FINANCIAL

MANAGEMENT
M A R K D . N I VA L , C PA , D i p P M , M PA

Faculty-in-charge

College of Accountancy

Quezon City University

INTRODUCTION TO FINANCIAL MANAGEMENT
NATURE

- referred to as managerial finance, corporate finance, and business finance.

- a decision-making process concerned with planning, acquiring and utilizing funds
in a manner that achieves the firm’s desired goals.
- also described as the process for and analysis of making final decisions in the
business context.
- part of a larger discipline called FINANCE which is a body of facts, principles, and
theories relating to raising and using money by individuals, businesses, and
governments.
- concerns both financial management of profit-oriented business organizations
particularly the corporate form of business, as well as, concepts and techniques
that are applicable to individuals and to government.
GOAL OF FINANCIAL MANAGEMENT

The goal of financial management is to maximize the current value per share of
the existing stock or ownership in a business firm.

SCOPE OF FINANCIAL MANAGEMENT

TRADITIONALLY, financial management is primarily concerned with acquisition, financing

and management of assets of business concern in order to maximize wealth the wealth of
the firm for its owners. The traditional view looks into the following functions that a
financial manager of a business firm will perform:

1. Procurement of short-term as well as long-term funds from financial institutions.

2. Mobilization of funds through financial instruments such as equity shares, preference
shares, debentures, bonds, notes and so forth.
3. Compliance with legal and regulatory provisions relating to funds procurement, use and
distribution as well as coordination of the finance function with the accounting function.
With modern business situation increasing in complexity, the role of Finance
Manager which initially is just confined to acquisition of funds, expanded to
judicious and efficient use of funds available to the firm, keeping in view the
objectives of the firms and expectations of the providers of funds.

More recently though, with the globalization and liberalization of world economy,
tremendous reforms in financial sector evolved in order to promote more
diversified, efficient and competitive financial system in the country. The
financial reforms coupled with the diffusion of information technology have
brought intense competition, mergers, takeovers, cost management, quality
improvement, financial discipline and so forth.

In view of modern approach, the Finance Manager is expected to analyze the

business firm and determine the following:

1. The total fund requirements of the firm

2. The assets or resources to be acquired
3. The best pattern of financing the assets
TYPES OF FINANCIAL DECISIONS

The three major types of decisions that the Financial Manager of a modern
business firm will be involved in are:

1. Investment decisions – are those which determine how scarce or limited

resources in terms of funds of the business firms are committed to projects.

2. Financing decisions – assert that the mix of debt and equity chosen to finance
investments should maximize the value of investments made.

3. Dividend decisions – is concerned with the determination of quantum of

profits to be distributed to the owners, the frequency of such payments and
the amounts to be retained by the firm.
SIGNIFICANCE OF FINANCIAL MANAGEMENT
The importance of fi nancial management is known for the following aspects:

BROAD APPLICABILITY

Financial management is equally applicable to all forms of business-like sole traders,

partnerships, corporations. It is also applicable to nonprofit organizations like trust,
societies, government organizations, public sectors, and so forth.

REDUCTION OF CHANCES OF FAILURE

Finance function is treated as primordial which enables the other functions like
production, marketing, purchase and personnel to be effective in the achievement of
organizational goal and objectives.

MEASUREMENT FO RETURN ON INVESTMENT

Financial Management studies the risk-return perception of the owners and the time
value of money. It considers amount of cash flows expected to be generated for the
benefit of owners, the timing of these cash flows and the risk attached to it. The
greater the time and risk associated with the expected cash flow, the greater is the
rate of return required by the owners.
RELATIONSHIP OF FINANCIAL OBJECTIVES TO ORGANIZATIONAL
STRATEGY AND OTHER ORGANIZATIONAL OBJECTIVES

Firms have numerous goals but not every goal can be attained without causing conflict in
reaching other goals. Conflict often arise because of the firm’s many constituents who
include shareholders, managers, employees, labor unions, customers, creditors, and
suppliers.

For example, the objective may be stated in such a broad terms as:
• It is the goal of the company to be a leader in technology in the industry, or
• To achieve profits through a high-level manufacturing efficiency, or
• To achieve a high degree of customer satisfaction.

STRATEGIC FINANCIAL MANAGEMENT

The strategic financial planning involves financial planning, financial forecasting, provision
of finance and formulation of finance policies which should lead the firm’s survival and
success.
RELATIONSHIP OF FINANCIAL OBJECTIVES TO ORGANIZATIONAL
STRATEGY AND OTHER ORGANIZATIONAL OBJECTIVES

STRATEGIC FINANCIAL MANAGEMENT (continuation…)

The responsibility of a finance manager is to provide a basis and information for strategic
positioning of the firm in the industry. The firm’s strategic financial planning should be able
to meet the challenges and competition, and it would lead to firm’s failure or success.

SHORT-TERM AND LONG-TERM FINANCIAL OBJECTIVES OF A BUSINESS ORGANIZATION

Short and Medium-Term

• Maximization of return on capital employed or return on investment
• Growth in earnings per share and price/earnings ratio through maximization of net
income or profit and adoption of optimum level of leverage
• Minimization of finance charges
• Efficient procurement and utilization of short-term, medium, and long-term funds

LONG-TERM
• Growth in the market value of the equity shares through maximization of the firm’s
market share and sustained growth in dividend to shareholders
• Survival and sustained of the firm

There have been a number of different, well-developed viewpoints concerning what the
primary financial objectives of the business firm should be. The competing viewpoints
are:
• The owner’s perspective which hold that the only appropriate goal is to maximize
shareholder or owner’s wealth, and;
• The stakeholder’s perspective which emphasizes social responsibility over profitability
(stakeholders include not only the owners and shareholders, but also include the
business’ customers, employees and local commitments)
RESPONSIBILITIES TO ACHIEVE THE FINANCIAL OBJECTIVES

INVESTING

The investing function deals with managing the firm’s assets. The investment decisions
should aim at investments in assets only when they are expected to earn a return
greater than a minimum acceptable return which is called as hurdle rate. This minimum
return should consider whether the money raised from debt or equity meets the
returns on investments made elsewhere on similar investments.

The following areas are example of investing decisions of a finance manager:

a. Evaluation and selection of capital investment proposal
b. Determination of the total amount of funds that a firm can commit for investment
c. Prioritization of investment alternatives
d. Funds allocation and its rationing
e. Determination of levels of investment in working capital (i.e. inventory, receivables,
cash, marketable securities and its management)
f. Determination of fixed assets to be acquired
g. Purchase or lease decisions
h. Restructuring reorganization mergers and acquisition
i. Securities analysis and portfolio management
FINANCING

The financing objective asserts that the mix of debt and equity chosen to finance
investments should maximize the value of investments made.

The finance manager will be involved in the following finance decisions:

a. Determination of the financing pattern of short-term, medium-term and long-term
funds requirements.
b. Determination of the best capital structure or mixture of debt and equity financing
c. Procurement of funds through the issuance if financial instruments such as equity
shares, preference shares, bonds, long-term notes, and so forth
d. Arrangement with bankers, suppliers, and creditors for its working capital,
medium-term and other long-term funds requirement
e. Evaluation of alternative sources of funds
OPERATING

This third responsibility are of the finance manager concerns working capital
management. The term working capital refers to a firm short-term asset (i.e., inventory,
receivables, cash and short-term investments) and its short-term liabilities (i.e. accounts
payable, short-term loans).

Some issues that may have to be resolved in relation to managing a firm’s working
capital are:
a. The level of cash, securities and inventory that should be kept on hand
b. The credit policy (i.e. should the firm sell on credit? If so, what terms should be
extended?)
c. Source of short-term financing (i.e., if the firm would borrow in the short-term, how
and where should it borrow?)
d. Financing purchases of goods (i.e., should the firm purchase its raw materials or
merchandise on credit or should it borrow in the short-term and pay cash?)
FUNCTIONS OF FINANCIAL MANAGEMENT
RESPONSIBILITIES AND ROLES OF FINANCIAL MANAGER

Financial Manager Makes Decisions

Involving

Analysis and Acquisition of

Utilization of Funds
Planning Funds

Impact on Risk and

Return

Affect the Market Price

of Common Stock

Lead to Shareholder’s
Wealth Maximization
THE FINANCE ORGANIZATION
Board of Directors

Chairman of the Board

and Chief Executive
Officer (CEO)

President and Chief

Operations Officer (COO)

Vice President Finance Vice President

Vice President Marketing
(CFO) Production

Treasurer Controller

Cost
Cash Credit Tax
Accounting
Manage Manage Manage
Manager

Financial Data
Capital Financial
Accounting Processing
Expenditure Planning
Manager Manager
RELATIONSHIP WITH OTHER KEY FUNCTIONAL MANAGERS
IN THE ORGANIZATION

Finance is one of the major functional areas of business. For

example, the functional areas of business operations for a typical
manufacturing firm are manufacturing, marketing, and finance.
Manufacturing deals with the design and production of product. Marketing
involves the selling, promotion, and distribution of a product. Manufacturing
and marketing are critical for the survival of a firm because these areas
determine what will be produced and how these products will be sold.
However, these other functional areas could not operate without funds.
Since finance is concerned with all of the monetary aspects of a business,
the financial manager must interact with other managers to ascertain goals
that must be met, when and how to meet them. Thus, finance is an integral
part of total management and cuts across functional boundaries.
CORPORATE GOVERNANCE
It is the process of monitoring managers and aligning their incentives with
shareholders goals. In reality, because shareholders are usually inactive, the firm
actually seems to belong to management. Generally speaking, the investing public
does not know what goes on at the firm’s operational level. Managers handle day-to-
day operations, and they know that their work is mostly unknown to investors. This
lack of supervision demonstrates the need for monitors.
Monitors

Inside the company

Board of Directors

Outside the company

Auditors
Stockholders Analysts Managers
Bankers
Credit Agencies

Government
SEC, BIR, BSP
ETHICAL BEHAVIOR

Ethics are of primary importance in any practice of finance. Finance professionals

commonly manage other people’s money. For instance, corporate managers control
the stockholders’ firm, bank employees perform cash receipts and disbursements
functions and investment advisors manage people’s investment portfolios.

In a number of instances, the corporate governance system has created ethical

dilemmas and has failed to prevent unethical managers from stealing from firms
which ultimately means stealing from owners or stockholders.

Governments all over the world have passed laws and regulations meant to ensure
compliance with ethical codes of behavior. And if professionals do not act
appropriately, governments have set up strong punishment for financial fraud and
abuse.
THANK YOU! 
mdnivalcpadippmmpa