FIN 101
OVERVIEW OF
Finance is defined by Webster’s Dictionary as
“the system that includes the circulation of
money, 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.
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
1. Financial Markets and
Institutions
2. Investments
3. Financial Services
Financial institutions, which include banks,
insurance companies, savings and loans, and
credit unions, are an integral part of the general
financial services marketplace.
The success of these organizations requires an
understanding of factors that cause interest rates
and other returns in the financial markets to rise
and fall, regulations that affect such institutions,
and various types of financial instruments, and
various types of financial instruments, such as
mortgages, automobile loans, and certificates of
deposit, that financial institutions offer.
This area of finance focuses on the decisions
made by businesses and individuals as they
choose securities for their investment
portfolios.
The major functions in the investments area
are:
(a) determining the value, risks, and returns
associated with such financial assets as stocks
and bonds; and
(b) determining the optimal mix of securities that
should be held in a portfolio of investments, such
as a retirement fund.
Financial services refer to functions
provided by organizations that deal with
the management of money. Persons who
work in these organizations, which include
banks, insurance companies, brokerage
firms, and similar companies, provide
services that help individuals and
companies determine how to invest money
to achieve such goals as home purchase,
retirement, financial stability and
sustainability, budgeting, and so forth.
General Areas of Finance
Managerial (business) finance
Managerial finance deals with decisions
that all firms make concerning their cash
flows, including both inflows and outflows.
Managerial finance is important in all types
of businesses, whether they are public or
private, and whether they deal with
financial services or the manufacture of
products.
General Areas of Finance
• Managerial (business) finance
• The duties encountered in managerial finance range
from making decisions about plant expansions to
choosing what types of securities should be issued to
finance such expansions.
• Financial managers also have the responsibility for
deciding the credit terms under which customers can
buy, how much inventory the firm should carry, how
much cash to keep on hand, whether to acquire other
firms (merger analysis), and how much of each year’s
earnings should be paid out as dividends versus how
much should be reinvested in the firm.
ROLES OF FINANCE
MANAGER
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.
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.
Ms. Ruthcel Velasquez-Aragon, MBA
