Quarter 1: Introduction to Financial Management PDF

Quarter 1: Introduction to Financial Management Business Finance  Overview of the Subject Business Finance is a specialized subject of Accounting, Business and Management strand, which introduces the basic concepts of corporate finance and personal finance.  Business Finance INTROD...

Quarter 1: Introduction to Financial Management Business Finance  Overview of the Subject Business Finance is a specialized subject of Accounting, Business and Management strand, which introduces the basic concepts of corporate finance and personal finance.  Business Finance INTRODUCTION TO FINANCIAL MANAGEMENT LEARNING COMPETENCIES 1. Explain the major role of financial management and the different individuals involved 2. Distinguish a financial institution from financial instrument and financial market 3. Enumerate the varied financial institutions and their corresponding services 4. Compare and contrast the varied financial instruments 5. Explain the flow of funds within an organization – through and from the enterprise—and the role of the financial manager What is Finance and Financial Management? FINANCE Finance is the study and system of money, investments, and other financial instruments. Finance as the science and art of managing money. (Gitman & Zutter, 2012)  FINANCIAL MANAGEMENT Financial Management deals with that decisions that are supposed to maximize the value of shareholder’s wealth. These decisions will ultimately affect the markets perception of the company and influence the share price. The goal of Financial Management is to maximize the value of shares of stocks. Managers of a corporation are responsible for making the decisions for the company that would lead towards shareholder’s wealth maximization. Organizational structure defines how activities such as task allocation, coordination, and supervision are directed towards the achievement of organizational aims. Organizational structure of the company is important especially in the financial aspect of the business and the particular set of people, each play a role in the decision making of the company. Recap Finance is the study and system of money, investments, and other financial instruments. Financial Management deals with that decisions that are supposed to maximize the value of shareholder’s wealth.  The roles of each position identified. Shareholders The shareholders elect the Board of Directors (BOD). Each share held is equal to one voting right. Since the shareholders elect the BOD, their responsibility is to carry out the objectives of the shareholders. Otherwise, they would not be elected in that position.  The roles of each position identified. Board of Directors The board of directors is the highest policy making body in a corporation. The board’s primary responsibility is to ensure that the corporation is operating to serve the best interest of the stockholders.  The roles of each position identified. Board of Directors The following are among the responsibilities of the board of directors: a. Setting policies on investments, capital structure and dividend policies. b. Approving company’s strategies, goals and budgets.  The roles of each position identified. Board of Directors The following are among the responsibilities of the board of directors: c. Appointing and removing members of the top management including the president. d. Determining top management’s compensation. e. Approving the information and other disclosures reported in the financial statements  The roles of each position identified. President (Chief Executive Officer) The roles of a president in a corporation may vary from one company to another. a. Approving the information and other disclosures reported in the financial statements. Overseeing the operations of a company and ensuring that the strategies as approved by the board are implemented as planned.  The roles of each position identified. President (Chief Executive Officer) b. Performing all areas of management: planning, organizing, staffing, directing and controlling. c. Representing the company in professional, social, and civic activities.  The roles of each position identified. VP for Marketing a. Formulating marketing strategies and plans. Directing and coordinating company sales. b. Performing market and competitor analysis.  The roles of each position identified. VP for Marketing c. Analyzing and evaluating the effectiveness and cost of marketing methods applied. d. Conducting or directing research that will allow the company identify new marketing opportunities, e.g. variants of the existing products/services already offered in the market. e. Promoting good relationships with customers and distributors.  The roles of each position identified. VP for Production a. Ensuring production meets customer demands. b. Identifying production technology/process that minimizes production cost and make the company cost competitive.  The roles of each position identified. VP for Production c. Coming up with a production plan that maximizes the utilization of the company’s production facilities. d. Identifying adequate and cheap raw material suppliers.  The roles of each position identified. VP for Administration a. Coordinating the functions of administration, finance, and marketing departments. b. Assisting other departments in hiring employees.  The roles of each position identified. VP for Administration b. Assisting other departments in hiring employees. c. Providing assistance in payroll preparation, payment of vendors, and collection of receivables.  The roles of each position identified. VP for Administration d. Determining the location and the maximum amount of office space needed by the company. Identifying means, processes, or systems that will minimize the operating costs of the company. The role of the VP for Finance/Financial Manager is to determine the appropriate capital structure of the company. Capital structure refers to how much of your total assets financed by debt and how much is financed by equity. To be able to acquire assets, our funds must have come somewhere. If it has bought using cash from our pockets, it has financed by equity. On the other hand, if we used money from our borrowings, the asset bought has financed by debt. What are the functions of Financial Managers? 1. Financing decisions - include making decisions as to how to finance long-term investments and working capital- which deals with the day-to-day operations of the company. 2. Investing Decisions - To minimize the probability of failure, long-term investments have supported by a capital budgeting analysis. 3. Operating Decisions - Deal with the daily operations of the company especially on how to finance working capital accounts such as accounts receivable and inventories. 4. Dividend Policies - Dividend is a part of profits that are available for distribution, to equity shareholders. Note: The Finance manager must decide whether the firm should distribute all the profits or retain them or distribute a portion and retain the balance. OVERVIEW OF THE FINANCIAL SYSTEM  Differentiate the Financial instruments, financial institutions and financial markets  Differentiate the Financial instruments, financial institutions and financial markets 1. Financial institutions are companies in the financial sector that provide a broad range of business and services including banking, insurance, and investment management.  Differentiate the Financial instruments, financial institutions and financial markets Examples of financial institutions/Intermediaries: a. 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 firms or government agencies.  Example of Commercial Banks  Differentiate the Financial instruments, financial institutions and financial markets Examples of financial institutions/Intermediaries: b. Insurance Companies - Individuals purchase insurance (life, property and casualty, and health) protection with insurance premiums. - The insurance companies pool these payments and invest the proceeds in various securities until the funds needed to pay off claims by policyholders. Can you give examples of Insurance Companies?  Example of Insurance Companies  Differentiate the Financial instruments, financial institutions and financial markets Examples of financial institutions/Intermediaries: c. Mutual Funds - owned by investment companies that enable small investors to enjoy the benefits of investing in a diversified portfolio of securities purchased on their behalf by professional investment managers among others.  Differentiate the Financial instruments, financial institutions and financial markets Examples of financial institutions/Intermediaries: d. Pension Funds - Financial institutions that receive payments from employees and invest the proceeds on their behalf. 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.  Differentiate the Financial instruments, financial institutions and financial markets 2. Financial Instruments - real or a virtual document representing a legal agreement involving some sort of monetary value. - These can be debt securities like corporate bonds or equity like shares of stock.  Differentiate the Financial instruments, financial institutions and financial markets 2. Financial Instruments - When a financial instrument issued, it gives rise to a financial asset on one hand and a financial liability or equity instrument on the other.  Differentiate the Financial instruments, financial institutions and financial markets a. Financial Asset is any asset that is: Cash An equity instrument of another entity A contractual right to receive cash or another financial asset from another entity.  Differentiate the Financial instruments, financial institutions and financial markets a. Financial Asset is any asset that is: A contractual right to exchange instruments with another entity under conditions that are potentially favorable. Examples: Notes Receivable, Loans Receivable, Investment in Stocks, Investment in Bonds  Differentiate the Financial instruments, financial institutions and financial markets b. Financial Liability is any liability that is a contractual obligation: To deliver cash or other financial instrument to another entity.  Differentiate the Financial instruments, financial institutions and financial markets b. Financial Liability is any liability that is a contractual obligation: To exchange financial instruments with another entity under conditions that are potentially unfavorable. Examples: Notes Payable, Loans Payable, Bonds Payable  Differentiate the Financial instruments, financial institutions and financial markets c. Equity Instrument is any contract that evidences a residual interest in the assets of an entity after deducting all liabilities Examples: Ordinary Share Capital, Preference Share Capital Identify common examples of Debt and Equity Instruments.  Differentiate the Financial instruments, financial institutions and financial markets d. Debt Instruments generally have fixed returns due to fixed interest rates. Examples of debt instruments are as follows: Treasury Bonds and Treasury Bills Corporate Bonds  Differentiate the Financial instruments, financial institutions and financial markets Treasury Bonds and Treasury Bills issued by the Philippine government. These bonds and bills have usually low interest rates and have very low risk of default since the government assures that these has been paid.  Differentiate the Financial instruments, financial institutions and financial markets Corporate Bonds issued by publicly listed companies. These bonds usually have higher interest rates than Treasury bonds. However, these bonds are not risk free. If the company issued the bonds goes bankrupt, the holder of the bonds will no longer receive any return from their investment and even their principal investment has wiped out.  Differentiate the Financial instruments, financial institutions and financial markets e. Equity Instruments - It generally have varied returns based on the performance of the issuing company. Returns from equity instruments come from either dividends or stock price appreciation.  Differentiate the Financial instruments, financial institutions and financial markets e. Equity Instruments - Any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities. Residual Interest occurs when you carry a credit card balance from one month to the next. It’s the interest calculated on your balance in the days between your statement being issued and you making a full statement balance payment.  Differentiate the Financial instruments, financial institutions and financial markets The following are types of equity instruments: Preferred Stock has priority over a common stock in terms of claims over the assets of a company. This means that if a company has liquidated and its assets have to be distributed, no asset be distributed to common stockholders unless all the claims of the preferred stockholders has given.  Differentiate the Financial instruments, financial institutions and financial markets The following are types of equity instruments: Common Stock on the other hand are the real owners of the company. If the company’s growth is encouraging, the common stockholders will benefit on the growth.  Differentiate the Financial instruments, financial institutions and financial markets 3. Financial Market - refers to a marketplace, where creation and trading of financial assets, such as shares, debentures, bonds, derivatives, currencies, etc. take place.  Differentiate the Financial instruments, financial institutions and financial markets Classify Financial Markets into comparative groups: - Primary vs. Secondary Markets To raise money, users of funds will go to a primary market to issue new securities (either debt or equity) through a public offering or a private placement. The sale of new securities to the public referred to as a public offering and the first offering of stock named an initial public offering.  Differentiate the Financial instruments, financial institutions and financial markets Classify Financial Markets into comparative groups: - Primary vs. Secondary Markets Suppliers of funds or the holders of the securities may decide to sell the securities that have purchased. The Philippine Stock Exchange (PSE) is both a primary and secondary market. Philippine Stock Exchange A private non-profit and non-stock organization created to provide and maintain a fair, efficient, transparent and orderly market for the purchase and sale of securities such as stocks, warrants, bonds, options and others. Philippine Stock Exchange It is the corporation that governs our local stock market. People buy or invest in stocks to benefit from a company's tremendous value potential over time. Once you buy or invest into a stock, you now become part owner or a shareholder of that particular corporation. Philippine Stock Exchange You buy the stock at a low price and then sell it when its price rises in the future. For example, if you purchase 100 shares of a corporation at PHP 10 per share and sell them a year later for PHP 20 per share, you'll gain a 100% return on your investment (ROI) or PHP 2,000 on the 100 shares.  Differentiate the Financial instruments, financial institutions and financial markets Classify Financial Markets into comparative groups: - Money Markets vs. Capital Markets Money markets are a venue wherein securities with short-term maturities (1 year or less) are sold. Securities with longer-term maturities sold in Capital markets. The key capital market securities are bonds (long- term debt) and both common stock and preferred stock (equity, or ownership).  Differentiate the Financial instruments, financial institutions and financial markets Classify Financial Markets into comparative groups: Money Markets vs. Capital Markets The money market is a constant flow of cash between governments, corporations, banks, and financial institutions, borrowing and lending for a term as short as overnight and no longer than a year. The capital market encompasses the trade in both stocks and bonds. Thank you and Good day!