Business Finance & Financial Management – Comprehensive Bullet-Point Notes

Financial Management: Definition, Scope & Purpose

  • Defined by Gitman & Zutter (2012) as “the science and art of managing money.”

  • Application of the four traditional management functions to financial assets:

    • Planning

    • Organizing

    • Leading

    • Controlling

  • Determines:

    1. How much additional funding is required and the best way to obtain it.

    2. How, where, and when to invest any excess funds.

  • Relies on rigorous analysis of relevant business data.

Distinction Between Financial Management & Accounting

  • Accounting = tracking money (record-keeping, classification, reporting).

  • Financial Management = using money wisely (decision making, allocation, strategy).

Goals of the Firm

Wealth Maximization

  • Long-term objective: increase overall business value and thus shareholders’ value.

  • Considers both risk and return, growth and survival.

Profit Maximization

  • Short-term focus on immediate profits.

  • Danger: can sacrifice long-term profitability (e.g., borrowing excessively to boost sales).

Real-Life Illustration – Marco’s Milk-Tea Shop

  • Problems: shrinking profit, untracked expenses, excessive discounts, no emergency or growth fund → cash-flow crisis.

  • Financial-management remedies:

    • Prepare a cash budget & monitor daily expenses.

    • Implement inventory controls to reduce wastage.

    • Set pricing/discount policy based on cost–volume–profit analysis.

    • Build an emergency fund & allocate retained earnings for expansion.

  • Why essential? Sound financial management sustains operations, supports growth, mitigates risk, and maximizes wealth.

The Financial System – Overview

  • Structure that enables the flow of money within an economy; interaction among people, businesses, and governments.

  • Facilitates movement of funds from savers (net lenders) to borrowers (net spenders) and from savings to investments.

Components

  1. Financial Institutions

  2. Financial Markets

  3. Financial Instruments

Financial Institutions

  • Organizations that channel funds from savers to users (Kaliski, 2007).

  • Act as intermediaries to manage efficient fund flow (Collins, 2012).

  • Examples: banks, insurance companies, mutual funds, pension funds, investment banks.

Financial Instruments

  • Contract that creates a financial asset for one party and a financial liability or equity instrument for another (IFAC, 2020).

  • Examples: corporate bonds, shares of stock, checks, futures, options, credit cards.

Financial Markets

  • Provide a platform where financial managers can acquire funds (Kaliski, 2007).

  • Allow exchange of financial resources in two broad arenas:

    1. Capital Markets (long-term)

    2. Money Markets (short-term)

Capital Market

  • Trade in long-term securities (stocks, bonds) via brokers/dealers, inside or outside organized exchanges.

  • Split into:

    • Primary Market: creation & first sale of securities (IPOs, private placements). Example: Jollibee Foods Corporation IPO.

    • Secondary Market: subsequent trading among investors. Example: buying Ayala Corp. shares through an online broker.

Money Market

  • Exchange of short-term ((< 1) year) securities such as Treasury Bills, commercial paper, negotiable instruments.

Other Market Segments

  • Foreign Exchange (Forex) Markets: global currency trading (supervised domestically by BSP; includes money changers, remittance centers).

  • Commodity Markets: trade raw materials/agricultural products (e.g., Tagum City Public Market).

  • Derivatives Markets: futures & options based on underlying assets (limited locally, wider via international brokers).

  • Over-the-Counter (OTC) Markets: decentralized, unlisted securities & private deals (e.g., corporate bond private placements, Tagum Cooperative loans).

Functions of Financial Markets

  • Capital formation

  • Price determination: Price=f(Demand, Supply)\text{Price} = f(\text{Demand},\ \text{Supply})

  • Funds mobilization: channel excess funds to productive investments.

  • Liquidity: easy conversion of securities to cash.

  • Risk sharing: diversification & transfer of risk.

  • Easy access: platform for buyers & sellers.

  • Reduction of transaction costs.

Importance

  • Boosts productivity & efficiency of the economy.

  • Ensures balanced flow of funds.

  • Lets individuals meet short- & long-term needs; firms raise capital & scale production; governments fund projects.

Banking System & Regulation

  • Bangko Sentral ng Pilipinas (BSP) founded via RA 7653 (New Central Bank Act).

  • Roles:

    • Monetary authority: creates & supplies money.

    • Regulator of banks (deposit-taking & lending activities).

    • Lender of last resort.

    • Controller of national money supply.

    • Creator & implementer of monetary policy.

Corporate Organization & Key People

  • Shareholders: ultimate owners; elect Board of Directors.

  • Board of Directors: represent shareholders; oversee business.

  • President (short-term) & CEO (long-term) – sometimes combined.

  • Vice Presidents / C-suite:

    • VP Sales & Marketing / Chief Commercial Officer (CCO) – revenue & client portfolio.

    • VP Production / Chief Operations Officer (COO) – goods & services creation.

    • VP Administration / Chief Administrative Officer (CAO) – HR & general management.

    • VP Finance / Chief Financial Officer (CFO) – acquisition of funds, investments, operations, dividends.

  • Under CFO:

    • Treasurer: external financing, cash & investments management.

    • Controller: internal accounting, financial records.

Roles & Decisions of the Financial Manager

  • Analyze financial health, create forecasts, develop strategies, manage cash flows.

  • Four decision arenas:

    1. Financing Decisions – when/where/how to obtain funds.

    • Debt financing: bank loans, bonds, credit lines (repay with interest).

    • Equity financing: angel investors, venture capitalists.

    1. Investing Decisions – selection of profitable assets.

    • Short-term (working capital).

    • Long-term (capital budgeting).

    1. Operating Decisions – financing daily working-capital items (A/R, inventories) via short- vs long-term sources.

    2. Dividend Policies – allocation between shareholder distribution vs retained earnings.

Flow of Funds

  • Macroeconomic tracking of money movements among sectors (Hayes, 2021).

  • Two paths:

    • Direct Financing: Lender→Financial Markets→Borrower\text{Lender} \rightarrow \text{Financial Markets} \rightarrow \text{Borrower}

    • Indirect Financing: Lender→Financial Institution→Borrower\text{Lender} \rightarrow \text{Financial Institution} \rightarrow \text{Borrower}

Direct Financing

  • Advantages: flexibility, full control.

  • Disadvantages: time-consuming, high research cost, higher risk.

Indirect Financing

  • Advantages: saves time, multiple opportunities, lower risk.

  • Disadvantages: pay intermediaries’ fees, lose some control.

Cash-Flow Categories

Cash Inflows

  • Sales revenue

  • Owner’s investments

  • Borrowed funds

  • Sale of fixed assets

  • Collection of accounts receivable

Cash Outflows

  • Purchase of fixed assets & inventories

  • Payment of expenses and dividends

Financial System – Functions & Importance

  • Channels surplus funds to deficit units and creates liquidity for borrowers.

  • Gathers & disseminates information about lender/borrower expectations.

  • Diversifies risk through pooled investments.

  • Encourages savings, prevents idle funds, monitors corporate health, links savers & borrowers.

  • Increases profits for individuals, firms, governments and underpins monetary-policy implementation.

Participants in the Financial System

  • Lenders (net savers): households, firms, government, foreigners – deposit/invest excess funds.

  • Borrowers (net spenders): households, firms, government, foreigners – obtain funds at cost (interest).

  • Financial institutions mitigate conflicts between lenders & borrowers.

Functions of the Financial System Summarized

  • Fund transfer channels

  • Liquidity creation

  • Information dissemination

  • Risk diversification

Concept Checks & Riddles

  1. “I represent ownership…” → STOCK.

  2. “I make sure trades go smooth…” → LIQUIDITY.

  3. “I fund your plans…” → CAPITAL.

Concept Mapping & 360° Perspective

  • Financial management decisions reverberate through the financial system, affecting fund circulation and ultimately the macro-economy.

  • Individuals contribute to system efficiency by prudent saving, investing, and informed borrowing.

  • Financial managers’ decisions on financing, investing, operations, and dividends can influence market liquidity, interest rates, and economic growth.