Lesson 1 Introduction to Business Finance PDF

ATENEO DE DAVAO UNIVERSITY Km. 7 Central Park Blvd, Talomo, 8016 Davao City, Philippines Tel N...

ATENEO DE DAVAO UNIVERSITY Km. 7 Central Park Blvd, Talomo, 8016 Davao City, Philippines Tel No. +63 (82) 221.2411 local 6200 E-Mail: [email protected] * www.addu.edu.ph In Consortium with Ateneo de Zamboanga University and Xavier University SENIOR HIGH SCHOOL – Business Finance Subject: Business Finance ce Grading/Topic No.: 1st Grading (1st Semester) | 1 Lesson 1: Introduction to Business Finance an TOPIC LEARNING OUTCOMES At the end of this session, the learners are expected to be able to: explain the major role of financial management and the different individuals involved in strategic in decision-making, resource allocation, and ensuring financial stability, leading to the achievement of organizational objectives. (ABM_BF12-IIIa-1) F distinguish a financial institution from a financial instrument and financial market. (ABM_BF12-IIIa-2) explain the flow of funds within an organization – through and from the enterprise—and the role s of the financial manager. (ABM_BF12-IIIa-5) es define finance properly by highlighting its importance in managing money and resources within organizations. Identify and explain the roles and responsibilities of key individuals involved in financial in management within an organization, such as financial managers, CFOs, and finance teams. engage actively in class discussions, ask relevant questions, and participate in activities related to financial decision-making, indicating a genuine interest in the subject matter. us recognize and discuss the ethical implications of financial decisions by understanding the importance of ethical behavior in financial management. B LEARNING CONTENT - Finance and Business U The field of finance is broad and dynamic. Finance influences everything firms do, from hiring personnel to building factories to launching new advertising campaigns. There are many financially oriented career dD opportunities for those who understand finance's basic concepts and principles. Even if you do not see yourself pursuing a career in finance, you’ll find that an understanding of a few key ideas in finance will help make you a smarter consumer and a wiser investor with your own money. A Finance Finance can be defined as the science and art of managing money (Gitman & Zutter, 2013). At the personal level, finance is concerned with an individual's decisions about how much of their earnings they spend, how much they save, and how they invest their savings. In a business context, finance involves the same types of decisions: how firms raise money from investors, how firms invest money to earn a profit, and how they decide whether to reinvest profits in the business or distribute them back to investors. The keys to a good financial decision are much the same for businesses and individuals, which is why most students will benefit 1 AdDU Senior High School | Business Finance | Lesson 1 Intro to Financial Management  ATENEO DE DAVAO UNIVERSITY Km. 7 Central Park Blvd, Talomo, 8016 Davao City, Philippines Tel No. +63 (82) 221.2411 local 6200 E-Mail: [email protected] * www.addu.edu.ph In Consortium with Ateneo de Zamboanga University and Xavier University SENIOR HIGH SCHOOL – Business Finance from an understanding of finance regardless of the career path they plan to follow. Learning the techniques of ce good financial analysis will not only help you make a better financial decision as a consumer, but it will also help you understand the financial consequences of the important business decisions you will face no matter what career path you follow. an Finance may be also defined as the science of managing and creating money, administration, and operations of institutions like banks, investment companies, cooperatives, lending groups that facilitate credits and a unit or department that directs the organizations’ assets, liabilities and equities (Gitman, Joehnk, Billengsley, in Besley & Brigham 2017). F Career Opportunities in Finance Careers in finance typically fall into one of the two broad categories: (1) financial services and (2) managerial finance. Workers in both areas rely on a common analytical “tool kit,” but the types of problems s to which that tool kit is applied vary a great deal from one career path to the other. es Financial Management is the broadest of the Money and Capital markets, including the investment area, and the one with the most job opportunities. in Job opportunities: making decisions regarding plant expansions, financing decisions, and dividend decisions. us Some of the career opportunities in the field of finance are Financial Analyst, Fund Manager, Stock Broker, Banker, Bond Dealer, Treasury or Trust Manager, Investment researcher, business consultant, forex trader, trust agent, risk management associate, finance officer, and credit appraiser. B Financial Management - Major Role of Financial Management U Generally, financial management is concerned with procurement, allocation and control of financial resources of a business entity with the following objectives: dD 1. To ensure regular and adequate supply of funds; 2. To ensure adequate returns to the shareholders through capital gains which is which are dependent upon the earning capacity and the market price of the share; A 3. To ensure optimum funds utilization at least cost; 4. To ensure investment of funds in safe ventures so that adequate rate of return can be achieved; and 5. To design a sound capital structure by maintaining a fair composition of capital through a balance between debt and equity capital 2 AdDU Senior High School | Business Finance | Lesson 1 Intro to Financial Management  ATENEO DE DAVAO UNIVERSITY Km. 7 Central Park Blvd, Talomo, 8016 Davao City, Philippines Tel No. +63 (82) 221.2411 local 6200 E-Mail: [email protected] * www.addu.edu.ph In Consortium with Ateneo de Zamboanga University and Xavier University SENIOR HIGH SCHOOL – Business Finance Individuals Involved in Financial Management ce The senior leaders of an organization are responsible for all aspects of its financial health. They are the ones who understand the unit’s financial situation and do not allow unintended deficits to occur. They are accountable for the resources entrusted to them that include the funds, facilities and the recruitment of an employees, even if the control and the tasks have been delegated to their staff, under command of responsibilities. in Examples of Senior Leaders in an Organization: F Chief Executive Officer (CEO): The CEO is the highest-ranking executive in an organization. They have ultimate responsibility for the company's financial health, overall strategy, and decision-making. s Chief Financial Officer (CFO): The CFO is responsible for managing the organization's financial operations es and ensuring financial stability. They oversee financial planning, budgeting, financial reporting, and risk management. in Chief Operating Officer (COO): The COO oversees the day-to-day operations of the organization, including financial management. They work closely with other senior leaders to ensure effective financial and us operational strategies are implemented. President: In some organizations, the President may be responsible for the overall financial management and strategic decision-making. They work alongside the CEO and other senior leaders to drive the organization's B financial success. - Unit heads are responsible for internal financial management and to develop budgeting, financial reporting and management practices. Units are encouraged to develop an oversight process that builds on best U practices. dD Examples of Unit Heads: Division Head: A Division Head is responsible for managing a specific division or business unit within the organization. They oversee financial operations, resource allocation, and performance management within A their division. Department Manager: Department Managers are responsible for the financial management of individual departments within the organization. They handle budgeting, cost control, and financial reporting for their respective departments. 3 AdDU Senior High School | Business Finance | Lesson 1 Intro to Financial Management  ATENEO DE DAVAO UNIVERSITY Km. 7 Central Park Blvd, Talomo, 8016 Davao City, Philippines Tel No. +63 (82) 221.2411 local 6200 E-Mail: [email protected] * www.addu.edu.ph In Consortium with Ateneo de Zamboanga University and Xavier University SENIOR HIGH SCHOOL – Business Finance Project Manager: Project Managers are responsible for managing specific projects within the organization. ce They oversee the financial aspects of the project, including budgeting, cost tracking, and financial analysis. It's important to note that the specific titles and roles may vary across organizations. The examples provided are common positions found in many companies, but the organizational structure and titles can differ an depending on the industry and size of the organization. Differences among Financial Institution, Financial Instrument, and Financial Market in 1. Financial Institution F Financial institutions are the ones that facilitate the transfer of resources among those investors who are involved in buying and selling of financial instruments. s Identify examples of financial institutions: es 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 in firms or government agencies. Insurance Companies - Individuals purchase insurance (life, property and casualty, and health) protection us with insurance premiums. The insurance companies pool these payments and invest the proceeds in various securities until the funds are 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 B firm’s performance, and ultimately, the performance of the securities they own. Mutual Funds - are owned by investment companies which 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, U 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. dD Pension Funds - Financial institutions that receive payments from employees and invest the proceeds on their behalf. A Other financial institutions include pension funds like Government Service Insurance System (GSIS) and Social Security System (SSS), unit investment trust fund (UITF), investment banks, and credit unions, among others. 4 AdDU Senior High School | Business Finance | Lesson 1 Intro to Financial Management  ATENEO DE DAVAO UNIVERSITY Km. 7 Central Park Blvd, Talomo, 8016 Davao City, Philippines Tel No. +63 (82) 221.2411 local 6200 E-Mail: [email protected] * www.addu.edu.ph In Consortium with Ateneo de Zamboanga University and Xavier University SENIOR HIGH SCHOOL – Business Finance ce 2. Financial Instrument: Financial instruments like stocks and bonds are recorded evidence of obligations on which exchanges of resources are founded. The effective investment management of these financial instruments is one of the important aspects of the financing activities of any organization. an Identify examples of financial instrument: in Ayala Corporation Stocks (AC): Ayala Corporation is one of the largest conglomerates in the Philippines. F Investing in AC stocks allows individuals to become partial owners of the company and participate in its financial performance through dividends and potential capital appreciation. s Retail Treasury Bonds (RTBs): RTBs are government-issued bonds accessible to retail investors. These es fixed-income securities offer a low-risk investment option with regular interest payments and the return of principal upon maturity. in Mutual Funds: Mutual funds pool money from multiple investors to invest in a diversified portfolio of stocks, bonds, or other assets. In the Philippines, various mutual fund companies offer investment products, allowing individuals to participate in the financial markets without directly buying individual securities. us 3. Financial Market: Financial markets are the mechanisms used to trade financial institutions. B Two Types of Financial Market - Money and Capital Market Financial institutions, including banks, insurance companies, mutual funds, and investment banking firms. These institutions need valuation techniques, factors that cause interest rates to rise U and fall, regulations of financial institutions and types of financial instruments. The money and the capital market deal with securities markets and financial institutions. dD 1. Money Market The money market is created by a financial relationship created between suppliers and users of short-term A funds. Money markets are a venue wherein securities with short-term maturities (1 year or less) are sold. They are 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. 5 AdDU Senior High School | Business Finance | Lesson 1 Intro to Financial Management  ATENEO DE DAVAO UNIVERSITY Km. 7 Central Park Blvd, Talomo, 8016 Davao City, Philippines Tel No. +63 (82) 221.2411 local 6200 E-Mail: [email protected] * www.addu.edu.ph In Consortium with Ateneo de Zamboanga University and Xavier University SENIOR HIGH SCHOOL – Business Finance 2. Capital Market ce The capital market is a market that enables suppliers and users of long-term funds to make transactions. The key capital market securities are bonds (long-term debt) and both common and preferred stock (equity, or ownership). an Bonds are long-term debt instruments used by businesses and the government to raise large sums of money, generally from a diverse group of lenders. in Common stocks are units of ownership interest or equity in a corporation. F Preferred stock is a special form of ownership that has features of both a bond and common stock. The three main functions in the investment area are sales, analyzing individual securities, and determining the s optimal mix of securities for a given investor. es Possible career opportunities are found in brokerage houses, security firms, banks, mutual funds, insurance companies, financial consulting firms, investment banks, etc. The investment area focuses on the decisions made by both individual and institutional investors as they choose securities for their investment portfolios. in In summary, a financial institution provides financial services, a financial instrument is a tradable asset or us contract representing a financial claim, and a financial market is a platform where financial instruments are bought and sold. Together, they form an ecosystem that supports the flow of funds and investment opportunities in the economy. B Flow of Funds within an Organization - All business transactions include the exchange of value between two or more parties which are measurable in terms of money, particularly cash if not on credit or on account. Companies will not be able to attain growth U by offering on a cash basis only. But to survive in the long run, there is a need to generate positive cash flows through intensified collection of accounts or by ensuring that the company’s long-term cash inflows exceed dD its long-term cash outflows. There will be an outflow of cash when a company pays cash to another party. Such a payment could be made to pay for employees, suppliers and creditors, or to purchase long-term assets and investments, or even pay A for legal expenses and lawsuit settlements. A cash inflow involves a receipt or collection of cash which is the exact opposite of a cash outflow. Typically, the majority of a company’s cash inflows are payments received from customers, cash received from borrowings and cash from investors who purchase company’s shares of stock or equity from the company. Occasionally, cash flows come from other sources like cash settlements for legal cases or cash generated from the sale of company real estate or equipment. 6 AdDU Senior High School | Business Finance | Lesson 1 Intro to Financial Management  ATENEO DE DAVAO UNIVERSITY Km. 7 Central Park Blvd, Talomo, 8016 Davao City, Philippines Tel No. +63 (82) 221.2411 local 6200 E-Mail: [email protected] * www.addu.edu.ph In Consortium with Ateneo de Zamboanga University and Xavier University SENIOR HIGH SCHOOL – Business Finance ce You can imagine the flow of funds within an organization as a cycle. Cash flows out of the company when they make payments to employees, suppliers, or for various expenses. At the same time, cash flows into the company from customers, lenders, investors, or other sources. This continuous cycle of cash inflows and outflows keeps the organization functioning and supports its growth and financial stability. an Three Branches of Finance in 1. Personal Finance - deals with the individual’s investment decisions. 2. Public Finance - deals with the efficient management of public funds. F 3. Corporate Finance - deals with the management of the firm’s resources. Corporation s es A corporation is an artificial being created by operation of law, having the right of succession and the powers, attributes and properties expressly authorized by law or incident to its existence (The Corporation Code of the Philippines, Sec. 2). in The Main Goal of the Firm us The primary goal for management decisions is stockholder wealth maximization. Other Goals of the Firm B Social Responsibility - The concept that businesses should be actively concerned with the welfare of the society at large. - Ethical Responsibility - A company’s attitude and conduct toward its employees, customers, community, U and stockholders. dD POINT TO PONDER How can we relate the importance of studying Business Finance to our daily lives? A 7 AdDU Senior High School | Business Finance | Lesson 1 Intro to Financial Management