 BUSINESS is defined as an organization or enterprising entity engaged in commercial, industrial, or professional

activities. It also refers to the organized efforts and activities of individuals to produce and sell goods and
services for profit (Hayes, 2019)
 Finance is the art and science of managing money
a. Public Finance
b. Private Finance

KEY OBJECTIVES OF FINANCIAL MANAGEMENT

 Maximization of the value of the firm
 Maximization of shareholder’s wealth
 Social responsibility and ethical behavior

KEY ELEMENTS TO THE PROCESS OF FINANCIAL MANAGEMENT

FINANCIAL PLANNING
Management needs to ensure that enough funding is available at the right time to meet the needs of the business
FINANCIAL CONTROL
Critically an important activity to help the business to ensure that the business is meeting its objective.
Addresses questions such as;
a. Are assets being used efficiently?
b. Is the business asset secure?
c. Do management act in the best interest of shareholders and in accordance with business rules?
FINANCIAL DECISION MAKING
The key aspects of financial decision making relate to:
1. Investment
 those that determine how scares or limited resources in terms of funds of the business are committed to
projects.
 the firm should select only those capital investment proposals whose net present value is positive and the
rate of return exceeding the marginal cost of the capital.
 consider also the profitability of each individual project proposal that will contribute to overall
profitability of the firm and lead to the creation of wealth.
2. Financing
 assert that the mix of debt and equity chose to finance investments should maximize the value of
investments made.
 should consider the cost to finance available indifferent forms and he risk attached to it.
3. Dividends.
 Concerned with the determination of quantum of profits to be distributed to the owners, the frequency of
such payments and the amounts to be retained by the firm.
 The business firm should retain its profits in the form of appropriations or reserves for financing its future
growth and expansion schemes.

 The basic objective of investment, financing, and dividend decisions is to maximize the firm’s wealth. If the
fir enjoys stability and growth, its share prices in the market will improve and will lead to capital
appreciation of shareholders investment and ultimately maximize the shareholders wealth.

 Every business needs finance to carry on its operations and to achieve its objectives.
 Finance may also be simply defined as provision of money at the time of need.

3 MAIN APPROACHES TO FINANCE:

 Finance as activity of providing funds to a business entity at the time of need and on favorable terms keeping in mind the
firm’s objectives.
 Finance relates to cash. It views finance as broad-based function and relates it to all activities taking place in a business.
 Finance is concerned with raising of funds and their effective utilization in a business.
 Every firm secures the capital it needs and employs it in activities which generate return on invested capital.
 Finance Function refers to the procurement of funds and their effective utilization in the business concern.

Meaning of Financial Management

 A managerial activity which is concerned with the planning and controlling of the firm’s financial resources. It is a
permanent and continuous process for every business concern
.  It is concerned with the efficient use of an important economic resource, namely, Capital Funds.
 An application of general managerial principles to the area of financial decision making.

Nature of Finance Function

 It is an integral and central function to all business organizations
 It plays a significant role in the long-term growth and survival of a business
 It helps in managerial decision making through analysis and interpretation of financial data.
 It is interrelated to other primary business functions like marketing, human resource planning, production planning.
 It helps in valuation of the business.

Scope of Finance Function

*Estimation Financial Requirements of a business * Management of cash flows
*Selecting a source of finance * Implementing financial control
*Making good investment decisions * Determining the capital structure of a firm

External Factors
 State of Economy
 Government policy
 Structure of capital and money markets
 Requirements of investors
 Taxation policy
 Lending policy of financial institution

Internal Factors
 Nature and size of the business
 Trend of earnings
 Expected return, cost and risk involved
 Composition assets
 Structure of ownership
 Age of the firm
 Liquidity position
 Working capital requirement
 Conditions of debt agreements
LEGAL FORMS OF BUSINESS
Sole Proprietorship
 A business owned by one person who has ADAVANTAGES:
complete control over the business 1.EASE OF FORMATION- forming a partnership may
 Owns all the firm’s asset and responsible for all its require relatively little effort and low start-up cost
liabilities 2.ADDITIONAL SOURCES CAPITAL-has the financial
 The owner is not separable from the business and resources of several individuals.
is personally liable for all debts of the business. 3.MANAGEMENT BASE-has a broader management
 In accounting, however the business is an entity base expertise than a sole proprietorship
separate from the owner (proprietor) 4.TAX IMPLICATION- does not pay any income taxes.
ADAVANTAGES; The income or loss of a business is distributed among
1. Ease of entry and exit- requires no formal the partners in accordance with the partnership and
charter and is inexpensive to form and each partners reports his or her portion whether
distributed or not on personal income tax return.
dissolve
2. Full ownership and control- the owner has
DISADVANTAGES;
full control, reaps all profits and bears all 1.UNLIMITED LIABLITY- general partners have unlimited
losses. liability for the debts and litigations of the business.
3. Tax saving- the entire income generated by 2. LACK OF CONTINUITY- a partnership may dissolve
the proprietorship passes directly to the upon the withdrawal or death of a general partner,
owner which result in a tax advantage if the depending on the provisions of the partnership.
owners tax rate is less than the tax rate of a 3. DIFFICULTY OF TRANSFERRING OWNERSHIP- it is
corporation. difficult for a partner to liquidate or transfer ownership.
4. Few government regulations- has the It varies with conditions set forth in the partnership
greatest freedom as compared with any form agreement.
of business organization. 4. LIMITATIONS IN RAISING CAPITAL; a partnership may
DISADVANTAGES have raising large amounts of capital because many
sources of funds are available only to corporations.
1. Unlimited liability- the owner is personally
liable or responsible for any and all business
CORPORATION.
debts. Thus, the owners’ personal assets can
 An artificial being created by operations of law
be claimed by the creditors if the firm defaults
having the right of succession, the powers and
on its obligation.
attributes expressly authorized by law or incident to
2. Limitation in raising capital- fund raising
its existence.
ability is limited. Resources may be limited to
 Legal entity separates from its owners.
the assets of the owner and growth may
 Legal entity may own assets, borrow money and
depend on his or her ability to borrow money.
engage in other business entities without directly
3. LACK OF CONTINUITY-upon death or
involving the owners
retirement of the owner, the proprietorship
 Owners are called shareholders/ stockholders.
ceases to exist.
ADVANTAGES;
1.LIMITED LIABILITY- shareholders are liable only to the
PARTNERSHIP
extent of their investment in the corporation.
 A legal arrangement in which two or more
 Shareholders can only lease what they have invested
persons agree to contribute or services to the
in the firms shares, not any other personal assets.
business and divide the profits and losses that
2.LIMITED LIFE- it continues to exist even after death of
may be derived therefrom
the owners.
 An association where two or more persons bind
 Maximum legal life is 50 years but may be renewed
themselves to contribute money property or
for the desired additional life not to exceed 50years.
industry to a common fund with the intention of
3.EASE IN TRANSFERRING OWNERSHIP
dividing the profits among themselves.
 Shareholders can easily sell their ownership interest
in most corporation by selling their stock without
affecting the legal form of business organizations.
4.ABILITY TO RAISE CAPITAL- can sale capital through the Ten Principles that Form the Basics of Financial
sale of securities such as bonds to investors who are Management
lending money to corporations and equity securities such  The risk-return trade off
common stock to investor who are the owners.  Additional risk is not taken unless there is an
additional compensation or return is expected.
DISADVANTAGES;  The time value of money
1.TIME AND COST FORMATION-registration of public  A peso received today is worth more than a peso
companies with the SEC may be time consuming and received in the future.
costly.  Cash- not profits is king
2.REGULATION- they are subject to greater government  Incremental cash flows
regulations than other forms of business organizations.  Its only what changes that counts.
Shareholders can just withdraw assets from the  The curse of competitive markets
business.  Why it’s hard to find exceptionally profitable
They can only receive corporate assets when dividends projects.
are declared and these amounts may be subject to  Efficient capital markets
limits imposed by law  The markets are quick and the prices right.
3.TAXES- they pay taxes on income they have earned.  The agency problem
 Managers won’t work for owners unless it’s in their
best interest.
ONE PERSON CORPORTION  Taxes bias business decision.
 All risk is not equal.
 Some risk can be diversified away and some cannot.
 Ethical behavior is doing the right thing, and ethical
dilemmas are everywhere in finance.

Activity Number 2: True or False. Determine whether

the statements below are correct or not.
1. Financial management can only be applied in
business organizations. ______
2. Financial management has the same objectives as
that of the field of accounting. ____
3. Financial management is also concerned with social
responsibility and ethics. _____
4. Financial planning ensures that funding is available
when needed. ____
5. Financial control ensures that management is
prepared financially. ____
6. A limited liability company offers the advantage of
unlimited liability for its owners. ____
7. A corporation is considered by the law as an artificial
person. ____
8. Sole proprietorships possess separate legal
personality distinct from its owner. ____
9. A corporation can only be created by operations of
law. _____
 10. Corporations have the ability to raise more capital
compared to partnerships. ____

GETTING TO KNOW THE PRIMARY FINANCIAL

STATEMENTS LESSON 2

Income Statement- the statement of the profit or loss

for the period, comprised of revenue less expenses for
the period.
Revenue (Sales)- money derived from selling the
company’s product or services
Cost of goods sold – the cost of producing or acquiring
the goods or services to be sold.
Operating expenses- expenses related to marketing
and distributing the product or service
Tax expenses – the amount of taxes owed based on a
firm’s taxable income
Balance Sheet- statement of financial position at a
particular date
Current assets- assets that are expected to be
converted into cash within one year
Accounts receivable – a promise to receive cash from
customers who purchased goods from the firm on
credit
Inventory – raw materials, work-in-process, and
finished goods held by the firm for eventual sale.
Prepaid expenses – expenses that have been paid in
advance
Fixed assets – assets comprising of equipment,
building, land, etc.
Debt – consists of such sources as credit extended by
suppliers or a loan from a bank
Current liability– debt due to be paid within one year.
Accounts payable – liability of the firm for goods
purchased from suppliers
Other payables – consists of interest payable and
income taxes payable that are to be paid within one
year.
Accrued expenses - expenses already incurred but not
yet paid. Short-term notes – amounts borrowed from a
creditor that will mature in one year. Long-term debt –
loans from banks or other sources that lend money for
longer than 12 months.