What is Financial Management?

Chief financial
officer

Concerns the acquisition, fiancning and management of

asets with some overall goal in mind.
Treasurer Controller

Financial Management Process

Financial Cost
Credit
-dynamic decision-making process include a series of cash Manager
Manager
Accounting
Manager
Accounting
Manager
interrelated activities involving
Cpaital Data
Fund Raising
Budgeting Tax Manager Processing
Manager
 Financial Planning Manager Manager

 Financial analysis
Porfolio Internal
 Financial decision-making Manager auditor

 Financial control

Managerial Finance Function

- Longterm asset mix or investment decision
- Capital-mix or financing decision
- Profit allocation or dividend decision
- Short-term asset mix or liquidity decision

Finance functions classifications

1. Treasuring functions
a. Procurement and management funds
i. Cash management
ii. Collection of accounts
iii. Credit administration
iv. Investment of surplus funds
v. Short-term financing
2. Control Functions
a. Responsible for management and
control of assets
i. Accounting and preparation of
financial reports
ii. Internal auditing and internal
control systems
iii. Taxation matter
b. Protection of assets-insurance coverage
etc.
Functions and Scope
Factor Influencing Financial Decisions
External factors
a. State of economy
b. Structure of capital and money markets
c. Requirements of investors
d. Government policy
e. Taxation policy
f. Lending policy of financial institutions
Internal Factor
a. Nature and size of business
b. Expected return, cost and risk
c. Composition of assets
d. Structure of ownership
e. Trend of earnings
f. Age of the firm
g. Liquidity position
 h. Working capital requirements
i. Conditions of debt agrements
Functional Areas of FM
a. Determining financial needs
b. Choosing the sources of funds
c. Financial analysis and interpretation
d. Cost volume profit analysis
e. Capital budgeting
f. Working capital management
g. Profit planning and control
h. Dividend policy
Focuses in wealth maximization goal/enhancing firm’s
value- The process of value creation
Insert diagram
Goal of the Firm
MAXIMIZE SHAREHOLDER WEALTH!!
Because maximizing the shareholder wealth properly
considers cash flows, the timing of these cash flows,
and the risk of these cash flows
- Primarily what owners want
𝐹𝑢𝑡𝑢𝑟𝑒 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠
𝑆ℎ𝑎𝑟𝑒 𝑃𝑟𝑖𝑐𝑒 =
𝑟𝑒𝑞𝑢𝑖𝑟𝑒𝑑 𝑅𝑒𝑡𝑢𝑟𝑛
FD- level of timing of cf
rr- risk of cash flows
Major factors Affecting stock prices
Insert diagram
Why have ethical standards?
Essential for a smooth functioning advanced
market economy
- Without ethical standards in business, the
economy and all of us who depend on it for
jobs, goods and services would suffer
- Abandoning ES in business lead to a lower
quality of life with less desirable goods and
services at higher prices
Corporate Governance
BOD- incentives and monitoring for
Top management to pursue objectives of the stock
holder
- System by which a company is directed and
controlled
COMPANY CODES OF CONDUCTS
Broad based statement of a company’s responsibilities
for
- Employees
- Outsiders
- Suppliers
- And to the communities in which the company
operates
Corporate Social responsibility
Concept whereby organizations consider the needs of
all stakeholders when making decisions
Extends beyond legal compliance to include voluntary
actions that satisfy stakeholder expectations
Modern Corporation
- Stakeholders
- Management
Exist a separation between owners and managers - Priority sector development
- Develop production and trade
Role of Management - Plan governance
- Acts as agent for the owners (shareholders) of - Final accelerated economic development
the firm
- Agent-indiv authorized by another person,
called the principal to act in the latter’s behalf.

Agency Problem. Remedial Measures

1. Provision of appropriate incentives
2. Monitoring agents/managers

Incentives to the Agents

1. Stock options- management having the right to
acquire the shares of the enterprise at a
concessional price
2. Cash bonus- linked to the performace target
Functions of Financial System
3. Perquisites- company car, expensive offices,
- Payment systems
other fringe benefits
- Pooling of funds
- Transfer of resources
Monitoring of Agents
- Risk management
There is a greater need for the monitoring of agents by
- Price information for decentralized decision
the shareholders monitoring can be done by
making
- Auditing the financial statements
- Dealing with incentive problems
- Limiting decision making by the management
- Bonding the agents

Financial System
Proce by which money flows from savers to users

Components of Financial System

- Financial markets
- F. instruments
- F. institution
Objectives of financial system
- F. services/products
- Facilitates savings
- F. regulators
- Mobilize avings
- Channelize savings
- Results in investments
- Additional employment
 - Loans
- Lease and hire purchase
- Derivative
- Mutual funds
- Shares
Type of FM

Functions of Financial Markets in the FS

Interaction of buyers and sellers determines price
- Price discovery process
Primary Secondary
Provides a mechanism to sell New issue of securities Trading prev issued
- Liquidity securities
Reduces transaction costs Exchange of funds for No new funds for
- Search costs financial claim issuer
- Information costs Funds for borrower an Liquidity for seller
IOU for lender
Uses of Financial Instruments
1. Means of payment = ex money Money Capital
Short term <1 yr Long term 1 yr
a. Emp take stock opt as payment for
High quality issuers Range of issuer quality
working
Debt only Debt and equity
2. Store of value Primary market focus Secondary market
a. Generate increases in wealth that are focus
larger than from holding money Liquidity market low Financing investment
b. Use to transfer purchasis power into returns higher returns
the future
3. Transfer of risk unlike money Organizer Otc
a. Futures and insurance contract allows Visible marketplace Wired network of
dealers
one person to transfer risk to another
Member trade No central physical
Fx of FI
location
Facilitate the transfer of funds from saver to the users Securities listed All securities traded
Deal with asymmetric information problems off the exchanges
- Adverse selections before transaction Philippine stock
- Avoid selecting the risky borrowe exchange
- Moral hazard
o Ensure borrower will not engage in
activitie that will prevent him to repay
Important because Types of F. ins
1. Reduce transaction costs
2. Provide customers with liquidity services
3. Risk sharing- asset transformation
Types of financial Intermediaries
Financial Products/Services
 International Investment
- Other side of corporate financing
- Direct inv vd inder inv thro FI
- Forms
o Bank loans
o Marketable securities or portfolio
investment
o Foreign direct investment
Intermediaries perform 5 basic services as they
transform Comparison of two capital Flow
1. Denomination divisibility- pools saving of many Foreign direct inv Portfolio inv
smalls SSUs into large investments Closely related to Financial gains
2. Currency transformation- buy and sells financial globalization of
claim denominatd in various currencies production Short term highly
liquid speculative
3. Maturity flexibility- offer different ranges of
Longterm
maturities to boths DSU and SSU commitment and Hot money
4. Credit risk diversification- assum credit risk of controls
DSUs spear risk over many different type of REGULATION OF FS
DSUS - Bank regution
5. Credit Risk diversification- give SSUs and DSUs - Govt reg of FM
different choices about hrn to what extent and - Industry self reg
for how long to commit to financial - Rules of conduct by professional org
relationships - Market surveillance
Why?
Information/ efficiency concern
Bankruptcy/ stability
Globalization of FM Control of monetary polity/ optimality
- Refers to the interdependence of national
financial systems HOW WOULD REGULATIONS HELP?
- Global standardization of financial instruments Increase the information available ot investors
- Facilitates the movement of funds between - SEC forces listed corporations to disclose
savers and borrowers in different countries information
- Reduces insider trading
Internationalization of FM Ensure the soundness of financial intermediaries fight
- Internation bond market (foreign bonds) against bankruptcy prevent financial panics
o Sld in a foregin country and - Restrictions on entry (chartering), reporting
denominated in that country’s currenct reuirements, restrictions on asets and activities
- Eurobonds deposit insurance and limits on competition
o Bond denominated in a currency other REGULATORY AGENCIES
thatn that of the country in which it is Sec insurance commission BSP Phil deposit ins corp PSE
sold DF BOT
- Eurocurrencies
o Foreign currencies deposited in baks Types of Regualatory Agencies
outside the home country
o Eurodollars
- World stock markets