BM 213 – FINANCIAL MANAGEMENT

CHAPTER I
FINANCIAL MANAGEMENT: AN OVERVIEW

Learning Objectives

At the end of this discussion, the student must have:

1. Understood the scope and functions of financial management

2. Explain the objectives of financial management;
3. Understand the role of a financial manager; and
4. Described how the Philippine Financial systems works

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FINANCIAL MANAGEMENT

Financial Management means planning, organizing, directing and controlling

the financial activities such as procurement and utilization of funds of the company.
It means applying general management principles to financial resources of the
enterprise. It denotes the effective acquisition and use of money. The financial
manager must determine the best way to raise money. It is important that the
money should be used effectively in realizing the goals of the business.

Scope of Financial Management

The scope of the financial management according to Dr. S. C. Saxena

includes the following (five) 5As:

Anticipation. Financial management estimates the financial needs of the

company. That is, it finds out how much finance is required by the company.
Acquisition. It collects finance for the company from different sources.
Allocation. It uses this collected finance to purchase fixed and current
assets for the company.
Appropriation. It divides the company’s profits among the shareholders. It
keeps a part of the profits as reserves.
Assessment. It also controls all the financial activities of the company.
Financial management is the most important functional area of management.

Its scope applies to the following:

Investment Decision. This involves the evaluation of risk, measurement of cost of

capital and estimation of expected benefits from a project. Capital budgeting is one
major component of investment decision. It is concerned with the allocation of
capital and commitment of funds in permanent assets which would yield earnings in
the future. Capital budgeting is a required managerial tool. One duty of a financial
manager is to choose investments with satisfactory cash flows and rates of return.
Therefore, a financial manager must be able to decide whether an investment is
worth undertaking and be able to choose intelligently between or among
alternatives. To do this, a sound procedure to evaluate, compare and select projects
is needed.

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Financing Decision. This is concerned with the financing mix or financial structure
of the cooperative. The raising of funds requires decisions regarding the methods
and sources of finance, relative proportion and choice between alternative sources as
well as time of floatation of securities. In order to meet its investment needs, An
enterprise can raise funds from various sources.

Dividend Decision. In order to achieve the wealth maximization objective, an

appropriate dividend policy is to decide whether to distribute all the profits in the
form of dividends or to distribute a part of the profits and retain the balance.

Working Capital Decision. This is concerned with making decisions related to the
investment in current assets and current liabilities. Working capital is the excess of
current assets over current liabilities. It shows the strength of the business in a
short period of time. Current assets are convertible into cash within one year or less.
Similarly, current liabilities are those which are due for payment within an accounting
year.

Functions of Financial Management

Financial management functions in the following areas:

1. Estimation of capital requirements . The capital requirements of a firm
must be estimated in a way that it will provide adequate capital for its
operations that will result to increases in its earning capacity.
2. Determination of capital composition . Once the estimation has been
made, the capital structure has to be decided. Capital structure represents
the proportionate relationship between debt and equity. This will depend
upon the proportion of equity capital a company is estimating with that of its
debt that includes short-term and long-term debt.
3. Choice of sources of funds. For additional funds needed, a company has
many choices such as issuance of shares of stocks, loans from banks and
financial institutions and issuance of bonds.
4. Investment of funds. The financial manager has to decide to allocate
funds into profitable ventures so that there is safety of investment. The
decision to invest could be based on the amount of excess funds over the
needs of the business. Any excess fund when properly invested could
provide additional income to the company.
5. Disposal of surplus. This can be through dividend declaration or using the

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 retained earnings for expansion, innovation and diversification of the
company.
6. Management of cash. The financial manager has to make decision as
regards cash management. This ensures that the firm has sufficient cash
during peak times for purchase and for other purposes. It helps to invest
surplus cash for short or long term periods to keep idle funds fully
maximized.
7. Financial controls. The financial manager has to exercise control over
finances. This can be done through many techniques like ratio analysis,
financial forecasting, cost and profit control, etc.

Objectives of Financial Management

1. Financial Planning generally refers to the allocation of financial resources.

In accordance with the company’s financial objectives and standards, projects
or activities and operations are carefully planned, evaluated based on certain
criteria and subsequently ranked for the allocation of financial resources.
2. Financing involves the procurement of funds. Procurement function requires
awareness of different sources of funds with varying requirements and
conditions.
3. Investment entails the effective and efficient utilization of financial
resources. Financial resources must be utilized in a manner that minimizes
company costs arising from wastage and loss of opportunities due to delays
in operations and idle and nonproductive resources. It requires adoption of
effective control measures.
Efficient utilization of financial resources refers to their economical
use. In other words, one sees to it that financial resources are actually being
used for what they were intended. Inefficiency in the usage of resources
maybe caused by extravagance in the choice of property or equipment,
unnecessary expenditures, tardiness of personnel and non-productive
resources.
Effective utilization of resources refers to their use towards the
attainment of predetermined objectives. This requires a periodic review of
operations to determine whether they are in accordance with plans and
whether the plans, as prepared, will enable the company to attain short term
and long term objectives considering the changes brought about by economic

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 development.

Financial Manager
The financial manager is a member of the firm’s top management with
expertise in the management of financial assets. He participates in the corporate
strategic planning, makes financial decisions to promote the successful operations
and growth of the firm. He is an adviser of the firm regarding advantages and costs
in the prevailing market using his expertise because of his wide imagination and
proficiency in costing. He can project to a certain degree of accuracy the
organization’s capital structure based on available statistics. He supervises the
efficient utilization of the firm’s assets in order to achieve adequate profit as
management goal.

The Role of the Financial Manager

1. Analyze and plan the company’s performance. Analyzing and planning
company’s operations occupy much of the financial manager’s time.
Company progress depends on the management’s knowing where the
company now and where in the future it wants the company to be. The
financial manager gives opinion on the consequences of the different
alternative courses of action.
Assessing the financial strengths and weaknesses of the company
requires the financial manager to work with people from accounting,
marketing and production. Company accountants develop the income
statement showing sales revenues and expenses for a period of time; they
also prepare the balance sheet which is a listing of company assets, liabilities
and the owner’s equity. Based on these financial statements and projected
versions of these statements, the financial manager assesses company
strengths and weaknesses, both currently and in the future to a large degree,
the plans of the production department and sales forecasts of the marketing
department.

2. Anticipate the company’s financial needs. The need to anticipate future

events is one of the roles of the financial manager. Forecasting company

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 expenditures for assets and their required financing avoids surprises and the
problems these surprises create.
 Being involved in the planning process of other departments and top
management.
 Monitoring developments in the economy that impinge on the
company’s products.
 Keeping track of what is happening in the markets for the company’s
securities.

To develop reliable forecasts and plans, a financial manager must

understand not only finance and accounting but company operations as well;
product lines, manufacturing processes, customer groups, potential suppliers
of raw materials, vendors of equipment, and so on. A basic understanding of
the operations enables the financial manager to identify and anticipate costs
of future asset acquisitions and needed financing.

3. Procure the funds the company needs. Financial managers procure and
manage funds that a company needs to finance operations. To obtain these
funds, the company can issue shares of stocks, borrow money or use a
combination of the two. The company that borrows must allocate amounts
to repay its debts at maturity.

4. Allocate funds to acquire the most profitable assets. Equally critical as

the financing decision to the success of a company is the investment
decision, the process of allocating funds for investment in competing assets.
The investment decision must not overemphasize one sort of asset and slight
another. For instance, it would be unwise to use so much cash to invest in a
building that the company could not pay its bills when due. The financial
manager plays a key role in the allocation of funds to competing assets. The
goal is to select fixed assets that will generate large returns and minimal
risks.

Vital Functions of the Financial Manager

1. Identification and analysis. The financial manager is partly in charge of
the management of the financial assets of the cooperative. He is also
responsible in identifying the present strengths and weaknesses of the
organization.

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 2. Financial planning and strategy. The financial manager considers the
major financial factors to make the firm survive or develop, including
activities such as fund raising, maximization of profit, financing and expansion
development and many others. It includes the preparation of different
budgets as they form an important part of financial planning.
3. Capital structure of the organization - The financial manager is an
adviser of the organization regarding the advantages and costs of
investments in the financial markets and any other future plans. With his
expertise as an accountant, he has a wide imagination and proficiency in
costing. He can project with a certain degree of accuracy and based on
statistics and costs, expenses of a certain project; the required capital
outlays, and any change that may take place in the organization’s assets.
4. Stock price and dividends - The financial manager gives advice to the firm
if dividends should be declared or not. Likewise, when the firm has such
highly profitable undertaking that should retain most of the earnings,
stockholders are properly warned of such a plan, and gives the assurance of
possible equivalent appreciation of the price of the stock certificates in their
possession.
5. Control of cash and other assets - It is also the intention of the financial
manager to strive to achieve adequate profits as a management goal, done in
such a way that cash is always available when needed. The needed cash
should be with the level needed in the operation of the business. Since cash
is a non-productive asset, any excess cash must be invested into placements
that are possibly easily convertible into cash as an assurance to fill any cash
deficiency falling below the minimum cash requirements for the operation of
the business.

The Financial Manager in a Business Organization

The finance manager in a business organization is not always called as such.
His title varies depending on the size of the company and its organizational set up.
In small business firms, the finance functions are discharged by the sole proprietor,
the accountant or the manager. As the organization grows bigger, the organizational
set up becomes more sophisticated so that we may have the finance functions
delegated to the controller or the treasurer. In some cases, there is a vice president

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for finance to whom the controller and treasurer report. The finance functions are
usually divided between the controller and treasurer as follows:
CONTROLLER TREASURER
1. Planning for control which includes [Link] of financial
budgeting. requirements and procurement of
funds
2. Reporting and interpreting results [Link] management, banking,
of operations and system custody of funds and foreign
installation exchange problems
3. Evaluation of objectives, policies [Link] relations
and procedures in all segments of
management
4. Tax administration and government [Link] investments
reporting
5. Protection of assets [Link] and collection
6. Economic appraisal (forward [Link] and employee benefits
planning)

From the foregoing distribution of functions, it may be noted that the

controller takes care of the internal finance functions while the treasurer takes care
of the external ones.

Overview of Financial System

A financial system can be defined at the global, regional or firm specific level.
The firm's financial system is the set of implemented procedures that track the
financial activities of the company. On a regional scale, the financial system is the
system that enables lenders and borrowers to exchange funds. The global financial
system is basically a broader regional system that encompasses all financial
institutions, borrowers and lenders within the global economy. There are multiple
components making up the financial system of different levels. Within a firm, the
financial system encompasses all aspects of finances. For example, it would
include accounting measures, revenue and expense schedules and wages and
balance sheet verification. Regional financial systems would include banks and other
financial institutions, financial markets, and financial services. In a global view,
financial systems would include the International Monetary Fund, Central Banks,
World Bank and major banks that practice overseas lending.
The Global Financial System (GFS) is the financial system consisting of
institutions and regulators that act at the international level, as opposed to those
that act on a national or regional level. The main players are the global institutions,
such as the following:

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 International Monetary Fund (IMF). It is an international organization
that was created on July 22, 1944 at the Bretton Woods Conference and
came into existence on December 27, 1945 when 29 countries signed the
Articles of Agreement. It originally had 45 members. The IMF’s goal was to
stabilize exchange rates and assist the reconstruction of the world’s
international payment system post-World War II. Countries contribute
money to a pool through a quota system from which countries with payment
imbalances can borrow funds temporarily. Through this activity and others
such as surveillance of its members' economies and policies, the IMF works to
improve the economies of its member countries. The IMF describes itself as
“an organization of 188 countries (as of April 2012), working to foster global
monetary cooperation, secure financial stability, facilitate international trade,
promote high employment and sustainable economic growth, and reduce
poverty.” The organization's stated objectives are to promote international
economic cooperation, international trade, employment opportunities, and
exchange rate stability, and making financial resources available to member
countries to meet balance of payments needs. The International Monetary
Fund keeps account of international balance of payment accounts of member
states. It acts as a lender of last resort for members in financial distress, e.g.,
currency crisis, problems meeting balance of payment when in deficit and
debt default. Membership is based on quotas, or the amount of money a
country provides to the fund relative to the size of its role in the international
trading system.
 World Bank. It is an international financial institution that provides loans to
developing countries for capital programs. The World Bank's official goal is
the reduction of poverty. According to the World Bank's Articles of Agreement
(as amended effective 16 February 1989), all of its decisions must be guided
by a commitment to promote foreign investment, international trade, and
facilitate capital investment. The World Bank aims to provide funding, take up
credit risk or offer favorable terms to development projects mostly in
developing countries that could not be obtained by the private sector.
 World Trade Organization (WTO). It is an organization that intends to
supervise and liberalize international trade. The organization officially
commenced on January 1, 1995 under the Marrakech Agreement, replacing
the General Agreement on Tariffs and Trade (GATT), which commenced in

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 1948. The organization deals with regulation of trade between participating
countries; it provides a framework for negotiating and formalizing trade
agreements, and a dispute resolution process aimed at enforcing participants'
adherence to WTO agreements which are signed by representatives of
member governments and ratified by their parliaments. Among the various
functions of the WTO, these are regarded by analysts as the most important:
 It oversees the implementation, administration and operation of the
covered agreements.
 It provides a forum for negotiations and for settling disputes.

Additionally, it is the WTO's duty to review and propagate the national

trade policies, and to ensure the coherence and transparency of trade policies
through surveillance in global economic policy-making. Another priority of the
WTO is the assistance of developing, least-developed and low-income
countries in transition to adjust to WTO rules and disciplines through
technical cooperation and training. The WTO is also a center of economic
research and analysis: regular assessments of the global trade picture in its
annual publications and research reports on specific topics are produced by
the organization. Finally, the WTO cooperates closely with the two other
components of the Bretton Woods system, the IMF and the World Bank.

The Philippine Financial System

It is composed of different institutions serving different markets and
competing each other in attaining the process of intermediation, providing a link
between economic suits with excess funds and those who use these funds. In the
Philippine setting, financial system is composed of banking institutions and non-bank
financial intermediaries, including commercial banks, specialized government banks,
thrift banks and rural banks.   It is also composed of offshore banking units, building
and loan associations, investment and brokerage houses and finance companies.
1. Commercial Banks. Constituting the bulk of the banking system, these are
institutions that accept deposits, including demand deposits, which are
subject to withdrawal by checks. They also perform other functions like
lending, essentially on a short-term basis, and accept drafts and letters of
credit, and can discount and negotiate promissory notes, drafts, bills of
exchange and other forms of indebtedness. They can also invest in allied
undertaking up to a limit, including trading in bonds and securities.

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2. Government Commercial Banks. These serve as banks for the
government. The role of the government in the banking system in the
country is to supplement the credit facilities of the private financial
institutions. The Government sector establishes banks with special lending
programs like the socio-economic development of the small farmers, the
Moslem regions, and the rural areas.
3. Thrift Banks. These are institutions designed to accumulate the savings of
depositors (in case of savings and mortgage banks) of their members or
stockholders (in case of stock savings and loan associations). These savings
are then invested in various ways to earn income through loans, interest-
bearing deposits, real estate investments, personal finance and home-
building and home development activities. Savings Banks are the most
obvious example of thrift banks.
4. Small Private Banks. These small banking units were designed to meet the
financial requirements of small rural or town units that do not have the
services provided by normal banking institutions. The first are the rural
banks, for short term financial requirements and the others are the private
development banks.
a. Rural Banks. These banks were designed primarily to mobilize rural
savings by accepting savings and time deposits and to provide
channel for funds from urban areas and the government sector for
agricultural and individual activities in the countryside. They also
provide credits to small scale farmers and enterprises in the rural
sector. They receive government assistance mainly for the support of
food production program.
b. Private Development Banks. These banks are modeled to serve
like the Development Bank of the Philippines (DBP) at the community
or provincial level. They are allowed to accept time and savings
deposits and provide medium- and long-term credit to small and
medium scale industries. At the community level, these banks assist
the financing of development projects by providing loan assistance to
entrepreneurs.
5. Non-Banking Financial Institutions. These are financial institutions that
provide banking services without meeting the legal definition of a bank, i.e.,
one that does not hold a banking license. These institutions are not allowed

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 to take deposits from the public. Nonetheless, all operations of these
institutions are still exercised under bank regulation.
a. Government Non-Banking Financial Institutions. As the
banking system is evolving, there was a parallel development of other
financial institutions. On the government side, for instance,
Government Service Insurance System (GSIS) for the government
employees was developed. In fact, insurance for workers under the
GSIS was in operation by 1936. Compulsory social security insurance
in private sector was founded in 1937 with the creation of Social
Security System (SSS). These institutions were created essentially to
protect the welfare of employees. But in consequence, they set up
large trust funds that were generated from the insurance premiums of
members and their counterpart institutions.
b. Private Non-Banking Financial Institutions. Other non-bank
financial institutions serve primarily as further intermediaries of units
with excess funds, facilitation of their investments. There is an
interaction between the position of the bank, the most important
financial institution, and other financial institutions.

Role of Bangko Sentral ng Pilipinas (BSP) in the Philippine Financial

System
Central Banks are financial institutions vested by the State with the function
of regulating the supply, cost and use of money with a view to promoting national
and international economic stability and welfare.

Development of the Bangko Sentral ng Pilipinas

The central bank of countries within the region of Southeast Asia were
established mostly only after the end of the Second World War. The Philippines is not
an exception. It established its central bank on January 3, 1949. The concept of a
central bank was developed in 1933 by Miguel Cuaderno, the first governor of the
Central Bank of the Philippines. The Central Bank of the Philippines was patterned
after similar central banks established in Paraguay and Guatemala, two countries
which, like the Philippines have the same export economies. The Central Bank of the
Philippines came to existence as a result of the approval by the former President
Elpidio Qurino of Republic Act No. 265, otherwise known as the “Central Bank Act”

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on June 15, 1948. However, actual operations did not commence until January 3,
1949 when the bank opened its doors for business in the old Intendencia Building
located at Intramuros, Manila.
With the accumulation of losses incurred by the Central Bank, P317B as
of December 1992, there emerged the CMA bill to transform the Central Bank into
Central Monetary Authority. This bill is also in response to a call of the International
Monetary Bank and World Bank to ease the foreign debt burden and strengthen the
credit standing of the Philippines. And then when the CMA law also known as “The
New Central Bank Act” took effect on June 14, 1993 there is established an
independent Central Monetary Authority which is known as the “Bangko Sentral ng
Pilipinas” and has a capital of P50billion.

Objectives of The Bangko Sentral ng Pilipinas (BSP)

1. To maintain price stability conducive to a balanced and sustainable growth
of the economy, and
2. To promote and maintain monetary stability and convertibility of the
Philippine peso.

The BSP monitors and compiles various indicators on the Philippine banking
system which is composed of universal and commercial banks, thrift banks, rural and
cooperative banks. As prescribed by the “New Central Bank Act, the main functions
of the Bangko Sentral are:
1. Liquidity management, by formulating and implementing monetary policy
aimed at influencing money supply, consistent with its primary objective to
maintain price stability;
2. Currency issue, the BSP has the exclusive power to issue the national
currency. All notes and coins issued by the BSP are fully guaranteed by the
Government and are considered legal tender for all private and public debts;
3. Lender of last resort, by extending discounts, loans and advances to banking
institutions for liquidity purposes;
4. Financial supervision, by supervising banks and exercising regulatory powers
over non-bank institutions performing quasi-banking functions;
5. Management of foreign currency reserves , by maintaining sufficient
international reserves to meet any foreseeable net demands for foreign
currencies in order to preserve the international stability and convertibility of
the Philippine Peso;

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6. Determination of exchange rate policy , by determining the exchange rate
policy of the Philippines. Currently, the BSP adheres to a market-oriented
foreign exchange rate policy, and;
7. Being the banker, financial advisor and official depository of the Government ,
its political subdivisions and instrumentalities and GOCCs.

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