ABM 6: Business Finance

No Man Stands Alone

Week 2
Lesson 1: The Financial Institution
A financial institution is an organization that handles financial
transactions for individuals, groups, and other organizations-profit, nonprofit,
or government-owned. Some financial institutions are smaller than others like
community-based rural banks over large urban-based commercial banks.
Financial institutions can either be depository or non-depository
institutions. A depository institution, as the name implies, manages money that
is deposited by individuals and organizations. A non-depository institution, on
the other hand, does not handle deposits. Instead, such institutions serve as
intermediaries between savers and demanders of funds, or individuals,
households, and other businesses who need additional funds to support
personal needs or business operations. They borrow those funds from those
who have excess funds (called savers).
Most Common Types of Financial Institutions
1. Commercial banks- accept deposits from individuals
and organizations that have excess funds and provide
loans to those who need or want to borrow money.
2. Savings and Loans- They are also referred to as S&L
of thrift banks.
3. Credit Unions- Normally associated with or are an
offshoot of cooperatives.
4. Investment banks- Operation of investment banks are
different from those of commercial banks.
5. Insurance Companies- provide individuals and
organizations a way to manage risk.
6. Brokerage- a financial institution that earns through
commissions.
7. Investment Companies- are corporations wherein
individuals and other organizations invest in
investment portfolios that are managed by
professionals who are tasked to keep track of market
trends and the performance of different financial
products or instruments.
Lesson 2: The Financial Market
Financial institutions operate in the financial
markets. Financial market is a means for the
buying and selling of stocks, bonds, and other
financial instruments. Stocks are shares of a
corporation sold to investors while bonds are,
in essence, money loaned. The financial market
is also the means where individuals and
organizations who need funds find investors and
 According to the official Web site of the Bangko
Sentral ng Pilipinas or BSP (www.bsp.gov.ph),
financial markets channel funds into savings. The
exchange of funds between people and organizations
with surplus funds and those who want to barrow or
need money take place in the financial markets. Such
transactions are called financial transactions, and
they are facilitated by financial institutions. In the
Philippines, the BSP promotes and safeguards the
efficient functioning of the financial markets.
 According to professors Scott Besley and Eugene
Brigham, in the book Principles of Finance, the financial
market is sometimes described as a “’mechanism rather
than a physical location or a specific type of organization
or structure.” Given that it is not a physical place, this
means that savers and borrowers of funds are brought
together in financial markets regardless of where they are
located. For instance, an individual who is based in the
U.S. can choose to invest some of his or her excess money
(savings) in the Philippine financial market.
Lesson 3: The Financial Instruments
Financial products are signified by instruments when
individuals and organizations alike deal with each other in
completing financial transactions, thus the term financial
instruments. Financial instrument is a document which
signifies a legal or binding agreement between two parties
typically associated with monetary values such as personal
check once it is dated, issued to a payee, and signed by the
person who issued it or his or her legal representative. A
stock certificate is another example of a financial
instrument.
Most Common Financial Instruments

1. Savings- a savings account in a bank is by far the most common

type of financial product that is offered to customer either
regular account or time deposit.
2. Loans- Deposits in the banks are being loaned to individuals or
organizations who need funds that is associated with a
collateral.
3. Bonds- are loans granted to other organizations by individuals
and organizations with excess funds.
4. Security- is a financial instrument signifying ownership of stocks
by an investor of a publicly traded company, or a bond issued by
a government agency.
5. Treasury Bills- often referred to as T-bills issued by the
government that yield no interest but are sold at a
discount.
6. Insurance Products- Almost everything nowadays can
be insured: homes, vehicles, businesses, and other
properties among others including educational, life
and accidental even death insurance.
7. Mutual Funds- are based on the pooling of funds from
different investors that gained popularity in the
Philippines for the past decade.
SYNTHESIS: The Flow of Funds

Flow of Funds in a Business Organization

Individuals, households, organizations, and government
agencies with surpluses or excess money are the supplier of
funds. On the other hand, there are also individuals, households,
organizations, and government agencies who are in need of
money for a variety of reasons –for personal use, to support
family needs, for expansion, and to support public programs or
infrastructure building, among others. Those in need of funds
are the demanders of funds. These needed funds are provided by
the suppliers in the form of loans or investments.