INTRODUCTION TO FINANCIAL MANAGEMENT

Atty. Prackie Jay T. Acaylar, CPA, JD, MPA, PhD-BM, FRILL, PD-SM

OBJECTIVES

At the end of the lesson, the learner must be able to:

 Describe the nature, purpose, scope and role of financial management within an
organization;

 Compare and contrast financial accounting and financial management;

 Outline the relationship of financial objectives to organizational strategy and other

organizational objectives;

 Explain the different functions of financial management;

 Distinguish the different functions of financial management;

 Identify and explain the attributes of good financial management;

 Explain the limitations of financial management in providing guidance for managerial

decision-making.

 Describe forms of business organization;

 Explain the uses and limitations of financial management;

 Describe the impact of general economic environment on financial management;

 Explain and illustrate the different functions of financial management;

 Explain the importance of the functions of financial management; and

 Explain and illustrate with examples the different forms of business organization.

MEANING AND DEFINITION OF FINANCIAL MANAGEMENT

Financial Management is concerned with the acquisition of funds and their optimum utilization. It
is all about acquiring funds at minimum cost and generate optimum return by its optimum
utilization. Funds are acquired to meet financial aspects of business activity.

1. According to J.S. Massie: “Financial management is the operational activity of a business

that is responsible for obtaining and effectively utilizing the funds necessary for efficient
operations.”

2. According to Howard and Upton: “Financial management is the application of planning

and controlling functions of finance function.”

3. According to the Guthman and Dougal: “Business finance can be broadly defined as the
activity concerned with planning, raising, controlling, administering of the funds used in
the business”

NATURE OF FINANCIAL MANAGEMENT

 It is an integral part of overall management.

 Estimates Capital Requirements

 Decides capital structure

 Selects sources of fund

 Selects investment pattern

 Raises shareholders value

 Management of cash

 Apply financial controls

FUNCTIONS/PURPOSE OF FINANCIAL MANAGEMENT

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1. Financing Decisions: Managers also make decisions pertaining to raising finance from long-
term sources (called Capital Structure) and short-term sources (called Working Capital).
They are of two types:
A. Financial Planning decisions which relate to estimating the sources and application of
funds. It means pre-estimating financial needs of an organization to ensure the
availability of adequate finance. The primary objective of financial planning is to plan
and ensure that the funds are available as and when required.
B. Capital Structure decisions which involve identifying sources of funds. They also
involve decisions with respect to choosing external sources like issuing shares, bonds,
borrowing from banks or internal sources like retained earnings for raising funds
2. Investment Decisions: Managers need to decide on the amount of investment available
out of the existing finance, on a long-term and short-term basis. They are of two types:

Long-term investment decisions or Capital Budgeting mean committing funds for a long
period of time like fixed assets. These decisions are irreversible and usually include the
ones pertaining to investing in a building and/or land, acquiring new plants/machinery or
replacing the old ones, etc. These decisions determine the financial pursuits and
performance of a business.

Short-term investment decisions or Working Capital Management means committing

funds for a short period of time like current assets. These involve decisions pertaining to
the investment of funds in the inventory, cash, bank deposits, and other short-term
investments. They directly affect the liquidity and performance of the business.

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 3. Dividend Decisions: These involve decisions related to the portion of profits that will be
distributed as dividend. Shareholders always demand a higher dividend, while the
management would want to retain profits for business needs. Hence, this is a complex
managerial decision.

SCOPE OF FINANCIAL MANAGEMENT

Financial Management is a sub-system in an organization which has to coordinate with other

subsystems such as production, marketing etc. Following are scope of financial management :

1. Financial Management and Economics 

2. Financial Management and Accounting

3. Financial Management and Mathematics

4. Financial Management and Marketing

5. Financial Management and Human Resource 

6. Financial Management and Production Management

RELATIONSHIP OF FINANCIAL OBJECTIVE TO ORGANIZATIONAL STRATEGY AND

OTHER ORGANIZATION

INTRODUCTION

• Finance permeates the entire business organizations by providing guidance for the firm’s
strategic and day to day decision.

• Objectives setting is an important phase in the business enterprise since upon correct
objectives setting will the entire structure of strategies, policies, and plans of company
rest.

Example of Objectives in broad terms

• It is the goal of the company to be a leader in technology in the industry

• To achieve profit through a high-level manufacturing efficiency

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 • To achieve a high degree of customer satisfaction

Strategic Financial Management

• Strategic planning is long range in scope and has its focus on the organization as a whole

• A company strategic or business plan reflects how it plans to achieve its goal and
objectives.

• Historical financial statements provide insights into the success of a company’s strategic
plan and are an important input of the planning process.

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 term and long-term fund.

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 growth of the firm

FINANCIAL OBJECTIVE

 Profit Maximization is also called as cashing per share maximization. It leads to maximize
the business operation for profit maximization.

 Wealth Maximization is also known as value maximization or net present worth

maximization. This objective is a universally accepted concept in the field of business.

 Satisficing Objective This objective directs the interest of managers towards satisfying
rather than maximizing. Maximizing involves seeking the best possible outcome while ~'
satisficing involves a willingness to settle for something less (Weston, J.F.,1966).
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  Sales Maximization The goal of sales maximization is traced to the classic bureaucratic
practice of empire building.

 Expense Preference The expense preference theory of the firm asserts that managers may
seek to achieve a higher level of personal utility through higher salaries, additional staff
and other prerequisites for which the managers have positive preference.

 Revenue Maximization is a theoretical objective of a firm which attempts to sell at a price

which achieves the greatest sales revenue. 

FINANCIAL OBJECTIVES AND OTHER ORGANISATIONS

ORGANIZATION FINANCIAL OBJECTIVES

Companies (Limited and Unlimited) Wealth or Value Maximization

Public Corporations Profit/Revenue Maximization
Federal, State or Local Government Revenue Maximization
Charities, Clubs, Societies Revenue Maximization

Financial Objectives and Organizational Strategy are set at the top of an organization and are
filtered down to ensure all parts of an organization are working to achieved the same goal.

FINANCE MANAGEMENT FUNCTION

This model records classification structure addresses the Finance Management function, the
steps in the business process developed to fulfill the function (i.e., sub-functions), the activities
associated with each of these sub-functions, and the transactions of administrative business
concerning the management of finances within a certain framework.

The four sub-functions of the Finance Management business process, listed in order of a life-
cycle concept of managing finances, are:

Planning
Budgeting
Management and Control
Performance
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 Measurement

As a business process, these sub-functions are arranged in the following

sequence

Planning

Budgeting

Performance
Measurement
Management and
Control

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FINANCE MANAGEMENT FUNCTION PRIMARY NUMBERS AND SUB-FUNCTIONS
1. Finance Management – Comprehensive Matters
2. Finance Management – Planning
3. Finance Management – Budgeting
4. Finance Management – Management and Control
5. Finance Management – Performance Measurement

1. FINANCE MANAGEMENT – COMPREHENSIVE MATTERS

The Finance Management - Comprehensive Matters record grouping is reserved

for records of activities and transactions that relate to or affect, in a
comprehensive manner, the Finance Management function or the business
process developed to fulfill that function (i.e., this record grouping is reserved for
records of activities and transactions that relate to or affect all or most sub-
functions of the Finance Management business process). Examples of such
activities and/or transactions are:

 developing, applying, monitoring, and/or evaluating a policy, guidelines,

systems, procedures, etc. that address or encompass all or most aspects of
the finance management function and/or business process (example record
types: draft and approved policies, guidelines, procedures; draft and final
requirements definitions for finance management information systems 1;
draft and final requirements definitions for finance staff learning programs2);
  group activities and initiatives, i.e., those of committees, project teams,
delegations, etc., that focus on all or most aspects of the finance
management function and/or business process (example record types:
committee and/or work group meeting agenda and minutes, records of
decisions, issue logs);

 liaison activities (e.g., via the Finance Management Council, the Financial
Management Institute) that address or encompass all or most aspects of
the finance management function and/or business process (example record
types: documents of inter-organizational information sessions and/or
collaborative initiatives);

 reporting activities that address or encompass all or most aspects of the

finance management function and/or business process (example record
types: draft and final reports addressing the overall (e.g., corporate) finance
management function and/or business process.

1
Note: for records of activities relating to information management systems and technologies,
see the model records classification structure developed for the Management of Information
function.

2
Note: for records of activities relating to the delivery of learning programs, see the model
records classification structure developed for the Human Resources Management function.

Note: records of activities and transactions that relate to specific aspects of the finance
management business process (i.e., planning, budgeting, management and control, or
performance measurement) should be classified to those sections of this classification
structure. Records that simultaneously address two or more, but not all, sub-functions of the
business process should be classified to one of those sub-functions; the existence of these
records should be noted in the descriptions of the related sub-function, activity, and/or
transaction records groupings or, if appropriate, in the profiles of related individual documents
(as a metadata ‘cross-reference’ element).

2. FINANCE MANAGEMENT - PLANNING

This sub-function record grouping is reserved for records of activities and

transactions that relate to or affect, in a specific manner, determining how
financial resources will be used to achieve goals and objectives. Activities
associated with the Finance Management - Planning sub-function may have a
sequential relationship as follows:

Defining Requirements

Assessing

Reporting

Costing
Finance management - planning entails the activities of:
1. defining financial requirements against mandated goals and objectives (i.e.,
determining how annual and long-term goals and objectives, as delivered
from Parliament, can be met through the use of financial resources, and
translated into specific financial commitments);
2. assessing requirements in financial terms (i.e., determining what is
achievable using available financial resources);
3. costing all aspects of defined and assessed requirements (i.e., determining
what level of financial resources is needed); and
4. reporting findings to the appropriate authorities in advance of preparing a
budget.
3. FINANCE MANAGEMENT - BUDGETING

This sub-function record grouping is reserved for records of activities and

transactions that relate to or affect, in a specific manner, assigning financial
resources to specific programs, activities, or initiatives as authorised in the
financial plan. Activities associated with the Finance Management - Budgeting
sub-function may have a sequential relationship as follows:

Forecasting

Allocating
Reporting

Monitoring
Adjusting

Finance management - budgeting entails the activities of:

1. forecasting estimates for the predicted use of financial resources against the
budgeted financial resources during a given fiscal year or period;
2. allocating funds to specific accounts in the chart of accounts;
3. monitoring the actual use of financial resources against the approved budget
and identifying variances;
4. adjusting the approved budget under directives from appropriate authorities
and/or in response to variances between planned and actual expenditures;
and
5. reporting findings and action taken to the appropriate authorities
4. FINANCE MANAGEMENT - MANAGEMENT AND CONTROL

This sub-function record grouping is reserved for records of activities and

transactions that relate to or affect, in a specific manner, managing and
controlling financial resources. Activities associated with the Finance
Management - Management and Control sub-function may have a sequential
relationship as follows:

Accounting Reconciliation

Reporting Quality Assurance

Finance management - management and control entails the activities of:

1. complying with a certain framework of policies, business processes,
procedures and standards pertaining to recording, classifying, monitoring,
and reporting on use and disposition of financial resources; and
2. establishing, maintaining, and applying a framework of institution-specific
policies, business processes, procedures and standards pertaining to
recording, classifying, monitoring, and reporting on use and disposition of
financial resources.
 5. FINANCE MANAGEMENT - PERFORMANCE MEASUREMENT

This sub-function record grouping is reserved for records of activities and

transactions that relate to or affect, in a specific manner, the assessment of
financial management performance. Activities associated with the Finance
Management - Performance Measurement sub-function may have a
sequential relationship as follows:

Evaluating

Analysing

Reporting

Adjusting

Finance management - performance measurement entails the activities of:

1. measuring performance against measures and targets (output and
outcomes) established during finance management planning, against
budget objectives, and/or against financial management performance
standards used within a certain framework;
2. evaluating and analysing findings; and
3. exploring options for corrective action.

FORMS OF BUSINESS ORGANIZATION

There are 5 forms of business organization

1. Sole proprietorship

2. Partnership
3. Corporation

4. Cooperative

5. Limited liability company

1. Sole proprietorship

This popular form of business structure is the easiest to set up. Sole proprietorships have one
owner who makes all of the business decisions, and there is no distinction between the
business and the owner.

ADVANTAGES:

 Total control of the business

 No public disclosure required

 Easy tax reporting:

 Low start-up costs

DISADVANTAGES:

 Unlimited liability

 Lack of structure

 Difficulty in raising funds

2. Partnership

In a partnership, two or more people share ownership of a single business. The partners should have a
legal agreement that establishes how decisions will be made, how profits will be shared, how disputes
will be resolved, how future partners will be admitted to the partnership, how partners can be bought
out or what steps will be taken to dissolve the partnership when needed.

ADVANTAGES

 Easy to establish

 Partners can combine expertise

 Distributed workload

DISADVANTAGES

 Possibility for disagreements

 Difficulty in transferring ownership

 Full liability

3. Corporation

A corporation is a business organization that acts as a unique and separate entity from its
shareholders. A corporation pays its own taxes before distributing profits or dividends to
shareholders.

3 Main Forms of Corporations:

1. C Corporation

2. S Corporation

3. LLC or Limited Liability Corporation.

ADVANTAGES

 Owners aren't responsible for business debts

 Tax exemptions

 Quick capital through stocks

DISADVANTAGES

 Double taxation for C-corporations

 Annual record-keeping requirements

 Owners are less involved than managers

4. Cooperative

A cooperative, or a co-op, is a private business, organization or farm that a group of individuals

owns and runs in order to meet a common goal. These owners work together to operate the
business, and they share the profits and other benefits. Most of the time, the members or part-
owners of the cooperative also work for the business and use its services

ADVANTAGES

 Greater funding options

 Democratic structure

 Less disruption

DISADVANTAGES

 Raising capital

 Lack of accountability

4. Limited Liability Company (LLC)

The most common form of business structure for small businesses is a limited liability company,
or LLC, which is defined as a separate legal entity and may have an unlimited amount of owners
ADVANTAGES

 Limited liability

 Pass-through taxation

 Flexible management

DISADVANTAGES

 Associated costs

 Separate records

 Taxes

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