INTRODUCTION TO FINANCIAL MANAGEMENT

What is Finance?

- Finance can be defines as the science and art of managing money.

- At the personal level, finance is concerned with individual’s decisions about how much of their
earnings they spend, how much they save, and how they invest their saving.
- In a business context, finance involves the same types of decisions: how firms raise money from
investors, how firms invest money in an attempt to earn a profit, and how they decide whether
to reinvest profits in the business or distribute them back to investors.

FINANCIAL MANAGEMENT

Financial Management means planning, organizing, directing and controlling the financial activities
such as procurement and utilization of funds of the enterprise. It means applying general management
principles to financial resources of the enterprise.

Functions of Financial Management

1. Estimation of capital requirements: A finance manager has to make estimation with regards to
capital requirements of the company. This will depend upon expected costs and profits and
future programmes and policies of a concern. Estimations have to be made in an adequate
manner which increases earning capacity of enterprise.

2. Determination of capital composition: Once the estimation have been made, the capital
structure have to be decided. This involves short- term and long- term debt equity analysis. This
will depend upon the proportion of equity capital a company is possessing and additional funds
which have to be raised from outside parties.

3. Choice of sources of funds: For additional funds to be procured, a company has many choices
like-

1. Issue of shares

2. Loans to be taken from banks and financial institutions

4. Investment of funds: The finance manager has to decide to allocate funds into profitable ventures so
that there is safety on investment and regular returns is possible.

5. Disposal of surplus: The net profits decision have to be made by the finance manager. This can be
done in two ways:

Dividend declaration - It includes identifying the rate of dividends and other benefits like bonus.

Retained profits/earnings - The volume has to be decided which will depend upon expansional,
innovational, diversification plans of the company.

6. Management of cash: Finance manager has to make decisions with regards to cash management.
Cash is required for many purposes like payment of wages and salaries, payment of electricity and water
bills, payment to creditors, meeting current liabilities, maintenance of enough stock, purchase of raw
materials, and others.
7. Financial controls: The finance manager has not only to plan, procure and utilize the funds but he also
has to exercise control over finances. This can be done through many techniques like ratio analysis,
financial forecasting, cost and profit control and other tools.

NATURE AND SCOPE OF FINANCIAL MANAGEMENT

FINANCING DECISIONS

- It includes making decisions on how to fund long term investments (such as company
expansions) and working capital with the day to day operations of the company.
- The role of the Financial Manager is to determine the appropriate capital structure of the
company.

INVESTING DECISIONS

- Investment decision It relates to as how the funds of a firm are to be invested into different
assets, so that the firm is able to earn highest possible return for the investors.

Investing Decisions

LIQUIDITY DECISIONS

- Is concerned with the working capital management or current assets management. Current
assets should be managed to save the firm from the illiquidity and insolvency.

What is current assets?

- If the firm does not invest sufficient funds in current assets, it may become illiquid and may not
have ability to meet its current obligations and, thus invite serious risk of bankruptcy. Its current
assets are too large, profitability is adversely affected. Therefore there must be neither too low
nor too high current assets in the organization.

How important is Financial Management in business?

ANS:
INTODUCTION TO FINANCIAL MANGEMENT 1.2

Financial Market, Financial Institution, Financial Instrument

FINANCIAL MARKET

 Financial markets refer broadly to any marketplace where the trading of securities occurs.

 There are many kinds of financial markets, including (but not limited to) forex, money, stock,
and bond markets.

 When financial markets fail, economic disruption including recession and unemployment can
result.

 Financial markets create securities products that provide a return for those who have excess
funds (Investors/lenders) and make these funds available to those who need additional money
(borrowers).
FINANCIAL INSTITUTIONS

 A financial institution (FI) is a company engaged in the business of dealing with financial and
monetary transactions such as deposits, loans, investments, and currency exchange.

 Financial institutions encompass a broad range of business operations within the financial
services sector including banks, trust companies, insurance companies, finance and investment
companies.

 Governments consider it imperative to oversee and regulate banks and financial institutions
because they do play such an integral part of the economy

FINANCIAL INSTRUMENTS

 A financial instrument is a real or virtual document representing a legal agreement involving any
kind of monetary value.

 Financial instruments may also be divided according to an asset class, which depends on
whether they are debt-based or equity-based.

 Financial instruments are contracts for monetary assets that can be purchased, traded, created,
modified, or settled for. In terms of contracts, there is a contractual obligation between involved
parties during a financial instrument transaction
LEARNING COMPETENCIES

Enumerate various financial institutions and their corresponding services.

FINANCIAL INSTITUTIONS

 BANKS
 INSURANCE COMPANIES
 MUTUAL FUNDS
 PENSION FUNDS
 OTHER FINANCIAL INSTITUTIONS
- GSIS
- SSS
- INVESTMENT BANK

BANKS

 Commercial Banks. Individuals deposit funds at commercial banks, which use the deposited
funds to provide commercial loans to firms and personal loans to individuals, and purchase debt
securities issued by firms or government agencies.

 Universal Banks.Universal banking combines the services of a commercial bank and an

investment bank, providing all services from within one entity. The services can include deposit
accounts, a variety of investment services, and may even provide insurance services. Deposit
accounts within a universal bank may include savings and checking.

 Investment Banks.is a financial service provided by a banking division or a finance company. It

assists high-net-worth individuals, companies, or government to raise or create capital.

INSURANCE. Individual purchase insurance (life, property and casualty, and health) protection with
insurance premiums. The insurance companies pool these payments and invest the proceeds in various
securities until the funds are needed to pay off claims by policyholders

MUTUAL FUNDS. They are owned by investment companies which enable small investors to enjoy
benefits of investing in a diversified portfolio of securities purchased on their behalf by professional
investment managers. Diversified portfolio means collection of different kinds of investment like
purchasing of stocks, engaging in bonds instruments and others.
PENSION FUNDS. Financial institutions that receive payments from employees and invest the proceeds
on their behalf

OTHER FINANCIAL INSTITUTIONS

SSS is a social insurance program that aims to provide protection to its members and beneficiaries, while
GSIS serves as the counterpart social insurance program for those who work in government.

FINANCIAL SYSTEM

- A 'Financial system' is a system that allows the exchange of funds between financial market
participants such as lenders, investors, and borrowers. Financial systems operate at national and
global levels. (Wikipedia)

FINANCIAL MARKETS

Organized forums in which the suppliers and users of various types of funds can make transactions
directly

FINANCIAL INSTITUTIONS

Intermediaries that channel the savings of individuals, businesses and governments into loans or
investments.

TERMINOLOGY

Private Placements - the sale of a new security directly to an investor or group of investors. (Cayanan)

Public Offering - the sale of either bonds or stocks to the general public. (Cayanan)

Financial Instruments - is real or virtual document representing a legal agreement involving some sort of
monetary value. (investopedia)

FINANCIAL INSTRUMENTS

DEBT

 Treasury Bonds and Treasury Bills

 Corporate bonds

OWNERSHIP

 Common Stock
 Preferred Stock
Debt Instruments Examples:

BONDS

CORPORATE BONDS.

type of debt security that is issued by a firm and sold to investors. The company gets the capital it needs
and in return the investor is paid a pre-established number of interest payments at either a fixed or
variable interest rate. When the bond expires, or "reaches maturity," the payments cease and the
original investment is returned.

GOVERNMENT BONDS

Type of debt security issued by the government to finance their projects.

Treasury bills- short-term

Treasury bonds - long term

EQUITY INSTRUMENTS