Bato Institute of Science and Technology

Dolho, Bato, Leyte

Business Finance
ABM 4
Student’s Name:______________________________________ Year & Section: ________________
Date Submitted:_________________
3. Dividend decision - The finance manager has to take
decision with regards to the net profit distribution. Net
Module 1 (Week 1) profits are generally divided into two:
a. Dividend for shareholders- Dividend and the
Breakthrough to Financial rate of it has to be decided.
b. Retained profits- Amount of retained profits has
Management Part 1 to be finalized which will depend upon expansion
and diversification plans of the enterprise.

Introduction Objectives of Financial Management

Financial management deals with the ways in which The financial management is generally concerned
an organization can raise funds for the various projects, with procurement, allocation and control of financial
allocation of those funds in the most productive and efficient resources of a concern. The objectives can be-
way, how to exercise control over those funds, and how to ✓ To ensure regular and adequate supply of funds to the
distribute the returns of those funds to the various concern.
stakeholders. It generally deals with planning, controlling, ✓ To ensure adequate returns to the shareholders which
organizing, and directing the financial activities of a firm. will depend upon the earning capacity, market price
Financial Management ensures that the organization of the share, expectations of the shareholders.
meets its primary objectives such as maximizing the ✓ To ensure optimum funds utilization. Once the funds
shareholders’ wealth, cutting down the finance cost, and other are procured, they should be utilized in maximum
non-financial objectives which are to other stakeholders such possible way at least cost.
as the government, employees, and suppliers. ✓ To ensure safety on investment, i.e., funds should be
invested in safe ventures so that adequate rate of
return can be achieved.
Learning Outcomes ✓ To plan a sound capital structure-There should be
sound and fair composition of capital so that a balance
At the end of this module, you should be able to: is maintained between debt and equity capital.
1. Defined financial management; and
2. Explain the major role of financial management and Functions of Financial Management
the different individuals involved. 1. Estimation of capital requirements: A finance
manager has to make estimation with regards to
capital requirements of the company. This will
Core Content depend upon expected costs and profits and future
programmes and policies of a concern. Estimations
LESSON 1 – INTRODUCTION TO FINANCIAL have to be made in an adequate manner which
MANAGEMENT increases earning capacity of enterprise.

What is Financial Management? 2. Determination of capital composition: Once the

Financial Management means planning, organizing, estimation has been made, the capital structure has to
directing and controlling the financial activities such as be decided. This involves short- term and long- term
procurement and utilization of funds of the enterprise. It debt equity analysis. This will depend upon the
means applying general management principles to financial proportion of equity capital a company is possessing
resources of the enterprise. and additional funds which have to be raised from
outside parties.
Scope/Elements of Financial Management
1. Investment decisions includes investment in fixed 3. Choice of sources of funds: For additional funds to
assets (called as capital budgeting). Investment in be procured, a company has many choices like-
current assets is also a part of investment decisions ✓ Issue of shares and debentures
called as working capital decisions. ✓ Loans to be taken from banks and financial
institutions
2. Financial decisions - They relate to the raising of ✓ Public deposits to be drawn like in form of bonds.
finance from various resources which will depend
upon decision on type of source, period of financing, Choice of factor will depend on relative merits
cost of financing and the returns thereby. and demerits of each source and period of financing.

4. Investment of funds: The finance manager has to

decide to allocate funds into profitable ventures so

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 that there is safety on investment and regular returns
is possible. These financial decisions directly and indirectly
influence other managerial activities. Hence formation of a
5. Disposal of surplus: The net profits decision has to good asset mix and proper allocation of funds is one of the
be made by the finance manager. This can be done in most important activity.
two ways:
✓ Dividend declaration - It includes identifying 3. Profit Planning
the rate of dividends and other benefits like Profit earning is one of the prime functions of any
bonus. business organization. Profit earning is important for
✓ Retained profits - The volume has to be decided survival and sustenance of any organization. Profit
which will depend upon expansional, planning refers to proper usage of the profit generated by
innovational, diversification plans of the the firm.
company. Profit arises due to many factors such as pricing,
industry competition, state of the economy, mechanism of
6. Management of cash: Finance manager has to make demand and supply, cost and output. A healthy mix of
decisions with regards to cash management. Cash is variable and fixed factors of production can lead to an
required for many purposes like payment of wages increase in the profitability of the firm.
and salaries, payment of electricity and water bills, Fixed costs are incurred by the use of fixed factors
payment to creditors, meeting current liabilities, of production such as land and machinery. In order to
maintenance of enough stock, purchase of raw maintain a tandem, it is important to continuously value
materials, etc. the depreciation cost of fixed cost of production. An
opportunity cost must be calculated in order to replace
7. Financial controls: The finance manager has not those factors of production which has gone thrown wear
only to plan, procure and utilize the funds but he also and tear. If this is not noted then this fixed cost can cause
has to exercise control over finances. This can be done huge fluctuations in profit.
through many techniques like ratio analysis, financial
forecasting, cost and profit control, etc. 4. Understanding Capital Markets
Shares of a company are traded on stock
exchange and there is a continuous sale and purchase of
LESSON 2 – MAJOR ROLE OF FINANCIAL securities. Hence a clear understanding of capital market
MANAGEMENT is an important function of a financial manager. When
Financial activities of a firm are one of the most securities are traded on stock market there involves a huge
important and complex activities of a firm. Therefore, in order amount of risk involved. Therefore, a financial manager
to take care of these activities a financial manager performs understands and calculates the risk involved in this trading
all the requisite financial activities. of shares and debentures.
A financial manager is a person who takes care of all It’s on the discretion of a financial manager as to
the important financial functions of an organization. The how to distribute the profits. Many investors do not like
person in charge should maintain a far sightedness in order to the firm to distribute the profits amongst shareholders as
ensure that the funds are utilized in the most efficient manner. dividend instead invest in the business itself to enhance
His actions directly affect the Profitability, growth and growth. The practices of a financial manager directly
goodwill of the firm. impact the operation in capital market.

Following are the main functions of a Financial Manager: MISCONCEPTIONS ABOUT FINANCIAL
1. Raising of Funds MANAGEMENT
In order to meet the obligation of the business it 1. Financial management is accounting.
is important to have enough cash and liquidity. A firm can The most common mistake is thinking that
raise funds by the way of equity and debt. It is the financial management is accounting because it utilizes
responsibility of a financial manager to decide the ratio financial statements to arrive at certain decisions. It is true
between debt and equity. It is important to maintain a that financial information necessary to arrive at a sound
good balance between equity and debt. decision is provided by accounting. However, the tools
used in making decision are different from the ones used
2. Allocation of Funds in accounting. Accounting has standard to be followed
Once the funds are raised through different while financial management does not have any. The tools
channels the next important function is to allocate the and techniques used by finance people are more
funds. The funds should be allocated in such a manner that sophisticated and more scientific and vary depending on
they are optimally used. In order to allocate funds in the what decision is needed.
best possible manner the following point must be
considered: 2. Financial management is a review of mathematics.
✓ The size of the firm and its growth capability In making financial decisions, a lot of formulas are
✓ Status of assets whether they are long-term or used before arriving at a decision. With the
short-term computation of present values, future values/,
✓ Mode by which the funds are raised annuities, and other values, finance is thought to be
too much mathematical. Mathematics is always

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 present in every decision-making in financial
management. To a certain extent, it also uses calculus,
References
math of investments, and algebra before arriving at a Timbang, Ferdinand L.; “Financial Management, Part
decision. Like in accounting, mathematics is one of 1”;2015; C & E Publishing, Inc...
the tools used in decision-making.
Brigham, Eugene F. and Ehrhardt, Michael C.;
3. Financial management is a branch of statistics.
“Financial Management: Theory and Practice”; 12th
Statistics is used at times to ascertain the risks
involved in decision-making. Standard deviations, Edition
correlation coefficient, coefficient of determinations,
and forecasting tools and techniques are used to
measure the risk before making financial decisions.
With statistics as part of the decision-making process,
it is thought that financial management is a branch of
statistics.
ARGENE B. ABELLANOSA
Instructor
In-text Activity 1
0995-852-3831
? What is the role of financial management in a firm?
? What is the main goal of the financial manager? How argene.abellanosa@gmail.com
does the risk-return trade-off relate to the financial
manager’s main goal?

Summary & Key Takeaways

❖ Financial management refers to the strategic
planning, organizing, directing, and controlling of
financial undertakings in an organization or an
institute. It also includes applying management
principles to the financial assets of an organization,
while also playing an important part in fiscal
management.
❖ Finance involves managing the firm’s money. The
financial manager must decide how much money is
needed and when, how best to use the available funds,
and how to get the required financing. The financial
manager’s responsibilities include financial planning,
investing (spending money), and financing (raising
money). Maximizing the value of the firm is the main
goal of the financial manager, whose decisions often
have long-term effects.
❖ Financial managers perform data analysis and advise
senior managers on profit -maximizing ideas.
❖ The role of the financial manager, particularly in
business, is changing in response to technological
advances that have significantly reduced the amount
of time it takes to produce financial reports.
❖ Types of financial managers include controllers,
treasurers, credit managers, cash managers, risk
managers and insurance managers.

Self-Assessment Questions
Posted separately as quiz assignment or assignment in your
google classroom.