Business Finance

Introduction to Financial Management

This module is written and designed to help you understand the definition of finance and financial management
and the different individuals who are involved in achieving the goal of the organization.

After this module, you are expected to:

1. explain the major role of financial management and the different individuals involved a.

define Finance and Financial Management;

b. explain the major role of financial management and the different individuals involved; c.

identify the primary activities of financial manager; and

d. describe how the financial manager helps in achieving the goal of the organization

Lesson 1
Overview of Financial
Management

According to Gitman and Zutter (2012), “Finance can be defined as the science
and art of managing money. At the personal level, finance is concerned with individuals’
decisions about how much of their earnings they spend, how much they save, and how
they invest their savings. In a business context, finance involves the same types of
decisions: how firms raise money from investors, how firms invest money in an attempt
to earn a profit, and how they decide whether to reinvest profits in the business or
distribute them back to investors.”

Finance is a process that includes raising money or resources and allocating them
effectively and efficiently to achieve the firm’s goals or objectives. It includes financial
management, the study of investment, and the study of institutions and markets.
Money is needed by the firm to continue its operations, expansion, replacement of new
machinery and equipment, payments, acquisition of new investment, and internal
growth.

According to Cayanan and Borja (2017), “Financial management deals with

 decisions that are supposed to maximize the value of shareholders' wealth.” Financial
management is a decision-making process that includes planning, analysis, utilization,
and acquisition of funds in order to achieve the desired goals of the business. Risk and
return are part of managing a business. A thorough plan and analysis should be done to
avoid or reduce risks and to have a good return.

The goal of financial management is to maximize the wealth of the shareholders.

Its aim is to make money and add value to the investors and to the firm. Investors buy
stocks because they want something in return. More investors will create more funds
and more jobs. Maximizing the shareholders’ wealth is not that easy; a lot of things
should be considered, and they need to satisfy different stakeholders. To gain profit, the
business should make customers happy. They must treat their employees well like
customers to become more productive and trustworthy. They should pay their financial
obligations with their creditors and suppliers on time so they can establish a good
relationship. They must pay their financial obligation on time. Firms must also pay
attention to the government and environmental issues. They must comply with the
government and legal requirements. They must see that they will not have a bad effect
on the environment.

Financial management includes planning, organizing, controlling, and directing to

acquire and utilize the funds or resources effectively and efficiently. Every activity of the
finance manager should be according to plan. It should be organized, controlled,
monitored, and evaluated.

Activity No. 2.1

Directions: Respond to the given situation. Write your answers on a separate sheet
of paper and to be submitted in the google classroom.
Your mobile phone broke. You believe that you badly need it for your studies,
but your money is insufficient for the repair fee. Where will you get the funds needed?
I believe that I need to look for a job or work to add to my insufficient money.
Also it is also helpful to me to have experience in a job, so that in the future i will not
struggle
with the
job.
Also to
save money and be an independent one.

__

Scoring Rubrics:
 5 points The answer is well-written, organized and the idea is very relevant
to the question and has no grammatical or spelling errors.

4 points The answer is fairly written, and the idea is almost relevant to the
question and has one grammatical or spelling error.

3 points The answer is somewhat relevant to the questions and has two to
three grammatical or spelling errors.

2 points The answer is unclear and has four grammatical or

spelling errors.

1 point The answer does not address the question and has more than five
grammatical or spelling errors.

Sources of finance can be internal or external. An internal source of finance does

not increase the debts of the business-like profit, savings, and sale of unwanted assets
while, an external source of finance is provided by people or institutions outside the
business that creates debt and requires payment

ACTIVITY NO. 2.2

Directions: Respond to the given situation. Write your answers on a separate sheet
of paper and to be submitted in the google classroom.

Directions: Visualize your dream business and write your thoughts/ideas on the
given questions. Write them on a separate sheet of paper.

What is your dream business?

My dream business is a Hotel and Restaurant because I want to share my cooking skills and my main
course in the future. Also, I want to serve other people in the future. I want to communicate with
them especially in our place or island. Many people or tourists visit here and I want them to try
other recipes or menus that they remember if they talk about the Philippines.

How are you going to achieve it?

I'm going to achieve it by finishing my studies and graduating with this course which is BSHM. Also
by my parents and friends who support me in my future dream.

Who do you think will help you?

I think about my friends, family and also myself. In this future dream I will become a professional
and get a job that I want too. Myself because if i'm not dedicated to this course or this profession i
will not be enrolled in this course. By the help of myself I become a professional one.

Scoring Rubrics:
5 points The answer is well-written, organized and the idea is very relevant
to the question and has no grammatical or spelling errors.

4 points The answer is fairly written, and the idea is almost relevant to the
question and has one grammatical or spelling error.

3 points The answer is somewhat relevant to the questions and has two to
three grammatical or spelling errors.

2 points The answer is unclear and has four grammatical or

spelling errors.

1 point The answer does not address the question and has more than five
grammatical or spelling errors.

Like you, businesses also have goals. To achieve them, you need the help of
experts who will perform the different tasks for the realization of the GOALS.

The Corporate Organization Structure

The figure below shows a typical organizational chart.

 Figure 1: Illustration of the Corporate Organization Structure
Adapted from Cayanan (2017)

• The Shareholders elect the Board of Directors (BOD). Each share is equalto one
voting right. They buy shares to earn a profit in a form of dividend. • The Board of
Directorsis the highest position in a corporation. Some of their responsibilities are
providing direction of the company, setting the policies on investments, approving
the company’s strategies, goals, and budgets, appointing, and removing members of
the top management.
• The President supervises the company’s operations and ensures that the strategies
are well executed and planned. He/She also performs all areas of management
such as planning, organizing, staffing, directing, controlling, and evaluating.
• Some ofthe responsibilities of VicePresidentforSalesandMarketingare
formulating business strategies and plans, directing and coordinating sales,
making environmental scanning or research that will allow the company to
increase sales, or identifying new market opportunities, analyzing and assessing
the effectiveness and efficiency of the plans, methods and strategies applied and
establishing a good relationship with customers and distributors.

• Vice President for Administration is responsible for the coordination of the

different departments, providing assistance to the other department by
determining the staff needed and assisting other departments in hiring
employees and in payroll preparation.
• The Vice President for Production makes sure that the production meets the
demand, finds ways to minimize cost in producing a competitive quality product,
maximizes the utilization of the production facilities and solves production issues.
 • The Vice President for Finance makes decisions including planning, acquiring and
utilization of funds. The functions of the Finance Manager are investing decisions,
financing decisions, operating decisions, and declaring dividends.
o Investingdecisions deals with managing the assets of the firms. Some of the
examples of investment decisions are the allocation of funds,
determination of the funds that a firm can put into investment, evaluation,
and selection of capital investment proposals.
o Financing decisions includes making decisions on how to finance the long-
term investments (expansions or acquisition of new land) and working
capital which deals with the day-to-day operations of the company
(payment of rent and utilities, purchase of raw materials). The finance
manager must determine the right capital structure of the company.
Capital structure refers to how much the total asset is financed by the
debt (like loans) or equity (like stocks or bonds).
o Operating decisions deals with working capital management. Working capital
refers to short-term assets and short-term liabilities. Inventory,
receivables, cash, and short-term investments are examples of short term
assets. Accounts payable and short-term investments are examples of
short-term liabilities. Working capital management helps the firm to
ensure that the firm has sufficient resources to finance the day-to-day
operations but, if the management is aggressive, they will take the risk to
use either long-term or short-term sources or even the combination of the
sources. (Later on, this will be discussed in other modules.)
o Declaration of dividends refers to the determination of how much
dividends are to be distributed to the shareholders, frequency of
payments and amounts to be retained by the firm. Dividend is a portion of
profit or payment made by a corporation to its shareholders.
o There are certain conditions before a company can declare dividends: (1) The
company must have enough retained earnings (accumulated profits) to
support cash dividend declaration. (2) They must have enough cash.

Both the treasurer and the controller report to the Vice President for Finance.
The treasurer is responsible in managing the cash and credit, financial planning and
capital expenditures. The controller handles tax payments, financial accounting and
management information systems.

The organizational structure of the firm depends on the size and nature of the
firm. Every department in the organization needs funds to function well. Since finance is
needed in all parts of the organization, the finance manager must communicate with
other department managers to achieve the goals of the company.
 The Role of the Finance Manager

According to Cabrera (2017), “In striving to maximize owners’ orshareholders’

wealth, the financial manager makes decisions involving planning, acquiring, and utilizing
funds which involve a set of risk-return trade-offs.” Those risks or returns would have an
impact on the market value of the firm that will lead to the shareholder’s wealth
maximization or downfall of the firm if no proper decisions were made, but some of the
factors that affect the market’s price of the firm’s shares are beyond the control of the
management. Thus, it is the responsibility of the financial manager to make decisions in
allocating the funds or resources properly, finding the best alternatives for funding the
company, and creating a policy in distributing the dividends of the investors in line with
the organization’s objectives.

Figure 2: The Role of Financial Manager

Activity No. 2.3

Directions: Answer the following questionsin one (1) to two (2) sentences. Write your
answers on a separate sheet of paper.

1. Why do we study financial management? Enumerate its benefits to the

success of a business.

● 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.

Benefits to the success of a business;

● Correctly managed cash flow. ...

● Personal finances. ...
 ● Achieving personal goals. ...
● Clear retirement goals. ...
● A secure retirement income. ...
● Reduced risk. ...
● Insurance. ...
● Succession planning.

2. What is the role of finance in the development of an economy?

Employment Growth- the presence of the financial system in a country will give rise to more
employment opportunities. The money market of the financial system provides working
capital to business owners and manufacturers.

3. How does the financial manager affect the firm’s overall business strategies?
The Goal of the Financial Manager. ... To maximize the firm's value,
the financial manager has to consider both short- and long-term
consequences of the firm's actions. Maximizing profits is one approach,
but it should not be the only one. Such an approach favors making
short-term gains over achieving long-term goals.

Scoring Rubrics:
5 points The answer is well-written, organized and the idea is very relevant
to the question and has no grammatical or spelling errors.

4 points The answer is fairly written, and the idea is almost relevant to the
question and has one grammatical or spelling error.

3 points The answer is somewhat relevant to the questions and has two to
three grammatical or spelling errors.

2 points The answer is unclear and has four grammatical or

spelling errors.

1 point The answer does not address the question and has more than five
grammatical or spelling errors.

Activity No. 2.4

Directions: Answer the following questions in one (1) to two (2) sentences. Write your
answers on a separate sheet of paper.

In this lesson, I learned about the other shareholders and their use to the business or to your business.
How they help you to improve your business.

I learned that: i need to focus or study the difference between them. On how they manage the business
you build.

I did that: so I study and learn. So if I encounter these people or other shareholders in the future job or
business i build i have already an idea how helpful they are and how they take good care of the
business.

I realized that: in this subject I need to learn the difference to handle the different business. Also on
how to manage the business.

Scoring Rubrics:
5 points The answer is well-written, organized and the idea is very relevant
to the question and has no grammatical or spelling errors.

4 points The answer is fairly written, and the idea is almost relevant to the
question and has one grammatical or spelling error.

3 points The answer is somewhat relevant to the questions and has two to
three grammatical or spelling errors.

2 points The answer is unclear and has four grammatical or

spelling errors.

1 point The answer does not address the question and has more than five
grammatical or spelling errors.
What I Can Do
Saving money is a basic
application of the principles of
financial management that
teaches one to budget properly. It
does not matter how much money
you save, what matters is that you
learn to save.