INTRODUCTION TO

FINANCIAL
MANAGEMENT
12 – Business Finance
LESSON PURPOSE
The lesson will help you understand what is
finance.
You will be able to describe who are responsible
for financial management within an Organization,
explain the roles and functions in the
organizational structure and value the
importance of each role in the organization.
Finance is every day!
How much is your monthly allowance or
everyday allowance?
How much is your expense?
How much is your extra money?
Do you experience short of cash? Why?
What do you think are the hierarchy
of position in one organization?
 Board of
Directors

President

Vice Vice
President Vice Vice President
President
President for
for for Administration
for Finance
Marketing Production
From the diagram presented, emphasized that each
line is working for the interest of the person on the
line above them. Since the managers of the
company are making decisions for the interest
of the board of directors and the board of
directors do the same for the interest of the
shareholders, it follows the goal of each
individual in a corporate organization should
have an objective of shareholders wealth
maximization.
 From the identified position,
search on the roles and function
in the organization.

What are the functions of

Financial Managers?
The roles of each position identified.
1. 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.
2. 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:
a. Setting policies on investments, capital structure
and dividend policies.
b. Approving company’s strategies, goals and
budgets.
c. Appointing and removing members of the top
management including the president.
d. Determining top management’s compensation.
e. Approving the information and other disclosures
reported in the financial statements (Cayanan, 2015)
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:

a. Approving the information and other disclosures

reported in the financial statements. Overseeing the
operations of a company and ensuring that the
strategies as approved by the board are
implemented as planned.
a. Approving the information and other disclosures
reported in the financial statements. Overseeing the
operations of a company and ensuring that the
strategies as approved by the board are
implemented as planned.

b. Performing all areas of management: planning,

organizing, staffing, directing and controlling.

c. Representing the company in professional, social,

and civic activities.
VP for Marketing: The following are among the
responsibilities:
a. Formulating marketing strategies and plans.
Directing and coordinating company sales.

b. Performing market and competitor analysis.

c. Analyzing and evaluating the effectiveness and

cost of marketing methods applied.
d. 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.

e. Promoting good relationships with customers and

distributors. (Cayanan,2015)
VP for Production: The following are among the
responsibilities:
a. Ensuring production meets customer demands.

b. Identifying production technology/process that

minimizes production cost and make the company
cost competitive.

c. Coming up with a production plan that maximizes

the utilization of the company’s production facilities.

d. Identifying adequate and cheap raw material

suppliers. (Cayanan, 2015)
VP for Administration: The following are among the
responsibilities:
a. Coordinating the functions of administration,
finance, and marketing departments.
b. Assisting other departments in hiring employees.
c. Providing assistance in payroll preparation,
payment of vendors, and collection of receivables.
d. Determining the location and the maximum
amount of office space needed
by the company. Identifying means, processes, or
systems that will minimize the operating costs of the
company. (Cayanan, 2015)
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.
If we used money from our borrowings, the asset
bought has financed by debt.
Financed by Equity Financed by Debt
Using your own Borrowing money
money (e.g., from a bank)
Interest and
No interest to pay
repayment required
Risk of repossession if
Full ownership
unpaid
What are the functions of Financial Managers?

1. Financing decisions- include making decisions as

to how to finance long-term investments and
working capital-which deals with the day-to-day
operations of the company.
2. Investing Decisions- To minimize the probability of
failure, long-term investments have supported by a
capital budgeting analysis.
What are the functions of Financial Managers?

3. Operating Decisions – deal with the daily

operations of the company especially on how to
finance working capital accounts such as accounts
receivable and inventories.
4. 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.
 OVERVIEW OF THE FINANCIAL SYSTEM

FINANCIAL Users of Funds/

SAVERS INTERMEDIARIES (Borrowers/
Investors)
-Households -Banks
- Households
-Individuals -Insurance
Companies -Individuals
-Corporations/
Company -Stock Exchange -Corporation/
companies
Government -Stock brokerage firms
Agencies -Government
-Mutual Funds Agencies
 OVERVIEW OF THE FINANCIAL SYSTEM
The financial system links the savers and the users of funds.
Savings can come from households, individuals,
companies, government agencies, or any other entity
whose cash inflows are greater than their cash outflows. The
financial system through financial intermediaries provides a
mechanism by which these savings can be channeled to
users of funds, borrowers, and investors.
Some of the financial instruments issued by users of funds
such as the shares of stocks and corporate bonds of
publicly listed companies and the debt securities issued by
the National Government has traded.
 Differentiate the Financial instruments, financial
institutions and financial markets
Financial institutions are companies in the financial sector
that provide a broad range of business and services
including banking, insurance, and investment management
like commercial banks while financial Instruments is a real or
a virtual document representing a legal agreement
involving some sort of monetary value and financial markets
is a marketplace, where creation and trading of financial
assets, such as shares, debentures, bonds, derivatives,
currencies, etc. take place.
 Differentiate the Financial instruments, financial
institutions and financial markets
1. Financial institutions are companies in the
financial sector that provide a broad range of
business and services including banking, insurance,
and investment management.
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.
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.
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.
d. Pension Funds - Financial institutions that receive
payments from employees and invest the proceeds
on their behalf.
2. 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.
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. (IAS 32.11)
• Examples: Notes Receivable, Loans Receivable,
Investment in Stocks, Investment in Bonds
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. (IAS 32)
• Examples: Notes Payable, Loans Payable, Bonds
Payable
c. An Equity Instrument is any contract that
evidences a residual interest in the assets of an
entity after deducting all liabilities. (IAS 32)
• Examples: Ordinary Share Capital, Preference
Share Capital
• Identify common examples of Debt and Equity
Instruments.
d. Debt Instruments generally have fixed returns due
to fixed interest rates.
Examples of debt instruments are as follows:
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.
e. 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. (Cayanan, 2015)
• 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.
3. Financial Market - refers to a marketplace, where
creation and trading of financial assets, such as
shares, debentures, bonds, derivatives, currencies,
etc. take place.
3. Financial Market - refers to a marketplace, where
creation and trading of financial assets, such as
shares, debentures, bonds, derivatives, currencies,
etc. take place.
Classify Financial Markets into comparative groups:
- Primary vs. Secondary Markets • 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 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.
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).
The role of Financial Managers: make financing
decisions that require funding from investors in the
financial markets.
 WEALTH
MAXIMIZATION
12 – Business Finance
The lesson will help you analyze how
to measure wealth maximization
and value the importance of
financial manager in financial
management.
How do we measure wealth maximization?
Assume that Mr. Y bought 10 shares of
Globe Telecom at PHP2, 510 each on
September 9, 2010. This brings his
investments to PHP25, 100.
What happens to the value of his
investment if the price goes up to PHP2,
600 per share or it goes down to PHP2,
300 per share?
Explanation: An increase of the share
price to PHP2, 600 per share means that
people are willing to buy the shares for
that amount. If the learners were to sell
their shares at this point, it will result to a
profit of PHP90 per share or PHP900 on
their whole investment. Hence, the value
of their investment increased from PHP25,
100 to PHP26, 000. Therefore, there is an
increase in shareholder’s wealth.
On the other hand, a decrease in the
share price to PHP2, 300 per share means
that people are only willing to buy shares
for PHP2, 300. If the learners were to sell
their investment at this point, they will
receive PHP23, 000 which would result to a
loss of PHP2, 100. The decrease in value of
their investment leads to a decrease in
shareholder’s wealth.
Explain why we need to consider the
function of finance manager in financial
management?
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.
Explain the importance of these to
every Filipino.
The existing relationship between
financial institutions and financial
markets is that the latter depends on
financial institutions for access to
financial assets on investors' behalf.
Secondly, the prices of financial
instruments in financial markets are
majorly influenced by the financial
institution's activities.
The lesson will help you differentiate
financial institution from financial
instrument and financial market,
describe financial institution, financial
instrument and financial market and
apply financial management
The lesson will help you understand and
identify the role and key activities of a
manager and how the risk-return trade-
off relate to the financial manager’s
main goal.
cash flows
- The inflow and outflow of cash for a
firm
financial management
- The art and science of managing a
firm’s money so that it can meet its
goals.
return
- The opportunity for profit.

risk
- The potential for loss or the chance
that an investment will not achieve the
expected level of return.
risk-return trade-off
- A basic principle in finance that holds
that the higher the risk, the greater the
return that is required.
Financial managers are the one who
determine how available funds will be used
and how much money is needed. Then they
choose the best sources to obtain the
required funding. They focus on cash flows,
the inflows and outflows of cash. They plan
and monitor the firm’s cash flows to ensure
that cash is available when needed
 QUALITIES OF
FINANCIAL
PROFESSIONALS
12 – Business Finance
A finance professional must possess both
technical and soft skills in order to thrive in
the industry.

What does these means?

QUALITIES OF A FINANCE PROFESSIONAL

1. INTEGRITY
A strong quality of being honest.
2. ATTENTION TO DETAIL
Policies and programs are created
because of data erroneously reported
would not be any good for the
organization.
3. Strong Oral and Written communication
skills
Who possess the ability to communicate
well would be more effective in carrying
out all those tasks and responsibilities.
4. ABILITY TO MULTITASK
Who are capable of wearing many hats
and still be focused on key issues that
affect the financial well-being of the
organization.
5. ANALYTICAL
Who has the ability to interpret data and
discover underlying reasons that would
explain a particular situation.
6. ABILITY TO THINK STRATEGICALLY
Who always find the connection between
the decisions made and trends of today
and their impacts on the achievement of
the overall goals and objectives of an
organization.
7. ABILITY TO USE TECHNOLOGY
The work of finance professionals have to
be aided by the use of technology.
8. TEAM PLAYER
They are required to work with other
members of the organization, his ability to
work in a collaborative environment is
imperative.
9. LEADERSHIP
Who handle people either on a permanent
or on ad hoc basis.
10. FLEXIBILITY
Who know the customers demand and
trends in the global environment.
Among the qualities of a finance
professional, what do you think must be his
strength and his weaknesses.
As a future managers, What should you do so
that as early as now, you can develop the
qualities of finance professional?
The qualities of a Finance Professional are
integrity, attention to detail, strong oral and
written communication; ability to multitask,
analytical, ability to think strategically, ability
to use technology, team player, leadership
and flexibility.
To be accomplish in your notebook
1. Think and create your own bank
company name and describe the
function of Finance Manager or
describe the Financial Management of
your bank.
2. What is the goal of financial
management?

3. What is the function of financial

manager?
4. What are the financial institution,
financial instrument and financial
market in the Philippines that are
familiar to you?
5. Explain the importance of these to
every Filipino.
6. How can financial managers make wise
planning, investment, and financing
decisions?
 PERFORMANCE TASK
1. define Finance
2. describe who are responsible for financial
management within an organization
3. describe the primary activities of the
financial manager
4. describe how the financial manager helps
in achieving the goal of the organization
5. describe the role of financial institutions
and markets