Introduction to Financial Management PDF

INTRODUCTION TO FINANCIAL MANAGEMENT Prepared by: Mr. Jeffrel F. Thurston WHAT IS FINANCE? Ø It is the body of facts, principles and theories relating to raising and using money by individuals, businesses, and governments (Cabrera & Cabrera, 2017). Ø...

INTRODUCTION TO FINANCIAL MANAGEMENT Prepared by: Mr. Jeffrel F. Thurston WHAT IS FINANCE? Ø It is the body of facts, principles and theories relating to raising and using money by individuals, businesses, and governments (Cabrera & Cabrera, 2017). Ø Gitman also defined it as the science and art of managing money. Ø It includes understanding how funds are managed, allocated, and raised. It involves: Ø Managing money Ø Allocating resources Ø Raising capital Subfields of Finance: 1) Financial Management 2) Investments 3) Financial Institutions and Markets WHAT IS FINANCIAL MANAGEMENT? Ø Also called Managerial Finance, Corporate Finance, or Business Finance. Ø It is the decision-making process of planning, acquiring, and utilizing funds to achieve the business’s goals. Primary Goal of Financial Management: ü Maximizing shareholders’ wealth primarily by increasing the current value of stocks (shareholder’s wealth maximization) Major Functions of Financial Management: 1. Financial Analysis and Planning 2. Utilization of Funds 3. Acquisition of Funds (from investors) Responsible for Financial Management (ABM_BF12-IIIa-1) Ø Senior Leaders oversee overall financial health. Ø Unit Heads manage internal budgeting and reporting. o Financial Managers: They focus on investing, financing, and analyzing financial statements. They work closely with other managers to ensure funds are used efficiently across the business and that all decisions align with the goal of increasing shareholder value. Key Activities of a Financial Manager: 1. Investing: Deciding how to allocate capital to assets. 2. Financing: Determining whether to fund through debt or equity source. 3. Financial Statement Analysis and Planning: Analyzing data to plan and forecast. THE FINANCIAL ENVIRONMENT Key Components of the Financial Environment 1. Financial Instruments: Tools for raising or investing money. 2. Financial Markets: Platforms where instruments are traded. 3. Financial Institutions: Organizations facilitating the flow of funds. DIFFERENCES AMONG FINANCIAL INSTRUMENTS, MARKETS, AND INSTITUTIONS (ABM_BF12-IIIA-2) FINANCIAL INSTRUMENTS (ABM_BF12-IIIa-4) Ø These are tradable assets which are real or virtual documents representing monetary agreements. They are divided into two categories: 1) Debt Securities (Bonds): Ø are a financial asset which generated when other party lends money to another in return is the interest earned together with the principal upon maturity date.  Ø debt securities wherein one is lending and one is borrowing that gives an opportunity to to the issuer to borrow money from bondholders (lenders) which legally promise to pay the lender at a future time. In case of bankruptcy, the bondholders are paid first before the stockholders. Ø these also known as fixed-income securities as it generates a fixed interest payments unlike equity securities which are reliant on the market performance. Ø Basic types: i. government bonds (issued by the government to investors then investors lend money to the government such as retail treasury bonds, treasury notes, treasury bills, among others) ii. corporate bonds (issued by the corporations to the investors then investors lend money to the company like long-term commercial papers) 2) Equity Securities (Stocks): Ø Shares in a company that represent ownership. It represents the claims from company’s shares bought by the investors. Types of equity include: i. Common Stock: § issued by the companies and is the most common type of stocks. § stockholders having these stocks are the real owners of the company which entitles them to share from dividends. § some benefits of being common stockholders are having preemptive rights, voting rights (equivalent to the number of shares owned to elect director in the board of directors), and unlimited investment potential as the value of its investment grows over time. § its dividend per share is not fixed. § the common stockholders can only claim its shares only after the assets and cash dividends have been distributed to the preferred stockholders. ii. Preferred Stock: § preferred stockholder provides priority in dividends declaration and claims on company’s assets (in liquidation) but no voting rights. Basic Types of Financial Instruments (ABM_BF12-IIIa-4) Different investment choices to choose from which are being offered in the investment marketplace or platforms like the following financial instruments: 1. Savings Accounts: Safe, low-interest, low-risk deposit accounts used for emergency fund. 2. Time Deposits: Fixed-term withdrawal accounts offering higher interest rates than savings accounts. 3. Money Market Funds: conservative short-term investments with low-risk and low-returns; better than deposit accounts. 1 year or less investment period. 4. Stocks: company’s shares bought to raise funds; high-risk and potentially high-return investments (not guaranteed) as the market is volatile. The more profitable a company is, the more its stock prices increase. 5 years or more investment period. 5. Bonds: Debt securities that are safer than stocks offer fixed but lower returns. Medium-risk, 1 - 3 years investment period. 6. Mutual Funds: Pooled investment vehicles managed by professional fund managers; gains from mutual funds are tax exempted as amended by the National Internal Revenue Code of the Philippines to encourage Filipinos to save and invest more. 7. Annuities: Insurance products providing alternative income (lump-sum or pension) or death benefit to the policy holder during retirement or upon death. FINANCIAL MARKETS (ABM_BF12-IIIA-2) Ø These are platforms where buyers and sellers trade financial instruments. Examples include stock exchanges like the Philippine Stock Exchange (PSE), New York Stock Exchange (NYSE), Nasdaq Stock Exchange (NASDAQ), among others. Through the PSE, individuals and companies who have money (supplier of funds) can purchase shares of stocks. The sold shares will give funds to the public companies and the buyers of shares will now become stockholders of the company, while the PSE brokers will earn commisions in trading of stocks. The two types of financial markets are as follows: 1. Money Market: a forum that deals with short-term funds (less than 1 year) such as Treasury Bills (government securities matures in 91 / 182 / 364 days) and Commercial Papers (private companies matures from 3 – 270 days for short-term debt). 2. Capital Market: a forum that deals with long-term funds (greater than 1 year), including stocks and bonds.  Divided into two markets: 1. Primary Market: where the newly issued securities are being sold originally by the private companies and governments. Two types of primary market transactions: i. Public Offerings: where the securities are being offered in the general public to sell ii. Private Placement: involves sold security to a specific buyer 2. Secondary Market: a.k.a. Stock Market or Stock Exchange, where existing or already-issued securities are traded among investors. Ø Stock Exchange is an organized secondary market and an entity which facilitates the transactions together between buyers and sellers in exchanging stocks and securities, while a virtual market is a stock market with no physical facility. Includes of the two segments: i. Organized Stock Exchange: the physical location where the buying and selling of stocks happen in the stock exchange floor (e.g. PSE) ii. Over-the-Counter Exchanges (OTC): the transactions of financial instruments are being traded by means of computer system, monitors, and telephones. Securities are created in the primary market where companies sell their new stocks and bonds for the first time to the public through an Initial Public Offering (offers stocks to the market for the first time) and then these existing securities are being traded (buy and sell) by investors in the secondary market. The transactions exist between the issuers and investors in primary market and among investors in secondary market.