Business Finance and Income Taxation e.

Approving the information and other

Module 1 – Introduction to Financial disclosures reported in the financial statements
Management 3. President (Chief Executive Officer): The
roles of a president in a corporation may vary
What is Financial Management? from one company to another. Among the
Finance is always of great importance, be responsibilities of a president are the following:
it in a business or in one’s everyday life. It is a. Approving the information and other
important to manage risks in business, it is disclosures reported in the financial statements.
equally important to manage risks in life as well. Overseeing the operations of a company and
Risk is nothing but an uncertain event that might ensuring that the strategies as approved by the
damage your assets and when it is financial risks, board are implemented as planned.
it creates loss of Finance. Some books define b. Performing all areas of management: planning,
Finance as the science and art of managing organizing, staffing, directing and controlling.
money. c. Representing the company in professional,
Financial Management deals with that social, and civic activities.
decisions that are supposed to maximize the 4. VP for Marketing: The following are among
value of shareholder’s wealth. These decisions the responsibilities:
will ultimately affect the markets perception of a. Formulating marketing strategies and plans.
the company and influence the share price. The Directing and coordinating company sales.
goal of Financial Management is to maximize the b. Performing market and competitor analysis.
value of shares of stocks. Managers of a c. Analyzing and evaluating the effectiveness and
corporation are responsible for making the cost of marketing methods applied.
decisions for the company that would lead d. Conducting or directing research that will allow
towards shareholder’s wealth maximization. the company identify new marketing
Organizational structure of the company is opportunities, e.g. variants of the existing
important especially in the financial aspect of the products/services already offered in the market.
business and the particular set of people, each e. Promoting good relationships with customers
play a role in the decision making of the and distributors.
company. 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
From the diagram presented, emphasized suppliers.
that each line is working for the interest of the 6. VP for Administration: The following are
person on the line above them. Since the among the responsibilities:
managers of the company are making decisions a. Coordinating the functions of administration,
for the interest of the board of directors and the finance, and marketing departments.
board of directors do the same for the interest of b. Assisting other departments in hiring
the shareholders, it follows the goal of each employees.
individual in a corporate organization should have c. Providing assistance in payroll preparation,
an objective of shareholders wealth payment of vendors, and collection of
maximization. receivables.
d. Determining the location and the maximum
The Roles of Each Person Identified amount of office space needed by the company.
1. Shareholders - The shareholders elect the Identifying means, processes, or systems that will
Board of Directors (BOD). Each share held is minimize the operating costs of the company.
equal to one voting right. Since the shareholders The role of the VP for Finance/Financial
elect the BOD, their responsibility is to carry out Manager is to determine the appropriate capital
the objectives of the shareholders. Otherwise, structure of the company. Capital structure refers
they would not be elected in that position. to how much of your total assets financed by debt
2. Board of Directors: The board of directors is and how much is financed by equity. To be able
the highest policy making body in a corporation. to acquire assets, our funds must have come
The board’s primary responsibility is to ensure somewhere. If it has bought using cash from our
that the corporation is operating to serve the best pockets, it has financed by equity. On the other
interest of the stockholders. The following are hand, if we used money from our borrowings, the
among the responsibilities of the board of asset bought has financed by debt.
directors:
a. Setting policies on investments, capital What are the functions of Financial
structure and dividend policies. Managers?
b. Approving company’s strategies, goals and 1. Financing decisions- include making
budgets. decisions as to how to finance long-term
c. Appointing and removing members of the top investments and working capital-which deals with
management including the president. the day-to-day operations of the company.
d. Determining top management’s compensation.
2. Investing Decisions- To minimize the Budgeting vs. Forecasting
probability of failure, long-term investments have While frequently used together, budgets and
supported by a capital budgeting analysis. forecasts are distinctly different fiscal
3. Operating Decisions– deal with the daily management tools.
operations of the company especially on how to  Budgeting: Sets the financial targets and
finance working capital accounts such as goals that management wants to achieve
accounts receivable and inventories. for a given period.
4. Dividend Policies – Dividend is a part of  Financial Forecasting: Estimates what will
profits that are available for distribution, to equity actually happen and acts as a tracking
shareholders. The Finance manager must report to see if the company is on pace to
meet its budget.
The financial system links the savers and
the users of funds. Savings can come from Risk Management
households, individuals, companies, government Financial risk management is the process
agencies, or any other entity whose cash inflows of identifying, analyzing, and reducing threats to
are greater than their cash outflows. The an organization's money and assets. Its main goal
financial system through financial intermediaries is to balance potential dangers against possible
provides a mechanism by which these savings rewards. This protects a business from losing
can be channeled to users of funds, borrowers, money while allowing it to grow safely.
and investors. Some of the financial instruments Types of Financial Risks
issued by users of funds such as the shares of  Market Risk: Money lost from changes in
stocks and corporate bonds of publicly listed the overall market, such as stock prices or
companies and the debt securities issued by the interest rates.
National Government has traded.  Credit Risk: The chance that a borrower
or client will not pay back their debts.
Financial Forecasting  Liquidity Risk: Not having enough quick
Financial forecasting is the process of cash to pay bills when they are due.
predicting future business performance by  Operational Risk: Losses caused by
analyzing historical data, market trends, and human errors, computer system failures,
strategic assumptions. It empowers organizations or poor internal processes.
to anticipate revenue, optimize cash flow, and The 4 Main Risk Strategies
manage risks. It serves as a vital tool for steering  Avoidance: Choosing not to do a risky
budgets, securing investments, and aligning activity to prevent any potential loss.
stakeholders.  Reduction (Mitigation): Taking steps to
A robust financial forecast prevents lower the impact or chance of a risk
operational bottlenecks and keeps your business happening.
proactive rather than reactive. Here is how the  Transference: Moving the risk to another
process is generally broken down: party, usually by buying insurance or
Core Types of Forecasts outsourcing.
 Revenue Forecasting: Predicts future sales  Acceptance: Keeping and accepting the
using pipelines, historical performance, risk, usually because the cost of fixing it is
and customer behavior. higher than the potential loss itself.
 Expense Forecasting: Estimates Common Risk Tools
operational and capital expenditures while  Hedging: Using financial tools (like
factoring in inflation and supplier options or swaps) to balance out potential
contracts. losses from unexpected price changes.
 Cash Flow Forecasting: Projects the exact  Diversification: Spreading investments
timing of cash inflows and outflows to across many different assets or markets.
ensure liquidity and avoid insolvency. Think of it as not putting all your eggs in
 Profit & Loss (P&L) Forecasting: Combines one basket.
revenue and expense forecasts to analyze  Stress Testing: Testing how a company's
projected net income. finances will perform under extreme or
 Balance Sheet Forecasting: Projects future bad conditions.
assets, liabilities, and equity for high-level Resource Acquisition
financial stability. Resource acquisition is the process of securing
Common Forecasting Techniques the funds and assets a company needs to operate
 Straight-Line Method: Assumes historical and grow. It involves identifying capital needs and
growth rates will continue at a constant choosing the best way to pay for them, such as
pace. Best utilized in stable markets. borrowing money or selling ownership shares.
 Moving Average: Smooths out short-term 1. Main Ways to Get Funds
fluctuations by averaging data over a set Companies use three primary routes to acquire
period (e.g., a rolling 3-month average). financial resources:
 Linear Regression: Identifies statistical  Debt Capital: Borrowing money through
relationships between variables (e.g., how bank loans or bonds. The company must
a specific increase in marketing spend pay back the money with interest (a fee
affects monthly sales). for borrowing).
 Top-Down Forecasting: Estimates your  Equity Capital: Selling pieces of the
total addressable market (TAM) and company (stock) to investors. Investors
projects the market share you can provide cash in exchange for partial
realistically capture. Often used for ownership.
startups lacking historical data.
  Internal Funds: Using profits that the and Social Security System (SSS), unit investment
company already made and kept in the trust fund (UITF), investment banks, and credit
business. unions, among others.
2. The Acquisition Strategy Process
Smart financial managers follow these steps to B. Financial Instruments - is a real or a virtual
get resources: document representing a legal agreement
1. Plan: Figure out exactly how much money involving some sort of monetary value. These can
the project needs. be debt securities like corporate bonds or equity
2. Evaluate: Compare the costs of borrowing like shares of stock. When a financial instrument
versus selling shares. issued, it gives rise to a financial asset on
3. Select: Choose the funding option that one hand and a financial liability or equity
costs the least and brings the most value. instrument on the other.
4. Monitor: Track the budget to ensure
funds are spent wisely. i. A Financial Asset is any asset that is:
3. How Companies Acquire Other Businesses  Cash
In a broader sense, "acquisition" also refers to  An equity instrument of another entity
one company buying another. This helps a  A contractual right to exchange
business quickly gain new equipment, instruments with another entity under
technology, or market share. These deals can be conditions that are potentially favorable.
paid for with cash, stock, or a mix of both.  Examples: Notes Receivable, Loans
Receivable, Investment in Stocks,
Investment in Bonds

ii. A Financial Liability is any liability that is

Difference between Financial Instruments, contractual obligation:
Financial Institutions, and Financial Markets  To deliver cash or other financial
instrument to another entity.
A. Financial Institutions are companies in the  To exchange financial instruments with
financial sector that provide a broad range of another entity under conditions that are
business and services including banking, potentially unfavorable.
insurance, and investment management.  Examples: Notes Payables, Loans Payable,
Bonds Payable
Examples:
i. Commercial Banks - Individuals deposit funds iii. An Equity Instrument is any contract that
at commercial banks, which use the deposited evidences a residual interest in the assets of an
funds to provide commercial loans to firms and entity after deducting all the liabilities.
personal loans to individuals, and purchase debt  Examples: Ordinary Share Capital,
securities issued by firms or government Preference Share Capital
agencies.
iv. Debt Instruments generally have fixed
ii. Insurance Companies - Individuals purchase returns due to fixed interest rates. Examples of
insurance (life, property and casualty, and debt instruments are as follows:
health) protection with insurance premiums.  Treasury Bonds and Treasury Bills
The insurance companies pool these payments issued by the Philippine government.
and invest the proceeds in various securities until These bonds and bills have usually low
the funds needed to pay off claims by interest rates and have very low risk of
policyholders. Because they often own large default since the government assures that
blocks of a firm’s stocks or bonds, they these has been paid.
frequently attempt to influence the
management of the firm to improve the firm’s  Corporate Bonds issued by publicly
performance, and ultimately, the performance listed companies. These bonds usually
of the securities they own. have higher interest rates than Treasury
Bonds. However, these bonds are not risk
iii. Mutual Funds - Mutual funds owned by free. If the company issued the bonds
investment companies that enable small goes bankrupt, the holder of the bonds will
investors to enjoy the benefits of investing in a no longer receive any return from their
diversified portfolio of securities purchased on investment and even their principal
their behalf by professional investment investment has wiped out.
managers. When mutual funds use money from
investors to invest in newly issued debt or v. Equity Instruments generally have varied
equity securities, they finance new investment by returns based on the performance of the issuing
firms. Conversely, when they invest in debt or company. Returns from equity instruments come
equity securities already held by investors, they from either dividends or stock price appreciation.
are transferring ownership of the securities The following are types of equity instruments:
among investors.
 Preferred Stock has priority over a
iv. Pension Funds - Financial institutions that common stock in terms of claims over the
receive payments from employees and invest assets of a company This means that if a
the proceeds on their behalf. Other financial company has liquidated and its assets
institutions include pension funds like must be distributed, no asset will be
Government Service Insurance System (GSIS) distributed to common stockholders unless
 all the claims of the preferred stockholders investment if the price goes up to PHP2, 600 per
has given. Moreover, preferred share or it goes down to PHP2, 300 per share?
stockholders have also priority over Explanation:
common stockholders in cash dividend An increase of the share price to PHP2,
declaration. Dividends to preferred 600 per share means that people are willing to
stockholders are usually in a fixed rate. No buy the shares for that amount. If Mr. Y were to
cash dividends given to common sell his shares at this point, it will result to a profit
stockholders unless all the dividends due of PHP90 per share or PHP900 on their whole
to preferred stockholder paid first. investment. Hence, the value of their investment
increased from PHP25, 100 to PHP26, 000.
 Holder of Common Stock on the other Therefore, there is an increase in shareholder’s
hand are the real owners of the company. wealth.
If the company’s growth is encouraging, On the other hand, a decrease in the share
the common stockholders will benefit on price to PHP2, 300 per share means that people
the growth. Moreover, during a profitable are only willing to buy shares for PHP2, 300. If Mr.
period for which a company may decide to Y were to sell his investment at this point, they
declare higher dividends preferred stock will receive PHP23, 000 which would result to a
will receive a fixed dividend rate while loss of PHP2, 100. The decrease in value of his
common stockholders receive all the investment leads to a decrease in shareholder’s
excess. wealth.
Scenario: ABC Company bought 10 shares of
C. Financial Market – refers to a marketplace, Jollibee Corporation at PHP2, 000 each on January
where creation and trading of financial assets, 9, 2012. This brings his investments to PHP20,
such as shares, debentures, bonds, derivatives, 000. What happens to the value of his investment
currencies, etc. take place. if the price goes up to PHP2, 520 per share or it
Financial Markets are classified as: goes down to PHP1, 500 per share?

 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 on 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 was purchased. The sale of
previously owned securities takes place in
secondary markets.
 The Philippines 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 are 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