BusFin: CHPTR1-UNDERSTANDING FINANCE

Prof.

CONCEPT AND DEFINITION OF FINANCE Financial Resources, Investments, and

FINANCE is defined as; Expenditures
“both a science and an art of correct • Financial resources refer to the funds of a business
application of the economic and accounting concepts and which are provided by the owner or by the creditors.
principles that define the system, structure, and process of • Financial investments are resources that are expected
management, allocation, and utilization of financial to provide income and achieve appreciation or growth of
resources, investments, and expenditures” the business.
• The financial expenditures of a business may cover
Key Concepts of Finance: the operating expenditures and the capital expenditures.
1. both a science and an art
2. application of the economic and accounting
concepts and principles
3. system, structure, and process
4. management, allocation, and utilization
DIFFERENT AREAS OF FINANCE
5. financial resources, investments, and 2 Finance is broadly classified:
expenditures 1. Private finance
2. Public finance

2 Private finance is subdivided into:

2 Application of Economic and Accounting 1. Business finance
Concepts and Principles: 2. Personal finance
1. Economics, as a social science, is
concerned with the efficient utilization of 3 Business finance is further subdivided into
scarce resources to satisfy human needs the following areas:
and wants.
1. Financial management
2. Accounting is an art of recording business
transactions and deals with the preparation of
2. Capital market
financial statements. Accounting is 3. Financial investment
considered as the language of both
business and finance.

Areas of Finance:

System, Structure, and Process:

• The field of finance provides and clearly defines a
systematic, structured, and procedural mechanism on
the various financial activities affecting the business
• The term system connotes that the financial activities of
the business are properly coordinated with the whole
structure.
• Every financial activity has a purpose.

Management, Allocation, and Utilization:

• The fundamental concern of finance is to ensure that the
limited financial resources are correctly managed,
allocated, and utilized in order to achieve the financial
goal of a business.
• Management implies the efficient handling of business
resources, particularly those that are financial in nature
• Allocation connotes the wise distribution of financial
resources to the different functional areas, the proper
assignment of funds between current and non-current
assets, and the correct sourcing of funds based on the
concepts of risk and return.
• Financial resources that are properly managed,
allocated, and utilized significantly influence the
financial performance of the business
 2. Capital market
is an area of business finance that studies the different
financial institutions and their functions that provide
DIFFERENT AREAS OF FINANCE:
assistance to both private and public borrowers of funds.
2 Finance is broadly classified into two: → It also includes the study of the cost of borrowing
1. Private finance 2. Public finance the funds such as interest and other financing
• Private finance is the • Public finance is the charges.
management of allocation of 3. Financial investment
financial resources of government income - includes business decisions about the value and price of
private individuals, non- generated from either stocks and bonds, portfolio analysis, market analysis,
government taxation or borrowings security analysis, and behavior of the investors.
organizations, and and the government
private organizations in expenditure based on
accordance with the the approved national
prescribed financial and local appropriation
policy and priority of or budget. Public FINANCE IN A BUSINESS
the business finance is also termed ORGANIZATION
organizations. as fiscal
administration. 4 FUNCTIONAL DIVISIONS OF A BUSINESS
ORGANIZATION:
1. Production and Operation division
2. General administrative or Human
resource division
2 Private finance is subdivided into: 3. Finance division
1. Business Finance 4. Marketing division
- is an area of finance that focuses on the TWO MAJOR DIVISIONS:
handling and management of financial resources 1. OPERATING DIVISION –
of business organizations. The three major → Usually headed by the Chief Operating Officer (COO)
divisions of business finance are financial → handles the following functions:
management, capital market, and financial 1. Marketing
investment. 2. Production and Operations; and
3. Human Resource
2. Personal Finance
- is a sub-category of private finance which is 2. FINANCE DIVISION–
directed towards the management of personal → Usually headed by the Chief Finance Officer (CFO)
resources of an individual. The income of an → handles the following:
individual is sourced from compensation, exercise 1. Accounting function
of profession, or business income as a sole 2. Treasury function
proprietor.

Income is allocated based on the individual’s

personal needs such as household expenses, FUNCTIONS OF A FINANCE OFFICER
education, hospitalization, and acquisition of personal • Acts as the wary financial traffic officer to almost all
and real properties. business transactions with monetary considerations.
• The finance officer is also expected to be the “shock
absorber” of budgetary requests and requirements of
other functional units of the business.
3 Business finance is further subdivided into • Is primarily responsible for managing the finances in
the following areas: the organization.
• The professional judgment of the finance officer in
1. financial management routine and occasional transactions is the product of his
2. capital market or her varied expenses and strong educational
background in accounting, economics, and even
3. financial investment operation science.

1. Financial management
-focuses on capital budgeting decision or → The finance officer is heavily engaged in making
decisions for the business to attain its objectives at the
investment decision on the acquisition of assets
optimum level. His or her decision-making
and its corresponding financing scheme. This
function is broadly classified into three:
area of finance answers the following questions:
1. operating decisions
➢ What kind of asset shall be acquired?
2. investing decisions
➢ What type of financing scheme shall
3. financing decisions
be used in the acquisition of the
asset?

Reviewer by SADSAD & SOBREVEGA

 FUNCTIONS OF A FINANCE OFFICER
1. Operating decisions
→ are financial decisions affecting the routine
operating activities of a business.
→ It is directed towards providing immediate
solution to the concerns of the functional
areas of the firm such as manufacturing,
marketing, purchasing, and the like.
2. Investment decisions
→ deal with choosing small and large projects
with several investment opportunities.
→ The different projects are critically
evaluated in terms of return of investment
and expected cash flows.
→ However, investment decisions are made
only when investment opportunities come.
3. Financing decisions
→ deal with raising or acquiring of funds from
outside sources and not form the ordinary
results of the business operation.
→ In other words, financing decisions are
made when the business needs to borrow
money.
→ A business can raise money from the
following activities or sources:
1. operations
2. investors or lenders
3. owners
QUALIFICATION OF FINANCE OFFICER:
1.POSSESSES SOUND KNOWLEDGE OF ACCOUNTING
AND ECONOMIC CONCEPTS AND PRINCIPLES.
2.Has profound understanding of operation science, statistics
and marketing research.
3.has gained technical experience in finance and provided
professional judgement
4.has good communication skills in both oral and written forms
5.has impressive relationship with banks and other financial
institutions
6.has outstanding relationship within the business and among
other functional areas
7.is ethically and morally upright and socially responsible
CHAPTER 2: FINANCIAL INSTITUTIONS,
INSTRUMENT AND MARKETS
Financial Institution is defined as;
“ are institutions or organizations that
provide financial services, among others, in the form of
loan, credit, fund administration, financing, depository
and safekeeping”
Classification of Financial Institutions
1. Depository Institutions
2. Financial Intermediaries
3. Investment Institutions
1. Depository Institutions:
→ that accepts deposits ( savings, current and time
deposits) form individuals and corporate entities, extend
loans to borrowers, transfer funds and manage funds for
investment purposes.
4 Depository institutions include the following:
1. Banks
2. Savings and loan association
3. Trust companies
4. Credit unions
1. Banks
“ are institutions authorized to operate and
regulated by the BSP under the general
banking law of 2000. They accept
deposits and bills payment, provide loans
and facilitate the transfer of funds
domestically or abroad”
Classification of banks:
1. Universal bank - considered as the biggest
bank in terms of portfolio and revenue
2. Commercial bank - it is a type of bank that
provides commercial loans and and offers
investment products in addition to the regular
banking service of accepting deposits.
3. Thrift bank - include savings and mortgage
banks, private development banks and stocks
savings, loan associations and microfinance thrift
banks. - organized and operating in rural areas.
4. Rural bank Target market is farmers.
5. Cooperative bank
6. Islamic bank - aims and promotes and
accelerate the socio-economic development of
the autonomous region of Muslim Mindanao by
performing banking, financing and investment
operations.
2. Savings and loan association
-engaged in the business of accumulating the savings
of its members and stockholders
3. Trust Companies
-is a legal business entity usually major division of a
universal or commercial bank, that acts as fiduciary
agent or trustee on behalf of an individual person or
corporate entity.
4. Credit Union
- is a financial depository institutions that is mainly
controlled and operated by its members.
Reviewer by SADSAD & SOBREVEGA
Financial Intermediaries
→ “ a type of financial institution that acts as a
middleperson between two parties . The investor and
borrowers”.
3 Financial Intermediaries refer the following:
1. Mutual Fund
-accumulate money by selling shares of stocks or bonds of
publicly listed corporations to individual or corporate
investors.
2. Pension Fund
-is set up by a business for the purpose of paying the pension
requirements of all private sector employees who retire from
the business organization upon reaching their retirement age.
3. Insurance Companies
- acts as a financial intermediary by pooling together the
proceeds of insurance policies sold to the public and investing
the accumulated funds in high yield maturing securities from
investment house.
Insurance Companies may offer the following
products to the public:
A. Life Insurance
B. Health Insurance
C. Car Insurance
D. Fire Insurance
E. Crop Insurance
F. Marine Insurance
G. Other Insurance Products
Market- refers to the place where the sellers and the
buyers of goods or services meet.
Financial Market- refers to the place where the selling
and buying activity occurs to trade equity securities such as
bonds and stocks, currencies, derivative securities, notes
and mortgages.
The typical financial market, among others include the
following:
1.Capital market - is a financial market where stocks
and bonds are issued for medium and long term
periods.
2. Money market - when the financial securities being
traded have period of less than one year.
3. Primary market - is a financial market where a
corporation can issue new shares of stocks
4. Secondary market - is a financial market where
financial securities are traded between or among the
investors.
5. Public market - is a market which the financial
securities of publicly listed corporation are traded
following a standardized contract agreement and
procedures.
Financial Instruments
→ refer to contracts that give rise to the
formation of financial assets of one entity and
at the same time the creation of financial
liability or an equity instrument in another
entity
Bond – is a financial instrument that represents a
contractual debt of the party issuing the bond.
6 The most common type of bonds are as
follows:
1. Term Bond- that has a single maturity date. The bond
can be a single lone bond or can be composed of
several bonds with the same maturity bond.
2. Serial Bond- is a kind of bond that has a series of
several maturity dates instead of single maturity date.
3. Secured Bond- a type of bond that is secured by the
issuing company. The security is issued in the form of
real property which serves as collateral in the event of
default on the part of the bond issuer.
4. Debenture Bond- when it is not supported by any
collateral or security as assurance in times of non-
payment or default.
5. Convertible Bond- is a debt security, as such a
bondholder is also referred to as creditor.
6. Callable Bond- have maturity dates indicated on the
face of the indenture. The issuing company is
expected to pay the bondholder on the maturity date.
Stocks
-is a financial security that signifies ownership of the
assets of the corporation.
The holders of the shares of stocks as evidenced by
the Stock Certificate are called shareholders or
stockholders.
The 2 major types of stocks are as
follows:
1. Common Stock or ordinary shares
→ is a financial instrument whose holders do not
have preferences over each other.
→ The common stockholders have the same rights
and privileges in terms of dividend or asset
distribution with other stockholders
2. Preferred stocks or preference shares
→ is a kind of stock that is preferred over common
stock.
*The preference on the distribution of profit means that
preference stockholders are Paid First of the Dividends
accruing to them.
Reviewer by SADSAD & SOBREVEGA