MODULE 1

INTRODUCTION TO FINANCIAL MANAGEMENT

Content Standards

The learners demonstrate an understanding of the definition of finance, the activities of

the financial manager, and financial institutions and markets.

Performance Standards

The learners shall be able to:

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

Learning Competencies

The learners should be able to:

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. Explain the flow of funds within an organization – through and from the enterprise –
and the role of the financial manager.

Let’s Take the First Step!

Business Finance focuses on Financial Management which contributes a big part of the
accounting system, it will help the management form better plans by studying the past, the present
and to forecast the future condition of their business. This also includes the basic concepts of
corporate finance and personal finance. Business Finance gives an overview of the financial

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system which includes the players and the different financial instruments that are available in the
market.

In financial accounting we deal with historical data to form an opinion to help in maximizing
profits while in financial management we will deal with future data not just the historical data to
maximize shareholders’ wealth rather than maximizing profit and to also make decisions that
maximize the market value of the enterprise. How can we do that? By forecasting and budgeting.

Seat back and relax as we try to see what lies in the future by forecasting what’s next.
Welcome to Business Finance!

Time to Warm up!

Directions: Try to remember your previous lessons in Organization and Management and
Fundamentals of Accountancy, Business and Management 1 and answer the following questions
below.

1. What should be the most important goal of a company? Why?

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2. Differentiate Shareholders from Board of Directors.

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3. Describe the Responsibilities of a Vice President for Finance.

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 LINKING CONCEPTS
(Previous Topics and New Topics)

Financial management starts with a plan. This applies to both individuals and companies.
It is not enough to have cash and other resources today. Such resources, if not managed properly,
can be wiped out. Hence, financial management is a must.

From the perspective of a corporation, financial management deals with decisions that are
supposed to maximize the value of shareholders’ wealth. This means maximizing the market
value of the shares of stocks.

The changes in the price of a stock can be a confluence of many factors: profitable
operation, nature of the business, prospects of the business, projected earnings and timeframe
for the realization of such projected earnings, ability to meet maturing obligations, appropriate
capital structure, dividend policies, investing decisions, management and market sentiment.

While profits significantly affect the price of a stock, finance literature states that profit
maximization should not be the overriding objective of company’s management, but shareholders’
wealth maximization. Profits can be maximized by taking more risks which may result in operating
losses if some external shocks occur and adversely affect the company’s operations while
shareholders’ wealth maximization takes into account the risk-return trade-off of management
decisions and the prospects of a company.

EXPLORING NEW CONCEPTS

SHAREHOLDERS’ WEALTH MAXIMIZATON

Maximizing shareholders’ wealth through maximization of stock price should be the
overriding objective of management as it covers the different facets of operating a company and
it considers the different stakeholders in the organization. Stakeholders are not limited to the
stockholders of the company and their interest has to be borne in mind for a longer and more
sustainable operations.

Maximizing shareholder’s wealth motivates members of top management to develop a

longer perspective for the company that they manage. To achieve this, management may need
to consider the following factors:

 Make their customers happy;

 To innovate and invest in technology;

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  To consider setting aside a certain percentage of income to research and development;
 The interest of the employees – “Happy employees means productive employees”;
 Good relationships with suppliers and creditors;
 Compliance with the requirements of regulatory agencies;
 Supporting the community where the company operates.

FINANCIAL SYSTEM

SAVERS FINANCIAL USERS OF FUNDS

INTERMEDIARIES (BORROWERS/INVESTORS)
 Households
 Individuals  Banks  Households
 Corporations /  Insurance Companies  Individuals
Companies  Stock Exchange  Corporations/Compan
 Government  Stock Brokerage Firms ies
Agencies  Mutual Funds  Government
 Other Financial Agencies
Institutions

Figure 1 Overview of the Financial System

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 can be traded. The financial market provides a system for the trading of these
securities. The Philippine Stock Exchange (PSE) offers facilities for the trading of shares of
publicly listed companies.

A company can become publicly listed through an initial public offering (IPO) where shares
will be offered to many investors. The offering of the shares will be coursed through an investment
bank which will underwrite the offering of the shares. Corporate bonds and government debt
securities can be traded through the Philippine Dealing & Exchange Corp. (PDEX).

As shown in Figure 1, the same entities can be savers and users of funds. One entity may
have savings today but may be needing funds in the future, for example, for expansion.

The next section will discuss the different functions that each financial intermediary may
perform.

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Financial Intermediaries
1. Banks
Banks provide mechanism where savers can put their excess funds through
deposits. They give the depositors interest on the money deposited to them. Some
of the deposits can also be invested in some financial instruments like government
securities and corporate bonds. Banks have to be regulated by the Bangko Sentral
ng Pilipinas.

2. Insurance Companies
Insurance companies offer different products. It can be broadly categorized into
life insurance products and non-life insurance products. Life Insurance products
protect the insured from loss of life while non-life insurance products protect the
insured from the loss of o damage to properties. Insurance Companies are
regulated by the Insurance Commission.

3. Stock Exchange
The Philippine Stock Exchange (SCE) provides a system for the trading of equity
securities of publicly listed companies. These equity securities are common stocks
and preferred stocks.

4. Stock Brokerage Firms

Investing in the stock market has to be coursed through stock brokerage firms. At
present, there are online brokers and live brokers. Online Brokers can trade in the
stock market though the internet while Live Brokers uses a telephone to
communicate, to buy and to sell.

5. Mutual Funds
Mutual funds provide opportunities for big and small investors to invest in financial
instruments which they would not have considered on their own, or they may have
considered but do not have the time or the expertise to do it.

6. Other Financial Institutions

Other financial institutions include pension funds like Government Service
Insurance System (GSIS) and Social Security System (SSS), investment banks,
and credit unions, among others.

FINANCIAL INSTRUMENT
Financial Instruments are generally classified into two major categories: equity securities
and debt securities.

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Equity Securities

Equity Securities represent ownership in a company or the rights to acquire ownership at

an agreed upon determinable price. It includes preferred stock and common stock. Owners of this
kind of securities are legally know as Stockholders.

1. Preferred Stock – this stocks with priority over a common stocks of claims over the
assets of a company and preferred stockholders also have priority over common
stockholders in cash declaration.
2. Common Stock – the common stockholders are the real owners of the company.
Being residual owners, the growth potential of their investments is unlimited and they
have voting rights.

Debt Securities

Debt Securities represents a creditor relationship with the company. They are instruments
that typically have the following characteristics: 1) maturity value, 2) periodic interest payments at
a fixed or variable interest rate; and 3) maturity date. Examples of debt securities are Treasury
Bonds and Treasury Bills issued by the National Treasury which are forms of indebtedness of the
National Government.

The treasury bills which are in the tenors of 91 days, 182 days, and 360 days are auctioned
at the National Treasury every Monday to accredited dealers. These are eventually farmed out to
both institutional and retail investors on Wednesdays.

Occasionally, the National Treasury also issues retail Treasury Bonds. A small investor
can participate in these retail treasury bonds. These are normally in multiples of P5000. Coupon
interest om these retail Treasury bonds is paid quarterly. For Treasury Bonds, coupon interest is
paid semi-annually.

ORGANIZATIONAL CHART

Board of
Directors

President

VP for Sales & VP for VP for

VP for Finance
Marketing Production Administration

Figure 2 Organizational Chart

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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. They are elected by the shareholders.

Responsibilities of the Board of Directors

1. Setting policies on investments, capital structure, and dividends.

2. Approving company’s strategies, goals, and budgets.
3. Appointing and removing members of the top management including the president.
4. Determining top management’s compensation.
5. Approving the information and other disclosures reported in the financial statements.

President

Responsibilities of a President
1. Overseeing the operations of a company and ensuring that the strategies as approved by
the board are implemented as planned.
2. Performing all areas of management: planning, organizing, staffing, directing, and
controlling.
3. Representing the company in professional, social, and civic activities.

Vice President for Sales and Marketing

1. Formulating marketing strategies and plans.
2. Directing and coordinating company sales.
3. Performing market and competitor analysis.
4. Analyzing and evaluating the effectiveness and cost of marketing methods applied.
5. Conducting or directing research that will allow the company to identify new marketing
opportunities, for example, variants of the existing products/services already offered in the
market.
6. Promoting good relationships with customers and distributors.

Vice President for Production

1. Ensuring production meets customer demands.
2. Identifying production technology/process that minimizes production cost and makes the
company cost competitive.

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 3. Coming up with a production plan that maximizes the utilization of the company’s
production facilities.
4. Identifying adequate and competitively priced raw material suppliers.

Vice President for Administration

1. Coordinating the functions of administration, finance, and sales and marketing
departments.
2. Assisting other departments in hiring employees.
3. Providing assistance in payroll preparation.
4. Determining the location and the maximum amount of office space needed by the
company.
5. Identifying means, processes, or systems that will minimize the operating costs of the
company.

Vice President for Finance

Financing

Investing
VP for Operating
FINANCE

Dividend Figure 3 Functions of Vice

Policies President for Finance

Financing Decisions
Financing decisions include making decision as to how to finance long-term investments
and working capital which deals with the day-to-day operations of the company. The VP for
Finance is also responsible for determining the appropriate capital structure of the company, that
is, how much of the total assets should be financed by debt and equity.

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 Capital structure is affected by the stability of cash flows, extent of fixed operating
expenses and variable expenses.

Investing Decisions
To minimize the probability of failure, long-term investments have to be supported by a
capital budgeting analysis which is among the responsibilities of a finance manager. Capital
budgeting analysis is a technique used to determine the financial viability of a long-term
investment. The investment can only be considered if it satisfies certain financial parameters that
are acceptable to the top management.

Operating Decisions
Operating decisions deal with the daily operations of the company. The role of the VP for
Finance is determining how to finance working capital accounts such as accounts receivable and
inventories.

The decision regarding the financing of these working capital accounts depends on the
appetite of top management for risk. If the company is more aggressive, then these accounts
receivable and inventories can be substantially financed by short-term sources while if they are
more conservative, management will opt to finance working capital accounts mostly through long-
term sources.

Dividend Policies
Some investors buy stocks because of the dividends they expect to receive from the
company. Non-declaration of dividends may disappoint these investors. Two conditions must exist
before a company can declare cash dividends. First, the company must have enough retained
earnings to support cash dividend declaration. Second, the company must have Cash.

Several Factors considered in declaring cash dividends

1. Availability of Investment opportunities
This is especially true for small and medium enterprises (SMEs) which access to
long-term sources of funds is limited. These SMEs may rely heavily on internally
generated funds to finance expansion. Hence, the decision to declare cash
dividends can be substantially influenced by the availability of investment
opportunities.
2. Access to long-term source of funds
Publicly listed companies have better access to long-term sources of funds and
can afford to declare cash dividends even if they are faced with huge amounts of
investments, for as long as their retained earnings can support such declarations.

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 3. Capital Structure
The capital structure of a company can depend largely on the nature of its
business. The amount of cash dividends to be declared depends on how such
declaration can affect the capital structure of a company.

EXPLAINING LEARNED CONCEPTS

(Let’s sum up what you’ve learned!)

ACTIVITY 01

Directions: Explain your understanding about Financial Management by answering the following
questions on the space provided. Provide an additional sheet of bond paper if necessary.

1. Explain why the same company can be a saver and a user of funds.
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2. What is the role of financial intermediaries in the financial system?

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3. Explain the differences among common stocks, preferred stocks, and debt securities.
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 APPLYING LEARNED CONCEPTS

ACTIVITY 02

Directions: Read the question below and write your answers on the activity sheet at the end of
this module. Provide an additional sheet of bond paper if necessary.

1. Go to the Philippines Stock Exchange website (www.pse.com.ph) and look for the
historical prices of the following stocks for the last 30 trading days:
a. PLDT (stock code is TEL)
b. Globe Telecom (GLO)
c. Jollibee Foods Corporation (JFC)
d. San Miguel Corporation (SMC)
e. Aboitiz Power (AP)
2. Based on the data that you have gathered, make an observation of the price movements
of each stock. Which of the five stocks is more volatile in terms of price movements?

EVALUATING LEARNED CONCEPTS

ACTIVITY 03

CASE STUDY

Directions: Excerpts from the news articles about some Philippine listed companies are shown
below. Answer the questions after each excerpt. Write your answers on the activity sheet at the
end of this module. Provide an additional sheet of bond paper if necessary.

1. The following information from a business article entitled "PLDT cuts full-year profit forecast
after third-quarter results disappoint" was posted on Interaksyon.com (Date Accessed: March
11, 2015) on November 4, 2014. From the article, PLDT management reported that PLDT's
2014 third-quarter net income was down to P7.9 billion from P9.2 billion in the same period in
2013.

"Our third-quarter results reflect intensifying competition in the cellular space of our
business, to which we have taken measures to respond to competition and stabilize our
share of market. Smart, Sun, and Talk 'N Text undertook to match or neutralize price

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 aggression on the prepaid front, effectively lowering price points for the same level of
activity," Manuel V. Pangilinan, PLDT chairman said.

"Based on this market assessment and on information available to the company, PLDT is
revising its profit guidance for the full-year to P37 billion from the P39.5 billion previously
disclosed," Mr. Pangilinan said.

How do you think will PLDT investors react to this piece of information? What do you think will
happen to its stock price? Explain your answer.

2. On November 5, 2014, the following information from an article entitled "Puregold earnings
surge in 3rd quarter" was posted on Abs-cbnnews.com (Date Accessed: March 11, 2015):

The company's third-quarter earnings for 2014 surged to P1.55 billion up 55% from the
same period last year. This brought the company's 9-month income to P3.007 billion up
14% from P2.64 billion in the same period in 2013.

How do you think will the stock market react to this piece of news? What do you think will
happen to Puregold's stock price after this announcement?

3. On October 13, 2014, the following information from an article entitled "Petron completes $2-
B refinery upgrade: Firm doubling production capacity" was posted on Business.inquirer.net
(Date Accessed: March 11, 2015):

Dubbed as Refinery Expansion Project (RMP-2), this project started in 2011. "With the
upgrade, Petron said it would significantly increase production. Its gasoline production
alone is projected to double from the current 18 000 barrels per day to 36 000 barrels per
day."

In the same article, Mr. Ramon Ang, the president of Petron also made the following
statements:

"For Petron, this means increasing our revenues while improving profitability.” Ang said.
"With Increased production, Petron will enhance the country’s supply security and further
lessen its dependence on higher-costing imported fuel products. We will also be the only
oil company capable of locally producing more efficient and environment-friendly fuels that
meet or exceed global standards"

What do you think will be the effect of this project on the long term profits of Petron
Corporation? What do you think will be the possible effect of this news on the share price of
Petron Corporation?

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 BIBLIOGRAPHY

Cayanan, Arthur S., Borja, Daniel Vincent H., Business Finance, Rex Book Store, 2017
Tugas, Florenz T., Dela Cruz, Aeson Luiz C., Paril, Alloysius Joshua S., Tang, Alger C.,
Business Finance, Vibal Group, Inc.,
Beticon, Josefina L., Domingo, James Christopher D., Yabut, Fermin Antonio D.,
Fundamentals of Accountancy, Business, and Management 2, Vibal Group, Inc.,
2016
ABS-CBNnews.com. "Puregold Earnings Surge in 3rd Quarter" Posted on November 5,
2014. http://www.abs-cbnnews.com/business/11/05/14/puregold-earnings-surge-
3rd- quarter.
Amojelar, Darwin. "PLDT Cuts Full Year Profit Forecast After Third-Quarter Results
Disappoint." Interaksyon.com. Posted on November 4, 2014. http://www.
interaksyon.com/business/98524/pldt-cuts-full-year-profit-forecast-after-third-
quarter-results-disappoint.
Olchondra, Riz. "Petron Completes $2-B Refinery Upgrade: Firm Doubling Production
Capacity." Business.inquirer.net. Posted on October 13, 2014.
http://business.inquirer.net/180211/petron-completes-2-b-refinery-upgrade.

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