FINANCIAL MANAGEMENT obtaining and effectively utilizing the funds necessary

for efficient operations.

MIDTERM REVIEWER
Financial Manager - in charge of ensuring the financial
WEEK 2
wellness of a company.
INTRODUCTION TO FINANCIAL MANAGEMENT
- responsible for coming up with financial
Financial Management – composed of two words reports, direct investments, and strategizes
“Financial” & “Management.” the company’s financial planning.

- also called “Corporate Finance” FUNCTIONS OF FINANCIAL MANAGER

- focuses on decisions relating to how much
• Forecasting financial requirements – the
and what types of assets to acquire, how
primary function
to raise the capital needed to purchase
• estimate the financial requirement of the
assets, and how to run the firm to maximize
business concern.
its value.
• Acquiring necessary capital – concentrate on
- entails planning for the future of a person or
how the finance is mobilized & where it will be
a business enterprise to ensure a positive
available.
cash flow, including
• Investment Decision – must carefully select best
the administration and maintenance of
investment alternatives.
financial assets.
- primary concern is the assessment rather • must concentrate to principles of safety, liquidity
than the techniques of financial and profitability while investing capital.
quantification. • Cash Management – for effective utilization of
cash and helps to meet short-term liquidity
Management - is how businesses organize and direct position of the concern.
workflow, operations, and employees to meet company
goals. OBJECTIVES OF FINANCIAL MANAGEMENT

Finance – art & science of managing money. • Profit Maximization – main aim of any kind
economic activity is earning profit.
- provision of money at the time when it is • Wealth Maximization – involves latest
needed. innovations and improvements in the field of the
- main function is procurement of funds and business concern.
its effective utilization. • wealth means shareholder wealth or wealth of
Corporate Finance - concerned with budgeting, the persons involved in the business concern.
financial forecasting, cash management, • Return Maximization – safeguard the economic
credit administration, investment analysis and fund interest of persons directly connected with the
procurement. company (shareholders, creditors, employees
etc.)
Financial Management according to experts:
IMPORTANCE OF FINANCIAL MANAGEMENT
Weston and Brigham: Financial Management “is an area
of financial decision-making, harmonizing individual • Financial Planning – helps to determine the
motives and enterprise goals.” financial requirement of the business concern.
• Acquisition of Funds Financial – involves the
Howard and Upton: Financial management “as an acquisition of required finance to the business
application of general managerial principles to the area concern.
of financial decision-making.” • acquiring needed funds play a major part, which
Joshep and Massie: Financial Management “is the involve possible source of finance at minimum
operational activity of a business that is responsible for cost.
 • Proper Use of Funds – leads to improve the decided and estimated by the
operational efficiency of the business concern. financial department and the finance
- when funds used properly, they can reduce manager allocates the appropriate finance
the cost of capital and increase the value of to production department.
the firm.
• Final Decision – helps to take sound financial
decision in the business concern. Financial Management and Marketing
- financial decision will affect the entire
- Produced goods are sold in the market with
business operation of the concern.
innovative and modern approaches. For this,
• Improve Profitability - helps to improve the
the marketing department needs finance to
profitability position of the concern with the help
meet their requirements.
of strong financial control devices such
- The financial manager or finance
as budgetary control, ratio analysis and cost
department is responsible to allocate the
volume profit analysis.
adequate finance to the marketing
• Increase the Value of the Firm - very important
department.
in the field of increasing the wealth of the
investors and the business concern. Financial Management and Human Resource
• Promoting Savings - savings are possible only
- also related with human resource
when the business concern earns higher
department, which provides manpower
profitability and maximizing wealth.
to all the functional areas of the
- helps promoting and mobilizing individual
management. Financial manager
and corporate savings.
should carefully evaluate the requirement of
SCOPE OF FINANCIAL MANAGEMENT manpower to each department.

Financial Management and Economics COMPONENTS OF FINANCIAL MANAGEMENT

- Economic concepts like micro

and macroeconomics are directly applied
with the financial management approaches.
- Investment decisions, micro and
macro environmental factors are closely
associated with the functions of financial
manager.

Financial Management and Accounting

- Accounting records includes the financial

information of the business concern.

Financial Management and Mathematics

3 MAJOR DECISIONS OF FINANCIAL MANAGERS
- Modern approaches of the 1. Investment Decision – relates to the careful
financial management applied large number selection of assets in which funds will be invested
of mathematical and statistical by the firm.
tools and techniques. - Involves buying, holding, reducing,
replacing, selling & managing assets.
Financial Management and Production Management
Common questions involving Investments
- Production performance needs finance, include.
because production department requires 2. Financing Decision - involves the acquisition of
raw material, machinery, wages, operating funds needed to support long-
expenses etc. These expenditures are term investments. While taking this
 decision, financial management weighs Financial Asset Markets – deals with stocks, bonds,
the advantages and disadvantages of notes, and mortgages and derivative securities.
the different sources of finance.
Primary markets – markets in which corporations raise
3. Dividend Decision - the decision which relates to
new capital. The corporation selling the newly created
the appropriation of profits earned. The two
stock receives the proceeds from the sale in a primary
major alternatives are to retain the profits
market transaction.
earned or to distribute these profits to
shareholders. - “new issue market”
- While declaring - where securities like shares and bonds are
dividend, many considerations are kept in being created and traded for the first time
mind such as: without using any intermediary.
• Trend of earnings
Ex. Initial Public Offering - The process of offering shares
• Stability in dividends
of a private corporation to the public in a new stock
• The trend of share market prices
issuance.
• The requirement of funds for future growth
• The cash flow situation Secondary market - is the place where
investors purchase previously issued securities like
Organization Structure of Finance Department
stocks, bonds, futures and options from other investors
instead of issuing companies themselves.

- “aftermarket”
- where the bulk of exchange trading occurs,
and it is what people are talking about when
they refer to the “stock market”. It
includes the NYSE, Nasdaq and all other
major exchanges that you are familiar with.

FINANCIAL INSTITUTIONS

Financial Institution - corporations that are responsible

for the supply of money to the market through the
transfer of funds from investors to the companies in the
WEEK 3
form of loans, deposits, and investments.
CAPITAL ALLOCATION PROCESS
- acts as an intermediary that takes
Capital Allocation - distributing and investing a funds from the people who save and lend it
company’s financial resources. to people who have productive
investment opportunities.
Stock - the capital raised by a business or corporation
through the issue and subscription of shares and is being DIFFERENT FINANCIAL INSTITUTIONS
paid through dividends to stockholders.
1. Investment Banks - an organization that
Bonds – certificate of debt issued sold by institution, underwrites and distributes new investment
company or by the government as a means of borrowing securities and helps businesses obtain financing.
long-term funds. 2. Commercial Banks - the traditional department
store of finance serving a variety of savers and
TYPES OF MARKETS borrowers.
Physical Asset Markets – also called 3. Financial Services Corporations - firms that offer
as “tangible” or “real” asset markets; these are a wide range of financial services, including
for products such as wheat, autos, real investment banking, brokerage operations,
estate, computers, and machinery. insurance, and commercial banking.
4. Banks
 • Call loans - These loans are called back at any
time. Normally, these loans are taken by bill
brokers or stockbrokers.
• Short term loans - These are sanctioned for
a period up to 1 year.
• Medium term loans - These are sanctioned
for the period varying between 1 and 5 years.
• Long Term Loans - These loans are
5. Credit Unions – cooperative associations whose sanctioned for a period of more than 5 years.
members are supposed to have a common bond,
such as being employees of the same firm. 2.1 Lending Loans – Long Term Loans
6. Pension Funds – retirement plans funded by • Overdraft - The bank grants overdraft facility
corporations or government agencies for their to its reliable and respectable depositors.
workers. • Cash credit - Under this facility, the bank
7. Life Insurance Companies – take savings in the allows the borrower to withdraw cash
form of annual premiums; invest these funds in against certain security.
stocks, bonds, real estate, and mortgages, and • Bills of Exchange - The bank provides funds
make payments to the beneficiaries of the to their customers by purchasing or
insured parties. discounting bills of exchange.
8. Mutual Funds – corporations that accept money
from savers and then use these funds to buy OTHER FUNCTIONS OF BANKS
stocks, long-term bonds, or short-term debt 1. Merchant Banking - an organization which
instruments issued by businesses or government underwrites securities for companies advises in
units. various activities.
THE BANKS AND ITS FUNCTIONS 2. Leasing - banks have started funding the fixed
assets through leasing.
Banking – business activity of accepting and safeguarding - renting out of immovable property by the
money owned by other individuals and entities, and then bank to the businessmen.
lending out this money to earn a profit. 3. Mutual Funds - mobilize the savings of the
Main Functions of Banks general public and invest them in stock market
and money market.
1. Accepting deposits 4. Venture Capital - financial capital provided
• Fixed Deposits – these deposits mature after to early-stage, high-potential, high risk, growth
a considerable long period like 1 year or start-up companies.
more than the rate of interest is fixed. - makes money by owning equity in the
• Current A/C deposit – mainly maintained by companies it invests in, which usually have a
the business community novel technology or business.
to facilitate frequent transaction with big 5. Automated Teller Machine (ATM) - cash point
amounts. 6. Telebanking /Internet Banking - a throwback to
• Savings bank A/C - It is kind of demand the days when people would call into a central
deposits which is generally kept by number at their bank/financial institution in
the people for the sake of safety. order to get balance.
• Recurring deposit A/C - In case of recurring 7. Credit cards - allow a person to buy goods and
deposit the fixed amount is deposited in a services up to a certain limit without immediate
bank every month for a fixed period. payment.
8. Locker Service - lockers are provided to the
2. Lending Loans public in various sizes on payment of fixed rent.
9. Bancassurance - offering protection coverage to
its existing clients (life and non-life).
TYPES OF INSURANCE COMPANIES Yield To Maturity – expected return on bond.

Professional liability insurance - Also known as errors Yield curve - A graph of the term structure of interest
and omissions (E&O) insurance.
- represents relationship between remaining
- It protects you against negligence claims time to maturity and the yield to maturity.
arising from harm that results from mistakes
The corresponding yield curve is shown below:
or failure to perform.

Property insurance - typically covers equipment, signage,

inventory and furniture in the event of storm, theft or
fire.

- mass destruction events, such as tornadoes,

floods and earthquakes, are not usually
covered under a general policy.

Workers' compensation insurance - Should be added

with the hiring of your first employee to cover medical
expenses as well as disability and death benefits.
This is the how the yield curve normally looks, it has been
Home-based businesses - Not typically covered
referred to as the “normal yield curve”.
by homeowners’ insurance policies.
The yields of longer-maturity bonds tend to
Product liability insurance - For potential claims
be higher than the yields of shorter-maturity bonds
of damage or harm that result from a product. Coverage
since the longer maturity bonds are riskier. This is
can be tailored to specific types of products, such as toys
because:
or machinery.
Changes in market conditions have a greater impact on
Vehicle insurance - Necessary if using company-owned
the prices of longer maturity bonds than shorter
vehicles. If you or employees use personal vehicles for
maturity bonds; and
business, personal insurance provides coverage in case of
an accident. There is more uncertainty over market conditions that
take place further in the future.
Business interruption insurance - Covers your business
in the event you have to limit or shut down because of During periods of rising inflation, the entire yield
disaster or catastrophic event. The curve shifts up as lenders require higher rates of return
insurance compensates a business for financial losses. to compensate for the loss of purchasing power.

During periods of falling inflation, the entire yield

curve shifts down.
WEEK 4
Occasionally, the yield curve can have a negative slope
TERM STRUCTURES, INTEREST RATES AND YIELD
(referred to as an ‘inverted yield curve’); this tends to
CURVES
happen when inflation is at unusually high levels and
Interest rate - required return. is expected to fall in the future or when recessions are
imminent.
- represents the price of money. The
compensation that a demander of funds
must pay to the supplier.

The term structure of interest rates - the relationship

between remaining time to maturity and the yield to
maturity of a bond.
Yield Curve of the yield curve. For example, 30-year rates are
influenced by the supply and demand for mortgages.

FINANCIAL STATEMENTS AND REPORTS

Financial statements – a collection of summary-level

reports about an organization's financial results, financial
position, and cash flows.

- provide various important financial

information that helps investors, creditors
and analysts evaluate a company’s
INTEREST RATES
financial performance.
Interest Rate - a common thread going through the
It includes:
whole macroeconomic system, linking all the separate
players such as the government, businesses, and - Income statement
consumers. - Balance sheet
- Statement of cash flows
- acts as a signal in moving funds among these
players. This is true in the international FINANCIAL REPORTING
arena, too, through foreign exchange rates.
Financial reporting - uses financial statements to disclose
In a perfect market, the interest rates over different financial data that indicates the financial health of a
maturities should be the same given the same risk since company over a specific period of time.
these interest rates are affected by the risk only. In reality,
however, this is not true. - The information is vital for management
to make decisions about
Theories the company’s future.
- helps management communicate the past
In general terms, the following observations of interest
successes and future expectations of the
rates over time are made in reality.
business.
1. Interest rates for different terms move together.
WHY FINANCIAL REPORTING IS IMPORTANT:
2. Interest rates on short-term debts fluctuate more than
Tax Purposes - the most important reason to use financial
those on long-term debts.
reports is that you have to and required by law to do so.
3. The term structure of interest rates usually slopes The Internal Revenue Agency uses these reports to make
upward in most cases. sure you’re paying your fair share of taxes.

INTEREST RATES THEORY - Businesses that make a lot of profit have

to pay quite a lot of taxes. Accurate financial
Expectations Theory - if the yield curve is upward
reporting helps reduce their tax burden and
sloping, this indicates that investors expect short-term
helps them ensure that all their resources
rates to be higher in the future.
are not depleted in a short amount of time.
Liquidity Premium Theory - investors expect to
Showing Financial Condition - Investors, creditors and
be compensated for holding long-term bonds instead of
other capital providers rely on a company’s financial
short-term bonds as long-term bonds are perceived to
reporting to gauge the safety and profitability of their
be riskier. This causes the yield curve to be steeper than
investments.
it would be under the Expectations Theory.
- The balance sheet address provides detailed
Market Segmentation Theory - rates are determined
information about the company’s asset
by supply and demand conditions in each maturity range
investments and outstanding debt and
equity components. Investors and creditors
 can use this information to better statement, the statement of cash flows and
understand the company’s position and the statement of shareholders’ equity.
capital mix.
ANNUAL REPORT - BALANCE SHEET
Evaluating Operations - Financial reporting done on an
The Balance Sheet - This financial statement shows what
income statement shares results about sales, expenses
assets the company owns and who has claims on those
and profit or losses. Using the income statement,
assets as of a given date.
investors can both evaluate a company’s past income
performance and assess future cash flow. Assets - upper side = assets that the company owns, and
the lower side = firm’s liabilities and stockholders’ equity,
Examining Cash Flow - The cash flow statement shows
which are claims against the firm’s assets. As shown in
the exchange of cash between the company and the
the figure above, assets are divided into
outside work during a period of time. By reviewing this
two major categories:
statement, investors can know if a company has enough
cash to pay for expenses and purchases. • Current Assets - assets that should be
converted to cash within one (1) year, and
Sharing Shareholder Equity - Shareholder equity is a
they include cash and cash equivalents,
company’s total assets minus its total liabilities and
accounts receivable and inventory.
represents a company’s net worth. Steady growth in a
business’s shareholders’ equity because of increasing • Long-term Assets or Fixed Assets - assets
retained earnings, as opposed to expanding shareholder expected to be used for
base, means higher investment returns for current equity more than one (1) year, they include plant
shareholders. and equipment in addition to
intellectual property such as patents and
Decision-making, Planning and Forecasting - When a copyrights. Plant and Equipment is
business needs to decide, analyzing financial statements generally reported net of accumulated
is crucial. Managers can look at the value of the assets depreciation.
that a business currently holds and decide if they can
afford to purchase more. Conversely, when the value of Liabilities - The claims against assets are of two (2) basic
assets is severely depreciated, managers can decide if types – liabilities (or money the company owes to others)
they need to be sold off. and stockholders’ equity.

Mitigate Errors - Accurate financial reporting can help • Current liabilities - consist of claims that must be
business’s catch costly mistakes and inter errors early on paid off within one year, including accounts
in the process. There is no better way to detect illegal payable, accruals (total of accrued wages and
financial activities than catch discrepancies in financial accrued taxes), and notes payable to banks and
statements. other short-term lenders that are due within one
year.
THE ANNUAL REPORT • Long-term debt includes bonds that mature in
more than one year.
Annual report - most important
report that corporations issue to stockholders, and it Shareholders’ Equity - Shareholders’ equity can be
contains two (2) types of information: thought of in two (2) ways:
1. Verbal section - often presented as a letter from - The amount that stockholders paid to the
the chairperson, which describes the firm’s company when they bought shares the
operating results during the past year and company sold to raise capital, in addition to
discusses new developments that will affect all of the earnings the company has retained
future operations. over the years.
2. The report provides the four (4) basic financial Stockholders’ equity = Paid-in capital + Retained earnings
statements – the balance sheet, the income
- The retained earnings are not just the
earnings retained in the latest year – they are
 the cumulative total of all the earnings the Depreciation – firms often use accelerated depreciation
company has earned and retained during its for tax purposes but straight-line depreciation for
life. stockholder reporting.

Stockholders’ equity can also be thought of as a residual: Market values versus Book Values – companies generally
use generally accepted accounting principles to
Stockholders’ equity = Total assets – Total liabilities
determine the values reported on their balance sheets.
ANNUAL REPORT - BALANCE SHEET (POINTERS) In most cases, these accounting numbers (or “book
values”) are different from what the assets would sell if
Cash versus other assets – although assets are reported they were offered for sale (or “market values”).
in pesos terms, only the cash and equivalents account
represent actual spendable money. Time dimension – the balance sheet is a snapshot of the
firm’s financial position at a point in time – for example
Accounts receivable - represent credit sales that have December 31, 2018. The balance sheet changes every
not yet been collected. day as inventories rise and fall, as bank loans are
Inventories - show the cost of raw materials, work in increased or decreased, and so forth.
process, and finished goods.

- Net fixed assets represent the cost of the ANNUAL REPORT - INCOME STATEMENT
buildings and equipment used in operations
minus the depreciation that has been taken Income statement is a report summarizing a firm’s
on these assets. revenues, expenses, and profits during a reporting
period, generally a quarter or a year.
Remember:

The non-cash assets should generate cash over time, but

they do not represent cash in hand and the cash they
would bring in if they were sold today could be higher or
lower than the values reported on the balance sheet.

Working Capital – Current assets are often called

“working capital” because these assets “turnover”, that
is they are used and then replaced throughout the year.

Net working capital = Current assets - Current liabilities

Net operating working capital = Current assets - (Current

liabilities – Notes Payable)

Total Debt versus Total Liabilities – a company’s total

debt includes both its short-term and long-term interest-
bearing liabilities. Total liabilities equal total debt plus the
company’s “free” (non-interest bearing) liabilities. WEEK 5
Total debt = Short-term debt + Long-term debt Book value per share (BVPS) = Total common
Total liabilities = Total debt + (Accounts payable + equity/Common shares outstanding
Accruals) A typical stockholder focuses on the reported EPS, but
Other Sources of Fund – most companies finance their professional security analysts and managers differentiate
assets with a combination of short-term debt, long-term between operating and non-operating income.
debt, and common equity. Some companies also use
“hybrid” securities such as preferred stock, convertible
bonds, and long-term leases.
 Many firms have divisions that operate in different
industries, for such companies, it is difficult to develop a
meaningful set of industry averages. Therefore, ratio
analysis is more useful for narrowly focused firms than
for multidivisional ones.

Most firms want to be better than average, so merely

attaining average performance is not necessarily good. As
a target for a high-level performance, it is best focus on
the industry leaders’ ratios. Benchmarking helps in this
regard.

FINANCIAL RATIO ANALYSIS Inflation has distorted many firms’ balance sheets – book
values are often different from market values.
Financial ratio - is a comparison in fraction, proportion,
decimal or percentage of two significant figures taken Seasonal factors can also distort a ratio analysis.
from financial statements. It expresses the direct
Different accounting practices can distort comparisons.
relationship between two or more quantities in the
statement of financial position and statement of It is difficult to generalize about whether a particular
comprehensive income of a business firm. ratio is “good” or “bad”.

FINANCIAL RATIO ANALYSIS – CATEGORIZATION Firms often have some ratios that look “good” and others
that look “bad”, making it difficult to tell whether the
• Liquidity Ratio – these ratios give us an idea of
company is, on balance, strong or weak.
the firm’s ability to pay off debts that are
maturing within a year or within the next
operating cycle. Satisfactory, liquidity ratios are
HOW TO COMPUTE FOR FINANCIAL RATIOS AND ITS
necessary if the firm is to continue operating.
SIGNIFICANCE
• Asset Management Ratio – these ratios give us
an idea of how efficiently the firm is using its 1.
assets. Good asset management ratios are
necessary for the firm to keep its costs low and
thus, its net income high.
• Debt Management Ratio – these ratios would
tell us how the firm has financed its assets as well
as the firm’s ability to repay its long-term debt.
Debt management ratios indicate how risky the
firm is and how much of its operating income
must be paid to bondholders rather than
stockholders.
• Profitability ratios – these ratios give us an idea
of how profitable the firm is operating and
utilizing its assets. Profitability ratios combine
the asset and debt management categories and
show their effects on return on equity.
• Market book ratios – these ratios which consider
the stock price give us an idea of what investors
think about the firm and its future prospects.
2. 4.

3. 5.
6.