12

Business Finance
(Quarter 1-Module 1/Week 1)

Role of Financial Management

Department of Education
SDO- City of San Fernando (LU)
Region 1
 12
Business Finance
(Quarter 1-Module 1/Week 1)

ROLE OF FINANCIAL MANAGEMENT

MOST ESSENTIAL LEARNING COMPETENCY

 explain the major role of financial management and the different
individuals involved. (ABM_BF12-IIIa-1)

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Guide to Parents:
Get the module from your child’s subject teacher.
2. Read and understand together with your child.
3. Guide your child in reading the module.
4. If there are questions regarding the lesson/module, feel free to call/text the teacher using
this cellphone numbers 09385918457.
5. The module shall be returned to the designated area/teacher every Friday of the week.
6. Place the checked answer sheets in your child’s portfolio.
7. Thank you parent partners. We’re hoping for your full support.

Guide to Learners:
1. Read and understand the module together with your parents.
2. Do not leave any activity sheets unanswered.
3. Work on the activity sheets independently and BE HONEST at all times for you to maximize
learning.
4. Write your answers clearly.
5. If you are done with the module, give it to your parents/guardian so they can give it back to
the designated area/teacher for checking.

Health Tips:
1. Always wear your face mask and face shield.
2. Wash your hands with soap and water regularly.
3. Use alcohol or hand sanitizer when needed.
4. Practice social distancing to stop the spread of COVID-19 virus.

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 Business Finance Self-Learning Module has been developed for you to be
equipped with the knowledge of business and finance. It prepares you to work
in corporate and government financial management, banking, and financial
planning. And because finance revolves around planning and analysis, studying
finance and becoming more financially literate enables you to make better
personal financial decisions in the future.

Business Finance Self-Learning Module attains all the competencies outlined

in the K to 12 curriculum guide. Each lesson is packed with varied strategies
and activities and applies different instructional approaches to ensure that
lifelong learning is achieved. Furthermore, this module includes the following
components:

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 Introduction
This module has been developed for you to be equipped with the knowledge
of business and finance. It prepares you to work in corporate and government
financial management, banking, and financial planning. And because finance
revolves around planning and analysis, studying finance and becoming more
financially literate enables you to make better personal financial decisions.

Besides improving a person's chances, Finance can also help you hone your
critical-thinking and problem-solving skills, which you can then use to make
sound financial decisions.

Therefore, this module will help you to add value to your learning phase by
proper understanding of time value of money; taking better financing decision;
being aware of the valuation of financial resources; understanding the
requirement of evaluation of investment opportunities; able to analyze each and
every opportunity cost; putting efforts for maximization of wealth; acquiring
maximum return of your investment; increasing your analytical skills;
managing their personal and professional life in a better way; deep analysis of
sources of funds; understand the investors life cycle to choose right investment
time; understand key success factors of financing and know how to get their
cost capital and analyze it.

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 What I Need To Know
Learning Competency:
 Explain the major role of financial management and the different
individuals involved. (ABM_BF12-IIIa-1)

Learning Objectives:
1. Have an appreciation of what the overall aim of management should be;
2. Describe the goals of the firm and explain why maximizing the value of the
firm is an appropariate goal for a business; and
3. Identify factors that influence the change in market price.

What I Know

Directions: Read the following questions carefully and encircle the letter that
best describes the answer.

1. Most of the activities we do involving decisions on where to use our

money is a
a.) Finance decision
b.) Finance reaction
c.) Finance action
2. It can be defined as the science and art of managing money.
a.) Budget
b.) Save
c.) Finance
3. The act of estimating revenue
a.) Budgeting
b.) Saving
c.) Financing
4. A business owned by one person and operated for his or her own profit.
a.) Sole/Single Proprietorship
b.) Partnership
c.) Corporation
5. An entity created by law owned by shareholders.
a.) Sole/Single Proprietorship
b.) Partnership
c.) Corporation

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6. A business owned by two or more people and operated for profit.
a.) Sole/Single Proprietorship
b.) Partnership
c.) Corporation
7. The goal of the company is achieved through
a.) Financial management
b.) Financial resources
c.) Financial budget
8. They are responsible for making the decisions for the company that
would lead towards shareholders’ wealth maximization.
a.) Managers
b.) Secretary
c.) Clerk
9. It is a measure of the financial performance of a company for a period of
time.
a.) Savings
b.) Wealth
c.) Profit
10.These factors influences the general reaction of investors in making an
investment decision.
a.) External factors
b.) Internal factors
c.) Middle factors

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 LESSON PROPER

What’s In

Review of Pre-requisite Knowledge

Once you graduate from school, you will no longer receive your daily
allowance. You would either be employed by a company, manage your own
family business, or start your own business.
Who among you wants to own their own business? (Students will answer)
Now, what type of business organization is owned by one person who operates it
for his or her own profit? (Answer: Sole/Single Proprietorship)
Aside from Sole Proprietorship what are other forms of business organizations
do you know?
(Answer: Partnership, Corporation and Cooperative)
Sole Proprietorship – A business owned by one person and operated for his or
her own profit.
Partnership – A business owned by two or more people and operated for profit.
Corporation – An entity created by law owned by shareholders.
Now, how can you be a shareholder of a corporation? (Answer: by buying
stocks)
How and where can you buy stocks?
(Answer: from public and private corporations)

Privately owned corporations are often owned by family members whose

stocks may not be offered to outsiders unless consented by the family members
is secured while companies which are publicly listed are owned by unrelated
investors and are traded in organized exchanges like the Philippine Stock
Exchange. While there are many stockholders, there is generally a group of
investors or a family which controls each listed company. For example, in the
case of BPI, the biggest stockholder is Ayala Corporation and in the case of
Banco De Oro, it is SM Investment Corporation. Prices of stocks of listed
corporations are driven by several factors such as the earnings of the
companies, the prospects of the industry where these companies operate, the
general market sentiment, and the economic prospects of the country, among
others.

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 What’s New
Knowing the Shareholder
Let us assume that you are the biggest shareholder in a corporation. What
are the objective/goal you want to achieve as owners of the corporation?
(Answer: Be profitable; Have a lot of cash)

Do you think a profitable company is a successful company? Can success be

attributed to profitability only? (Answer: Though having a lot of cash has its
advantages, it also signals unhealthy company practices. It may tell them that
management has not been putting the company’s resources into good use.

Also, keeping too much cash in the books is like hiding your extra allowance
under their bed. They will be missing out on investment opportunities. The
overall objective of a shareholder should be wealth maximization.

Measurement of the shareholder’s wealth

How do we measure shareholders wealth?
Assuming you bought 10 shares of Globe Telecom at PHP2,510 each on
September 9, 2010. This brings his investments to PHP25,100. What happens
to the value of his investment if the price goes up to PHP2,600 per share or it
goes down to PHP2,300 per share?

An increase of the share price to PHP2,600 per share means that people are
willing to buy the shares for that amount. If the learners were to sell their
shares at this point, it will result to a profit of PHP90 per share or PHP900 on
their whole investment. Hence, the value of their investment increased from
PHP25,100 to PHP26,000.

Therefore, there is an increase in shareholder’s wealth.

On the other hand, a decrease in the share price to PHP2,300 per share means
that people are only willing to buy shares for PHP2,300. If the learners were to
sell their investment at this point, they will receive PHP23,000 which would
result to a loss of PHP2,100. The decrease in value of their investment leads to
a decrease in shareholder’s wealth.

Therefore, shareholders’ wealth is measured based on the current market

price of the corporation’s stocks. The market price changes across different
periods. Hence, the value of your investment changes in different points on time
based on the market value at that time.
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What Is It

Factors that Influence Market Price

Let us discuss the factors that affects market prices. We have the internal
factors that the Management can control and external factors that cannot be
controlled by management.
Internal Factors External Factors
 profitability  macroeconomic
 having a good conditions
liquidity  political stability
 competent  prospects of the
management industry where
which affects the the company
company’s operates
operating  general market
efficiency sentiment
 coming up with  flow of foreign
corporate plans funds invested in
that improve the the Philippine
business stock market
prospects of the
company
Now let us discuss each factor that influences market price. Internal factors:
1. Profitability •
 Profit is a measure of the financial performance of a company for a period
of time.
 Although it is a major driver for increasing the value of stock, an investor
should not rely on profits alone. As discussed earlier, it is possible that
the company has profits but its cash flow is negative.
Examples: Suppose the following Income Statements and Cash Flow
Statements
of companies A, B and C were presented to you. Which do you think is a
more attractive company?
Company A
Income Statements Cash Flows
Sales 100,000 Collection 100,000
from
customers
Less:Costs 50,000 Payment 50,000
of
Expenses
Profits 50,000 Net Cash 50,000
Flow
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Company B
Income Statements Cash Flows
Sales 100,000 Collection 100,000
from
customers
Less:Costs 150,00 Payment 50,000
0 of
Expenses
Profits (50,000 Net Cash 50,000
) Flow

Company C
Income Statements Cash Flows
Sales 100,000 Collection 100,000
from
customers
Less:Costs 70,000 Payment 70,000
of
Expenses
Profits 30,000 Net Cash 30,000
Flow

Company A is profitable but generated negative cash flows which resulted from
the uncollected accounts receivable of PHP100,000. Without adequate cash
inflows to meet its obligations, the company will face liquidity problems,
regardless of its level of profits. • Company B on the other hand has a positive
cash flow but is unprofitable. This is a result of the company’s delay in payment
of its costs. Accordingly, the Company will soon have to pay the remaining
PHP100,000 liability and its cash will no longer be sufficient. Again, without
adequate cash inflows to meet.
Be sufficient. Again, without adequate cash inflows to meet its obligations, the
company will face liquidity problems. • Company C is profitable and has a
positive cash flow. Based on the information provided, Company C seems to be
the best.
4. Good liquidity and reasonable leverage position.
 Liquidity and leverage refers to the company’s management of the type and
amount of assets and liabilities that it will hold in the course of its
operations.
5. Dividends.
 Holders of shares receive dividends from a corporation as returns on their
investments in form of cash or other properties. Companies which have
better dividend policies are generally more attractive than companies who
do not pay out dividends.
 Note that there may be times that companies do not pay out dividends
because of future expansions. Same with the other factors affecting share
price, dividend policies should go hand in hand with other factors in
determining market price.
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6. Competent management.
 Competent managers may have any of the following attributes: 1) visionary
2) decisive 3) people-oriented, 4) inspiring, 5) innovative, 6) respected and
7) experienced/seasoned manager.
7. Corporate plans that improve the business prospects.
Example:
Company A which is in the business of selling Halo-halo in the Dapitan area
(or any other area) for 5 years. Company A is consistently earning profits and
has a positive cash flow. When asked how Company A sees itself after 5 more
years, Company A answered that it would continue to sell Halo-halo in
Dapitan (or any other area).
On the other hand, Company B sells Buko Juice in Katipunan area (or any
other area different from Company A’s area) for 5 years. Company B is
consistently earning profits and has a positive cash flow. When asked how
Company B sees itself after 5 more years, Company B answered that it has
generated enough cash to expand its business to Cubao area (or any other
area) to take advantage of the growing demand of Buko Juice in Cubao.
Between Company A and Company B, which would be a better investment?
Company B. Since it has more concrete future prospects allowing investors to
hope for better revenues and net income.

These factors influences the general reaction of investors in making an

investment decision
External factors
1. These factors influences the general reaction of investors in making an
investment decision.
2. Its effect is not only to a specific company but on all companies or a group
of companies under similar circumstances. – Such factors are a result of
the
environment a company operates in rather than the decisions of the
company’s management.

What’s More

Role of Financial Management

Given the factors that influence market price, how will the company ensure
that such objectives will be achieved? (Answer: It is achieved through financial
management)
Financial management deals with decisions that are supposed to maximize
the value of shareholders’ wealth.
 These decisions will ultimately affect the markets perception of the company
and influence the share price. – The goal of financial management is to
maximize

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the value of shares of stocks. – Managers of a corporation are responsible for
making the decisions for the company that would lead towards shareholders’
wealth maximization.
That ends lesson 1, I hope you learn a lot. Always thank God for a wonderful
learnings and ideas. God bless you see you again on the next lesson.

What I have learned

From this lesson we were able to learn about the role of financial
management and the different individuals involved in it. We learned that the
main objective of management is to secure maximum outputs with minimum
efforts and resources and through increased productivity, management
ensures better standards of living for the society. Moreover, we also discussed
about value maximization that says managers should make all decisions so as
to increase the total long run market value of the firm. Profit maximization
does not achieve the objectives of the firm’s owners; therefore wealth
maximization is better option than profit maximization.

Assessment

Multiple Choice
Directions: Read the following questions carefully and encircle the letter
that best describes the answer.
1. A business owned by two or more people and operated for profit.
a.) Sole/Single Proprietorship c.) Corporation
b.) Partnership
2. These factors influences the general reaction of investors in making an
investment decision.
a.) External facto c.) Middle factors
b.) Internal factors
3. The act of estimating revenue
a.) Budgeting c.) Financing
b.) Saving
4. It is a measure of the financial performance of a company for a period of
time.
a.) Savings c.) Profit
b.) Wealth
5. Most of the activities we do involving decisions on where to use our money
is a
 a.) Finance decision c.) Finance action
b.) Finance reaction

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6. They are responsible for making the decisions for the company that would
lead towards shareholders’ wealth maximization.
a.) Managers
b.) Secretary
c.) Clerk
7. The goal of the company is achieved through
a.) Financial management
b.) Financial resources
c.) Financial budget
8. A business owned by two or more people and operated for profit.
a.) Sole/Single Proprietorship
b.) Partnership
c.) Corporation
9. A business owned by one person and operated for his or her own profit.
a.) Sole/Single Proprietorship
b.) Partnership
c.) Corporation
10. An entity created by law owned by shareholders.
a.) Sole/Single Proprietorship
b.) Partnership
c.) Corporation

ADDITIONAL ACTIVITIES

TRUE OR FALSE TEST:

Directions: Write T if the statement is True and write F if otherwise. Write the
letter of your answer on the blank provided at the right side of the test paper.

1. Investments come in many forms that will generate income or

appreciate in the future.
2. Saving is the act of estimating revenue and expenses over a period
of time.
3. Finance can be defined as the science and art of managing money.
4. Corporation is an entity created by law owned by shareholders.
5. Partnerships may either be privately owned or publicly owned.
6. By buying stocks you can be shareholders of a corporation.
7. Wealth maximization defines a shareholder’s wealth.
8. Loss is a measure of the financial performance of a company for a
period of time
9. Financial management deals with decisions that are supposed to
maximize the value of shareholders’ wealth.
10.Managers of a corporation are responsible for making the decisions
for the company that would lead towards shareholders’ wealth
maximization.
 10

Enumeration:
Directions: Give 5 internal and 3 external factors that affects market price.
Internal Factors External Factors
1. 1.

2. 2.

3. 3.

4.

5.

Essay:
1. Aside from the factors mentioned during class, what other factors can
influence the investor’s perception on the company’s performance which
would ultimately affect share price?
2. Why is the study of finance important to you?
 11
Answer Key:

Activity 1
1. T
2. F
3. T
4. T
5. F
6. T
7. T
8. F
9. T
10.T

Activity 2
Internal Factors External Factors
1. profitability • 1. macroeconomic conditions •
2. having a good liquidity and 2.political stability •
reasonable leverage 3. prospects of the industry where the
position company operates
3. dividends •
4. competent management
which affects the
company’s operating
efficiency •
5. coming up with corporate
plans that improve the
business prospects of the
company

Activity 3
 Possible answers: Ethics, Corporate Social Responsibilities, Employee
Relationships.

Essay type

Pre-Test Post-Test
1. a 1. b
2. c 2. a
3. a 3. a
4. a 4. c
5. c 5. a
6. b 6. a
7. a 7. a
8. a 8. c
9. c 9. a
10. a 10. c
 References:
Image Sources:
1. https://www.flaticon.com/free-icon/megaphone_314441
2. https://www.flaticon.com/free-icon/objective_1632633
3. https://www.iconfinder.com/icons/1297845/
message_note_noted_notes_report_statement_write_icon
4. https://en.m.wikipedia.org/wiki/File:VisualEditor_-_Icon_-_Open-book-
2.svg
5. https://icon-library.com/tags/writing.html
6. https://freeiconshop.com/icon/edit-document-icon-flat/
7. https://commons.wikimedia.org/wiki/
File:Checklist_Noun_project_5166_yellow.svg
8. https://www.clipartmax.com/middle/
m2H7H7m2d3K9K9N4_illustration-of-a-hand-writing-on-paper-
representing-things-to-do-icon/
9. https://slideplayer.com/slide/8171108/

Bibliography:
Bernstein, Leopold. Financial Statement Analysis, 4th Ed. Illinois: Irwin,
2014.
Brealey, Richard A., Myers, Stewart.C. and Marcus, Alan .J. Fundamentals
of Corporate Finance, 3rd Edition. New York: Mc-Graw Hill Co., 2014.
Cabrera, Elenita B. Management Advisory Services. Manila: Conanan,
2015.

Development Team of the Module

Writer: Jusie C. Apilado

EPS In-charge: Dr. Lorena C. Salvador
Management Team: Dr. Rowena C. Banzon, CESO V, SDS
Dr. Agnes B. Cacap, Chief- CID
Dr. Jose Mari P. Almeida, Chief- SGOD
Genevieve B. Ugay, EPS- LRMS
Hazel JaneB. Libatique, Librarian II
Aurelio C. Dayag, Jr. , PDO II