENT
WHAT IS FINANCIAL
MANAGEMENT?
FINANCE
The system that includes the circulation of money, the
granting of credit, the making of investments, and the
provision of banking facilities.
 AREAS OF FINANCE
1 2 3
FINANCIAL
CAPITAL INVESTMENT
MANAGEMENT
MARKETS MANAGEMENT
Concerned with financial Relate to the markets where Deals with the
decision-making within a interest rates, along with stock
business entity (how much and and bond prices, are determined
management of
what type of assets to acquire, individual or
how to raise the capital needed Also involves the study of institutional funds
to purchase assets) financial institutions that supply
capital to businesses
Also known as “Corporate
Finance”
WHAT IS FINANCIAL
MANAGEMENT?
FINANCIAL
MANAGEMENT
Financial management is the management of
financial resources in order to attain the objectives
of the company.
 MANAGEMENT
1 2
PLANNING ORGANIZING
Involves the Involves the process of
determination of bringing together physical,
financial, and human
courses of action to
resources and developing
achieve desired goals productive relationship
amongst them for
achievement of
organizational goals
3 4
DIRECTING CONTROLLING
Involves the social and Implies measurement of
informal sources of accomplishment against the
standards and correction of
influence that one can
deviation, if any, to ensure
use to inspire action to
achievement of
be taken by others organizational goals
 A PLAN SHOULD BE SMART

S M A R T
SPECIFIC MEASURABLE ATTAINABLE RELEVANT TIME BOUND
What will you What data will you Are you sure that Does the goal align When is the
achieve? use to decide you can do this? with your values deadline for
whether you’ve Do you have the and long-term accomplishing
met your goal? right skills or objectives? the goal?
resources?
FINANCIAL
MANAGEMENT
Financial management is the management of
financial resources in order to attain the objectives
of the company.
 FINANCIAL RESOURCES
These are the assets of the organization

FINANCIAL
needed for the company to operate.

RESOURCES FORMS OF FINANCIAL RESOURCES

Cash
Financial Investments
OBJECTIVES OBJECTIVES
OF THE May be financial and non-financial

COMPANY
 FINANCIAL OBJECTIVES

OBJECTIVES
The main objective of a profit company is to
maximize the wealth of the shareholders.

OF THE Wealth is referred to as the value of the company

COMPANY
as a whole.

Wealth can be measured through its capacity to

give dividends and increase its share/stock price.
 WEALTH VALUE

D S P I
CAPACITY TO CAPACITY TO PERCEIVED INTRINSIC
GIVE DIVIDENDS INCREASE Refers to the value Refers to the true value of
SHARE/STOCK based on observation a company that is
achieved through a
PRICE deeper analysis

Focus of FinMan

If the perceived value is equal to the intrinsic

value, this is what we call equilibrium.
 NON-FINANCIAL
OBJECTIVES OBJECTIVES

OF THE
Welfare of employees
Welfare of management

COMPANY Customer satisfaction

Supplier satisfaction
Welfare of society as a whole
FINANCIAL
MANAGEMENT
Financial management is the management of
financial resources in order to attain the objectives
of the company.
PURPOSE OF FINANCIAL
MANAGEMENT
PURPOSE OF FINMAN
FINANCIAL PLANNING
Where to spend and how to raise?

FINANCIAL CONTROL
Did I spend it correctly?

FINANCIAL DECISION MAKING

Investing, Financing, Operating, Dividend, & Risk Management
RESPONSIBILITIES OF A
FINANCIAL MANAGER
ORGANIZATIONAL BOARD OF DIRECTORS

STRUCTURE
CHIEF EXECUTIVE
OFFICER (CEO)

CHIEF OPERATING CHIEF FINANCIAL

OFFICER (COO) OFFICER (CFO)

Marketing, Production, Human Accounting, Treasury, Credit,

Resources, and Other Operating Legal, Capital Budgeting, and
Departments Investor Relations
 CHIEF FINANCIAL OFFICER
Tasks are more on the financing decisions of the company
TREASURER
Custody of finances
Relationship with third
parties (investors,
creditors, suppliers,
customers, banks, etc.)
Banking, credits and
collection, investments,
and insurance
CONTROLLER
Preparation of financial
reports
Evaluating & consulting
Compliance of financial
statements
Tax administration
Government reporting
Protection of assets
ROLES OF A FINANCIAL MANAGER
OPERATING DECISIONS
Involves decisions related to the day to day operations of the company

INVESTING DECISIONS
Where to invest?

FINANCING DECISIONS
How to raise capital?
ROLES OF A FINANCIAL MANAGER
DIVIDEND DECISIONS
When should we declare? What type of dividend to declare?

RISK MANAGEMENT DECISIONS

How do we manage the risk?
 FINANCIAL AND
MANAGEMENT ACCOUNTING
FINANCIAL AND MANAGEMENT
ACCOUNTING
Information from both financial accounting and
management accounting are important to
supplement the decision making in financing.
FINANCIAL VS. MANAGEMENT
ACCOUNTING

FINANCIAL MANAGEMENT
Historical Approach Futuristic Approach
For external users For internal users
Focuses on precision Focuses on timeliness
Concerned with the of information
company as a whole Concerned with the
Must conform to segments of a company
standards Not bound by standards
Mandatory Discretion of the
management
CLASSIFICATIONS OF
BUSINESS
BUSINESS
An organization that intends to earn profit.
 AS TO NATURE

SERVICE MERCHANDISING MANUFACTURING

Provision of services Buying and selling Complex process of
converting raw materials
into finished goods
 AS TO OWNERSHIP

SOLE PARTNERSHIP CORPORATION

PROPRIETORSHIP
Single owner Two or more persons An artificial being
created by the operation
of law that is composed
of stockholders
 AS TO OWNERSHIP

SOLE PARTNERSHIP CORPORATION

PROPRIETORSHIP
Owner has complete Partners share control Control is divided among
control over the partnership the directors and SHs
Unlimited liability Unlimited liability Limited liability
Pass-through tax Pass-through tax Separate taxable entity
treatment treatment
 MANAGERIAL INCENTIVES TO
MAXIMIZE SHAREHOLDER WEALTH
AGENCY THEORY
Conflicts between the principal and
agent of the company.
STOCKHOLDER-MANAGER
CONFLICT
It has long been recognized that managers’ personal goals
may compete with shareholder wealth maximization. In
particular, managers might be more interested in maximizing
their own wealth than their stockholders’ wealth.
STOCKHOLDER-CREDITOR
CONFLICT
Debtholders, which include the company’s bankers and its
bondholders, generally receive fixed payments regardless of how
well the company does, while stockholders do better when the
company does better. This situation leads to conflicts between
these two groups, to the extent that stockholders are typically
more willing to take on risky projects
STOCKHOLDER-CREDITOR
CONFLICT
Stockholder Creditor

Return on Investment Payment of Principal and

Claims
(Dividends) Interest

Focus Profitability Stability

Level of Risk Projects with higher risks Less risky projects

STOCKHOLDER-CREDITOR
CONFLICT
Sales
Less: Cost of Sales
Gross Profit
Less: Operating Expenses
Earnings before Interest & Taxes
Less: Interest Expense (Claim of Creditors)
Earnings before Taxes
Less: Taxes
Net Income
 SOLUTIONS TO AGENCY CONFLICT

POSITIVE NEGATIVE RESTRICTIVE

REINFORCEMENT REINFORCEMENT COVENANT
Reasonable Change in Board of Make each term of the
compensation packages Directors agreement clear to the
Bonuses Management Takeover parties
Incentives
Stock share options
BUSINESS ETHICS
BUSINESS ETHICS
Knowing what is right and doing what is right.
 GLOBAL TRENDS IN
MANAGEMENT ACCOUNTING
SHIFT TO PREDICTIVE
ACCOUNTING
Predictive accounting focuses management
reports on what is expected to happen rather
than on what happened in the past.
INFORMATION TECHNOLOGY
The substantial growth in IT over the past decade has
made it a critical and strategic function,
INFORMATION TECHNOLOGY
The substantial growth in IT over the past decade has
made it a critical and strategic function,
CUSTOMER PROFITABILITY
ANALYSIS
Management accounting must help the sales and
marketing functions. A company needs to know the
best types of customers to retain, grow, win back, and
acquire – and those who aren’t.
MANAGEMENT ACCOUNTING’S
ROLE IN ENTERPRISE
PERFORMANCE MANAGEMENT
EPM is a process and a methodology designed to
enhance the company's performance and enable
management to better respond to present challenges
as well as opportunities on a project,
FINANCIAL ENVIRONMENT
 PARTIES INVOLVED
BORROWER/
DEBTOR
Refers to the party
requesting the loan, who
receives the resources from
the credit grantors
With fund deficit
LENDERS/SAVERS/
CREDITORS
Person or entity that lends a
certain amount of money on
credit to an applicant, who is
the borrower
With fund surplus
WHO CAN BE BORROWERS?
Individuals
Businesses
Government
WHO CAN BE LENDERS?
Individuals
Businesses
Government
HOW IS CAPITAL
TRANSFERRED?
HOW IS CAPITAL
TRANSFERRED?
Direct Transfer
Indirect Transfer
 DIRECT VS. INDIRECT TRANSFER
DIRECT TRANSFER INDIRECT TRANSFER

Transaction A (lender) to B (borrower) A (lender) to C (bank) to B (borrower)

Link Direct Involvement of Financial Institution

Length Short Process Long Process

Extent Limited amount of money Large amount of money

FINANCIAL INSTITUTION
/INTERMEDIARY
An organization that acts as a link/intermediary
between the lenders and the borrowers.
 TYPES OF FINANCIAL INSTITUTION

INVESTMENT COMMERCIAL FINANCIAL

BANK BANK SERVICES CORP.
Help companies raise Referred to as Large conglomerates
capital through making “Department Stores of that combine many
their securities Finance” as they serve a different financial
attractive to investors, variety of savers and institutions within a
buying securities, or borrowers single corporation
reselling them to lenders Handlers of checking
accounts
 TYPES OF FINANCIAL INSTITUTION

CREDIT PENSION LIFE INSURANCE

UNIONS FUNDS COMPANIES
Cooperative associations Retirement plans funded Savings in the form of
whose members are by corporations or annual premiums
supposed to have a government agencies for
common bond. Members’ their workers
savings are loaned only
to other members
 TYPES OF FINANCIAL INSTITUTION

MUTUAL FUNDS EXCHANGE HEDGE FUNDS

Corporations that accept TRADED FUNDS Also similar to mutual
money from savers and funds because they
Similar to regular mutual
then use these funds to accept money from
funds and are often
buy stocks, long-term savers & use the funds
operated by mutual fund
bonds, or short-term debt to buy various securities.
companies
instruments issued by However, unlike mutual
businesses or funds, hedge funds are
government units largely unregulated.
TYPES OF FINANCIAL INSTITUTION

PRIVATE EQUITY
COMPANIES
Organizations that
operate much like hedge
funds; but rather than
purchasing some of the
stock of a firm, private
equity players buy and
then manage entire firms
BENEFITS OF FINANCIAL
INSTITUTIONS
Aggregation of Funds
Pooling of Risk
Convenience
WHAT IS A MARKET?
MARKET
A market is a venue where goods and
services are exchanged
 TYPES OF MARKET

PHYSICAL FINANCIAL
Tangible goods such as Intangible goods such as
machinery, real estate, stocks, bonds, etc.
etc. High value commodities
(e.g. precious metals
such as gold, diamonds,
etc.)
 TYPES OF MARKET

PRIMARY SECONDARY
Markets in which Markets in which existing,
corporations raise new already outstanding
capital securities are traded
among investors.

Note: Note:
New capital Old/existing/outstanding
First hand ownership capital
 TYPES OF MARKET

PUBLIC PRIVATE
Standardized contracts Transactions are
are traded on organized negotiated directly
exchanges (e.g. between two parties
Philippine Stock
Exchange)
 TYPES OF MARKET

SPOT FUTURES
Agreement: Present Agreement: Present
Delivery: Present Delivery Future Date
 TYPES OF MARKET

MONEY CAPITAL
Short-term securities Medium to long-term
securities
 TYPES OF MARKET

STOCK BOND
Equity securities Debt securities
INITIAL PUBLIC OFFERING
An initial public offering (IPO) refers to the process
of offering shares of a private corporation to the
public in a new stock issuance for the first time.
TIME VALUE OF MONEY
VARIABLES/COMPONENTS
OF TIME VALUE OF MONEY
Principal
Interest
Time/Period
Present Value
Future Value
CONCEPT OF INTEREST
The cost of borrowing money.
Main Types of Interest
Simple Interest - calculated on the principal or
original amount of a loan
Compound Interest - calculated on the principal
amount and the accumulated interest of
previous periods, and thus can be regarded as
“interest on interest”
CONCEPT OF PRESENT
& FUTURE VALUE
Present value is the current value of future
cash flow, whereas future value is the value of
future cash flow after specific periods or years.
Present value is the sum of money that must be
invested in order to achieve a specific future
goal. Future value is the dollar amount that will
accrue over time when that sum is invested.
CONCEPT OF ANNUITY
Payments are equal and are made at fixed intervals.

An annuity due is an annuity with payment due or

made at the beginning of the payment interval. In
contrast, an ordinary annuity generates payments
at the end of the period.
-END OF TOPIC-

TOPIC 01: INTRODUCTION TO

FINANCIAL MANAGEMENT
ACT1124 | FINANCIAL MANAGEMENT

DANA DANIELLE F. UGANIZA, CPA