Business finance

‘’different sources of finance have different implications Chief Financial Officer (CFO)-accounting, treasury,
for a business, so it is important that the most credit,legal, capital budgeting, & investor relations
appropriate method of finance is chosen for the purpose
that the business has in MIND’’. FINANCIAL MANAGEMENT
- planning, organizing, directing and controlling the
FINANCIAL MANAGEMENT financial activities such as procurement and utilization
FINANCE of funds of the enterprise.
-a study of how people and business evaluate - it means applying the general management principles
investments and raise capital to fund them. to financial resources of the enterprise
-a field that deals with the allocation of assets and OBJECTIVES OF FINANCIAL MANAGEMENT
liabilities over time under conditions of certainly and  To ensure regular & adequate supply of funds to the
uncertainly. concern.
-the science and art of money management (Gitnam and  To ensure adequate returns to the shareholders
Zutler. 2012) which will depend upon the earning capacity,
-this is the way in which money is need and handled. market price of the share expectations of the
shareholders.
WHY DO BUSINESS NEED FINANCE?  To ensure optimum funds utilization. Once the
funds are procured, they should be utilized in
maximum possible ways at least cost.
expansion  To ensure safety on investment, I.e. funds should be
invested in safe ventures so that adequate rate of
everyday return can be achieved.
for starting
bill  To plan a sound capital structure-there should be
up
payment sound and fair composition of capital so that a
business balance is maintained between debt and equity
need capital.
money for.. FINANCIAL MANAGEMENT DECISIONS
1. INVESTMENT DECISIONS
Internal Take
-include investment in fixed assets (called as capital
growth over bid
budgeting), investment in current assets are also apart of
Replace
machinery/
investment decisions called as working capital decisions
equipment 2. FINANCIAL DECISIONS
-they relate to the raising of finance from various
AREAS OF FINANCE resources which will depend upon decision on the type
FINANCIAL MANAGEMENT of resources period of financing,cost of financing and
- focuses on decisions relating to how much and what the returns thereby.
types of assets to acquire, how to raise the capital 3. DIVIDEND DECISIONS
needed to purchase assets and how to run the firm so as -the finance manager has to take decision with regards to
to maximize it’s value. the net profit distribution. Net profit are generally into
CAPITAL MARKET two:
-relate to markets, interest rates, along with stock and  Dividend for shareholder
bond pieces  Retained earnings- for expansion and
INVESTMENT diversification plans of the enterprise.
- relate to decisions concerning stocks and bonds and 4. CAPITAL BUDGETING
include security,portfolios and market. -what long-term investments or projects should the
FINANCE WITHIIN AN ORGANIZATION business take on?
Board of 5. CAPITAL STRUCTURE
Director -how should we pay for our assets? Should we use debt
or equity?
Chief Executive
6. WORKING CAPITAL MANAGEMENT
Officer (CEO) -how do we manage the day-to-day(daily) finances of
the firm?
FINANCIAL MANAGER
Chief Operating Chief Financial
Officer (COO) Officer (CFO)
A person who takes care of all the important financial
functions of an organization
ROLES OF FINANCIAL MANAGER
Chief Operating Officer (COO)-marketing, 1) RAISING OF FUNDS
production, human resources, and other operating In order to meet the obligation of the business it
department is important to have enough cash and liquidity. A firm
 Business finance
can raise funds by the way of debt and equity. It is the The net profit decision have to be made by the
responsibility of a financial manager to decide the ratio finance manager,this can be done in 2 ways:
between debt and equity. It is important to maintain a a. DIVIDEND DECLARATION
good balance between debt and equity. Include identifying the rate of dividends and
2) ALLOCATION OF FUNDS other benefits like bonus.
Once the fund are raised through different b. RETAINED PROFITS
channels the next important function of a financial The volume has to be decided which will
manager is to allocate the funds. In order to allocate depend upon expansions, innovations, diversification,
funds in the best possible manner of the firm and its plans of the company.
growth capability. 6. MANAGEMENT OF CASH
 The size of the firm and its growth capability finance manager has to make decisions with
 Status of assets whether they are short or long-term regard to cash management. Cash is required for many
 Mode by which the funds are raised purposes like payment of wages and salaries, electricity,
3) PROFIT PLANNING water bills, purchase of raw materials ,etc.
Profit earning is one of the prime functions of 7. FINANCIAL CONTROLS
any business organizations. Profit earning is more The finance manager has not only to plan,
important for the survival and substance of any procure and utilize the funds but he also has to exercise
organization.profit planning refers to proper usage of control over finances. This can be done through many
profit generated by the firm. techniques like ratio analysis, financial forecasting, cost
4) UNDERSTANDING CAPITAL MARKETS and profit control, etc.
Shares of the company are traded on stock
exchange and there is a continuous sale and purchase of
securities. Hence a clear understanding of capital market FINANCIAL SYSTEM
is an important function of financial manager. When
securities are traded on stock market there involves a financial
institution

huge amount of risk involved.therefore a financial

manager understands and calculate the risk involved in
this trading of shares and debentures.
savers/ users/
financial
suppliers of demanders
funds system of funds
FUNCTIONS OF FINANCIAL MANAGER
1. ESTIMATION OF CAPITAL
REQUIREMENTS
A finance manager has to make estimation with financial
market
regard to capital requirements of the company. This will
depend upon expected costs and profits and future
programs and policies of a concern. Estimations have to FINANCIAL SYSTEM ACTS AS …
be made in an adequate manner which increases earning -a middleman between users and savers.
capacity of enterprise. -fulfills task of transferring money from savers of funds
2. DETERMINATION OF CAPITAL to users of funds who need money.
COMPOSITION
Once the estimation have been made, the capital CHANNELS OF INTERMEDIATION
structure have to be decided. This involves short-term Funds can be channeled from saver to borrower in 3
and long-term debt equity analysis. This will depend ways:
upon the possessing and additional funds which has to 1. DIRECT INTERMEDIATION
be raised from outside parties. (direct transfer from saver to borrower- a non-market
3. CHOICE OF SOURCE OF FUNDS transaction)
For additional funds to be produced, a company 2. INDIRECT INTERMEDIATION
has many choices like; (a market-based transaction usually through a market
a. Issue of shares and debentures intermediary such as BROKER)
(creditor- lender debentures- borrower) 3. INDIRECT CLAIMS
b. Loans to be taken from banks and other financial Through financial intermediary/ institutions (where the
institutions. financial intermediary such as bank offers deposit-taking
c. Public deposits to be drawn like in the form of services & ultimately lends those deposit out as
bonds. mortgage or loans).
4. INVESTMENT OF FUNDS
The finance manager has to decide to allocate FINANCIAL INTERMEDIARIES/ INSTITUTIONS
funds into profitable ventures so that there is safety on  BANKS AND OTHER DEPOSIT-TAKING
investment and regular returns is possible. INSTITUTIONS
5. DISPOSAL OF SURPLUS
 Business finance
Individuals deposit funds at commercial banks, that these will be paid. (ex, shares of stock, bonds,
which use the deposited funds to provide commercial checks)
loans to firms and personal loans to individuals, and  CORPORATE BONDS
purchase debt securities issued by firms or government Are issued by publicly listed companies. These
agencies. bonds usually have higher interest rates than
 INSURANCE COMPANIES treasury bonds ,however these bonds are not risk
Individuals purchase insurance (life, property, free. If the company which issued the bonds goes
casualty, and health) protection with insurance bankrupt, the holder of the bonds will no longer
premiums. The insurance companies pool the payments receive any return from their investment and even
and invest the proceeds in various securities until the their principal investment can be wiped out.
funds are needed to pay off claims by policy holders. 2. EQUITY INSTRUMENTS
 PENSION FUNDS  COMMON STOCK
Financial institutions that receive payments from If the company’s growth is spurring, the common
employees and invest the proceeds on their behalf. stockholders will benefit on the growth. Moreover,
 MUTUAL FUNDS during a profitable period for which a company may
Mutual funds are owned by investment companies decide to declare higher dividend, preferred stock will
which enables small investors to enjoy the benefits of receive a fixed dividend rate while common
investing in a diversified portfolio of securities stockholders receive all the excess.
purchased o n their behalf by professional investment  PREFERRED STOCK
manager. Has priority over a common stock in terms of
 OTHER FINANCIAL INSTITUTIONS claims over the assets of a company. This means
Include pensionfundslike government service that if a company were to be liquidated and its
insnurance (GSIS) & social security system (SSS), unit assets have to be distributed, no asset will be
investment trust funds (UITF), investment banks, & distributed to common stockholders unless all the
credit unions among others. claims of the preferred stockholders have also
priority over common stockholders in cash dividend
FINANCIAL MARKET declaration. Dividends to preferred stockholders are
 PRIMARY MARKET usually in a fixed rate.
Markets that involve the issue of new securities by
the borrower in return for cash from investors (capital BASIC FUNCTIONS OF THE FINANCIAL
formation occurs). SYSTEM
 SECONDARY MARKET 1. PROMOTE SAVINGS
Markets that involve buyers and sellers of existing  Savings of different surplus spending units are
securities. Funds flow from buyer to the seller. Seller flowed into investments
becomes the new owner of the security (no capital  Offers potential rate or return with relatively low
formation occurs). risk
Ex.  Turns into investment
 EXCHANGES OR AUCTION MARKET 2. PAYMENT
Secondary markets that involve a bidding process  Payments to purchasegoodsand service through
that takes place in specific location. Ex. PSE, NYSE checking accounts through commercial banks and
 DEALER OR OVER-THE-COUNTER (OTC) other banks
MARKETS  Payment of expenses
Secondary markets that do not have a physical 3. PROTECTION AGAINST RISKS
location and consist of a network of dealers who trade  Life, property, and casualty insurance policies.
directly with one another. Ex. Bond market  Insurance companies offer a wide range of
 THIRD MARKET protection from any exposure to risks
Trading of securities that are listed on organized  Pag nag utang ka may kasali na yang fee for
exchanges in the over-the-counter market. insurance
 FOURTH MARKET 4. MEANS TO WEALTH
Trading of securities directly between investors  Serve as a means for storing wealth or pressuring
(usually between two large institutions) without the the value of funds until they are needed
involvement of brokers or dealers.  The markets do not only serve as storage but also
generate earnings.
FINANCIAL INSTRUMENTS  Ex. Ngonyan may binabayaran ka/kinaklatas
1. DEBT INSTRUMENTS sasahod mo pero pag nag retire ka magkakaigwa
 TREASURY BONDS & TREASURY BILLS kang pension
Issued by the Philippine Government. These 5. PROVIDE LIQUIDITY
bonds and bills have usually low interest rates and have
very low risk of default since the government assures
 Business finance
 Use of financial instruments (checks, bonds, shares) Financial reporting standard council (FRSC) -issues
as a good storage of wealth, with little or no risk of guidelines in preparation of FS
loss. Philippine financial reporting standards(PFRS)-
6. CREDIT FACILITY legislative
The market make credit facility available to -standards
financial consumers and investments . - guidelines issued by FRSC
The volume of credit extended by the money
and capital markets today is truly immeasurable that USERS OF FS
without said markets, probably the business world External users - outside the entity (consumers, general
would find it difficult to transact financially (Zacarias, public (expectators))
1899) Internal users- involved in person
-owner, management,stakeholders, employees
CLASSIFICATION OF THE PHILIPPINE
FINANCIAL SYSTEM
 BANKING INSTITUTIONS
 PRIVATE BANKS
1. Universal banks
2. Commercial banks
3. Thrift banks
a. Savings & Mortgage banks
b. Stock Savings & Loan Associations
c. Private Development banks
4. Rural banks
5. Cooperative banks
6. Islamic banks
7. Other classification of bank as determined
by the Monetary Board of the BSP
(BANKO SENTRAL NG PILIPINAS)
 GOVERNMENT BANKS
1. Development bank of the Philippines
2. Loan bank of the Philippines
 UNIVERSAL BANK
 LOCAL UNIVERSAL BANKS (PRIVATE-
OWNED)
1. Citibank
2. East West Bank
3. Philippine Trust Company (PhilTrust
Bank)
4. Philippine Veterans Bank
5. United Coconut Planters Bank
6. Philippine Bank of Communications
7. Asia United Bank
8. Banco de Oro Universal Bank (BDO
Unibank)
9. Metropolitan Bank and trust company
(Metrobank)
10. Rizal Commercial Banking corporation
(RCBC)
11. China Banking Corporation (china Bank)
12. Bank of the Philippine
13. Philippine National Bank
14. Union Bank of the Philippine

PREPARATION OF FINANCIAL
STATEMENT

-final product of the whole accounting process

SFP, SFC, SCE, SCF, NOTES
 Business finance
FINANCIAL PLANNING with the planned objectives then use the difference for analysis and
- systems that guides the top management to direct the actions the development.
different units of organization in accomplishing objectives (kelle &
Master plan- the combined budgets of the different units of the
demong 1988)
organization (____,2018)
____________ Propose of setting the primary objective identifying
the alternative courses of actions, & choosing the best alternative to -A control measure used by the firm to determine….
achieve the objectives.
- Includes systematically thinking about the possible barriers the 2 categories
form has to confront
-It involves the entire unit of organization 1. Operating budget- shows the plan of operation and includes the
- is the process of deciding how an organization can details of sales, production and expenses. Takes the form of
accomplish its financial goals and objectives. budgeted SCI showing the operating
2. Financial budget- shows the budgeted SFP of the prepared
Dimension of financial plan BASIC STEPS IN PREPARING THE BUDGET
1. Short range plan
2. Long range plan
1. short-term plans are short in nature, usually of a year or less and selling &
cost of goods
they have unique characteristics of the organization, such as cash sales
forecast
productio
n cost
inventory
level
sold
administrativ
e expense
cash budget

flow. In business organizations, managers create plans on how to use

and utilize the characteristics in order to reach long-term goals via
these short-term factors in a step-by-step manner.
-more participation in the lower management because they are the
budgeted budgeted
one implementing the plan
- daily operations of the company SCI SFP
-tends to focus on the actions to be done in the coming year
-looks on the volatility of the market, stability of the finance  sales forecast - volume of estimated sales. Serves the mother
operation and range of technology in the coming year of all the budgeted that every sub-sequence operating budget &
2. Long-term planning considers a long-term growth strategy and financial budget. Prepared monthly, quarterly, semi-annually,
forecasts the success by factors that have the characteristics of yearly. Provides detailed plan of sales.
running over a certain period of time. Long-term planning is more Expected (unit) multiply: unit selling price equals total sales
static than short-term plans that can be changed within a short while.
In the case of long-term planning, the initial consensus taken while  production cost - basis of getting the budget, expenses, that
forming the decisions stops the plan from being flexible. associated to operating activity. If It is manufacturing it is
called production budget if merchandising it is cost of sales
Long-term planning may include the facets, such as brand budget/ production cost. Ini itong may t-account.
awareness of the products, sales, SEO, public reputation, number of
employees, social and digital media presence, etc. Budegeted sales, add desired ending equals units available for sale ,
less beginning inventory equals budgeted production in units
-2 to 10 years -more difficult & prone to error
Manufactoring cost- production cost and direct material are direct,
-more participation of the top management prime cost (major cost. Direct labor and factory overhead (indirect
-sets the direction of the company materials) areindirect (hindi direktang pag gawa ng produkto (ex
supervisors))
-changes in the environment needs of the people, composition of the
top management & even political stability. -subject to changes/ Direct material + prime cost = prime cost
every year to incorporate the perception of the firm in the future. Indirect labor + indirect materials = convention/ convection cost??
Financial plan -known as budget Factory overhead has two types, variable and fixed Factory
Budgeting- process of transferring the planned overhead

a formal statement proposed by the company with regard to the Varibale Factory overhead - it varies cost
expected sales, expenses, production, and other related financial Fixed Factory overhead - includes depreciation
transactions in a certain period.
 inventory level.
Used in directing the operations and serves as a careful device that  cost of goods sold
helps measures periodic of secured performance  selling & administrative expense
Objectives in financial planning -list of overall budgeted expenses
- depreciation/non cash is excluded in this budget
1. Planning
2. Coordination Classified into two
3. control 1. Variable expenses (ex. Utility expense)
2. Fixed expense (ex. Pag nag rent ka tas sa kataid na lote/bulding tas
1. Planning-forces? The company to set its objectives & its courses irerent mo man saka lang maribay ang fixed expense)
of actions. With clear set of objectives, the firm its looking forward
to place itself as one of the major player in the industry.anticipate Budgeted sales, unit selling price,= total budgeted, variable cost:
any barriers we may encounter in the future. For improvement of sales commisions, delivery expense,advertisement expense, supplies=
your products or services. total variable cost, fixed cost: sales salaries, office salaries,
2. Coordination- creates a harmonious relationship among the insurance utilities, =
different units of the organization. The different units will learn to  cash budget
coordinate, communicate and work within each other. - ability to estimate cash flow or what the firms current needs
3. Control- important tool in enhancing and measuring the 4 sections of cash budget
performance of the company. Summarized reports are compared 1. Cash receipts section-(operating activities) receive cash inflows
 Business finance
2. Cash payments section-(operating activities) all cash outflow
ex.direct materials, direct labour, factory overhead
3. Cash surplus section- net of cash receipts and cash payments
4. Financing section- borrowings, payments

Cash balance beginning add cash receipts,account receivable

collections =total cash available, less, cash payments, direct
materials, direct labor, variable factory overhead, selling &
administrative expense, purchase of equipment, cash dividends,
income tax payment, cash surplus (deficit), investing, financing,
accrued interest, = cash balance ending

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