1 BUSINESS FINANCE
FINANCE CAN BE DEFINED AS: THE ROLES OF EACH POSITION IDENTIFIED:
o Science and art of managing a large amount of o Shareholders: The shareholders elect the
money. Board of Directors (BOD). Each share held is
o Giving of monetary support for an enterprise equal to one voting right. Since the
o Monetary resources and affairs of a shareholders elect the BOD, their
government, organization or person responsibility is to carry out the objectives of
the shareholders. Otherwise, they would not
TYPES OF FINANCE: be elected in that position.
o Public finance – includes tax systems, o Board of Directors: The board of directors is
government expenditures, budget the highest policy making body in a
procedures, stabilization instruments, debt corporation. The board’s primary
issues and government concerns responsibility is to ensure that the corporation
o Corporate finance – involves in managing is operating to serve the best interest of the
assets and debt for a business stockholders. The following are among the
o Personal finance – includes proper responsibilities of the board of directors:
management of an individual’s income and Setting policies on investments,
expenses so enough money is left over for capital structure and dividend
saving policies.
Approving company’s strategies, goals
BUDGETING and budgets.
is the act of estimating revenue (in the form of Appointing and removing members of
their allowance) and expenses over a period the top management including the
of time president.
Determining top management’s
INVESTMENTS compensation.
Approving the information and other
come in many forms that will generate income
disclosures reported in the financial
or appreciate in the future.
statements (Cayanan, 2015)
SOURCES OF FUNDS o President (Chief Executive Officer): The roles
of a president in a corporation may vary from
When faced with financial difficulties (in this
one company to another. Among the
case, the lack of funds to meet the current
responsibilities of a president are the
expenses) we look for people or institutions
following:
that will give us the money we need.
Approving the information and other
FORMS OF BUSINESS ORGANIZATION: disclosures reported in the financial
statements. Overseeing the
o Sole Proprietorship - A business owned by operations of a company and ensuring
one person and operated for his or her own that the strategies as approved by the
profit. board are implemented as planned.
o Partnership - A business owned by two or Performing all areas of management:
more people and operated for profit. planning, organizing, staffing,
o Corporation – An entity created by law owned directing and controlling.
by shareholders. Corporations may either be Representing the company in
privately owned or publicly owned. Overall professional, social, and civic
objective of a shareholder should be wealth activities.
maximization. o VP for Marketing: The following are among
the responsibilities:
Formulating marketing strategies and
plans. Directing and coordinating
company sales.
2 BUSINESS FINANCE
Performing market and competitor have supported by a capital budgeting
analysis. analysis.
Analyzing and evaluating the o Operating Decisions – deal with the daily
effectiveness and cost of marketing operations of the company especially on how
methods applied. to finance working capital accounts such as
Conducting or directing research that accounts receivable and inventories.
will allow the company identify new o Dividend Policies – Dividend is a part of
marketing opportunities, e.g. variants profits that are available for distribution, to
of the existing products/services equity shareholders. The Finance manager
already offered in the market. must decide whether the firm should
Promoting good relationships with distribute all the profits or retain them or
customers and distributors. (Cayanan, distribute a portion and retain the balance.
2015)
o VP for Production: The following are among FINANCIAL SYSTEM
the responsibilities:
Ensuring production meets customer
demands.
Identifying production
technology/process that minimizes
production cost and make the
company cost competitive.
If Company A knows that Company B is in need of
Coming up with a production plan
funds, or if Company B knows that Company A is
that maximizes the utilization of the
willing to invest funds, Company A and B may agree
company’s production facilities.
to make a private placement. However, if these facts
Identifying adequate and cheap raw
are unknown to them, Companies A and B can go
material suppliers. (Cayanan, 2015)
to a Financial Market which is an organized
o VP for Administration: The following are
forum that lets A, along with other suppliers of
among the responsibilities:
funds, and B, along with other users of funds, meet
Coordinating the functions of
and make transactions. Once A and B have met in
administration, finance, and
the Financial Market, they can now agree to make a
marketing departments.
private placement. If the two companies do not
Assisting other departments in hiring
want to make an effort to find counterparty in the
employees.
Financial Markets, they may go to a Financial
Providing assistance in payroll
Institution. Financial Institutions serve as an
preparation, payment of vendors, and
intermediary to the suppliers and users of funds.
collection of receivables.
Moreover, financial institutions actively
Determining the location and the
participate in the financial markets as both
maximum amount of office space
suppliers and users of funds.
needed
by the company. Identifying means,
FINANCIAL INTRUMENTS
processes, or systems that will
minimize the operating costs of the is a real or a virtual document representing a
company. (Cayanan, 2015) legal agreement involving some sort of
monetary value. These can be debt securities
FUNCTIONS OF FINANCIAL MANAGER:
like corporate bonds or equity like shares of
o Financing decisions- include making decisions stock.
as to how to finance long-term investments When a financial instrument is issued, it gives
and working capital-which deals with the day- rise to a financial asset on one hand and a
to-day operations of the company. financial liability or equity instrument on the
o Investing Decisions- To minimize the other.
probability of failure, long-term investments
FINANCIAL ASSET
3 BUSINESS FINANCE
o is any asset that is: bonds usually have higher interest
Cash rates than Treasury bonds.
However, these bonds are not risk
An equity instrument of another free. If the company which issued
entity the bonds goes bankrupt, the
A contractual right to receive cash holder of the bonds will no longer
or another financial asset from receive any return from their
another entity. investment and even their principal
A contractual right to exchange investment can be wiped out.
instruments with another entity
EQUITY INSTRUMENTS
under conditions that are potentially
favorable. (IAS 32.11) o generally have varied returns based on the
Examples: Notes receivable, loans performance of the issuing company. Returns
receivable, investment in stocks, from equity instruments come from either
investment in bonds dividends or stock price appreciation. The
following are types of equity instruments:
FINANCIAL LIABILITY
Preferred Stock has priority over a
o is any liability that is a contractual obligation: common stock in terms of claims over
To deliver cash or other financial the assets of a company. This means
instrument to another entity. that if a company were to be
To exchange financial instruments liquidated and its assets have to be
with another entity under distributed, no asset will be
conditions that are potentially distributed to common stockholders
unfavorable. (IAS 32) unless all the claims of the
Examples: Notes Payable, Loans preferred stockholders have been
Payable, Bonds Payable given. Dividends to preferred
stockholders are usually in a fixed
EQUITY INSTRUMENT
rate. No cash dividends will be given
o is any contract that evidences a residual to common stockholders unless all the
interest in the assets of an entity after dividends due to preferred
deducting all liabilities. (IAS 32) stockholders are paid first. (Cayanan,
Examples: Ordinary Share Capital, A. 2015)
Preference Share Capital. Common Stock on the other hand
are the real owners of the
Note: Suppliers of Funds are the holders of company. If the company’s growth is
financial assets. The users of funds are the makers spurring, the common stockholders
of financial liabilities and equity instruments. will benefit on the growth.
Moreover, during a profitable
DEBT INSTRUMENTS period for which a company may
decide to declare higher dividends,
o have fixed returns due to fixed interest preferred stock will receive a fixed
rates. Examples of debt instruments are as dividend rate while common
follows: stockholders receive all the excess.
Treasury Bonds and Treasury Bills
are sued by the Philippine FINANCIAL MARKETS
government. These bonds and bills
refers to a marketplace, where creation and
have usually low interest rates and
trading of financial assets, such as shares,
have very low risk of default since the
debentures, bonds, derivatives, currencies,
government assures that these will be
etc. take place.
paid.
Corporate Bonds are issued by PRIMARY VS. SECONDARY MARKETS
publicly listed companies. These
4 BUSINESS FINANCE
To raise money, users of funds will go to a to pay off claims by policyholders. Because
primary market to issue new securities (either they often own large blocks of a firm’s stocks
debt or equity) through a public offering or a or bonds, they frequently attempt to influence
private placement. the management of the firm to improve
The sale of new securities to the public the firm’s performance, and ultimately, the
referred to as a public offering and the first performance of the securities they own.
offering of stock named an initial public o Mutual Funds - Mutual funds are owned by
offering. The sale of new securities to one investment companies which enable small
investor or a group of investors (institutional investors to enjoy the benefits of investing
investors) is referred to as a private in a diversified portfolio of securities
placement. purchased on their behalf by professional
However, suppliers of funds or the holders of investment managers. When mutual funds
the securities may decide to sell the securities use money from investors to invest in newly
that have purchased. The sale of previously issued debt or equity securities, they finance
owned securities takes place in secondary new investment by firms.
markets. o Pension Funds – these are financial
The Philippine Stock Exchange (PSE) is both a institutions that receive payments from
primary and secondary market. employees and invest the proceeds on their
behalf.
MONEY MARKETS VS. CAPITAL MARKETS
o Other financial institutions include pension
Money markets are a venue wherein funds like Government Service Insurance
securities with short-term maturities are System (GSIS) and Social Security System
sold. They are created because some (SSS), unit investment trust fund (UITF),
individuals, businesses, governments, investment banks, and credit unions, among
and financial institutions have others.
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 find themselves in need of
seasonal or temporary financing.
On the other hand, securities with
longer-term maturities are sold in
Capital markets. The key capital market
securities are bonds (long-term debt)
and both common stock and preferred
stock
FINANCIAL INSTITUTIONS: ROLES AND PURPOSES
o 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 agencies.
o 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 are needed
