REVIEWER ABM 004.docx

**MODULE 1:** **DEFINITION OF FINANCE AND FINANCIAL MANAGEMENT** **Finance** - Resource Allocation - Resource Management - Resource Acquisition and investment **Financial Management** is the planning, directing, monitoring, organizing, and controlling of the monetary resources of an orga...

**MODULE 1:** **DEFINITION OF FINANCE AND FINANCIAL MANAGEMENT** **Finance** - Resource Allocation - Resource Management - Resource Acquisition and investment **Financial Management** is the planning, directing, monitoring, organizing, and controlling of the monetary resources of an organization. **Finance** **-** Is a branch of economics concerned with resource allocation as well as resource management, resource acquisition and investment, describe the management, creation and study of money, banking, credit, investments, assets and liabilities that make up financial systems, as well as the study of those financial instruments. Some people prefer to divide finance into three distinct categories: **Public Finance**, **Corporate Finance**, and **Personal Finance**. **Categories of Finance:** - **Public Finance --** deals with the financial management of government entitles at various levels, such as local, state, and national governments. - **Corporate Finance --** focuses on the financial decisions made by corporations to maximize shareholder value and ensure the long-term financial health of the company. - **Personal Finance --** the management of an individual's financial resources to achieve personal financial goals and ensure financial well-being. There is also the recently emerging area of **Social Finance**. Additionally, the study of **behavioral finance** aims to learn about the more "human" side of a science considered by most to be highly mathematical. **Financial Management** **-** Refers to the efficient and effective management of money (funds) in such a manner as to accomplish the objectives of the organization. It is the **planning**, **directing**, **monitoring**, **organizing**, and **controlling** of the monetary resources of an organization. **-** These decisions will ultimately affect the markets perception of the company and influence the share of price. **-** The goal of financial management is to maximize company's wealth. ***"Financial Management is an area of financial decision making, harmonizing individual motives and enterprise goals."*** By **Weston and Brigham** **Difference Between Finance and Financial Management:** **Finance** is a broad field that deals with the study of money, investments, and financial markets. It encompasses a wide range of activities related to the management of money, including how individuals, businesses, and governments acquire and use funds. Finance involves understanding various financial instruments, such as stocks, bonds, and loans, and how they impact the overall economic system. In simpler terms, finance is like the big picture of money-related activities, covering everything from saving money to making investments. **Financial Management** on the other hand, is a specific aspect of finance. It focuses on how organizations (like businesses or government agencies) manage their money internally. Financial management involves making decisions about how to raise capital, where to invest funds, and how to allocate resources within an organization. To put it simply, financial management is more about the day-to-day decisions and strategies that businesses use to handle their money effectively. In summary, while **finance** is the broader study of money and its various aspects, **financial management** is a subset that specifically deals with how organizations handle their finances internally. Think of finance as the entire forest, and financial management as one of the trees within that forest. **MODULE 2:** **DESCRIBING THE FUNCTIONS AND ROLES OF FINANCIAL MANAGER** **Note:** According to Ma'am, dapat magkabaligtad yung Roles and Functions of financial manager sa module that's why 'yon yung nilagay ko dito sa reviewer. **Functions of Financial Manager:** **Financing --** includes making decisions on how to fund long-term investment such as company expansions and working capital which deals with the day-to-day operations of the company (i.e., purchase of inventory, payment of operating expenses, etc.). This also involves determining the appropriate capital structure of the company. **Capital Structure** refers to how much of your total assets are financed by debt and how much is financed by equity. **Investing --** A finance manager function that includes choosing which type of investment would secure the best profits. Investments may be short or long term. Financial managers play a pivotal role in the investing function by strategically allocating resources, managing risks, and making informed decisions that contribute to the overall financial success and sustainability of the organization. **Operating --** deals with the daily operations of the company. It also involves determining how to finance working capital account such as accounts receivable and inventories. **Dividend Policies --** Cash dividends are paid by corporations to existing shareholders based on their shareholdings in the company as a return of their investment. The role of a financial manager is to determine when the company should declare cash dividends. **Financial activities** of a firm are one of the most important and complex activities. Therefore, in order to take care of these activities, a **financial manager** performs all the requisites of financial activities. **Roles of a Financial Manager:** **Raising of Funds** - In order to meet the obligation of the business, it is important to have enough cash and liquidity. A firm can raise funds by the way of equity and debt. It is the responsibility of a financial manager to decide the ratio between debt and equity. It is important to maintain a good balance between equity and debt. **Allocation of Funds** - Once the funds are raised through different channels, the next important function is to allocate the funds. The funds should be allocated in such a manner that they are optimally used. **Profit Planning** - **Profit earning** is one of the prime functions of any business organization. Profit earning is important for survival and sustenance of any organization. **Profit planning** refers to proper usage of the profit generated by the firm. - The financial manager is instrumental in profit planning by overseeing various financial activities, managing costs, optimizing revenues, and making strategic financial decisions. Their role involves a comprehensive understanding of the financial landscape and a strategic approach to enhance the organization's profitability. **Understanding Capital Markets** - Shares of a company are traded on stock exchange and there is a continuous sale and purchase of securities. Hence, a clear understanding of capital market is an important function of a financial manager. When securities are traded on stock market, it involves a huge amount of risk. Therefore, it is the discretion of a financial manager on how to distribute profits. Many investors do not like the firm to distribute the profits amongst shareholders as dividends. Instead invest in the business itself to enhance growth. The practice of a financial manager directly impacts the operation in capital markets. **MODULE 3:** **THE FINANCIAL SYSTEM** **How Financial System Works:** **Savers/Suppliers of Funds** - Referring to us na may-ari ng funds. - It goes directly to **Financial Institutions** if gusto nila ipunin yung funds nila. - Goes to **Financial Markets** if gusto naman nila i-invest ang funds nila. **Financial Institutions** - Makakatulong sa pagpapautang o pagbibigay ng pondo sa mga nangangailangan. **Financial Markets** - Ito yung mga seller ng stocks. **Users/Demanders of Fund** - Pinagbigyan ng naipon na pera o yung pera na ibinigay ng savers sa financial institutions. **Private Placement** - a sale of stocks, bonds, or securities directly to a private investor, rather than as part of a public offering. **Philippine Financial System** **Bangko Sentral ng Pilipinas --** Mother of all banks. - **Commercial Banks --** pwede mag-save, mangutang, mag-withdraw at insurance ng pera. - **Rural Banks --** to help farmers. - **Thrift Banks --** focus on offering home mortgages. - **Specialized Government Banks --** Bangkong pagmamay-ari ng Government. - **Private Nonbank Financial Intermediaries --** Hindi bangko pero nakakapagprovide ng financial help. Example, insurance. - **Government Specialized Nonbank Financial Intermediaries --** Pagmamay-ari ng Government pero hindi bangko. Example, Pag-ibig Fund. - **Nonbank Thrift Institutions --** halos kaparehas lang ng description ng Thrift Banks. Ang pinagkaiba lang is hindi ito bangko. - **External Sector --** banks outside the country. **Terms Defined:** **Financial System --** is the system that enable lenders and borrowers to exchange fund. It covers the financial transactions and the exchange of money between investors, lenders, and borrowers. **Financial Markets --** organized forums in which the suppliers and users of various types of funds can make transactions directly. **Financial Institutions --** Intermediaries that channel the savings of individuals, businesses, and governments into loans or investments. **Financial Instruments --** is a real or a virtual document representing a legal agreement involving some sort of monetary value. These can be securities like corporate bonds or equity like shares of stocks. **Private Placements --** the sale of a new security directly to an investor or group of investors. **Public Offering --** the sale of either bonds or stocks to the general public. **Lenders (Suppliers of Funds) --** the holders of financial assets. **Borrowers (Demanders of Funds) --** the users of financial asset or the markers of financial liabilities and equity instruments. **Method of Transferring Funds:** - **Direct Finance --** refers to lending by ultimate borrowers with no intermediary. (Nakukuha agad yung cash na hinihiram. - **Indirect Finance --** refers to lending by an ultimate lender to a financial intermediary that then relends to ultimate borrowers. (May nakapagitan na intermediary or alin man sa Financial Institution at Financial Market bago pa makarating sa borrower yung cash. The **Philippine Financial System** is primarily bank-based rather than capital market based. The banking sector, whose total assets accounted for more than 80 percent of the total resources of the financial system and of GDP in 2010, plays the primary role in financial intermediation and is the main source of credit in the economy. The **Philippine Financial System** is structured by type of bank including universal, commercial, savings and cooperative banks, according to statistics complied by **Asianbanks.net** from noted bank adviser **Paul Sheehan**. Although the country's banking system primarily consists of rural and thrift banks, universal and commercial banks account for larger market shares. Universal and commercial banks make up less than 5 percent of the total banking institutions in the Philippines but account for a much larger portion of the market share, explains data from Asianbanks.net. **Universal** and **Commercial Banks** differ from other banking institutions by offering a wider variety of financial services, according to **Investopedia**. In the Philippines, these banks have asset values of over 3 trillion pesos, making up over 90 percent of the banking market share in the country. The **Philippine Financial System** consists mainly of rural banks, which make up the majority of total banking institutions, notes Asianbanka.net. **Rural Banks** provide credit to farmers and agricultural-related businesses. These banks, along with cooperative banks that provide similar services have the lowest asset values and market shares relative to universal and commercial banks. However, rural, and cooperative banks have higher yearly growth rates than universal and commercial banks combined. **MODULE 4:** **TYPES OF FINANCIAL MARKETS AND FINANCIAL INSTITUTIONS** **Financial Market:** **-** A virtual or physical space where individuals, businesses, and governments come together to buy and sell financial assets. **Financial assets** include things like **stocks**, **bonds**, **currencies**, and **other investment products**. - **Money Market --** are a venue wherein securities with short-term maturities (1 year or less) are sold. - **Capital Market --** securities with long-term maturities are sold. The key capital market securities are bonds and both common stock and preferred stocks. - **Primary Market --** financial market in which securities are initially used; the only market in which the issuer is directly involved in the transaction. (Nag i-issue ng bagong stocks) - **Secondary Market --** financial market in which preowned securities (those that are not new issues are traded. (Existing stocks or stocks from primary market) **Financial Institutions:** **-** Are like financial service providers or companies that help people and businesses manage their money. They offer various services to make handling money easier and to meet different financial needs. These services can include keeping your money safe, providing loans when you need extra cash, helping you invest for the future, and offering insurance to protect against unexpected events. - **Commercial Banks --** individuals deposit funds at commercial banks, which use the deposited funds to provide commercial loans to firms and personal loans to individuals. **Examples:** BDO, BPI, CHINABANK, METROBANK - **Insurance Companies --** pool the payments of individuals and invest the proceeds in various securities until the funds are needed to pay off claims by policyholders. **Examples:** AXA PHILIPPINES, PRU LIFE UK, INSULAR LIFE - **Mutual Funds --** 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 manager. **Examples:** FIRST METRO CONSUMER FUND, INC., ATRAM ALPHA OPPORTUNITY FUND, INC. - **Pension Funds --** 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)**, **investment banks**, **credit unions**, among others. **MODULE 5:** **TYPES OF FINANCIAL INSTRUMENTS** **Financial Instrument --** These are assets or contracts that represent a claim to the payment of a sum of money. Examples include stocks, bonds, derivatives, and loans. **Financial Markets and Institutions --** these are organizations that provide financial services. These are platforms or systems that facilitate the buying and selling of financial instruments. **Financial Instruments** - Is a 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 or stocks. - When a financial instrument is issued, it gives rise to a financial asset on one hand and a financial liability or equity instrument on the other. **Financial Assets** **Financial assets** 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. - A contractual right to exchange instruments with another entity under conditions that are potentially favorable. - **Examples: Notes Receivable**, **Loans Receivable**, **Investment in Stocks**, and **Investment in Bonds**. **Financial Liability** **Financial Liability** is any liability that is a contractual obligation: - To deliver cash or other financial instrument to another entity. - To exchange financial instruments with another entity under conditions that are potentially unfavorable. - **Examples: Notes Payable**, **Loans Payable**, and **Bonds Payable**. **Debt vs. Equity Instrument** **Debt Instruments** generally have fixed returns due to fixed interest rates. Examples of debt instruments are as follows: - **Treasury Bonds and Treasury Bills** are issued by the Philippines government. These bonds and bills have usually have low interest rates and have very low risk of default since the government assures that these will be paid. - **Corporate Bonds** are 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 which issued the bonds goes bankrupt, the holder of the bonds will no longer receive any return from their investment and even their principal investment can be wiped out. **Equity Instruments** generally have varied returns based on the performance of the issuing company. Returns from equity instruments come from either **dividends** or **stock price appreciation**. The following are types of equity instruments. **Stocks** is an instrument of ownership. (Kapag bumili ka, part ka na ng company) - **Preferred Stock** has priority over a common stock in terms of claims over the assets of a company. This means that if a company were to be liquidated and its assets have to be distributed, no asset will be distributed to common stockholders unless all the claims of the preferred stockholders have been given. Moreover, preferred stockholders also have priority over common stockholders in cash dividend declaration. **Dividends** to preferred stocks are usually in a fixed rate. No cash dividends will be given to common stockholders unless all the dividends due to preferred stockholders are paid first. **(Cayanan, 2015)** - **Common Stock** on the other hand are the real owners of the company. If the company's growth is spurring, the common stockholders will benefit on the growth. Moreover, during a profitable period or which a company may decide to declare higher dividends, preferred stock will receive a fixed dividend rate while common stockholders receive all the excess. **ADDITIONAL KEY POINTS:** **Market Institutions --** places where people buy and sell such as stocks and bonds. **Financial Institutions --** places where people manage and grow their money. **Philippine Stock Exchange --** largest financial market in the Philippines. **Bonds --** may utang ka sa company. (**IOU --** I owe you)