LESSON Introduction to

1 Financial
Management
Define Finance
Describe who are responsible for financial
management within an organization
Describe the primary activities of the financial
manage
Describe how the financial manager helps in
achieving the goal of the organization
Describe the role of financial institutions and
markets
 As a senior high student taking this
subject and read this module, you will learn to
become financial literate in all aspect in life. If
you are thinking that only working individuals,
entrepreneurs, businesses make financial
decisions, then you will be benefiting more
from this subject than the rest. Perhaps, your
first lesson is to know that you do make
financial decisions on a daily basis. Finance is
every day; I want to challenge you to get your
notebook and answer these questions and give
your honest answer. How much is your monthly
allowance or everyday allowance?
List all your expenses when you come in
school. How much is your expense? How much
List all your expenses when you
come in school. How much is
your expense? How much is
your extra money? On the other
hand, do you experience short
of cash? In addition, why? All of
these questions will teach you
how to manage your finances.
What is Finance and Financial
Management?
Finance is always of great
importance, be it in a business or in
one’s everyday life. It is important to
manage risks in business, it is equally
important to manage risks in life as
well. Risk is nothing but an uncertain
event that might damage your assets
and when it is financial risks, it creates
loss of Finance. Some books define
Finance as the science and art of
 Financial Management deals with
that decisions that are supposed to
maximize the value of shareholder’s
wealth (Cayanan). These decisions
will
ultimately affect the markets
perception of the company and
influence the share
price. The goal of Financial
Management is to maximize the
value of shares of
stocks. Managers of a corporation
Organizational structure of the
company is important especially in
the
financial aspect of the business
and the particular set of people,
each play a role in the decision
making of the company. See
diagram below.
From the diagram presented,
emphasized that each line is working for
the interest of the person on the line
above them. Since the managers of the
company are making decisions for the
interest of the board of directors and the
board of directors do the same for the
interest of the shareholders, it follows
the goal of each individual in a corporate
organization should have an objective of
shareholders wealth maximization.
The roles of each position
identified.
1. Shareholders: The shareholders
elect the Board of Directors (BOD).
Each share held is equal to one
voting right. Since the shareholders
elect the BOD, their responsibility is
to carry out the objectives of the
shareholders. Otherwise, they would
not be elected in that position. Ask
2. Board of Directors: The board of directors is
the highest policy making body in a corporation.
The board’s primary responsibility is to ensure that
the corporation
is operating to serve the best interest of the
stockholders. The following are among the
responsibilities of the board of directors:
a. Setting policies on investments, capital structure
and dividend policies.
b. Approving company’s strategies, goals and
budgets.
c. Appointing and removing members of the top
management including the president.
d. Determining top management’s compensation.
e. Approving the information and other disclosures
3. President (Chief Executive
Officer): The roles of a president in a
corporation may vary from one
company to another. Among the
responsibilities of a president are the
following:
a. Approving the information and other
disclosures reported in the financial
statements. Overseeing the operations
of a company and ensuring that the
strategies as approved by the board are
implemented as planned.
b. Performing all areas of management: planning,
organizing, staffing, directing
and controlling.
c. Representing the company in professional,
social, and civic activities.

4. VP for Marketing: The following are among the

responsibilities:
a. Formulating marketing strategies and plans.
Directing and coordinating company sales.
b. Performing market and competitor analysis.
c. Analyzing and evaluating the effectiveness and
cost of marketing methods applied.
d. Conducting or directing research
that will allow the company identify
new
marketing opportunities, e.g.
variants of the existing
products/services
already offered in the market.
e. Promoting good relationships
with customers and distributors.
(Cayanan,
5. VP for Production: The following are
among the responsibilities:
a. Ensuring production meets customer
demands.
b. Identifying production
technology/process that minimizes
production cost and make the company
cost competitive.
c. Coming up with a production plan that
maximizes the utilization of thecompany’s
production facilities.
d. Identifying adequate and cheap raw
6. VP for Administration: The following are
among the responsibilities:
a. Coordinating the functions of
administration, finance, and marketing
departments.
b. Assisting other departments in hiring
employees.
c. Providing assistance in payroll preparation,
payment of vendors, and collection of
receivables.
d. Determining the location and the
maximum amount of office space needed by
the company. Identifying means, processes,
The role of the VP for
Finance/Financial Manager is to
determine the
appropriate capital structure of the
company. Capital structure refers to
how
much of your total assets financed by
debt and how much is financed by
equity.
To be able to acquire assets, our funds
must have come somewhere. If it has
bought using cash from our pockets, it
What are the functions of
Financial Managers?
1. Financing decisions- include
making decisions as to how to finance
long-term investments and working
capital-which deals with the day-to-day
operations of the company.
2. Investing Decisions- To minimize
the probability of failure, long-term
investments have supported by a
capital budgeting analysis.
3. Operating Decisions – deal with
the daily operations of the company
especially
on how to finance working capital
accounts such as accounts receivable
and inventories.
4. Dividend Policies – Dividend is a
part of profits that are available for
distribution, to equity shareholders. The
Finance manager must decide whether
the firm should distribute all the profits
or retain them or distribute a portion
 The financial system links the savers and
the users of funds. Savings can come from
households, individuals, companies, government
agencies, or any other entity whose cash inflows
are greater than their cash outflows.
The financial system through financial
intermediaries provides a mechanism by which
these savings can be channeled to users of
funds, borrowers, and investors. Some of the
financial instruments issued by users of funds
such as the shares of stocks and corporate
bonds of publicly listed companies and the debt
securities issued by the National Government
has traded.
Differentiate the Financial instruments,
financial institutions and financial markets

1. Financial institutions are companies in the

financial sector that provide a broad range of
business and services including banking, insurance,
and investment management.

Identify examples of financial

institutions/Intermediaries:
a. 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
b. Insurance Companies - Individuals
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 needed to pay off claims by
policyholders. Because they often own large
blocks of a firm’s stocks or bonds, they
frequently attempt to influence the
management of the firm to improve the firm’s
performance, and ultimately, the
performance of the securities they own.
c. Mutual Funds - Mutual funds owned by
investment companies that
enable small investors to enjoy the
benefits of investing in a diversified
portfolio of securities purchased on their
behalf by professional investment
managers. When mutual funds use money
from investors to invest in newly issued
debt or equity securities, they finance new
investment by firms. Conversely, when
they invest in debt or equity securities
already held by investors, they are
d. Pension Funds - Financial
institutions that receive payments from
employees and invest the proceeds on
their behalf.
Other financial institutions include
pension funds like Government Service
Insurance System (GSIS) and Social
Security System (SSS), unit investment
trust fund (UITF), investment banks,
and credit unions, among others.
2. Financial Instruments-is a real or a
virtual document representing a legal
agreement involving some sort of monetary
value. These can be debt securities like
corporate bonds or equity like shares of
stock. When a financial instrument issued, it
gives rise to a financial asset on one hand
and a financial liability or equity
instrument on the other.
a. A Financial Asset is any asset that is:
• Cash
• An equity instrument of another entity
• A contractual right to receive cash or
another financial asset from another
entity.
• A contractual right to exchange
instruments with another entity under
conditions that are potentially favorable.
(IAS 32.11)
• Examples: Notes Receivable, Loans
Receivable, Investment in Stocks,
b. A Financial Liability is any
liability that is a contractual
obligation:
• To deliver cash or other
financial instrument to another
entity.
• To exchange financial
instruments with another entity
under conditions
that are potentially unfavorable.
An Equity Instrument is any contract
that evidences a residual interest in the
assets of an entity after deducting all
liabilities. (IAS 32)
• Examples: Ordinary Share Capital,
Preference Share Capital
• Identify common examples of Debt
and Equity Instruments.
d. Debt Instruments generally have
fixed returns due to fixed interest rates.
Examples of debt instruments are as
follows:
 Treasury Bonds and Treasury Bills issued
by the Philippine government. These bonds
and bills have usually low interest rates and
have very
low risk of default since the government
assures that these has been paid.
Corporate Bonds issued by publicly listed
companies. These bonds usually have higher interest
rates than Treasury bonds. However, these bonds are
not risk free. If the company issued the bonds goes
bankrupt, the holder of the
bonds will no longer receive any return from their
investment and even their principal investment has
Equity Instruments generally
have varied returns based on the
performance of the issuing
company. Returns from equity
instruments
come from either dividends or
stock price appreciation.
The following are types of equity
instruments:
•Preferred Stock has priority over a
common stock in terms of claims over the
assets of a company. This means that if a
company has liquidated and its assets have
to be distributed, no asset be distributed to
common stockholders
unless all the claims of the preferred
stockholders has given. Moreover, preferred
stockholders have also priority over common
stockholders in cash dividend declaration.
Dividends to preferred stockholders are
usually in a fixed rate. No cash dividends
given to common stockholders unless all the
Holders of Common Stock on the other
hand are the real owners of the
company. If the company’s growth is
encouraging, the common stockholders
will
benefit on the growth. Moreover, during
a profitable period for which a company
may decide to declare higher dividends,
preferred stock will receive a fixed
dividend
rate while common stockholders receive
all the excess.
3. Financial Market - refers to a
marketplace, where creation and trading
of financial assets, such as shares,
debentures, bonds, derivatives, currencies,
etc. take place.
Classify Financial Markets into comparative
groups:
- Primary vs. Secondary Markets • To
raise money, users of funds will go to
a primary market to issue new securities
(either debt or equity) through a
public offering or a private placement
The sale of new securities to the public
referred to as a public offering and the first
offering of stock named an initial public
offering. The sale of new securities to one
investor or a group of investors (institutional
investors) is
referred to as a private placement.
• However, suppliers of funds or the holders of
the securities may decide to sell the securities
that have purchased. The sale of previously
owned securities takes place in secondary
markets. The Philippine Stock Exchange (PSE)
is both a primary and secondary
Money Markets vs. Capital Markets
•Money markets are a venue wherein
securities with short-term maturities (1
year or less) are sold. They have created
because some individuals, businesses,
governments, and financial institutions
have temporarily idle funds that they
wish to invest in a relatively safe,
interest bearing asset. At the same time,
other individuals, businesses,
governments, and financial institutions
•On the other hand, securities with
longer-term maturities sold in
Capital
markets. The key capital market
securities are bonds (long-term
debt) and both common stock and
preferred stock (equity, or
ownership).
The role of Financial Managers:
make financing decisions that
ASSIGNMENT