Module 1 Financial Management.pdf

Republic of the Philippines Laguna State Polytechnic University Province of Laguna ISO 9001:2015 Certified Level I Institutionally Accredite...

Republic of the Philippines Laguna State Polytechnic University Province of Laguna ISO 9001:2015 Certified Level I Institutionally Accredite LSPU Self-Paced Learning Module (SLM) Course Financial Management Sem/AY First Semester/2024-2025 Module No. 1 Lesson Title INTRODUCTION TO FINANCIAL MANAGEMENT Week 1-5 Duration Date August 19 - September 20, 2024 Description This module covers the definition of finance, of the Lesson business finance, types of finance, financial management, objectives of financial management, functions of finance manager and importance of financial management. Learning Outcomes Intended Learning Students should be able to meet the following Outcomes intended learning outcomes:  Explain the types of finance.  Distinguish the difference between finance and business finance. Targets/ Objectives At the end of the lesson, students should be able to:  Discuss the objectives of financial management.  Enumerate the functions of finance manager. LSPU SELF-PACED LEARNING MODULE: TECHNOLOGY FOR TEACHING AND LEARNING Prepared by: FLORISSE TERESA C. ARIATE  Republic of the Philippines Laguna State Polytechnic University Province of Laguna ISO 9001:2015 Certified Level I Institutionally Accredite Student Learning Strategies Online Activities A. Online Discussion via Google Meet (Synchronous/ You will be directed to attend in a One Asynchronous) Hour class discussion on the nature and types of educational technologies. To have access to the Online Discussion, refer to this link: https://meet.google.com/jrr-gucx-chr / https://meet.google.com/zat-xdwv-zxw / https://meet.google.com/wbh-tnwv-kkd The online discussion will happen on August 19 to September 20, 2024, from 10:30 am to 12:00 pm / 8:00 pm to 9:30 am / 8:30 am to 10:00 am. (For further instructions, refer to your Google Classroom and see the schedule of activities for this module) LSPU SELF-PACED LEARNING MODULE: TECHNOLOGY FOR TEACHING AND LEARNING Prepared by: FLORISSE TERESA C. ARIATE  Republic of the Philippines Laguna State Polytechnic University Province of Laguna ISO 9001:2015 Certified Level I Institutionally Accredite Lesson 1: Introduction to Financial Management Definition of Finance Finance may be defined as the art and science of managing money. It includes financial service and financial instruments. Finance also is referred as the provision of money at the time when it is needed. Finance function is the procurement of funds and their effective utilization in business concerns. The concept of finance includes capital, funds, money and amount. But each word is having unique meaning. According to Khan and Jain, “Finance is the art and science of managing money”. According to Oxford dictionary, the word 'finance' connotes 'management of money’. Webster's Ninth New Collegiate Dictionary defines finance as "the Science on study of the management of funds' and the management of fund as the system that includes the circulation of money, the granting of credit, the making of investments, and the provision of banking facilities. Definition of Business Finance According to the Wheeler, "Business finance is that business activity which concerns with the acquisition and conversation of capital funds in meeting financial needs and overall objectives of a business enterprise". According to the Guthumann and Dougall, “Business finance can broadly be defined as the activity concerned with planning, raising, controlling, administering of the funds used in the business". In the words of Parhter and Wert, "Business finance deals primarily with raising, administering and disbursing funds by privately owned business units operating in non- financial fields of industry". Corporate finance is concerned with budgeting, financial forecasting, cash management, credit administration, investment analysis and fund procurement of LSPU SELF-PACED LEARNING MODULE: TECHNOLOGY FOR TEACHING AND LEARNING Prepared by: FLORISSE TERESA C. ARIATE  Republic of the Philippines Laguna State Polytechnic University Province of Laguna ISO 9001:2015 Certified Level I Institutionally Accredite the business concern and the business concern needs to adopt modern technology and application suitable to the global environment. According to the Encyclopedia of Social Sciences, "Corporation finance deals with the financial problems of corporate enterprises. These problems include the financial aspects of the promotion of new enterprises and their administration during early development, the accounting problems connected with the distinction between capital and income, the administrative questions created by growth and expansion, and finally, the financial adjustments required for the bolstering up or rehabilitation of a corporation which has come into financial difficulties". Types of Finance Finance is one of the important and integral part of business concerns, hence, it plays a major role in every part of the business activities. It is used in all the area of the activities under the different names. Finance can be classified into two major parts: Private Finance, which includes the Individual, Firms, Business or Corporate Financial activities to meet the requirements. Public Finance which concerns with revenue and disbursement of Government such as Central Government, State Government and Semi- Government Financial matters. LSPU SELF-PACED LEARNING MODULE: TECHNOLOGY FOR TEACHING AND LEARNING Prepared by: FLORISSE TERESA C. ARIATE  Republic of the Philippines Laguna State Polytechnic University Province of Laguna ISO 9001:2015 Certified Level I Institutionally Accredite Definition of Financial Management Financial management is an integral part of overall management. It is concerned with the duties of the financial managers in the business firm. The term financial management has been defined by Solomon, "It is concerned with the efficient use of an important economic resource namely, capital funds". The most popular and acceptable definition of financial management as given by S.C. Kuchal is that "Financial Management deals with procurement of funds and their effective utilization in the business". Howard and Upton: Financial management "as an application of general managerial principles to the area of financial decision-making. Weston and Brigham: Financial management "is an area of financial decision-making, harmonizing individual motives and enterprise goals" Joshep and Massie: Financial management "is the operational activity of a business that is responsible for obtaining and effectively utilizing the funds necessary for efficient operations. Thus, Financial Management is mainly concerned with the effective funds management in the business. In simple words, Financial Management as practiced by business firms can be called as Corporation Finance or Business Finance. Objectives of Financial Management Effective procurement and efficient use of finance lead to proper utilization of the finance by the business concern. It is the essential part of the financial manager. Hence, the financial manager must determine the basic objectives of the financial management. Objectives of Financial Management may be broadly divided into two parts such as: 1. Profit maximization 2. Wealth maximization. LSPU SELF-PACED LEARNING MODULE: TECHNOLOGY FOR TEACHING AND LEARNING Prepared by: FLORISSE TERESA C. ARIATE  Republic of the Philippines Laguna State Polytechnic University Province of Laguna ISO 9001:2015 Certified Level I Institutionally Accredite  Profit Maximization Main aim of any kind of economic activity is earning profit. A business concern is also functioning mainly for the purpose of earning profit. Profit is the measuring techniques to understand the business efficiency of the concern. Profit maximization is also the traditional and narrow approach, which aims at, maximizes the profit of the concern. Profit maximization consists of the following important features. 1. Profit maximization is also called as cashing per share maximization. It leads to maximize the business operation for profit maximization. 2. Ultimate aim of the business concern is earning profit, hence, it considers all the possible ways to increase the profitability of the concern. 3. Profit is the parameter of measuring the efficiency of the business concern. So it shows the entire position of the business concern. 4. Profit maximization objectives help to reduce the risk of the business. Favourable Arguments for Profit Maximization The following important points are in support of the profit maximization objectives of the business concern: (i) Main aim is earning profit. (ii) Profit is the parameter of the business operation. (iii) Profit reduces risk of the business concern. (iv) Profit is the main source of finance. (v) Profitability meets the social needs also. Unfavourable Arguments for Profit Maximization The following important points are against the objectives of profit maximization: (i) Profit maximization leads to exploiting workers and consumers. (ii) Profit maximization creates immoral practices such as corrupt practice, unfair trade practice, etc. LSPU SELF-PACED LEARNING MODULE: TECHNOLOGY FOR TEACHING AND LEARNING Prepared by: FLORISSE TERESA C. ARIATE  Republic of the Philippines Laguna State Polytechnic University Province of Laguna ISO 9001:2015 Certified Level I Institutionally Accredite (iii) Profit maximization objectives leads to inequalities among the sake holders such as customers, suppliers, public shareholders, etc.  Wealth Maximization Wealth maximization is one of the modern approaches, which involves latest innovations and improvements in the field of the business concern. The term wealth means shareholder wealth or the wealth of the persons those who are involved in the business concern. Wealth maximization is also known as value maximization or net present worth maximization. This objective is an universally accepted concept in the field of business. Favourable Arguments for Wealth Maximization (i) Wealth maximization is superior to the profit maximization because the main aim of the business concern under this concept is to improve the value or wealth of the shareholders. (ii) Wealth maximization considers the comparison of the value to cost associated with the business concern. Total value detected from the total cost incurred for the business operation. It provides extract value of the business concern. (iii) Wealth maximization considers both time and risk of the business concern. (iv) Wealth maximization provides efficient allocation of resources. (v) It ensures the economic interest of the society. Unfavourable Arguments for Wealth Maximization (i) Wealth maximization leads to prescriptive idea of the business concern but it may not be suitable to present day business activities. (ii) Wealth maximization is nothing, it is also profit maximization, it is the indirect name of the profit maximization. (iii) Wealth maximization creates ownership-management LSPU SELF-PACED LEARNING MODULE: TECHNOLOGY FOR TEACHING AND LEARNING Prepared by: FLORISSE TERESA C. ARIATE  Republic of the Philippines Laguna State Polytechnic University Province of Laguna ISO 9001:2015 Certified Level I Institutionally Accredite controversy. (iv) Management alone enjoy certain benefits. (v) The ultimate aim of the wealth maximization objectives is to maximize the profit. (vi) Wealth maximization can be activated only with the help of the profitable position of the business concern. Functions of Finance Manager Finance function is one of the major parts of business organization, which involves the permanent, and continuous process of the business concern. Finance is one of the interrelated functions which deal with personal function, marketing function, production function and research and development activities of the business concern. At present, every business concern concentrates more on the field of finance because, it is a very emerging part which reflects the entire operational and profit ability position of the concern. Deciding the proper financial function is the essential and ultimate goal of the business organization. Finance manager is one of the important role players in the field of finance function. He must have entire knowledge in the area of accounting, finance, economics and management. His position is highly critical and analytical to solve various problems related to finance. A person who deals finance related activities may be called finance manager. Finance manager performs the following major functions: 1. Forecasting Financial Requirements It is the primary function of the Finance Manager. He is responsible to estimate the financial requirement of the business concern. He should estimate, how much finances required to acquire fixed assets and forecast the amount needed to meet the working capital requirements in future. 2. Acquiring Necessary Capital After deciding the financial requirement, the finance manager should concentrate how the finance is mobilized and where it will be available. It is also LSPU SELF-PACED LEARNING MODULE: TECHNOLOGY FOR TEACHING AND LEARNING Prepared by: FLORISSE TERESA C. ARIATE  Republic of the Philippines Laguna State Polytechnic University Province of Laguna ISO 9001:2015 Certified Level I Institutionally Accredite highly critical in nature. 3. Investment Decision The finance manager must carefully select best investment alternatives and consider the reasonable and stable return from the investment. He must be well versed in the field of capital budgeting techniques to determine the effective utilization of investment. The finance manager must concentrate to principles of safety, liquidity and profitability while investing capital. 4. Cash Management Present days cash management plays a major role in the area of finance because proper cash management is not only essential for effective utilization of cash but it also helps to meet the short-term liquidity position of the concern. 5. Interrelation with Other Departments Finance manager deals with various functional departments such as marketing, production, personel, system, research, development, etc. Finance manager should have sound knowledge not only in finance related area but also well versed in other areas. He must maintain a good relationship with all the functional departments of the business organization. Importance of Financial Management Finance is the lifeblood of business organization. It needs to meet the requirement of the business concern. Each and every business concern must maintain adequate amount of finance for their smooth running of the business concern and also maintain the business carefully to achieve the goal of the business concern. The business goal can be achieved only with the help of effective management of finance. We can't neglect the importance of finance at any time at and at any situation. Some of the importance of the financial management is as follows:  Financial Planning Financial management helps to determine the financial requirement of the business concern and leads to take financial planning of the concern. Financial LSPU SELF-PACED LEARNING MODULE: TECHNOLOGY FOR TEACHING AND LEARNING Prepared by: FLORISSE TERESA C. ARIATE  Republic of the Philippines Laguna State Polytechnic University Province of Laguna ISO 9001:2015 Certified Level I Institutionally Accredite planning is an important part of the business concern, which helps to promotion of an enterprise.  Acquisition of Funds Financial management involves the acquisition of required finance to the business concern. Acquiring needed funds play a major part of the financial management, which involve possible source of finance at minimum cost.  Proper Use of Funds Proper use and allocation of funds leads to improve the operational efficiency of the business concern. When the finance manager uses the funds properly, they can reduce the cost of capital and increase the value of the firm.  Financial Decision Financial management helps to take sound financial decision in the business concern. Financial decision will affect the entire business operation of the concern. Because there is a direct relationship with various department functions such as marketing, production personnel, etc.  Improve Profitability Profitability of the concern purely depends on the effectiveness and proper utilization of funds by the business concern. Financial management helps to improve the profitability position of the concern with the help of strong financial control devices such as budgetary control, ratio analysis and cost volume profit analysis.  Increase the Value of the Firm Financial management is very important in the field of increasing the wealth of the investors and the business concern. Ultimate aim of any business concern will achieve the maximum profit and higher profitability leads to maximize the wealth of the investors as well as the nation.  Promoting Savings Savings are possible only when the business concern earns higher profitability and maximizing wealth. Effective financial management helps to promoting and mobilizing individual and corporate savings. LSPU SELF-PACED LEARNING MODULE: TECHNOLOGY FOR TEACHING AND LEARNING Prepared by: FLORISSE TERESA C. ARIATE  Republic of the Philippines Laguna State Polytechnic University Province of Laguna ISO 9001:2015 Certified Level I Institutionally Accredite Nowadays financial management is also popularly known as business finance or corporate finances. The business concern or corporate sectors cannot function without the importance of the financial management. Engaging Activities: Answer the following questions. 1. What is finance? Define business finance. 2. Explain the types of finance. 3. Discuss the objectives of financial management. 4. Discuss the role of financial manager. 5. Explain the importance of financial management. LSPU SELF-PACED LEARNING MODULE: TECHNOLOGY FOR TEACHING AND LEARNING Prepared by: FLORISSE TERESA C. ARIATE  Republic of the Philippines Laguna State Polytechnic University Province of Laguna ISO 9001:2015 Certified Level I Institutionally Accredite Learning Resource  Financial Management Part II, Ferdinand L. Timbang, CPA, MSCF  Financial Management, C. Paramasivan, T. Subramanian, New Age International Publisher LSPU SELF-PACED LEARNING MODULE: TECHNOLOGY FOR TEACHING AND LEARNING Prepared by: FLORISSE TERESA C. ARIATE