BUSINESS FINANCE

Major Roles in Financial Management and Individuals Involved :

Objectives:
1. Define Finance
2. Describe who are responsible for financial management within an organization
3. Describe the primary activities of the financial manager
4. Describe how the financial manager helps in achieving the goal of the organization
5. Describe the role of financial institutions and markets

What is Finance and Financial Management?

Finance is always of great importance, be it in a business or in one's everyday life. It is important
to manage risks in business, it is equally important to manage risks in life as well. Risk is nothing but an
uncertain event that might damage your assets and when it is financial risks, it creates loss of Finance.
Some books define Finance as the science and art of managing money. (Gitman & Zutter, 2012)
Financial Management deals with that decisions that are supposed to maximize the value of
shareholder’s wealth (Cayanan). 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 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.

The roles of each position identified.

1. 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. Ask the learners again, what
objective of the shareholders is, just to refresh.
2. 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 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.
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
(Cayanan, 2015)
3. President (Chief Executive Officer): The roles of a president in a corporation may vary from
one company to another. Among the responsibilities of a president are the following:
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.
b. Performing all areas of management: planning, organizing, staffing, directing and controlling.
c. Representing the company in professional, social, and civic activities.
4. VP for Marketing: The following are among the responsibilities:
a. Formulating marketing strategies and plans. Directing and coordinating company sales.
b. Performing market and competitor analysis.
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. (Cayanan, 2015)
5. VP for Production: The following are among the responsibilities:
a. Ensuring production meets customer demands.
b. Identifying production technology/process that minimizes production cost and make the company
cost competitive.
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. (Cayanan, 2015)
6. VP for Administration: The following are among the responsibilities:
a. Coordinating the functions of administration, finance, and marketing departments.
b. Assisting other departments in hiring employees.
c. Providing assistance in payroll preparation, payment of vendors, and collection of receivables.
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.
(Cayanan, 2015)
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. 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

SAVERS: Financial Intermediaries: Users of Funds:

-Households Banks, Insurance Companies (Borrowers/Investors)
Stock Exchange Households
-Individuals Individuals -Corporations/Companies -
-Corporations/Companies Stock brokerage firms Government Agencies:
-Government Agencies Mutual Funds
 The financial system links the savers and the users of funds. Savings can come from households,
individuals, companies, government agencies, or any other entity whose cash inflows are greater than
their cash outflows. The financial system through financial intermediaries provides a mechanism by
which these savings can be channeled to users of funds, borrowers, and investors.

Some of the financial instruments issued by users of funds such as the shares of stocks and
corporate bonds of publicly listed companies and the debt securities issued by the National Government
has traded.

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. Identify 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.

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. 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 firm’s performance, and ultimately, the performance of the securities they
own.

c. Mutual Funds - 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. When mutual funds use money from investors to invest in newly
issued debt or equity securities, 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.

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.

2. 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 of stock.
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.

a. 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.
 • A contractual right to exchange instruments with another entity under conditions that are
potentially favorable. (IAS 32.11)
• Examples: Notes Receivable, Loans Receivable, Investment in Stocks, Investment in Bonds
b. A 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. (IAS 32)
• Examples: Notes Payable, Loans Payable, Bonds Payable
c. An Equity Instrument is any contract that evidences a residual interest in the assets of an entity after
deducting all liabilities. (IAS 32)
• Examples: Ordinary Share Capital, Preference Share Capital
• Identify common examples of Debt and Equity Instruments.
d. Debt Instruments generally have fixed returns due to fixed interest rates. Examples of debt
instruments are as follows:
• 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.

• 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.

e. 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:

•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.
Moreover, preferred stockholders have also priority over common stockholders in cash dividend
declaration. Dividends to preferred stockholders are usually in a fixed rate. No cash dividends given to
common stockholders unless all the dividends due to preferred stockholders paid first. (Cayanan, 2015)

• Holders of 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. Moreover,
during a profitable period for which a company may decide to declare higher dividends, preferred stock
will receive a fixed dividend rate while common stockholders receive all the excess.

3. Financial Market - refers to a marketplace, where creation and trading of financial assets, such as
shares, debentures, bonds, derivatives, currencies, etc. take place.

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. The sale of new securities to one investor or a group of
investors (institutional investors) is referred to as a private placement.

• However, suppliers of funds or the holders of the securities may decide to sell the securities
that have purchased. The sale of previously owned securities takes place in secondary markets.

• The Philippine Stock Exchange (PSE) is both a primary and secondary market.

Money Markets vs. Capital Markets •Money markets are a venue wherein securities with short-
term maturities (1 year or less) are sold. They have 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.

• On the other hand, 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).

The role of Financial Managers: make financing decisions that require funding from investors in
the financial markets.

How do we measure wealth maximization?

For example, assume that Mr. Y bought 10 shares of Globe Telecom at PHP2, 510 each on September 9,
2010. This brings his investments to PHP25, 100. What happens to the value of his investment if the
price goes up to PHP2, 600 per share or it goes down to PHP2, 300 per share?

Explanation: An increase of the share price to PHP2, 600 per share means that people are willing to buy
the shares for that amount. If the learners were to sell their shares at this point, it will result to a profit
of PHP90 per share or PHP900 on their whole investment. Hence, the value of their investment
increased from PHP25, 100 to PHP26, 000. Therefore, there is an increase in shareholder’s wealth.

On the other hand, a decrease in the share price to PHP2, 300 per share means that people are
only willing to buy shares for PHP2, 300. If the learners were to sell their investment at this point, they
will receive PHP23, 000 which would result to a loss of PHP2, 100. The decrease in value of their
investment leads to a decrease in shareholder’s wealth.

Activity 1.1

Direction: Read the problem and answer it correctly. Follow the format above when you answer.

1. ABC Company bought 10 shares of Jollibee Corporation at PHP2, 000 each on January 9,
2012. This brings his investments to PHP20, 000. What happens to the value of his
investment if the price goes up to PHP2, 520 per share or it goes down to PHP1, 500 per
share?

Activity 1.2
Instruction: Think and create your own bank company name and describe the function of Finance
Manager or describe the Financial Management of your bank.

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(Bank name)
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Activity 1.3

Directions: Write T if the statement is True and F if the statement is False. Write your answer on the
space provided.

______1. High cash flow is generally associated with a higher share price whereas higher risk tends to
result in a lower share price.
______2. The wealth of corporate owners has measured by the share price of the stock.
______3. When considering each financial decision alternative or possible action in terms of its impact
on the share price of the firm's stock, financial managers should accept only those actions that expected
to maximize shareholder value.
______4. Stockholders expect to earn higher rates of return on investments of lower risk and lower
rates of return on investments of higher risk.
______5. Financial markets are intermediaries that channel the savings of individuals, businesses, and
government into loans or investments.
______6. Commercial banks obtain most of their funds from borrowing in the capital markets.
______7. The money market involves trading of securities with maturities of one year or less while the
capital market involves the buying and selling of securities with maturities for more than one year.
______8. Primary and secondary markets are markets for short-term and long-term securities,
respectively.
______9. A mutual fund is a type of financial intermediary that obtains funds through the sale of shares
and uses the proceeds to acquire bonds and stocks issued by various business and governmental units.
______10. Credit unions are the largest type of financial intermediary handling individual savings.