BUSINESS

FINANCE
Introduction

PRESENTATION BY:
JEREMIAH RAYMOND C. LUMBA
Introduction to Business Finance

What is Finance?
o1.
Who are responsible for financial management within an
o2. organization ?

o3. What are the primary activities of the financial manager ?

How does the financial manager help in achieving the
o4. goal of the organization?

The role of financial institutions and markets.

o5.

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 What is Finance and Financial Management?

Financial Management

It is the art and science of managing money. Financial Management deals with that decisions that are supposed to maximize the value
of shareholder’s wealth. These decisions will ultimately affect the markets perception of the company and influence the share price.
The goal of Financial Management is to maximize the value of shares of stocks. Managers of a corporation are responsible for making
the decisions for the company that would lead towards shareholder’s wealth maximization.

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FM Organizational Structure

Board of
Directors

President

Vice President
Vice President Vice President Vice President
for
for Marketing for Finance for Production
Administration

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The role of Shareholders

The shareholders elect the Board of Directors (BOD).

Each share held is equal to one voting right. Since the
shareholders elect the BOD, their responsibility is to carry
out the objectives of the shareholders. Otherwise, they
would not be elected in that position.

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 The roles of the Board of Directors
Board of Directors: The board of directors is the highest policy making body in a
corporation. The board’s primary responsibility is to ensure that the corporation is
operating to serve the best interest of the stockholders. The following are among the
responsibilities of the board of directors:

o1. Setting policies on investments, capital structure and dividend policies.

Approving company’s strategies, goals and budgets.

o2.
Appointing and removing members of the top management including
o3. the president.

o4. Determining top management’s compensation.

Approving the information and other disclosures reported in the

o5. financial statements.
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 The roles of the President (or Chief Executive Officer)

President (Chief Executive Officer): The roles of a president in a corporation may vary
from one company to another. Among the responsibilities of a president are the following:

Approving the information and other disclosures reported in the

o1. financial statements. Overseeing the operations of a company and
ensuring that the strategies as approved by the board are implemented
as planned.

Performing all areas of management: planning, organizing, staffing,

o2. directing and controlling.

o3. Representing the company in professional, social, and civic activities.

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 The roles of the VP for Marketing

Formulating marketing strategies and plans. Directing and coordinating

o1. company sales

Performing market and competitor analysis.

o2.
Analyzing and evaluating the effectiveness and cost of marketing
o3. methods applied.

o4. Conducting or directing research that will allow the company identify
new marketing opportunities, e.g. variants of the existing
products/services already offered in the market.

o5. Promoting good relationships with customers and distributors.

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 The roles of the VP for Production

Ensuring production meets customer demands.

o1.
Identifying production technology/process that minimizes production
o2. cost and make the company cost competitive.

Coming up with a production plan that maximizes the utilization of the

o3. company’s production facilities.

Identifying adequate and cheap raw material suppliers.

o4.

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 The roles of the VP for Administration

Coordinating the functions of administration, finance, and marketing

o1. departments.

Assisting other departments in hiring employees.

o2.
Providing assistance in payroll preparation, payment of vendors, and
o3. collection of receivables.

Determining the location and the maximum amount of office space

o4. needed by the company. Identifying means, processes, or systems that
will minimize the operating costs of the company.

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The roles of the VP for Finance

The role of the VP for Finance/Financial Manager is to determine the

appropriate capital structure of the company. Capital structure refers to how
much of your total assets financed by debt and how much is financed by equity.

To be able to acquire assets, our funds must have come somewhere. If it

has bought using cash from our pockets, it has financed by equity. On the other
hand, if we used money from our borrowings, the asset bought has financed by
debt.

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 The functions of the VP for Finance

Financing decisions - include making decisions as to how to finance

o1. long-term investments and working capital-which deals with the
day-to-day operations of the company.

o2. Investing Decisions - To minimize the probability of failure, long-term

investments have supported by a capital budgeting analysis.

Operating Decisions – deal with the daily operations of the company

o3. especially on how to finance working capital accounts such as accounts
receivable and inventories.

o4. Dividend Policies – Dividend is a part of profits that are available for
distribution, to equity shareholders. The Finance manager must decide
whether the firm should distribute all the profits or retain them or
distribute a portion and retain the balance.

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 Overview of the Financial System

Savers Financial Users of Funds

Intermediaries

• Households
• Households • Banks • Individuals
• Individuals • Insurance Companies
• Corporations / Companies
• Corporations / Companies • Stock Exchange
• Government Agencies
• Government Agencies • Stock brokerage firms

• Mutual Funds

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 Financial Institutions

Financial institutions are companies in the financial sector that

provide a broad range of business and services including banking,
insurance, and investment management.

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 Financial Institutions
a.
Commercial Banks - Individuals deposit funds
at commercial banks, which use the deposited
funds to provide commercial loans to firms and
personal loans to individuals, and purchase debt
securities issued by firms or government
agencies

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 Financial Institutions
b.

Insurance Companies - Individuals purchase insurance

(life, property and casualty, and health) protection with
insurance premiums. The insurance companies pool these
payments and invest the proceeds in various securities until
the funds needed to pay off claims by policyholders.
Because they often own large blocks of a firm’s stocks or
bonds, they frequently attempt to influence the management
of the firm to improve the firm’s performance, and
ultimately, the performance of the securities they own.

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 Financial Institutions

c.

Mutual Funds - Mutual funds owned by investment companies that enable

small investors to enjoy the benefits of investing in a diversified portfolio of
securities purchased on their behalf by professional investment managers.
When mutual funds use money from investors to invest in newly issued debt
or equity securities, they finance new investment by firms. Conversely,
when they invest in debt or equity securities already held by investors, they
are transferring ownership of the securities among investors

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 Financial Institutions
d.

Pension Funds - Financial institutions that receive

payments from employees and invest the proceeds on their
behalf. Other financial institutions include pension funds
like Government Service Insurance System (GSIS) and
Social Security System (SSS), unit investment trust fund
(UITF), investment banks, and credit unions, among others.

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 Financial Instruments

Financial Instruments is a real or a virtual document representing

a legal agreement involving some sort of monetary value. These can be
debt securities like corporate bonds or equity like shares of stock. When a
financial instrument issued, it gives rise to a financial asset on one hand
and a financial liability or equity instrument on the other.

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 Characteristics of Financial Instruments
a.
A Financial Asset is any asset that is:

• Cash

• An equity instrument of another entity

• A contractual right to receive cash or another financial

asset from another entity.

• A contractual right to exchange instruments with another

entity under conditions that are potentially favorable.

• Examples: Notes Receivable, Loans Receivable,

Investment in Stocks, Investment in Bonds

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 Characteristics of Financial Instruments
b.

A Financial Liability is any liability that is a contractual

obligation:

• To deliver cash or other financial instrument to another

entity.

• To exchange financial instruments with another entity

under conditions that are potentially unfavorable.

• Examples: Notes Payable, Loans Payable, Bonds Payable

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 Characteristics of Financial Instruments

c. An Equity Instrument is any contract that evidences a

residual interest in the assets of an entity after deducting all
liabilities.

• Examples: Ordinary Share Capital, Preference Share

Capital

• Identify common examples of Debt and Equity

Instruments.

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 Characteristics of Financial Instruments

c.

Equity Instruments generally have varied returns based on the

performance of the issuing company. Returns from equity
instruments come from either dividends or stock price appreciation.
The following are types of equity instruments:

• Preferred Stock has priority over a common stock in terms of claims over the assets
of a company. This means that if a company has liquidated and its assets have to be
distributed, no asset be distributed to common stockholders unless all the claims of
the preferred stockholders has given. Moreover, preferred stockholders have also
priority over common stockholders in cash dividend declaration. Dividends to
preferred stockholders are usually in a fixed rate. No cash dividends given to
common stockholders unless all the dividends due to preferred stockholders paid first.
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 Characteristics of Financial Instruments

c.

Equity Instruments generally have varied returns based on the

performance of the issuing company. Returns from equity
instruments come from either dividends or stock price appreciation.
The following are types of equity instruments:

• Holders of Common Stock on the other hand are the real owners of the company. If
the company’s growth is encouraging, the common stockholders will benefit on the
growth. Moreover, during a profitable period for which a company may decide to
declare higher dividends, preferred stock will receive a fixed dividend rate while
common stockholders receive all the excess

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 Characteristics of Financial Instruments
d.
Debt Instruments generally have fixed returns due to fixed
interest rates.

• Treasury Bonds and Treasury Bills issued by the Philippine

government. These bonds and bills have usually low interest rates
and have very low risk of default since the government assures that
these has been paid.

• Corporate Bonds issued by publicly listed companies. These bonds

usually have higher interest rates than Treasury bonds. However,
these bonds are not risk free. If the company issued the bonds goes
bankrupt, the holder of the bonds will no longer receive any return
from their investment and even their principal investment has wiped
out.

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 Financial Market

Financial Market - refers to a marketplace, where

creation and trading of financial assets, such as shares,
debentures, bonds, derivatives, currencies, etc. take place.

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 Primary vs Secondary Market

To raise money, users of funds will go to a primary market to issue new

securities (either debt or equity) through a public offering or a private
placement.

• The sale of new securities to the public referred to as a public offering

and the first offering of stock named an initial public offering. The
sale of new securities to one investor or a group of investors
(institutional investors) is referred to as a private placement.

• However, suppliers of funds or the holders of the securities may decide

to sell the securities that they have purchased. The sale of previously
owned securities takes place in secondary markets.

• The Philippine Stock Exchange (PSE) is both a primary and

secondary market. 27
 Money Markets vs. Capital Markets

Money markets are a venue wherein securities with short-term

maturities (1 year or less) are sold. They have created because some
individuals, businesses, governments, and financial institutions have
temporarily idle funds that they wish to invest in a relatively safe, interest
bearing asset. At the same time, other individuals, businesses,
governments, and financial institutions find themselves in need of
seasonal or temporary financing.

• On the other hand, securities with longer-term maturities sold in

Capital markets. The key capital market securities are bonds
(long-term debt) and both common stock and preferred stock (equity,
or ownership).

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