TOPIC 1: Overview Financial Management ACCOUNTANT- financial statements

FINANCE MANAGER
OBJECTIVES OF AN ENTITY
- analyze financial statements (financial analysis)
 PROFIT MAXIMIZATION - ratio ( effect business )
 SHAREHOLDER MAXIMIZATION -More on - can make better decisions if they apply these basic
corporation, shareholders owns shares from a economic principles.
corporation and their goal is to increase the value of - Find the best and least expensive sources of funds and to
the shares. (Warren Buffet is one of the richest invest these funds into the best and most efficient mix of
person due to investing to coca cola's startup shares) assets
 SOCIAL RESPONSIBILITY -The business is helping
back the community, we are helping in our DIFFERENT CLASSIFICATION OF SOURCES OF FINANCE 1.
community. It is not just focusing on the profits. CLASSIFICATION ACCORDING TO DURATION OVER WHICH
 BUSINESS ETHICS -Guidelines and policies that the THE FUNDS WILL BE RETAINED.
business follows.
 GROWTH -Profit is not the only reason why we excel 1.1 LONG TERM SOURCE OF FUNDS - they are refundable
as a business. after a long period of time.
EQUITY SHARES- sharing of ownership rights
WHAT IS FINANCE DEBENTURES- cheaper mode of finance compared to equity
As defined by webster's dictionary refers to the system that TERM LOAN- given by some bank of financial institutions
includes the circulation of money, the granting of credit, the PREFFERED STOCK - they have got priority over common
making of investments, and the provisions of banking equity shares in terms of payment
facilities. VENTURE CAPITAL- normally invest in the new company at
an initial stage and do a rigorous analysis of a company
AREAS OF FINANCE LEASING/HP- Can help businesses delay its cash payment
which is equal to having its good financed.
1. CAPITAL MARKETS

STOCK MARKET -A stock market is a place where investors go 1.2 SHORT TERM SOURCE OF FUNDS - they are refundable
to trade equity securities (ex. Shares) issued by corporations. after a short period of time.

BOND MARKET is where investors go to buy and sell debt BANK OVERDRAFT - businesses need money for their day to
securities issued by corporations or govt. day requirement
TRADE CREDIT - the credit given to a business by their
2. INVESTMENT - An investment is an asset or item acquired
creditors/ Suppliers
with the goal of generating income or appreciation.
DEBT FACTORING - the business sells its account
3. FINANCIAL MANAGEMENT Also known as corporate receivables/debtors at a discount.
finance, Managerial Finance & Business Finance
1.3 PERMANENT SOURCES OF FUNDS - they are not
SCOPE OF FINANCIAL MANAGEMENT refundable as long as the business remains.
1. Procurement of short-term as well as long-term funds
from financial institutions. 2. CLASSIFICATION ACCORDING TO ORIGIN
2. Mobilization of funds through financial instruments. 2.1. External Sources of Funds- raised from outside the
3. Compliance with legal and regulatory provisions relating to organization
funds procurement, use and distribution as well as 2.2. Internal Sources of Funds- raised from within the
coordination of finance function with the accounting organization
function.
FINANCIAL DECISIONS 3. CLASSIFICATION ACCORDING TO THE RELATIONSHIP
BETWEEN THE FIRM AND PARTIES PROVIDING THE FUNDS
1. INVESTMENT DECISION - determine how scarce it limited 3.1. COMMON EQUITY CAPITAL- funds provided by the real
resources in terms of funds if the business firms are owners of the business
committed to projects. 3.2. QUASI CAPITAL- funds provided by the preference
shareholders
2. FINANCING DECISIONS - mix of debt and equity chosen to
3.3. DEBT FINANCE- funds provided by the creditors
finance investments should maximize the value of
investments made.
4. CLASSIFICATION TO THE RATE OF RETURN
3. DIVIDEND DECISION - determination of quantum if profits 4.1. CAPITAL WITH AFFIXED RATE OF RETURN- capital that is
to be distributed to the owners. paid a certain pre-specified rate of return each year.
Example: preference capital and long term debts
SIGNIFICANCE OF FINANCIAL MANAGEMENT 4.2. CAPITAL WITH A VARIABLE RATE OF RETURN- capital
1. Broad Applicability that is paid a different rate of return each year depending on
2. Reduction of Chances of Failure the firm’s performance.
3. Measurement of Return on Investment
5. A BUSINESS MAY OBTAIN FUNDS FROM VARIOUS
SOURCES WHICH MAY BE EITHER:
RELATIONSHIP BETWEEN FINANCIAL MANAGEMENT AND 5.1. LONG TERM SOURCES which are repaid after a long
ACCOUNTING period of time.
5.2. SHORT TERM SOURCES which are repaid after a short
term period even less than a year.

SOURCES OF FINANCE
EQUITY FINANCE- this refers to the funds sourced from the
owners of the company (shareholders).
- it is generally made up of ordinary share capital and
reserves
ORDINARY SHARE CAPITAL- owned by the common
shareholders
- they receive what is left after satisfaction of all other claims

AUTHORIZED, OUTSTANDING AND ISSUED SHARES METHODS OF ISSUING COMMON SHARES

1. AUTHORIZED SHARES- the number of shares of common 1. PUBLIC ISSUE -Shares that are offered to the general
stock that the firm’s charter allows without further public
shareholders’ approval. - Engages with an investment banker who will underwrite
2. OUTSTANDING SHARES- the number of shares held by the shares, that is, buy any shares not taken up by the public.
public. 2. PRIVATE PLACEMENT -Security that are sold to few, usually
3. ISSUED SHARES- the number of shares that has been put chosen investors mainly institutional investors.
in circulation; they represent the sum of outstanding and 3. RIGHTS ISSUE - Option offered to already existing
treasury stock. shareholders to buy common shares of the company at a
price less than the market price.
TREASURY STOCK- the number of shares of outstanding *When right are issued the shareholders has 3 options
stock that have been repurchased by the firm. available:
-He can exercise the rights and therefore buy the new shares
DIVIDENDS- the payment of it is at the discretion of the -He can sell the rights in the market
Board of Directors. It is usually paid semi-annually. - He can ignore the rights
4. BONUS ISSUE - An issue of additional shares to existing
VOTING RIGHTS shareholders in lieu of cash dividend
I. MAJORITY VOTING SYSTEM- shareholders receive a vote
for every share held. Under this system, any shareholders TAX BENEFIT- it is not taxable therefore shareholder can sale
owning more than 50% of the company’s shares will make the new shares in the market to make capital gain which is
all the decisions. The minority shareholders have no say. not taxable.
2. CUMULATIVE VOTING SYSTEM- shareholders receive one
vote for every share held times the number of similar OTHER SOURCES OF FUNDS
decisions to be made VENTURE CAPITAL- Money put into an enterprise which may
all be lost if the enterprise fails.
LEASE FINANCING- An agreement where the right
repossession and enjoyment of an asset is transferred for a
definite time.
LESSOR- the person transferring the right/ owner of the
asset
LESSEE- the person receiving the right/asset
LEASE- an agreement between two parties, wherein the
lessor allows the lessee to use it for a specified period of time

OPERATING LEASES -Rental agreements between lessor and

lessee:
a. the lessor supplies the equipment to the lessee
b. the lessor is responsible for servicing and maintaining the
leased equipment
c. the period of the lease is fairly short, less than economic
life of the asset so that at the end of the lease agreement

FINANCE LEASES Lease agreements between the user of the

leased asset and a finance provider

ADVANTAGES OF LEASE
1. To avoid risk of ownership.
2. Avoidance of investment outlay.
3.Increase flexibility Lease charges are tax allowable expenses

HIRE PURCHASE- This is an arrangement whereby a

company acquires an asset by making a down payment or
deposit and paying the balance over some time in
installments.
 - The Bernie Madoff scandal came to light the very same
MORTGAGES - A pledged of security over property or an year. Bernard L. Madoff Investment Securities LLC was a Wall
interest there in created by a formal written agreement for Street investment firm founded by Madoff, who tricked
the repayment of monetary debt. investors out of $64.8 billion through the largest Ponzi
scheme in history.
FRANCHISING- A method of expanding business on less
capital than would otherwise be needed. 3. SATYAM (FALSIFYING RECORDS)
- Under this agreement, a franchisee pays a franchisor for - In 2009, Indian IT services and back-office accounting firm
the right to operate a local business under the Satytam admitted to falsifying revenues, margins and cash
franchisor’s trade name. balances to the tune of 50 billion rupees. Although founder
and Chairman Ramalinga Raju and his brother were charged
with breach of trust, conspiracy, cheating and falsification of
TOPIC 2 : FUNCTIONS OF FINANCIAL records, they were released after the Central Bureau of
Investigation failed to file charges on time.
MANAGEMENT & BUSINESS
ORGANIZATION AND TRENDS FORMS IN BUSINESS ORGANIZATIONS
1. PROPRIETORSHIP- unincorporated business owned by ONE
ROLE OF FINANCIAL MANAGER individual.
1. ANALYSIS & PLANNING ADVANTAGES
- Financial Manager shall utilize both quantitative and 1. Easy of entry and exit
qualitative analysis of all operational aspects of company 2. Full ownership and control
and shall consider economics and business trends, review 3. Tax savings
past company performance and attempt to anticipate 4. Few government regulations
obstacles and potential problems. DISADVANTAGES
1. Unlimited liability
2. ACQUISITION OF FUNDS - Financial Manager should know 2. Limitations in raising capital
whether these funds are for short term, medium term or 3. Lack of continuity
long term use.
3. ALLOCATION OF FUNDS- Financial Manager should know 2. PARTNERSHIP- legal arrangement between TWO or more
where to allocate funds and obtain best mix of financing people who decide to do business together. ADVANTAGES
alternatives and to develop an appropriate dividend policy. 1. Ease of formation
LONG-TERM SOURCES shares and debentures, long-term 2. Additional sources of capital
borrowings and loans from financial institutions. 3. Management base
MEDIUM -TERM SOURCES borrowings from commercial 4. Tax implication
banks, public deposits, lease financing and loans from DISADVANTAGES
financial institutions 1. Unlimited liability
SHORT-TERM SOURCES Trade credit, loans from commercial 2. Lack of continuity
banks and commercial papers. 3. Difficulty of transferring ownership
4. Limitations in raising capital
FINANCE ORGANIZATION
3. CORPORATION- legal entity created by state, and it is
CHIEF FINANCIAL OFFICER - A senior executive responsible separate and distinct from its owners and managers.
for managing the financial actions of their company ADVANTAGES
CONTROLLER -Handles Cost & Financial Accounting, tax 1. Limited liability
payments and management information systems 2. Unlimited life
TREASURER - Responsible in managing the firm's cash and 3. Ease in transferring ownership
credit, its financial planning and its capital expenditures 4. Ability to raise capital
DISADVANTAGES
JOBS IN FINANCE 1. Time and cost formation
- Finance prepares students for jobs in banking, 2. Regulation
investments, insurance, corporations and government 3. Taxes

FINANCIAL SCANDALS 4. LIMITED LIABILITY COMPANY (LLC) - hybrid between

1. LEHMAN BROTHERS (REPURCHASE AGREEMENT) - partnerships and a corporation
Repurchase Agreement is a short term borrowing for dealers
in government securities. 5. LIMITED LIABILITY PARTNERSHIP (LLP) - similar to LLC, and
- Lehman Brothers sold toxic assets to Cayman Island banks, it is used for professional firms in the fields of accounting,
understanding that they would eventually be bought back. law and architecture.
The global financial services firm hid over $50 billion in loans
disguised as sales. The scandal was exposed in September IMPORTANT BUSINESS TRENDS
2008, when Lehman Brothers filed for bankruptcy. - Increased globalization of business
- Ever improving information technology (IT)
2. BERNIE MAD OFF (PONZI SCHEME) - Corporate Governance
- Ponzi Schemes ultimately require an unsustainably large - Outsourcing
pool of investors to keep the racket going
 4. Relationship between sales and current assets

CASH MANAGEMENT- It helps to identify the cash balance

TOPIC 3 : WORKING CAPITAL which allows for the business to meet the day to day
expenses, but reducing cash holding costs
MANAGEMENT
-It represents operating liquidity available to a business, CASH CYCLE- refers to the amount of time that elapses from
organization, or other entity, including governmental entity. the point when the firm makes a cash outlay to purchase
raw materials to the point when cash is collected from the
- It involves in managing inventory, accounts receivable and sale of finished goods produced using those raw materials.
payable and cash.
CASH TURNOVER -refers to the frequency of a firm’s cash
cycle during a year.

APPROACHES TO FINANCE CURRENT ASSETS

1. Matching Approach - involves the matching of the

expected life of assets with the expected life of the sources of
funds raised to finance assets.
- The firm uses long term funds to finance permanent assets
and short term funds to finance temporary assets.
2. Conservative Approach- Low return-low risk approach
- it depends more on long term funds for financing needs.
- its permanent and temporary assets with long term funds
which are more expensive than short term funds.

3. Aggressive Approach - High-risk approach

-finance permanent and temporary assets by short term
sources.

DETERMINANTS OF WORKING CAPITAL NEEDS

1. Nature and size of the business
2. The firm’s manufacturing cycle
3. Business fluctuations
4. Production policy
5. Firm’s credit policy SETTING THE OPTIMAL CASH BALANCE
6. Availability of credit A. CASH BUDGET -It shows the firm’s projected cash inflows
7. Growth and expansion activities and outflows over some specified period.

FACTORS DETERMINE WORKING CAPITAL NEEDS OF A FIRM CASH BUDGET SECTIONS

1. AVAILABILITY OF CREDIT- Amount of credit that a firm can 1. Beginning Cash Balance
obtain, as also the length of the credit period significantly 2. Cash Collections
affects the working capital requirement. 3. Cash disbursements
4. Cash excess or deficiency
2. GROWTH AND EXPANSION -The working capital 5. Financing
requirements increase with growth and expansion of 6. Ending Cash Balance
business.
REASONS FOR KEEPING CASH
3. PROFIT AND DISTRIBUTION- The larger the amount of  Cash is usually referred to as the “king” in finance, as it
cash profit, the greater will be the possibility of acquiring is the most liquid asset.
working capital.  The transaction motive refers to the money kept
available to pay expenses.
4. PRICE LEVEL FLUCTUATIONS - When prices rise, a firm will  The precautionary motive refers to the money kept
require more funds to purchase its current assets. aside for unforeseen expenses.
5. OPERATING EFFICIENCY -If a firm is efficient, it can use its  The speculative motive refers to the money kept aside
resources economically, and thereby it can reduce cost and to take advantage of suddenly a raising opportunities.
earn more profit.
B. BAUMOL’S MODEL (William J. Baumol) - An application
IMPORTANCE OF WORKING CAPITAL MANAGEMENT 1.Time of the EOQ (Economic Order Quantity) inventory model to
devoted to working capital management cash management.
2. Investment in current assets
3. Importance to small firms
C. MILLER-ORR MODEL (Merton Miller & Daniel Orr) - It is a DISCOUNTS - It involves an attempt to speed up the
stochastic (probabilistic) model which makes the more payment of receivables. It can result in reduced bad debt
realistic assumption of uncertainty in cash flows. losses.
COLLECTION POLICY- The higher the cost of collecting
D. CASH MANAGEMENT TECHNIQUES - To pay accounts accounts receivables the lower the bad debt losses.
payable as late as possible without damaging the firm’s
credit rating. EVALUATION OF THE CREDIT APPLICANT
1. The applicant’s financial statement
CASH MANAGEMENT TECHNIQUES 2. Credit ratings and reports from experts
1. CONCENTRATION BANKING - Firms with regional sales 3. Banks
outlets can designate certain of these as regional collection 4. Other firms
center. It reduces the amount of time that elapses between 5. The company’s own experience
the customers’ mailing of a payment and the firm’s receipt
of such payment. DISCRIMINATIVE ANALYSIS- A statistical model that can be
used to accept or reject a prospective credit customer.
2. Lock-box System - The customer sends the payments to a
post office box. The post office box is emptied by the firm’s TIME VALUE OF MONEY- It helps a finance manager
bank at least once or twice each business day. evaluate different investments to give qualified advice to
the business owner or the corporate executives.
E. INVENTORY MANAGEMENT - It helps to identify the level
of inventory which allows for uninterrupted production but PRESENT VALUE (PV)
reduces the investment in raw materials and minimizes - pesos INVESTED yesterday
reordering costs-and hence increases cash flow. - pesos INVESTED today
FUTURE VALUE (FV)
DEBTORS’ MANAGEMENT - pesos RECEIVED in the future
- It helps to identify the appropriate credit policy, i.e. - pesos WITHDRAWN today
credit terms that will attract customers, such that any
impact on cash flows and the cash conversion cycle will
be offset by increased revenue and return on capital.

FINANCIAL MARKET
- A market for funds where buyers and sellers bring
together to trade in a commodity.

CATEGORIES OF FINANCIAL MARKETS

AVERAGE COLLECTION PERIOD DEPENDS ON...
CREDIT STANDARDS - Follows a lenient credit policy and PRIMARY MARKET- Transfer of new financial instruments
tends to sell credit to customers on very liberal terms and (cash, shares, and debt capital)
credit is granted for a longer period. SECONDARY MARKET- Trading of already issued securities.
LENIENT- increased in sales and contribution margin CAPITAL MARKET- A financial market for long term securities
STRICT - sells credit on a selective basis to customers who MONEY MARKET- A financial market for short term
have proven creditworthiness. securities.

LENIENT CREDIT POLICY PHILIPPINE STOCK EXCHANGE (PSE)

- Increase bad debt losses - Is the only stock exchange in the Philippines
- Opportunity cost of tied-up capital in receivables 9:30 am – market open
- Increased cost of carrying out credit analysis 3:15 pm – market close
- Increased collection cost
- Increased discount costs to encourage early payments. HOW BROKERS MAKE MONEY
A STOCKBROKER is compensated for his services in
CREDIT TERMS - It involves both the length of the credit executing orders on the Exchange through commission
period and the discount given. charges, which are paid by both the buyer and seller to their
respective brokers.

THERE ARE FOUR DATES TO KNOW WHEN IT COMES TO

COMPANIES ' DIVIDENDS:
1. DECLARATION DATE- date in which the company
announces that it will be issuing a dividend in the future
2. RECORD DATE- when the company examines its current BEARS- who believe that the main market movement is
list of shareholders to determine who will received downwards therefore securities now hoping to buy them
dividend. back later at a lower price.
3. EX- DIVIDEND DATE- date that determines which of these
shareholders will entitled to receive the dividend. STAGS- who buy new shares because they believe that the
4. PAYABLE DATE- also known as payment date. price set by issuing company is usually lower than the
theoretical value and when shares are later dealt with in the
TERMINOLOGIES USED IN THE STOCK EXCHANGE stock exchange, the share price will increase and they will be
able to sell them at profit.
CUM-DIVIDEND - it means that the buyer will get both
shares to be sold and dividends declared on it. SPECIAL FINANCIAL INSTITUTIONS
COMMERCIAL BANK- Accepts both demand and time
EX-DIVIDEND-The buyer only gets the share sold. deposits, negotiable order of withdrawal (NOW) and money
market deposit accounts.
CUM-RIGHT- it means that the buyer will be entitled not SAVINGS AND LOAN- Similar to a commercial bank except
only to receive shares being purchased but also to rights that it may not hold demand deposits. They lend primarily
declared not yet issued. to individuals and businesses in the form of real estate
mortgage loans
EX-RIGHT - it means that the buyer will only receive the
original shares and the sellers will not be entitled to receive CREDIT UNION- Deal primarily in transfer of funds between
each right issue on share. members.

CUM-ALL - means with dividends, with bonuses, or with SAVINGS BANKS- Similar to a savings and loan bank in that it
rights. holds savings, NOW, and money deposit accounts.

The share price will thus reflect this additional value LIFE INSURANCE COMPANY- It receives premium payments
otherwise; the share will sell at an EX-ALL price. and invests them to accumulate funds to cover future
benefit payments.
INSIDER TRADING- It constitutes the use of confidential
information about a listed company that is not yet made PENSION FUND- These are set up so that employees can
public to take advantage of himself or the other person receive income after retirement
connected directly or indirectly with the company.
MUTUAL FUND- Pools funds from the sale of shares and
ACTIVE SECURITIES- are securities which are most uses them to acquire bonds and stocks of business and
frequently traded at the stock exchange. governmental units

BID- is the highest price a security purchaser will be willing

to purchase the security

OFFER PRICE- is price at which the seller is willing to sell the

security.

ODD LOTS- arises when the number of shares falls below

the stipulated limit in a NSE the minimum number is 100
shares.

MARKET CAPITALIZATION- This is the market value of a

company and its market price at a specified period.

FUTURE - is a contractual agreement entered between two

parties where one party promises to provide a security and
the other party promises to buy the security at some time in
the future.

OPTIONS- give the buyer the right, but not the obligation,
to purchase or sell an asset at a specified price and date.

JOBBER- He is a dealer.

JOBBER’S TURN- profit he earned.

BULLS- who believe that the main market movement is

upwards and therefore buy securities now hoping to sell
them at a higher price in the future.