Business Finance ABM 12

WEEK 1 TO WEEK 2
OBJECTIVES
At the end of the lesson, the learner should be able to
understand the following:
A. The Definition of Finance
B. What is the Overall and Overriding Objective of
management
C. Who is responsible for financial management within an
organization and the corresponding activities of the
Finance Manager?
D. How the financial system works and what are the different
functions of the financial intermediaries
E. What are Financial Institutions, Financial Instruments, and
Financial Markets
Competencies
• At the end of the lesson, the learner should be able to:
A. Explain the Major Role of Financial Management and
the different individuals involved.
B. Provide an overview of the financial system and
distinguish a financial institution from the financial
instrument and the financial market.
C. Explain the Flow of Funds within an organization
through and from the enterprise and Role of the
Financial Manager.

COMPETENCY CODE : ABM_BF12-IIIa-1

ABM_BF12-IIIa-5
INTRODUCTION

“Business Finance Deals with Financial Management”

 
Why is Financial Management important to your personal life? Financial
management applies to both individuals and companies. It is not enough
to have cash and other resources today, such resources if not properly
managed can be wiped out. Hence Financial Management is a must.
 
From the perspectives of your personal life, it deals with making decisions
on purchases and sales transactions, borrowing money, saving, and
investing to achieve financial goals.
 
From the perspective of a corporation, financial management deals with
decisions that are supposed to maximize the value of shareholders or
stockholder’ wealth. This means maximizing the market value of the shares
of stocks, the form of ownership in a corporation.
 
What is Finance?
1. It is the art and science of MANAGING MONEY.
2. It is concerned with the process, institutions, markets and
instruments involved in the transfer and movement of
money among individuals, business, and governments.

• What is Financial Management 

• As stated earlier, from the perspective of a corporation.
Financial Management deals with DECISIONS that will
maximize the market value of the shares of stock.

• REMEMBER THIS !!!

• SHAREHOLDERS’ WEALTH MAXIMIZATION = MAXIMIZING
THE MARKET VALUE OF THE SHARES OF STOCK
• Maximizing the shareholders’ wealth should be the overriding objective of management as
it covers the different factors of a company’s operations and it considers the different
stakeholders in the organization. Stakeholders include the following:
 
1. Shareholders or Stockholders – Owners of the company/corporation.
2. Management – Depending on the nature of the company’s operations, it may include
Finance, Administration, Production, Sales and Marketing.
3. Employees-Happy Employees = productive employees and will protect the company’s
interest.
4. Suppliers-Ensures good quality materials at a reasonable price.
5. Creditors – Enhances accessibility of getting credit or loan facilities during times of need.
6. Regulatory Agencies – Government agencies that regulate compliance requirements such
as the Bureau of Internal Revenue (BIR) and Securities and Exchange Commission (SEC).
Compliance means Smooth Operations.
7. Community – Supporting the Community where the company operates increases the
chances of Continuous Operations. This is called Corporate Social Responsibility (CSR).
 
“HAPPY STAKEHOLDERS = MORE INVESTMENT = MORE JOBS”
 
 
FINANCIAL SYSTEM
The Financial System links the savers and the users of the funds.
Shown below is an overview of the financial system

  FINANCIAL USERS OF FUNDS

SAVERS INTERMEDIARIES/ (BORROWERS/
INSTITUTIONS INVESTORS)
 HOUSEHOLDS
• Banks  Households
 INDIVIDUALS
• Insurance  Individuals
 CORPORATION/
Companies  Corporation/
COMPANIES
• Stock Exchange Companies
 GOVERNMENT
• Stock Brokerage  Government
AGENCIES
Firms Agencies
• Mutual Funds
• Other financial
Institutions
The Overview as illustrated above, the financial system through financial intermediaries
provides a mechanism by which savings can be channeled to users of funds, the borrowers
and investors. This will enable you to distinguish the financial institutions, financial
instruments, and the financial markets. Take note that the same entities can be users and
savers dependent on their needs.

Financial Institution

• An intermediary that channels the savings of individuals, businesses, and governments

into loans or investment
• The following are the different Financial Institutions/ Intermediaries and ow they
function:

A. Banks
• Accept deposits from savers and pay interest for money deposited.
• To compensate for the interest paid to savers, banks lend the money to Borrowers and in
return receive interest and fees.
• Invest the savers’ deposit on some financial instruments where earnings will be received
in the future.
• Serve as conduits of investors in buying and selling financial instruments.
• Regulated by the government through Bangko Sentral ng Pilipinas.
B. Insurance Companies

• Insurance products is broadly categorized into life and non-life

and to protect the insured from the loss of life and loss or
damages to properties respectively.
• Premiums collected form the insured are used to fund claims.
Generally cash from premiums collected may cover more than
claims for most of the time.
• Excess cash can be invested, following guidelines to ensure
that they have enough cash when claims are made.
• Insurance companies are regulated by the government
through the Insurance Commission (IC).
C. Stock Exchange
• It Provides a system for the trading of equity securities of
“publicly” listed companies.
• Equity securities are the company’s shares of stock and
are classified as a financial instrument.
• A Company to become publicly listed goes through an
Initial Public Offering (IPO) where shares of stock are
offered to investors/buyers.
• Philippine Stock Exchange (PSE) offers facilities and
provide a system for the trading of shares as well as
going public through an IPO.
• Financial Instruments such as corporate bonds and
government debt securities are traded through
Philippine Dealing and Exchange Corp. (PDEx).
D. Stock Brokerage Firm
• Stock market investment or the buying and selling of
shares of stock has to be coursed through them.
• Online and Check payments of transaction are available

 
IMPORTANT
An individual who wants to invest and trade in the stock
market cannot go directly to PSE to buy and sell stocks. He
has to open an account with an accredited stock brokerage
firms for his buy and sell orders of equity securities.
 
E. Mutual Funds
• Provide opportunities to big and small investors who may
have no time or the experience to invest on financial
instruments.
• Mutual funds are pooled and invested by professional
managers for a fee.
• Funds are either invested to Shares of Stock or
Bonds/Treasury notes or Both Ways.

F. Other Financial Institutions

• These include pension funds like GSIS or SSS, investment
funds and credit unions.
FINANCIAL INSTRUMENT
These are generally classified into two categories: Equity
Securities and Debt Securities. Equity securities include common
shares of stock and preferred shares of stock whereas Debt
securities are treasury bills and treasury bonds issued by the
national government as well as corporate bonds issued by
publicly listed companies.
• What’s the difference?
Equity Securities Debt Securities
 Ownership/stockholder  Creditor/Lender
 Earns dividends  Earns Interest
   
Note: Interest due on debt securities has to be paid first before
dividends are paid to stockholders. Claims over the assets of the
company, in case of bankruptcy, preference is given to bondholders.
Financial Market

Are forums or venues in which suppliers of funds (savers) and

demanders of funds (users) transact business. This is where Financial
instruments are traded.

Financial Manager 
As previously written, Financial Management deals with “DECISIONS”
that will maximize the value of the shares of stock. So, who makes
the decision? Of course, the FINANCIAL MANAGER.
 
• To fully understand and appreciate the role and activities of a
financial manager, below is a typical organizational chart of a
manufacturing company and a finance division/department
organization within.
 
  Board of
Directors
(BOD)


 (CEO)
PRESIDENT


 VP FOR SALES  VP FOR  VP FOR  VP FOR
AND FINANCE PRODUCTION ADMINISTRATION
MARKETING (CFO)

 TREASURER  CONTROLLER

As illustrated above in the organizational chart, the VP for finance or the chief financial
officer (CFO) reports directly to the President who reports directly to the BOD, also that
the treasurer and controller report directly to the CFO.
What are their roles, responsibilities, functions and Activities? 
1. Board of Directors (BOD)

A. Setting policies on investment, capital structure and dividends.

B. Approving strategies, goals and budgets.
C. Appointing and removing top management members including the
president as well as determining their compensation.
 
2. President / CEO

D. Overseeing the company’s operation and ensuring BOD approved

policies and strategies are implemented as planned.
E. Performing all areas of Management: Planning, Organizing,
Staffing, Directing and Controlling.
F. Representing the company in professional, social and civic
functions.
3. VP for Finance / CFO

A. Evaluated the financial statements, develop additional data and

make decisions based on assessment of related returns and risks.
B. The CFO makes decision on what matters?
a. Financing – Where and how will you get the funds to finance
long term investment and working capital requirements either
through debts or through equity.
b. Investing –Where will you put the funds form financing decision,
expansion of facilities and or on your working capital accounts
requirements such as accounts receivable and inventories.

To summarize, financing decisions made, determine the mix and type

of funding source used by the firm, form debts or equity investing
decisions made, determine the mix and type of assets held by the
firm.
 Remember your accounting equation: A=L + C/E
3.1 Treasurer-Responsible for the firm’s financial
activities such as; financial planning, fund raising,
making capital expenditure recommendation and
managing cash, credit and collection.

3.2 Controller-The firm’s chief accountant is

responsible for the company’s accounting activities
such as General accounting, Tax Management,
Financial accounting and Cost accounting.

(PLEASE USE SEPARATE ANSWER SHEETS IN ANSWERING ACTIVITY,

REFLECTION, ASSESSMENT/EVALUATION)
 ASSESSMENT / EVALUATION
 
1. What should be the Most important goal of a company? Why?
2. What is the role of financial intermediaries in the financial system?
3. What is the difference between PSE and PDEx?
4. Explain the role of banks in the financial system.
5. What are the differences between equity securities and debt securities?
6. Are financial institutions and financial markets one and the same? Why?
7. What are the reasons why the board of directors is the highest policy
making body in a corporation.
8. What are the roles and/or functions of the financial management team?
Provide two and explain each one.
9. Who are the stakeholders of the company? Why are they related to the
overriding objective of maximization of shareholders’ wealth? Give
three answers.
10.In your own terms, what should be the qualification to become a
financial manager? Do you want to be one?