Quipper Unit 1. Introduction to Financial Management PDF

Unit 1. Introduction to Financial Management Lesson 1.1 Financial Management Business Finance Accountancy, Business, and Management 1 How much Finance in is you allowance? Everyday Life As a student, what a...

Unit 1. Introduction to Financial Management Lesson 1.1 Financial Management Business Finance Accountancy, Business, and Management 1 How much Finance in is you allowance? Everyday Life As a student, what are your daily financial activities? How do you manage your finances? 3 What are your personal goals? Is finance important in achieving these goals? 4 Like individuals, businesses also need to manage their finances to achieve their goals. 5 Recall Definition of Terms  The allocation of your income Budgeting (allowance) and expenses over a span of time.  An acquisition of monetary asset purchased with the idea that the asset will provide Investments income in the future or later will be sold at a higher price for a profit (Investopedia)  Includes credit, Sources venture capital, of funds donations, grants, savings, and taxes.  The financial gain Profits from business activity minus expenses.  A person, company, or Shareholders institution that owns at least one share of a company stock.  Putting money aside Savings for future use.  The act of considering Decisions something carefully.  The process of thinking about the Planning activities required to achieve a desired goal.  To increase to the Maximization greatest possible amount.  A business owned by one person and Sole Proprietorship operated for his or her own profit.  A business owned by two or more people Partnership and operated for profit.  An entity created by law owned by Corporation shareholders.  concerned with recording, preparing periodic reports, analysis, and dissemination Accounting of information about a company’s assets, liabilities, and equities. Quick Look Personal Financial Goals Healthy financial habits will contribute to your success and prosperity in life. It begins with identifying your personal financial goals. Examples of personal financial goals: ○ saving a particular amount of money within a time frame ○ reducing your expenses by a certain percentage 20 Quick Look Personal financial goals should be clear and achievable so that you can figure out the strategies and activities that you need to do and perform. Some people seek help from financial advisors to help them plan, allocate, invest, and monitor their money. 21 Quick Look In the same way, companies employ financial managers to manage and control their funds. These people are instrumental in identifying and executing business strategies to achieve their goals. 22 Quick Look Questions to Ponder 1. What are your personal financial goals for this year? 2. Try to talk to a financial expert or read articles that provide financial advice. What are the activities that you need to do and practice to achieve your financial goals? 3. Why do you think it is important to consult experts such as financial advisors and financial managers in setting and achieving financial goals? 23 Learning Competency This activity aims to target the following DepEd competency: Explain the major role of financial management and the different individuals involved (ABM_BF12-IIIa-1). 24 Learning Objectives In this lesson, you should be able to do the following: Explain financial management and its purpose. Discuss the financial systems and its components. Identify the key people involved in financial management and their roles. Evaluate the importance of financial management for individuals and businesses through real-life situations. 25 How can financial management help individuals, businesses, and governments achieve their goals? 26  Financial Management “thescience and art of managing money” (Gitman and Zutter, 2012) application of management functions such as planning, organizing, leading, and controlling financial assets to achieve organizational goals 27  Financial Management in Business determines the following: ○ how much additional funds are needed and how to obtain it ○ how, where, and when to invest if there are excess funds requires the analysis of relevant business data 28  Check Your Progress Check Your Progre ss How does financial management differ from accounting? 29  The Financial System interaction between people, businesses, and governments facilitates and expedites the flow of funds or financial capital ○ between savers and borrowers or investors ○ from savings to investments 30 The Financial System 31  The Financial System 3 Components of Financial System financial institutions financial markets financial instruments 32  The Financial System Financial Institution an organization that directs the transfer of financial resources from its source to potential users (Kaliski, 2007) 33  The Financial System Financial Institution plays the part of intermediaries, managing the efficient flow of funds between savers and borrowers (Collins, 2012) 34  Commercial Banks and Insurance Companies Closer Look Banks where people ○ keep their savings ○ withdraw their money ○ acquire credit and debit cards ○ apply for personal or business loans 35  Commercial Banks and Insurance Companies Closer Look Insurance and investment companies where people ○ pay premiums ○ invest their money ○ transfer risks 36 The Financial System Financial Market provides a platform for financial managers to acquire funds from various sources (Kaliski, 2007) 37 The Financial System Financial Market allows the exchange of financial resources in capital market money market 38  The Financial System Capital markets exchange of long-term securities traded through brokers and dealers may or may not occur in an organized stock Capital Markets exchange 39  The Financial System Money markets exchange of short-term securities ○ treasury bills, commercial paper, and negotiable instruments Money Markets (Collins, 2012) 40  The Stock Market Closer Look Philippine Stock Exchange (PSE) is where the buying and selling of corporate stocks happen. The PSE is an example of a capital market. 41  The Financial System Financial Instrument any contract which produces a financial asset of one party while creating a financial liability or equity instrument of another (IFAC, 2020) 42  Financial System Financial Instrument Examples: corporate bonds, checks, futures, option contracts, shares of stock 43  Credit Cards and Checks Closer Look Buying items using a credit card a financial asset for the bank a liability to debtors 44  Check Your Progress Check Your Progre ss What are the main components of a financial system? 45 Financial Management Wealth Maximization increasing the business's value which also increases the value of shares held by its stockholders 46 Financial Management Wealth Maximization overall long-term goal in a business takes into account both risks and return; growth and survival 47  Financial Management Profit Maximization short-term profits may increase at the expense of long-term profitability 48  Financial Management Profit Maximization the company may need to borrow money to increase sales or expand production capacity 49  Increased Value of Shares Closer Look If a business spends the funds to develop a valuable property, say expansion, the investment coalition possibly recognizes the future positive cash flows associated with the new property by venturing up the price of the company's shares. This is a concrete example of wealth maximization. 50  Check Your Progress Check Your Progre ss How is profit maximization different from wealth maximization? 51  The Corporate Organizational Structure Financial managers need to be familiar with the flow of funds within the company. A common corporation is divided into various departments, each of which is responsible for a different set of tasks. 52 The Corporate Organizational Structure 53  The Corporate Organizational Structure Board of Directors President and CEO highest officer in elected by managing the business to shareholders achieve long-term (CEO) and short-term represents the (President) goals shareholders in for some companies, overseeing the these are different persons and entities business 54  The Corporate Organizational Structure VP for Sales and VP for Production Marketing responsible for leads the creation leading revenue of goods and and client services portfolio activities of the company 55  The Corporate Organizational Structure VP for Finance or Chief VP for Financial Officer (CFO) Administration manages acquisition leads the human of funds, resources and investments, general operating activities, management and dividend policies activities 56  The Finance Department Treasurer Controller handles external concerned with financing matters internal matters such responsible for as being in charge of managing the cash, investments, and accounting and the other financial financial records of resources the organization 57  Check Your Progress Check Your Progre ss What are the four major roles of a Chief Financial Officer (CFO)? 59 The Roles of Financial Manager Financial managers are involved in different decisions. 60  The Roles of Financial Manager 1. Financing Decisions Types of Financing: when, where, and how to acquire debt financing funds for the equity financing company 61  The Roles of Financial Manager 2. Investing Decisions Types of Investments: what investments short-term would be (working capital) profitable to the long-term (capital company budgeting) 62  The Roles of Financial Manager 3. Operation Decisions The company has how to finance options on whether working capital to finance working accounts such as capital needs by accounts long-term or short-term. receivables and inventories 63  The Roles of Financial Manager 4. Dividend Policies how much should be A common goal of distributed among all business the shareholders ventures is to earn profit or to have a how much should be positive return. retained for future contingencies 64  A Retail Company Turning Into a Bank? Case S A widely-popular international company engaged in tudy retail business has consistently nudged its way into the business of finance. Offering financial services such as: prepaid cards reloadable credit cards with cash-back features encashment of checks sale of money orders small business loans Avi Salzman, “Why Walmart Could Become a Serious Player in Banking,” Barron’s, March 1, 2021. https://www.barrons.com/articles/why-walmart-could-become-a-serious-player-in-banking-51614618870, last accessed on December 1, 2021. 65  A Retail Company Turning Into a Bank? Case S The retail company aims for “customers will tudy continue to drop the banks and buy (the company’s prepaid) cards.” The investing decision to venture into financial services resulted in: double-digit income growth ‘lock-in’ of consumers Avi Salzman, “Why Walmart Could Become a Serious Player in Banking,” Barron’s, March 1, 2021. https://www.barrons.com/articles/why-walmart-could-become-a-serious-player-in-banking-51614618870, last accessed on December 1, 2021. 66  A Retail Company Turning Into a Bank? Case S tudy The company’s growing involvement in finance will transform the the retail business into a bank. From being a saver and borrower, it would then become a financial institution. Avi Salzman, “Why Walmart Could Become a Serious Player in Banking,” Barron’s, March 1, 2021. https://www.barrons.com/articles/why-walmart-could-become-a-serious-player-in-banking-51614618870, last accessed on December 1, 2021. 67  Keep in Mind Financial management helps individuals, governments, and businesses achieve their goals. It involves finance: the activity of acquiring, spending, and managing money and other financial assets. 68  Keep in Mind Financial management is the effective and efficient management of assets, liabilities, and equity to achieve the company’s primary goal: the maximization of shareholders’ wealth. To do this, financial managers consider the long-term results, the risks or uncertainty, the timing of returns, and the stockholders’ return. 69  Keep in Mind Financial managers also make decisions based on the information they obtain from the financial system. The financial system is a mix of institutions and mechanisms that expedite the flow of funds from saving to investments. 70 Keep in Mind The four important roles of a financial manager are financing, investing, operating, and dividend policy. 71  Practice Your Skills Briefly answer the following questions in NOT MORE THAN five (5) sentences. 1. You are the financial manager of Company JKL, which posted a consistent increase in profits for the whole year. However, the business environment is still full of uncertainties because of the pandemic. You are tasked to propose how much the shareholders should receive and how much should be retained for future contingencies. As a financial manager, what factors should you consider in determining Company JKL’s dividend policy? 94  Practice Your Skills Financial managers should consider the following in making dividend policy of a company: earnings, stability of dividends, growth prospects, cash flow positions, and preference of shareholders. In this particular case, the pandemic could affect almost all these factors, especially the company’s growth prospects. 95  Practice Your Skills Briefly answer the following questions in NOT MORE THAN five (5) sentences. 2. A small and mid-size enterprise (SMEs) conference was organized to educate them on the importance of setting up their business goals. You were invited to speak in one of the sessions and encourage them to increase their business value rather than just going for higher profits. How would you explain to them the difference between wealth maximization and profit maximization? 96 Practice Your Skills Wealth maximization is the company’s long-term objective to increase the value of the company’s stock, while profit maximization is to increase the company’s capability of earning profit in the short run to sustain survival and growth. 97  Challenge Yourself Answer the following questions briefly and concisely. 1. Why is it important for start-up entrepreneurs to have a good understanding of finance? Provide a business situation and assess the impact of good financial management. 98  Challenge Yourself Sample answer. Answers may vary. Start-up entrepreneurs need to have a good understanding of finance to make sound decisions as they grow their business. For example, businesses should not simply borrow their funds from any bank or financial institution in acquiring start-up funds. They should consider first their profitability and the prospects of growth vis-à-vis the financial environment (i.e. the interest rates and monetary policies). It could be detrimental to a business’s health and survival if financial decisions do not match the situation. 99  Challenge Yourself Answer the following questions briefly and concisely. 2. Over the past years, people have increasingly used digital money for their financial transactions. How does this affect the financial system? Evaluate its effect based on how the financial system works. 100  Challenge Yourself Sample answer. Answers may vary. The financial system consists of people, businesses, and governments that interact to facilitate and expedite the flow of funds. The increased use of digital money in financial transactions could make financial transactions easier and much more accessible in a financial system. For instance, creditors and savers can easily put funds into financial markets, which could expedite the release of funds to debtors and spenders. On the other hand, digital money may pose problems in financial transactions. For example, the use of digital money is not easily traceable. As hackers know that they can be traced, they transfer the digital money in multiple transactions. Money laundering may arise as a problem here. Security is another reason: hackers have the chance to break into transactions. 101 Photo Credits Slide 3: supermarket cart on aisle, by Eduardo Soares is licensed under Unsplash License via Unsplash Slide 4: towfiqu-barbhuiya-jpqyfK7GB4w-unsplash, by Towfiqu barbhuiya is licensed under Unsplash License via Unsplash Slide 5: man looking at marketing analytics by Adeolu Eletu is licensed under Unsplash License via Unsplash Slides 19-20, 31-32: Singapore by the River by Aditya Chinchure is licensed under Unsplash License via Unsplash Slides 22-23: George Drachas The Uncomplicated Guide to Investing drachas.com, by Yiorgos Ntrahas is licensed under Unsplash License via Unsplash Slides 24-25: Business section of a newspaper, by Annie Spratt is licensed under Unsplash License via Unsplash Slides 27-28, 33: supermarket cart on aisle, by Carlos Muza is licensed under Unsplash License via Unsplash 102 Bibliography Bragg, Steven. Accounting Reference Desktop. 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