ACC 222 – Financial Management – Hand-out 1.

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Topic: Introduction to Financial Management
Instructor: Marj Jules Lorain V. Juntilla, CPA
REV: 0

1.1 NATURE, PURPOSE, AND SCOPE OF FINANCIAL MANAGEMENT

Financial Management

• Also called managerial finance, corporate finance, or business finance. It

is a decision-making process concerned with planning, acquiring and utilizing
funds, in a manner that achieves the firm’s desired goals.
• It is the process for and the analysis of making financial decisions in the
business context.
• It is part of a larger discipline called Finance which is the body of facts,
principles, and theories relating to raising and using money by individuals,
businesses, and governments.
• The goal of financial management is “to maximize the current value per share
of the existing stock or ownership in a business firm”.

Scope of Financial Management

• Financial management is primarily concerned with acquisition, financing, and

management of assets of business concern in order to maximize the wealth of
the firm for its owners.
• In the traditional view of Financial Management, the financial manager will
perform:
o Procurement of short-term and long-term funds from financial
institutions;
o Mobilization of funds through financial instruments such as equity
shares, preference shares, debentures, bonds, notes, others; and
o 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 the modern view of Financial Management, the role of financial managers
which is initially confined to acquisition of funds, expanded to judicious
and efficient use of funds available to the firm, keeping in view the
objective of the firm, and expectations of the providers of the funds.
Moreover, the financial manager is also expected to analyze the business
firm and determine the total funds requirements of the firm, the assets or
sources to be acquired, the best pattern of financing the assets and how
best to satisfy the investors’ expected return on their investment.

Significance of Financial Management

• The importance of financial management is known for the following aspects:

o Broad applicability;
o Reduction of chances of failure; and
o Measurement of return on investment.

Exercise 1.1.1: Essay

Directions: Read the article in this link:
https://business.inquirer.net/311808/shared-prosperity-the-business-groups-response-
to-inequality-and-the-pandemic, then answer the following questions in a 1 whole sheet
of yellow paper. Answer should not be less than fifty (50) words for each question.
(30 points)
1. Do you agree that the ultimate solution to poverty is jobs?
2. With the six (6) commitments to stakeholders, what commitment do you think is
the most important?
3. What is the role of financial management/financial managers in the situation?
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Source: Financial Management: Principles and Applications – Cabrera, M. E., Cabrera, G. A, & Cabrera, B. A. (2021-2022 Edition)
 ACC 222 – Financial Management – Hand-out 1.0
Topic: Introduction to Financial Management
Instructor: Marj Jules Lorain V. Juntilla, CPA
REV: 0

1.2 MAJOR TYPES OF DECISIONS OF A FINANCE MANAGER

Types of Financial Decisions

• The three (3) financial decisions that the Finance Manager of a modern
business firm will be involved in are:
1. Investment Decisions
o Investment decisions are those which determine how scarce or limited
resources in terms of funds of the business firms are committed to
projects.
o Generally, the firm should select only those capital investment
proposals whose net present value is positive, the rate of return
exceeds the marginal cost of capital, and those that will bring
profitability to the firm.
2. Financing Decisions
o Financing decisions assert that the mix of debt and equity chosen to
finance investments should maximize the value of investments made.
o This decision should consider the cost of capital available for each
form and the risks attached to it.
3. Dividend Decisions
o Dividend decision is concerned with 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 firms.
o An optimal dividend distribution policy will lead to maximization of
shareholders’ wealth.

1.3 THE PRIMARY FINANCIAL OBJECTIVES OF A BUSINESS FIRM AND THE RESPONSIBILITIES OF
FINANCIAL MANAGER IN ACHIEVING ITS OBJECTIVES
Strategic Financial Management
• Strategic planning is long-range in scope and has its focus on the
organization as a whole.
• Strategic financial planning involves financial planning, financial
forecasting, provision of finance and formulation of financial policies which
should lead the firm’s survival and success. It is needed to counter the
uncertain and imperfect market conditions, and highly competitive business
environment.
• A company’s strategic or business plan reflects how it plans to achieve its
goals and objectives. A plan’s success depends on an effective analysis of
market demand and supply.

Financial Objectives of a Business Organization

- Short-Term and Medium-Term Objectives

o Maximization of return on capital employed or return on investment;
o Growth in earnings per share and price/earnings ratio through
maximization of net income or profit and adoption of optimum level of
leverage;
o Minimization of finance charges; and
o Efficient procurement and utilization of short-term, medium-term, and
long-term funds.
- Long-Term Objectives
o Growth in the market value of the equity shares through maximization
of the firm’s market share and sustained growth in dividend to
shareholders; and
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Source: Financial Management: Principles and Applications – Cabrera, M. E., Cabrera, G. A, & Cabrera, B. A. (2021-2022 Edition)
 ACC 222 – Financial Management – Hand-out 1.0
Topic: Introduction to Financial Management
Instructor: Marj Jules Lorain V. Juntilla, CPA
REV: 0

o Survival and sustained growth of the firm.

- There are competing viewpoints as to which perspective must be followed in
achieving the objectives. With all strong arguments considered, financial
practitioners and academics now tend to believe that the owner’s perspective
is the primary objective while the stakeholders’ perspective is a secondary
consideration. The competing viewpoints concerning the primary financial
objectives are:
o The owner’s perspective which holds the only appropriate goal is to
maximize shareholder or owner’s wealth; and
o The stakeholders’ perspective which emphasizes social responsibility
over profitability.
- Adam Smith, an 18th century economist was one of the first and well know
proponent of the owner’s perspective viewpoint. He argued that, in
capitalism, an individual pursuing his own interest tends also to promote
the good of his community.
- The wealth maximization goal is advocated on the following grounds:
o It considers the risk and time value of money;
o It considers all future cash flows, dividends and earnings per share;
o It suggests the regular and consistent dividend payments to the
shareholders;
o The financial decisions are taken with a view to improve the capital
appreciation of the share price; and
o Maximization of the firm’s value is reflected in the market price of
share since it depends on shareholders’ expectations regarding
profitability, long-run prospects, timing difference of returns, and
risk distributions of returns of the firm.

Responsibilities to Achieve the Financial Objectives

1. Investing
▪ This function deals with managing the assets. The finance manager is
responsible for determining how scarce resources or funds are committed
to projects.
▪ The asset mix refers to the number of pesos invested in current and fixed
assets.
▪ The financial manager should aim to invest in assets only when they are
expected to earn a return greater than the hurdle rate (minimum acceptable
return).
2. Financing
▪ This responsibility ensures that the mix of debt and equity chosen to
finance investments should maximize the value of investments made.
3. Operating
▪ This involves working capital management. The term working capital refers
to a firm’s short-term asset and its short-term liabilities.
▪ This means that managing the firm’s working capital is a day-to-day
responsibility that ensures that the firm has sufficient resources to
continue its operations and avoid costly interruptions.
▪ This also involves activities related to the receipts and disbursements
of cash.
1.4 THE ROLE OF FINANCIAL MANAGER IN ACHIEVING THE PRIMARY GOAL OF THE FIRM

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Source: Financial Management: Principles and Applications – Cabrera, M. E., Cabrera, G. A, & Cabrera, B. A. (2021-2022 Edition)
 ACC 222 – Financial Management – Hand-out 1.0
Topic: Introduction to Financial Management
Instructor: Marj Jules Lorain V. Juntilla, CPA
REV: 0

Figure 1.1. The Financial Manager’s Role in Achieving the Goals of the Firm

The Finance Organization

• The financial management function is usually associated with a top officer

of the firm such as a Vice President of Finance or some other Chief Financial
Officer (CFO). This personnel coordinates the activities of the Treasurer
and Controller. The Controller’s Office handles costs and financial
accounting, tax payments, and management information systems. The
Treasurer’s Office is responsible for managing the firm’s cash and credit,
its financial planning, and its capital expenditures.

Corporate Governance

• This is the process of monitoring managers and aligning their incentives

with shareholders goals. Managers handle day-to-day operations which are
mostly unknown to investors. This lack of supervision demonstrates the need
for monitors.
• The monitors inside the company are the board of directors (BOD). The BOD
hires the CEO who evaluates the management’s performance.
• The monitors outside the firm are the auditors, analysts, investment banks,
credit rating agencies, and government.

- END OF HAND-OUT -

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Source: Financial Management: Principles and Applications – Cabrera, M. E., Cabrera, G. A, & Cabrera, B. A. (2021-2022 Edition)