Finance and Financial Management Module 1

Study Notes

Finance involves the allocation, management, acquisition, and investment of resources, particularly monetary resources within an organization.
Financial management encompasses the planning, directing, monitoring, organizing, and controlling of an organization's financial resources.
Finance is divided into categories: Public Finance (government management), Corporate Finance (corporate decision-making for value maximization), and Personal Finance (individual financial management).
Social Finance and Behavioral Finance are emerging fields within finance, focusing on social impact and human psychology, respectively.

Functions of Financial Manager:
- Financing: Decisions on funding long-term investments and determining capital structure (debt vs. equity).
- Investing: Selecting investments to maximize profits, while managing risks and resource allocation.
- Operating: Overseeing daily operations and financing working capital accounts.
- Dividend Policies: Deciding when to declare cash dividends to shareholders.
Roles of Financial Manager:
- Raising Funds: Balancing debt and equity to meet business obligations.
- Allocation of Funds: Ensuring optimal use of funds once raised.
- Profit Planning: Managing costs, revenues, and financial strategies to enhance organizational profitability.
- Understanding Capital Markets: Navigating risks associated with trading securities and distribution of profits.

The financial system facilitates the exchange of funds between lenders (savers) and borrowers (users of fund).
Savers can deposit funds in financial institutions or invest in financial markets.
Financial institutions act as intermediaries, lending capital and managing financial transactions.
Financial markets sell securities such as stocks and bonds to buyers seeking investments.

Bangko Sentral ng Pilipinas: The central bank that regulates all banking institutions.
Commercial Banks: Offer deposits, loans, and various services (e.g., BDO, BPI).
Rural Banks: Aid farmers with financial services.
Thrift Banks: Primarily provide home mortgages.
Specialized Government Banks: Government-owned banks with specific purposes.
Private Nonbank Financial Intermediaries: Provide financial assistance without being traditional banks (e.g., insurance companies).
External Sector: Represents foreign banks.

Financial System: Facilitates the lending and borrowing of funds.
Financial Markets: Organized platforms for transactions between savers and users of funds.
Financial Institutions: Channel savings into loans or investments.
Financial Instruments: Documents representing monetary agreements (e.g., stocks, bonds).

Direct Finance: Involves direct lending between borrowers and lenders without intermediaries.
Indirect Finance: Involves intermediaries like banks channeling funds to borrowers.

Financial markets are venues for buying and selling financial assets, categorized into:
- Money Market: Short-term securities.
- Capital Market: Long-term securities.
- Primary Market: New securities issuance.
- Secondary Market: Trading of existing securities.
Financial Institutions provide diverse services, including:
- Commercial Banks: Accept deposits and provide loans.
- Insurance Companies: Pool payments and invest proceeds for claims.
- Mutual Funds: Offer portfolios managed by professionals.
- Pension Funds: Manage retirement contributions from employees.

Financial Instruments represent claims to cash and include:
- Financial Assets: Cash, stocks, and contracts payable.
- Financial Liabilities: Obligations to pay cash or exchange instruments.
Debt Instruments (e.g., Treasury Bonds) have fixed returns and low risk.
Equity Instruments (e.g., stocks) offer variable returns based on company performance, including:
- Preferred Stock: Higher claim on assets and fixed dividends.
- Common Stock: Ownership benefits from company performance and profit sharing.

Market institutions facilitate buying and selling of securities.
Financial institutions help individuals and businesses manage and grow money.
The Philippine Stock Exchange is the largest financial market in the Philippines.
Bonds represent loans made to companies (i.e., IOUs).