Special Topics in Financial Management PDF

SPECIAL TOPICS IN FINANCIAL MANAGEMENT By: Olive Shower P. Basabas, MBA COURSE OUTCOMES: At the end of the semester the students should have:  Analyze and evaluate emerging trends and developments in financial management  Apply advanced financial concepts and techniques to solve rea...

SPECIAL TOPICS IN FINANCIAL MANAGEMENT By: Olive Shower P. Basabas, MBA COURSE OUTCOMES: At the end of the semester the students should have:  Analyze and evaluate emerging trends and developments in financial management  Apply advanced financial concepts and techniques to solve real-world problems  Make informed financial decisions for business in a variety of industries  Communicate effectively about financial topics to both technical and non-technical audiences  Demonstrate an understanding of the ethical implications of financial decisions  Identify and asses the risks associated with financial transactions and develop strategies to mitigate those risks.  CHAPTER I: BASIC PRINCIPLES OF FINANCIAL MANAGEMENT LEARNING OBJECTIVES After reading this chapter you will be able to: 1. Describe the nature, goal and basic scope of financial management. 2. Explain briefly the three major types of decisions that the Finance Manager makes. 3. Discuss the importance or significance of financial management 4. Describe the relationship between Financial Management and Accounting and Economics.  NATURE OF FIANCIAL MANAGEMENT Financial Management, also referred to as managerial finance, corporate finance, and business finance, is a decision-making process concerned with planning, acquiring and utilizing funds in a manner that achieves the firm's desired goals. It is also described as the process for and the analysis of making financial decisions in the business context. Financial management is part of a larger discipline called FINANCE which is a body of facts, principles, and theories relating to raising and using money by individuals, businesses, and governments. The Goal of Financial Management The goal of financial management is to make money and add value for the owners.  The financial manager in a business enterprise must make decision for the owners of the firm.  must act in the owners' or shareholders best interest by making decisions that increase the value of the firm or the value of the stock. The appropriate goal for the financial manager can thus be stated as follows: “The goal of financial management is to maximize the current value per share of the existing stock or ownership in a business firm.” SHARED PROSPERITY: NEW, BROADER GOAL OF BUSINESSES A historic event in the annals of Philippine business happened on Nov. 5, 2020. In that event, 26 of the country's largest business and professional associations signed a Covenant for Shared Prosperity. They are called the Philippine Business Groups or PBGs - they represent thousands of businesses and an even greater number of individual member- professionals committed to national development. Commitments of the PBGs In the Covenant for Shared Prosperity, the PBGs then pledged and signed he commitments to the following stakeholders: 1. Commitments to Employees Recruit, train and develop employees and managers to be best that they can be regardless of gender, alma mater, age, ethnicity and religion; provide just compensation and benefits, promote meritocracy and encourage work-life harmony; 2. Commitment to Customers Provide only quality products and services that are of continuing value to customers; 3. Commitment to Suppliers Treat the goods, service and funds providers fairly, ethically and with respect as they, in turn, are expected to treat their own suppliers in their supply chain the same way; 4. Commitment to the Community Be actively involved in the communities where they operate in, with particular attention to the needs of the disadvantaged in those communities; 5. Commitment to the environment: Protect and preserve the environment for the benefit of current and future generations by employing environment-friendly technologies in all aspects of business operations; and 6. Commitment to stockholders: Deliver reasonable and just returns to and fair treatment of the controlling and noncontrolling shareholders. Scope of Financial Management Briefly, the traditional view of Financial Management looks into the following functions that a financial manager of a business firm will perform: 1. Procurement of short-term as well as long-term funds from financial institutions. 2. Mobilization of funds through financial instruments such as equity shares, preference shares, debentures, bonds, notes, and so forth. 3. Compliance with legal and regulatory provisions relating to funds procurement, use and distribution as well as coordination of the finance function with the accounting function.  In view of modern approach, the Finance Manager is expected to analyze the business firm and determine the total funds requirements of the firm, the assets or resources to be acquired, the best pattern of financing the assets and how best to satisfy the investors' expected return on their investment.  TYPES OF FINANCIAL DECISIONS The three major types of decisions that the Finance Manager of a modern business firm will be involved in are: 1. Investment decisions 2. Financing decisions 3. Dividend decisions All these decisions aim to maximize the shareholders' wealth through maximization of the firm's wealth. 1. INVESTMENT DECISIONS - determine how scarce or limited resources in terms of funds of the business firms are committed to projects. - should select capital investment proposals whose net present value is positive and the rate of return exceeding the marginal cost of capital. - should consider the profitability of each individual project proposal that will contribute to the overall profitability of the firm and lead to the creation of wealth. 2. FINANCING DECISIONS - the mix of debt and equity to finance investments should maximize the value of investments made. - should consider the cost of finance available in different forms and the risks. - financial leverage or trading on the equity should be considered when selecting the debt-equity mix or capital structure decision.  If the cost of capital of component is reduced, the overall weighted average cost of capital and minimization of risks in financing will lead to the profitability of the organization and create wealth to the owner. 3. DIVIDEND DECISIONS - the determination of quantum of profits to be distributed to the owners, the frequency of such payments and the amounts to be retained by the firm. - the business firm should retain its profits in the form of appropriations or reserves for financing its future growth and expansion schemes. - the firm adopts a very conservative dividend payment policy. An optimal dividend distribution policy therefore will lead to the maximization of shareholders' wealth. SIGNIFICANCE OF FINANCIAL MANAGEMENT The importance of financial management is known for the following aspects: 1. BROAD APPLICABILITY  the principles of finance are applicable wherever there is cash flow.  the concept of cash flow is one of the central elements of financial analysis, planning, control, and resource allocation decisions.  cash flow is important because the financial health of the firm depends on its ability to generate sufficient amounts of cash to pay its employees, suppliers, creditors, and owners.  financial management is equally applicable to all forms of business-like sole traders, partnerships, and corporations.  it is also applicable to nonprofit organizations like trust, societies, government organizations, public sectors, and so forth. 2. REDUCTION OF CHANCES OF FAILURE  firmhaving latest technology, sophisticated machinery, high caliber marketing and technical experts, and so forth may still fail unless its finances are managed on sound principles of financial management.  finance function is treated as the original which enables the other functions like production, marketing, purchase, and personnel to be effective in the achievement of organizational goal and objectives. 3. MEASUREMENT OF RETURN ON INVESTMENT  anybody who invests his money will expect to earn a reasonable return on his investment to maximize their wealth.  financial management studies the risk-return perception of the owners and the time value of money.  it considers the amount of cash flows expected to be generated for the benefit of owners, the timing of these cash flows and the risk attached to these cash flows.  the greater the time and risk associated with the expected cash flow, the greater is the rate of return required by the owners. RELATIONSHIP BETWEEN FINANCIAL MANAGEMENT, ACCOUNTING AND ECONOMICS  FINANCIAL MANAGEMENT AND ACCOUNTING  Financial management is something more than an art of accounting and bookkeeping.  Accounting function discharges the function of systematic recording of transactions relating to the firm's activities into financial statements.  Financial statements help managers to make business decisions involving the best use of cash, the attainment of efficient operations, the optimal allocation of funds among assets, and the effective financing of investment and operations.  FINANCIAL MANAGEMENT AND ECONOMICS  financial managers do a better job when they understand how to respond effectively to changes in supply, demand, and prices (firm-related micro factors), as well as no more general and overall economic factors (macro factors).  learning to deal with factors provides important tools for effective financial planning. Types of Economics 1. Microeconomics 2. Macroeconomics Microeconomics - deals with the economic decisions of individuals and firms. - the operating strategies based on the economic data of individuals and firms. - the concept of microeconomics helps the finance manager in decisions like pricing, taxation, determination of capacity and operating levels. Macroeconomics - looks at the economy as a whole in which a particular business concern is operating. - provides insight into policies by which economic activity is controlled. - the success of the business firm is influenced by the overall performance of the economy and is dependent upon the money and capital markets, since the investible funds are to be procured from the financial markets