FINANCIAL MANAGEMENT
Chapter 1: Introduction to Financial Management
Financial Management
- preparing, directing and managing the money activities of a company such as buying, selling and using
money to its best results to maximize wealth or produce best value for money
- applying general management concepts to the cash of the company
- key objectives are to create wealth for the business, generate cash and provide an adequate ROI bearing in
mind the risks that the business is taking, and the resources invested
Personal Finance – individual’s decisions concerning the spending and investing of income
Business Finance – focuses on how the firms raise money from investors, how to invest money to earn a profit, and
how to reinvest profits in the business or distribute them back to investors
Three (3) Key Elements to the Process of Financial Management
1. Financial Planning – by time periods, include forecasting and budgeting
2. Financial Control – ensuring that the objectives of the business are met, determines if assets are secured and
being used efficiently
3. Financial Decision-making – include investment, financing and dividends
Scope of Financial Management (5A’s as stated by Dr. S. C. Saxena)
1. Anticipation – estimating the financial needs of the company, how much finance is required by the company
2. Acquisition – collects finance for the company from different sources
3. Allocation – uses collected or acquired finance to purchase fixed and current assets for the company
4. Appropriation – distributes part of the company profits among the shareholders, debenture holders, and
some are kept ass reserves
5. Assessment – controlling all the financial activities of the company, checks if the objectives are met if not
determines what can be done with it
Legal Forms of Business Organization
Sole Proprietorship – business owned by one person and operated for his or her own profit
Advantages
Simple, the owner has freedom to make all decisions and enjoy all profit
Has minimal legal restrictions and gov’t regulation
Can be discontinued with great ease and the tax rate is relatively at minimum
Disadvantages
The owner may lack expertise or experience to run business
Owner may incur unlimited liability
Partnership – business owned by two or more people and operated for profit, based on an agreement called Article
of Co-Partnership, owners are legally responsible for the debts and taxes of the business
Advantages
Ease of organization compared to corporation
Combined talents, more brain power and managerial skill
Can raise more capital than sole proprietorship
Disadvantages
Unlimited liability for general partners and limited life for the firm
Dissolved when a partner withdraws or dies and it is difficult to liquidate or transfer
partnership
Corporation – an entity created by law, have legal powers of an individual in that it can sue and be sued, make and
be party to contracts, and acquire property on its name, separate from its owners and has a legal right to own
property and do business in its own name
Advantage
Limited liability of stockholders and perpetual life
Easy to transfer ownership, expand, and obtain resources or financing
Disadvantages
Bound by relatively more government regulations/restrictions and maybe expensive to
organize
Finance, Economics, and Accounting
Financial managers administer the
financial affairs of all types of
businesses such as private and public,
large and small, profit-seeking and not-
for-profit. He handles a firm’s cash,
investing surplus funds when available
and securing outside financing when
needed. He also oversees a firm’s
pension plans and manages critical
risks related to movements in foreign
currency values, interest rates, and
commodity prices. The treasurer in a
mature firm must make decisions with
respect to handling financial planning,
acquisition of fixed assets, obtaining
funds to finance fixed assets, managing
working capital needs, managing the
pension fund, managing foreign
exchange, and distribution of
corporate earnings to owners.]
Corporate Governance, Ethics and Agency Issues
Corporate governance is a system of organizational control that defines and establishes the responsibility and
accountability of the major participants in an organization. Shareholders, BOD, managers and officers of the
corporations, and other stakeholders are the major participants included here.
Business Ethics are the standards of conduct or moral judgment that apply to persons engaged in industry or
commerce.
Chapter 2: Financial Statement Analysis