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Chapter 1 Introduction To Financial Management

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144 views3 pages

Chapter 1 Introduction To Financial Management

Uploaded by

Gem Tanquerido
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Chapter 1 Introduction to Financial Management

Learning Outcomes:
o Define and discuss what financial management is
o Explain the importance of financial management
o Identify various fundamental concepts of financial management
o Recognize the role of the financial manager in a business entity

Financial Management
It is a functional unit of business organization that sets policies towards organizing, planning,
controlling, and directing the proper use and allocation of its financial resources. It carries with it an
interlocking coordination within the business structure such as production, marketing, logistics and
personnel functions. It is considered to be one of the most significant responsibilities within the
business entity. Business activities related to operating, financing and investing require considerable
amount of decision making that will affect company’s financial condition, structure, performance and
profitability.

Importance of Financial Management


Functions focuses on the areas of:
a. Investment Decision – such as capital budgeting or financial plan preparation
b. Financing Decision – such as creating the best financing mix or capital structure
c. Operating Decision – such as cost control or strategies to increase revenue
These decisions add value and set the directions of the company to accomplish its business
objectives. The use of various analytical tools helps in the analysis, planning, and control in terms of
proper allocation and utilization of the company’s financial resources.
Important Function in Business Organization:
1. Guarantee rational and attractive return on investment made in the business.
2. Examine business financial performance for growth and expansion.
3. Plan, direct and control the use of financial resources.
4. Ensure maximum and efficient flow of operation.
5. Create pleasant and amiable relations with company stakeholder.
6. Harmonize operations of different facets of the business.
7. Build up appropriate controls to secure proper use of financial resources.

Fundamental Concepts in Financial Management

1
Financial management is in charge of efficient planning and control of funds inflow and outflow:
1. The appropriate magnitude or volume of funds needed for efficient operations (capitalization)
2. The wise allocation of financial resources to particular resources
3. The short and long term fund raising activities

Stages or Phases of Operations:


Research, Time and Knowledge – Businesses would require a significant amount of financial
information. These information take some time to collect and are product of past business
transactions. Even if the data are collected, it would undergo a process of analysis and interpretation
so it can be used to make economic decisions. Thus, an extensive amount of research, time and in
depth knowledge is needed to make these financial information relevant.
Cost – is one of the considerations in financial management. Since financial data would require
analysis and interpretation, the company would need experts or knowledgeable professionals to do
the job. As such, an appropriate cost is necessary to attract this type of personnel.
Revision and Attention – Internal and external factors surely affect the financial needs of a
business. Thus, constant study and undivided attention will be needed to identify these factors and
make adjustments on the company’s financial plans and objectives.
Power – Financial managers are given the power to make judgment call especially when the
operations of the business will be affected. Not all financial decisions may be popular to stakeholders
and thus might lead to unpleasant situation or misunderstanding within the company’s organizational
structure.
Money Availability and Planning – Managing finances results to being able to identify the sources
and uses of it. It gives financial managers the edge of knowing when funds will be available. Given
this knowledge, financial managers may be able to predict money availability or possible shortage of
it.
Accountability – Financial management focuses on various control procedures related to the use of
financial resources. It places a heavy burden on accountability as those involved need to monitor and
make sure compliance is done to every set of procedures and policies with regard to the
management of company’s financial resources.
Confidence – Financial management adds value and develops more confidence in the business
entity. It add value and confidence in the sense that this aspect of management put strong emphasis
on efficient planning and control on the inflow and outflow of funds.
Role of Financial Manager
The said person should be farsighted to ensure that the financial resources are properly allocated and
utilized in the most efficient manner. His actions directly affect the financial conditions and
performance of the business entity.

2
Most Important Functions of Financial Managers are:
1. Raise Needed Funds for the business operations – to ensure that the company meets the
obligation and required funds needed for the business. He needs to constantly monitor
company’s liquidity, solvency and profitability by way of establishing prudent financial
procedures and policies. The company can raise funds either thru equity and debt financing.
Equity financing refers to the issuance of company stocks while debt financing would
involve loan or fund borrowing. He/she should decide on the type of financing the company
would opt to choose.
2. Proper Allocation of Financial Resources – The moment funds are raised, the financial
manager should be able to make proper allocation on where to use the said funds. The
following needs are to be considered in order to make proper allocation of funds:
a. The business entity size and its capability for possible growth
b. Status of assets where the funds will be used; either for long-term or short-term.
c. Manner on which the funds are raised.
3. Profit Planning – Profit is an inherent component to ensure business sustainability and
survival. As such, profit planning requires tremendous amount of rational forecasting of
revenues and management of cost and expenses.
Many factors would have an impact on business profit and this will include:
o Product pricing o Demand and supply
o Competition o Product cost
o Economic status o Output

The financial manager should be able to keep a keen eye on all these factors in order to make
desirable and realistic financial plans to achieve the desired profit for the company.
4. Knowledge of Capital Markets – The financial manager should be able to have an in-depth
knowledge and a clear understanding of capital market. Capital market is where securities or
company shares are traded and this would involve a high amount of risk. Therefore, a financial
manager should be able to make strong calculation and analysis of the various risks involved
in the trading of shares and securities.

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