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  1. 1. OBJECTIVES: The learners should be able to: 1. define Finance 2. describe who are responsible for financial management within an organization.
  3. 3. “Finance as the science and art of managing money.” (Gitman & Zutter, 2012)
  4. 4. FINANCE The study of how the players in the financial system acquire, spend, manage, and make other sound financial decisions concerning money and other financial resources.
  5. 5. Why study finance?
  6. 6. According to Cayanan and Borja (2017), “Financial management deals with decisions that are supposed to maximize the value of shareholders’ wealth.” Financial management is a decision-making process that includes planning, analysis, utilization, and acquisition of funds in order to achieve the desired goals of the business. Risk and return are part of managing a business. A thorough plan and analysis should be done to avoid or reduce risks and to have a good return.
  7. 7. Finance Finance helps students understand the difference between value and price and its role and impact in the business decisions we take in our day to day lives. It also helps us create value and understand the future effects of value today.
  8. 8. To make sound and economic decisions Decisions being made by individuals, businesses, and governments affect the entire economy. To make sound personal and business investment decisions Investors in businesses should make prudence decisions To manage money and financial resources Money is a resource where everything starts, it is limited and scarce. Why study Finance? To be able to understand the career path available to finance professionals Knowing finance entails knowing as well the job opportunities available to finance professionals
  9. 9. Financial Management Means planning, organizing, directing and controlling the financial activities such as procurement and utilization of funds of the enterprise. It means applying general management principles to financial resources of the enterprise.
  10. 10. If you have cash, does it mean that you manage your finances?
  11. 11. In Financial Management, it is not enough to have cash and other resources, such resources if not managed properly, can be wiped out.
  12. 12. The goal of financial management is to maximize the wealth of the shareholders. Its aim is to make money and add value to the investors and to the firm. Investors buy stocks because they want something in return. More investors will create more funds and more jobs.
  13. 13. Maximizing the shareholders’ wealth is not that easy; a lot of things should be considered, and they need to satisfy different stakeholders. To gain profit, the business should make customers happy. They must treat their employees well like customers to become more productive and trustworthy. They should pay their financial obligations with their creditors and suppliers on time so they can establish a good relationship. They must pay their financial obligation on time.
  14. 14. Firms must also pay attention to the government and environmental issues. They must comply with the government and legal requirements. They must see that they will not have a bad effect on the environment.
  15. 15. The Corporate Organization Structure The figure below shows a typical organizational chart.
  16. 16. The Shareholders elect the Board of Directors (BOD). Each share is equal to one voting right. They buy shares to earn a profit in a form of dividend. The Board of Directors is the highest position in a corporation. Some of their responsibilities are providing direction of the company, setting the policies on investments, approving the company’s strategies, goals, and budgets, appointing, and removing members of the top management.
  17. 17. The President supervises the company’s operations and ensures that the strategies are well executed and planned. He/She also performs all areas of management such as planning, organizing, staffing, directing, controlling, and evaluating.
  18. 18. Some of the responsibilities of Vice President for Sales and Marketing are formulating business strategies and plans, directing and coordinating sales, making environmental scanning or research that will allow the company to increase sales, or identifying new market opportunities, analyzing and assessing the effectiveness and efficiency of the plans, methods and strategies applied and establishing a good relationship with customers and distributors.
  19. 19. The Vice President for Administration is responsible for the coordination of the different departments, providing assistance to the other department by determining the staff needed and assisting other departments in hiring employees and in payroll preparation. The Vice President for Production makes sure that the production meets the demand, finds ways to minimize cost in producing a competitive quality product, maximizes the utilization of the production facilities and solves production issues.
  20. 20. The Vice President for Finance makes decisions including planning, acquiring and utilization of funds. The functions of the Finance Manager are investing decisions, financing decisions, operating decisions, and declaring dividends.
  21. 21. • Investing decisions deals with managing the assets of the firms. Some of the examples of investment decisions are the allocation of funds, determination of the funds that a firm can put into investment, evaluation, and selection of capital investment proposal.
  22. 22. • Financing decisions includes making decisions on how to finance the long-term investments (expansions or acquisition of new land) and working capital which deals with the day-to-day operations of the company (payment of rent and utilities, purchase of raw materials). The finance manager must determine the right capital structure of the company. Capital structure refers to how much the total asset is financed by the debt (like loans) or equity (like stocks or bonds).
  23. 23. • Operating decisions deals with working capital management. Working capital refers to short-term assets and short-term liabilities. Inventory, receivables, cash, and short-term investments are examples of short-term assets.
  24. 24. • Declaration of dividends refers to the determination of how much dividends are to be distributed to the shareholders, frequency of payments and amounts to be retained by the firm. Dividend is a portion of profit or payment made by a corporation to its shareholders.
  25. 25. There are certain conditions before a company can declare dividends: (1) The company must have enough retained earnings (accumulated profits) to support cash dividend declaration. (2) They must have enough cash.
  26. 26. Both the treasurer and the controller report to the Vice President for Finance. The treasurer is responsible in managing the cash and credit, financial planning and capital expenditures. The controller handles tax payments, financial accounting and management information systems.
  27. 27. The organizational structure of the firm depends on the size and nature of the firm. Every department in the organization needs funds to function well. Since finance is needed in all parts of the organization, the finance manager must communicate with other department managers to achieve the goals of the company.
  28. 28. The Role of the Finance Manager
  29. 29. According to Cabrera (2017), “In striving to maximize owners’ or shareholders’ wealth, the financial manager makes decisions involving planning, acquiring, and utilizing funds which involve a set of risk-return trade- offs.”
  30. 30. Those risks or returns would have an impact on the market value of the firm that will lead to the shareholder’s wealth maximization or downfall of the firm if no proper decisions were made, but some of the factors that affect the market’s price of the firm’s shares are beyond the control of the management. Thus, it is the responsibility of the financial manager to make decisions in allocating the funds or resources properly, finding the best alternatives for funding the company, and creating a policy in distributing the dividends of the investors in line with the organization’s objectives.
  32. 32. 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 channelled to users of funds, borrowers, and investors.
  33. 33. 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.
  35. 35. 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:
  36. 36. 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 agencies.
  37. 37. 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.
  38. 38. 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.
  39. 39. d. Pension Funds - Financial institutions that receive payments from employees and invest the proceeds on their behalf.
  40. 40. 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.
  41. 41. 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.
  42. 42. 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, Investment in Bonds
  43. 43. 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. (IAS 32) Examples: Notes Payable, Loans Payable, Bonds Payable
  44. 44. c. 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.
  45. 45. d. Debt Instruments generally have fixed returns due to fixed interest rates. Examples of debt instruments are as follows:
  46. 46. • 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 wiped out.
  47. 47. e. 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:
  48. 48. •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.
  49. 49. • 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.
  50. 50. 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:
  51. 51. 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.
  52. 52. • 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 market.

Notes de l'éditeur

  • We will try to enhance your knowledge or have a recognition of what you are going to face with this subject, but don’t worry, we’ll make it easy
  • Ask their dream job or why they took ABM then explain that this subject will be significant to their dreams
  • Ask what they can notice about the picture (elements of the picture)
  • Ask first if they think money is part of their lives as abm students
    Ask on why they think finance is part of their subject.
    In finance they will be able to know how to manage their money.
  • Scarce - deficient in quantity or number compared with the demand : not plentiful or abundant.
    Economy - the wealth and resources of a country or region, especially in terms of the production and consumption of goods and services.
    Prudent- cautious
  • Ask the key elements of the picture. “Money is a key element in financial management”
  • Ask students to raise hands if yes or no
  • From the perspective of a corporation, Financial Management deals with decisions that are supposed to maximize the value of shareholder’s wealth. This means maximizing the market value of the shares of stocks.