NOTES IN FINANCIAL MANAGEMENT determines if assets are secured and being

used efficiently. It also identifies if the

 Fin Man is about preparing, directing and management act in the best interest of
managing the money activities of a company shareholders and in accordance with
such as buying, selling and using money to its business rules.
best results to maximize wealth or produce best
value for money. Basically, it means applying 3. Financial Decision Making
general management concepts to the cash of the - The key aspects of financial decision-
company.
making include investment, financing and
- Everyone should know fin man (like how to dividends. Investments must be financed in
manage your own money) considered, which will depend on the
 Taking a commercial business as the most source, period of financing, cost of financing
common organizational structure, the key and the net present returns generated. The
objectives of financial management would be to key financing decision is whether profit
create wealth for the business, generate cash and earned by the business should be retained
provide an adequate return on investment instead of distributing to shareholders via
bearing in mind the risks that the business is dividend. Dividend that are too high may
taking, and the resources invested. cause the business to starve of funding to
 Personal Finance deals with an individuals’ reinvest in growing revenues and profits
decisions concerning the spending and investing further.
of income. It includes the answers as to how
much of their earnings should they spend, how SCOPE OF FINANCIAL MANAGEMENT
much should they save, and how should they Financial management has a wide scope. It includes the
invest their savings. following five A’s as stated by Dr. S.C. Saxena:
 Business Finance involves same type of
decisions focusing on how the firms raise money 1. Anticipation – the financial needs of the
from investors, how to invest money to ear a company are being estimated. That is, it finds
profit, and how to reinvest profits in the business out how much finance is required by the
or distribute them back to investors. company.
Ex: before putting up a business, this method is
There are three key elements to the process of necessary.
financial management. These are the financial
planning, financial control and financial decision 2. Acquisition – it collects finance for the
making. company from different sources.
1. Financial Planning Ex: collection/completing your money for your
- Management need to ensure that enough business.
funding is available at the right time to
meet the needs of business. In the short term, 3. Allocation – it uses this collected or acquired
funding may be needed to invest in finance to purchase fixed and current assets for
equipment and stocks, pay employees and the company.
fund sales made on credit. In the medium Ex: allocate the money for each items needed.
and long term, funding may be required for
significant additions to the productive 4. Appropriation – it distributes part of the
capacity of the business or to make company profits among the shareholders,
acquisitions. This links in with the financial debenture holders, and some are kept as
decision-making process and forecasting. reserves.
(such as putting up a new branch) Ex: distribution of profits
5. Assessment – it also means controlling all the
financial activities of the company. It checks if
2. Financial Control the objectives are met. If not, it determines what
- Helps the business ensure that the can be done about it.
objectives are being met. Financial control Ex: continuation of control, for you to change
if there’s need to be changed.
FINANCE AREAS AND CAREER 4. American Academy of Financial
OPPORTUNITIES Management (AAFM) – this administers
certification programs for financial
The following are the major areas in the field of finance:
professionals in a wide range of fields. Their
1. Financial Service – the one concerned with the certifications include the Charter Portfolio
design and delivery of advice and financial Manager, Chartered Asset Manager,
products to individuals, businesses, and Certified Risk Analyst, Certified Cost
governments. Career opportunities: within the Accountant, Certified Credit Analyst, and
areas of banking, personal financial planning, many other programs.
investments, real estate, and insurance. 5. Professional Certifications in Accounting –
include Certified Public Accountant (CPA),
2. Managerial Finance – concerned with the Certified Management Accountant (CMA),
duties of the financial manager working in a Certified Internal Auditor (CIA), and many
business. This encompasses the financial other programs.
planning or budgeting, extending credit to
LEGAL FORM OF BUSINESS
customers or other credit administration
function, investment evaluation and analysis,  Sole Proprietorship – owned by one person
and obtaining of funds for a firm. Managerial who’s legally responsible for the debts and taxes
finance is the management of the firm’s funds of the business.
within the firm. - Most common form of business

Career opportunities: financial analyst, capital Advantages:

budgeting analyst, and cash manager. - Simple, and the owner has freedom to make
all decisions and enjoy all the profit
The recent global financial crisis and subsequent - Minimal legal restrictions and government
responses by governmental regulators, increased
regulation.
global competition, and rapid technological
- It can be discontinued with great ease and
change also increase the importance and
tax rate is relatively at the minimum.
complexity of the financial manager’s duties.
- Owner has unlimited liability
Increasing globalization has increased demand
- Owner has limited availability of outside
for financial experts who can manage cash
financing.
flows in different currencies and protect against
the risks that naturally arise from international
transactions.  Partnership – owned by two or more people
and operate on an agreement called Article of
The following are the professional certifications Co-Partnership.
in finance: - They are legally responsible for the debts
and taxes of business.
1. Chartered Financial Analyst (CFA) – a - Partners must agree upon amount each
graduate-level course of study focused partner will contribute to the business,
largely on the investments side of finance. percentage of ownership of each partner,
This is offered by the CFA institute. share of profits of each partner, duties each
2. Certified Treasury Professional (CTP) – this partner will perform, and the responsibility
program requires students to pass a single each partner has for the partnership’s debts.
exam that is focused on the knowledge and
Typical partnership includes those:
skills needed for those working in a
corporate treasury department. - Medical and Dental Practices
3. Certified Financial Planner (CFP) – students - Accounting
should pass a 10-hpur exam covering a wide - Architectural and Law firms
range of topics related to personal financial
planning in order to obtain CFP status.
There is ease of organization compared to corporation. - This is based on the fact that our resources
In partnership there are: are scarce and need to deliberately and
systematically allocated.
- Combined talents
 Finance – study of financial allocation and
- More available brain power
answers questions like where to put your
- Managerial skill money and why.
- In terms of available financing, it can raise - Form of applied economics
more capital for the firm than a sole - Firms operate within the economy and they
proprietorship.
must be aware of the economic principles,
- Unlimited liability for general partners and changes in economic activity, and
limited life for the firm economic policy.
- Partnership is dissolved when a partner - Marginal Cost-Benefit Analysis – primary
withdraws or dies, and it is difficult to economic principle that is being used in
liquidate or transfer partnership. managerial finance.
- Two or more heads may be better for the - This principle reminds the decision makers
firm. to choose and take actions only when the
firm will have a net advantage, which means
 Corporation – entity created by law. that the added benefits exceed the added
- Have the legal powers of an individual in costs.
that it can sue and be sued.  Accounting – accountants generally use the
- Make and be party to contracts accrual method while in finance, the emphasis
- Acquire property in its own name. is on cash flows.
- Publicly or privately-owned business entity - Accountants recognize revenues at the point
that separates form its owner and has a legal of sale and expenses when incurred
right to own property and do business in its regardless on when cash will flow into or
own name. out of the firm.
- Stockholders are not responsible for the - Financial manager focuses on the actual
debts or taxes of business. inflows and outflows of cash, recognizing
- Governed by BOD in case of profit revenues when cash is collected and
organization or BOT in case of non-profit expenses when actually paid.
org.
GOALS OF THE FIRM AND THE ROLE OF THE
Advantages: FINANCE MANAGER
- Limited liability of stockholders and Decision rule for managers:
perpetual life.
- There is ease of transferring ownership, Only take actions that are expected to increase the share
price.
expansion obtaining resources of financing.
- Relatively bound more government This rule means that whenever the financial manager
regulations/restrictions and maybe expensive decides or choose between or among alternatives, after
to organize. assessing the risks and the returns, only actions that
- All forms of business entities are considered would increase share price shall be accepted.
separate entities. However, the corporation Otherwise, the alternative/s shall be rejected.
is the only form of business that is a separate
legal entity. The goal of a firm, and therefore of all managers, is to
maximize shareholders’ wealth. This can be measured
FINANCE, ECONOMICS AND ACCOUNTING by share price. An increasing price per share of common
stock relative to the stock market as a whole indicates
 Economics – study of choice achievement of this goal.
- Social science that deals with individual or
collective economic activities such as Given the following opportunities, which investment is
production, consumption, distribution and preferred?
transfer of money and wealth.
 Earnings per Share Year He also oversees a firm’s pension plans and manages
Investm Year Year Year Total critical risks related to movements in foreign currency
ent 1 2 3 values, interest rates and commodity prices. The
A P14.0 P10.0 P4.00 P28.00 treasurer in a mature firm must make decisions with
0 0 respect to handling financial planning, acquisition of
B 6.00 10.00 14.00 30.00 fixed assets, obtaining funds to finance fixed assets,
managing working capital needs, managing the
pension fund, managing foreign exchange, and
Based on the information provided, the choice is not distribution of corporate earnings to owners.
obvious. Profit maximization is not consistent with
wealth maximization. It may not lead to the highest The two key activities that the financial manager does as
possible share price due to the following reasons: related to a firm’s balance sheet are the following.

1. Timing is important. The receipt of funds 1. Investment Decisions

sooner rather than later is preferred. - The finance manager defines the most
- Project B is expected to provide the higher efficient level and the best structure of
overall increase in earnings, thus, is the assets.
more profitable project. - Investment decisions deals with the items
- But, since the goal of the firm is to that appear on the asset section of the
maximize value, and therefore, timing must balance sheet.
be considered to determine which project is 2. Financing Decisions
superior. - The finance manager determines and
- Profit maximization may lead to value maintains the proper combination of
maximization, but it is not an absolute case. short- and long-term financing.
2. Profits do not necessarily result in cash flows - Also, he raises the needed financing in the
available to stockholders. In finance, cash is most economical manner.
king. - Financing decisions generally refers to the
- It is not unusual for a firm to be profitable items that appear on the liability and equity
yet experience a cash crunch. section of the balance sheet.
- They might have so much profit but less do
CORPORATE GOVERNANCE, ETHICS AND
not have enough cash to continuously run
AGENCY
the business.
- The most common cause is when expenses  Corporate Governance
have a shorter due date than expected - A system of organizational control that
revenue. defines and establishes the responsibility
- In such cases, the firm must arrange short and accountability of the major participants
term financing to meet its debt obligations in an organization.
before the revenue arrives. - Shareholders, board of directors, managers
3. Profit Maximization fails to account for risk. and officers of the corporations and other
Risk is the chance that actual outcomes may stakeholders are the major participants
differ from expected outcomes. included here.
- Financial managers must consider both risk - More detailed responsibilities would be
and return because of their inverse effect on established within each part of the
the share price of the firm. organizational chart.
- Increased risk may decrease the share price,  Business Ethics
while increased return is likely to increase - Are the standards of conduct or moral
the share price. judgment that apply to persons engaged in
Financial managers administer the financial affairs of all industry or commerce.
types of businesses such as private and public, large - Violations of these standards in finance
and small, profit-seeking and not-for-profit. Typically, include, but not limited to misstated
he handles a firm’s cash, investing surplus funds when financial statements, misleading financial
available and securing outside financing when needed. forecasts or projections, fraud, bribery,
 kickbacks, insider trading, excessive 2. Structured expenditures thru compensation
executive compensation and options plans.
backdating. - This maybe the most popular way to deal
- Bad publicity generally results to negative with the agency problem but this is the most
impacts on a firm. expensive one.
- Ethics programs seek to reduce lawsuits and - It could either be incentive or performance
judgment costs, uphold and preserve a plans.
positive corporate image, build trust and - Incentive plans tie management
confidence of the stockholders, and to gain performance to share price
the loyalty and respect of all stakeholders. - When the managers take actions that
- The expected result of such program is to maximize stock, they could be given stock
positively affect the firm’s share price. options giving them the right to purchase
- Shareholders are the owners of a stock at a set price.
corporation, and they purchase stocks - This incentive plan may not be favorable
because they want to earn a good return on because of market behavior that has a
their investment without undue risk substantial impact on share price and is
exposure. beyond the control that’s why performance
- In most cases, shareholders elect directors, plans are more popular today.
who the hire managers to run the corporation - In this plan, compensation is based on
on a day-to-day basis. performance measures, such as earnings
- Because managers are supposed to be per share and/or its growth, or other
working on behalf of shareholders, they return ratios.
should pursue policies that enhance - Managers may receive performance shares
shareholder value. and/or cash bonuses when the set
- Also, to achieve this goal, the financial performance goals are attained.
manager would take only those actions that 3. Market Forces
were expected to make a major contribution - Such as shareholder crusading from large
to the firm’s overall profits. institutional investors.
- When managers deviate from the goal of - Institutional investors hold large quantities
maximization of shareholder wealth by of shares in many of the corporations in their
putting their personal goals above the goals portfolio
of shareholders, this results to agency - The power of institutional investors far
problems and issues. exceeds the voting power of individual
- This kind of problems increases agency investors
costs. - Managers of these institutions should be
- Agency costs are the costs borne by active in the monitoring of management and
shareholders due to the occurrence and vote their shares for the benefit of the
avoidance of agency problems. shareholders.
- Both cases represent a reduction in the - This can lessen or avoid the agency
shareholders’ wealth. problem because these.
- It pressures on management to take actions
The agency problem and the associated agency costs can
that maximize shareholder wealth.
be reduced with the following:
- They may use their voting powers to elect
1. Properly constructed and implemented corporate new directors who are aligned with their
governance structure. objectives and will act to replace poorly or
- This should be designed to institute a non-performing managers.
system of checks and balances to reduce 4. Threat of hostile takeovers
the ability and incentives of management to - It occurs when a company or group not
deviate from the goal of shareholder wealth supported by existing management attempts
maximization. to acquire the firm.
- Because the acquirer looks for companies
that are poorly managed and undervalued,
this threat provokes managers to act in the
best welfares of the firm’s owners.