The University of

San Jose - Recoletos

SCHOOL OF BUSINESS
AND MANAGEMENT

Mrs. Marjorie C. Trias

OVERVIEW OF FINANCE
 What is Finance?
• Finance is defined by Webster’s Dictionary as “the
system that includes the circulation of money, the
granting of credit, the making of investments, and
the provision of banking facilities.”
• It may be defined as the science of managing and
creating money, administration and operations of
institutions like banks, investment companies,
cooperatives, lending groups that facilitate credits
and a unit or department that directs the
organizations’ assets, liabilities and equities.
• At large, finance boils down to “funds and resources”.
• In simple terms, finance is concerned with decisions
about money, or more appropriately, cash flows.
• Finance decisions deal with how money is raised and
used by businesses, governments, and individuals.
• Finance has many facets, which makes it difficult to
provide one concise definition. The discussion in this
section will give you an idea of what finance
professionals do and what you might do if you enter
the finance field after you graduate.
 What is Finance?
• To make sound financial decisions you must
understand three general, yet reasonable
concepts:
Everything else being equal:
1. More value is preferred to less.
2. The sooner cash is received, the more valuable it
is.
3. Less risky assets are more valuable than
(preferred to) riskier assets.
General Areas of Finance

1. Financial Management
2. Capital Markets
3. Investments
 1. Financial Management
also called corporate finance, focuses on
decisions relating to how much and what types
of assets to acquire, how to raise the capital
needed to purchase assets, and how to run the
firm so as to maximize its value. The same
principles apply to both for-profit and not-for-
profit organizations.
 2. Capital Markets
This relate to the markets where interest rates,
along with stock and bond prices, are
determined.
 3. Investments
relate to decisions concerning stocks and bonds and include a
number of activities:

i. Security Analysis
ii. Portfolio Theory
iii. Market Analysis
 Finance within an Organization
Figure 1.1
Board of Directors

Chief Executive Officer ((CEO)

Chief Operating Officer (COO) Chief Financial Officer (CFO)

Marketing, Production, Accounting, Treasury,

Human Resources, and Credit, Legal, Capital
Other Operating Budgeting, and Investor
Departments Relations
 FINANCE VERSUS ECONOMICS AND
ACCOUNTING
Finance, as we know it today, grew out of economics and
accounting. Economists developed the notion that an
asset’s value is based on the future cash flows the asset
will provide, and accountants provided information
regarding the likely size of those cash flows. People who
work in finance need knowledge of both economics and
accounting. Figure 1.1 illustrates that in the modern
corporation, the accounting department typically falls
under the control of the CFO. This further illustrates the
link among finance, economics, and accounting
 Roles of Financial Managers
• Allocation or Utilization of Funds
– The financial manager decides as to where to get
financial resources like cash, inventories,
equipment, and other assets needed by the firm in
its operation. If cash is acquired, the financial
manager decides where to use the cash – finance
a new project, pay outstanding obligations, pay
operating expenses, or buy equipment needed by
the firm.
• Management of Funds
– The person in charge of the finance function is
called the director of finance, VP – Finance, or
finance manager. He is responsible for the
allocation of the financial resources of a company,
the acquisition of additional funds needed, and
the utilization of these financial resources to attain
organizational objectives.
• The finance manager or comptroller
supervises the chief accountant, the
purchasing manager, the investment manager,
the budget and planning manager, the
treasury department, and the risk
management and insurance department.
 Goals of the Financial Manager
1. Acquisition of funds with the least cost from
the right sources at the right time;
2. Effective cash management;
3. Effective working capital management;
4. Effective inventory management;
5. Effective investment decisions;
6. Proper asset selection; and
7. Proper risk management.
 Goals of the Financial Manager
• Acquiring funds form the right sources at the right time with
the least cost provides an advantage toward goal attainment.
Establishing the right connection or networking is important in
this respect. Sources of funds include banks, financial
institutions and financial intermediaries, insurance companies,
mortgage and loan associations, and individual and corporate
investors.
• Effective cash management needs a detailed cash flow budget
so that the sources and uses of funds can be carefully planned.
Taking advantage of cash discounts in paying trade payables,
prioritizing the use of cash, and other similar strategies help in
managing cash.
• Similarly, inventories need to be managed effectively. Overstocking is
undesirable; it ties up capital. Understocking, likewise, is undesirable
because the firm misses' sales opportunities that could have increased
profits. Purchasing the right inventory at the right time from the right
sources gives the company an edge over its competitors. Disposing slow-
moving inventories needs to be done, that is why some companies resort to
barter in the barter exchanges where slow-moving inventories can be sold.
• Determining where to invest excess funds to create additional income is
making an investment decision. Too much cash lying in the bank or checking
accounts that do not ears interest are not advisable. Any excess cash needs
to be invested to earn income, either in the form of interest or dividends.
Investing in the right assets is a must for successful management of a firm.
Engaging in new projects and buying new assets are investment activities.
• Proper asset allocation is important. Selecting the right machinery
and equipment needed by a company in its operation is important
to attain its production goal that creates sales. Deciding on buying
a computer and the type of computer to buy will help the company
attain improvement in organizational efficiency.
• Risk management is a task so important to the firm to weigh risks
associated with certain business decisions. Buying stocks or
investing in something needs risk analysis and assessment. In
general, the riskier the project, the higher should be the return.
Every management decision involves risk, more so every financial
decision. Risk management is a primary task for the financial
manager.
 Business Ethics
• Ethics is defined in Webster’s Dictionary as
“standards of conduct or moral behavior.”

• Business ethics can be thought of as a

company’s attitude and conduct toward its
employees, customers, community, and
stockholders.
 What companies are doing?
Most firms today have strong written codes of
ethical behavior; companies also conduct
training programs to ensure that employees
understand proper behavior in different
situations. When conflicts arise involving profits
and ethics, ethical considerations sometimes are
so obviously important that they dominate. In
other cases, however, the right choice is not
clear.
 Consequences of Unethical Behavior

• Over the past few years, ethical lapses have

led to a number of bankruptcies.
• Companies avoid bankruptcy but face a
damaging blow to their reputation.
 How Should
Employees Deal with
Unethical Behavior?