SMMC

San Mateo Municipal College

San Mateo, Rizal
FM 2401
Financial Management
OVERVIEW OF FINANCIAL MANAGEMENT
NATURE OF FINANCIAL MANAGEMENT
Financial Management – also referred to as managerial finance, corporate finance, and business
finance is a decision-making process concerned with planning, acquiring, and utilizing funds in a
manner that achieves the firm’s desired goals.
GOAL OF FINANCIAL MANAGEMENT
- Maximize wealth
- The value of the company; and
- The value of stakeholders
SCOPE OF FINANCIAL MANAGEMENT
Traditionally, financial management is concerned with acquisition, financing and management of
assets of business concern to maximize wealth of the firm for its owners. The basic responsibility
of the Finance Manager is to acquire funds needed by the firm and invest those funds in profitable
ventures that will maximize the firm’s wealth, as well as generating returns to the business
concern.
Functions of a Financial Manager (Traditional View)
a. Procurement of short-term as well as long-term funds from financial institutions
b. Mobilization of funds through financial instruments such as equity shares, preference
shares, debentures, bonds, notes, and so forth.
c. Compliance with legal and regulatory provisions relating to funds procurement, use and
distribution as well as coordination of the finance function with the accounting function.
In view of modern approach, Finance Manager is expected to analyze the business firm and
determine the following:
a. The total funds requirement of the firm
b. The assets or resources to be acquired; and
c. The best pattern of financing the assets.
TYPES OF FINANCIAL DECISIONS
1. Investment Decisions – determine how limited resources are committed to projects. Also,
considering the profitability of each individual project proposal that will contribute to the
overall profitability of the firm and lead to the creation of wealth.
2. Financing Decisions – assert that the mix of debt and equity chosen to finance
investments should maximize the value of the investments made.
3. Dividend Decisions – determination of quantum of profits to be distributed to the owners,
the frequency of such payments and the amounts to be retained by the firm.
FINANCIAL MANAGEMENT and ACCOUNTING

FINANCIAL MANAGEMENT ACCOUNTING

Managing assets and liabilities Recording and reporting of past
Basic Difference for future growth events
Management, shareholders,
regulators, analysts and
Users Management and Stakeholders creditors

Importance Helps decide on future project Provides financial position

Creating wealth, generating

cash flow, earning returns,
Key Objectives effective use of assets Recording financial information
FM 2401 OVERVIEW OF FINANCIAL MANAGEMENT

FINANCIAL MANAGEMENT AND ECONOMICS

Microeconomics – deals with economic decisions of individuals and firms. Focuses on the
optimal operating strategies based on the economic data of individuals of firms.
Macroeconomics – looks at the economy from a broader perspective in which a particular
business concern is operating.
RELATIONSHIP OF FINANCIAL OBJECTIVES TO ORGANIZATIONAL STRATEGY
Strategic Financial Planning – involves financial planning, financial forecasting, provision of
finance and formulation of finance policies which should lead the firm’s survival and success.
SHORT TERM AND LONG-TERM FINANCIAL OBJECTIVES OF A BUSINESS
ORGANIZATION
Short and Medium-Term
- Maximization of return on capital employed or return on investment
- Growth in earnings per share and price/earnings ratio through maximization of net
income and profit adoption of optimum level of leverage
- Minimization of finance charges
- Efficient procurement and utilization of short-term, medium-term and long-term funds
Long-Term
- Growth in the market value of the equity shares through maximization of the firm’s
market share and sustained growth in dividend to shareholders.
- Survival and sustained growth of the firm
The wealth maximization goal is advocated on the following grounds:
- Considers the risk and time value of money
- Considers all future cash flow, dividends, and earnings per share
- Suggest the regular and consistent dividend payments to the shareholders
- Financial decisions are taken with a view to improve the capital appreciation of the share
price
- Maximization of a firm’s value is reflected in the market price of share since it depends
on shareholder’s expectations regarding profitability, long-run prospects, timing
difference of returns, risk distribution of returns of the firm.
RESPONSIBILITIES TO ACHIEVE THE FINANCIAL OBJECTIVES
INVESTING – deals with managing the firm’s assets
Examples of investing responsibility:
a. Evaluation and selection of capital investment proposal
b. Determination of the total amount of funds that a firm can commit for investment
c. Prioritization of investment alternatives
d. Funds allocation and its rationing
e. Determination of the levels of investments in working capital
f. Determination of fixed assets to be acquired
g. Asset replacement decisions
h. Purchase or lease decisions
i. Restructuring reorganization mergers and acquisitions
j. Securities analysis and portfolio management
FINANCING – concerned with ways in which the firm obtains and manages the financing it
needs to support investments.
Examples of financing responsibility:
a. Determination of the financing pattern of short-term, medium-term, and long-term funds
requirements.
b. Determination of the best capital structure or mixture of debt and equity financing
c. Procurement of funds through the issuance of financial instruments such as equity
shares, preference shares, bonds, long-term notes and so forth
 FM 2401 OVERVIEW OF FINANCIAL MANAGEMENT

d. Arrangement with bankers, suppliers and creditors for its working capital, medium-term
and other long-term requirements
e. Evaluation of alternative sources of funds

OPERATING – involves several activities related to the firm’s receipts and disbursements of
cash.

Examples of operating responsibility:

a. The level of cash, securities and inventory that should be kept on hand
b. The credit policy
c. Source of short-term financing
d. Financing purchases of goods.

FUNCTIONS OF FINANCIAL MANAGEMENT

Responsibility of Financial Management to allocate funds to current and fixed assets to

obtain the best mix of financing alternatives, and to develop an appropriate dividend policy
within the context of the firm’s objectives.

RELATIONSHIP WITH OTHERY KEY FUNCTIONAL MANAGERS IN THE ORGANIZATION

Finance is one of the major functional areas of a business, other functional areas of business
operations for a typical manufacturing firm are manufacturing, marketing and finance.

Manufacturing deals with design and production.

Marketing involves selling, promotion and distribution.
Finance covers all monetary aspects.

CORPORATE GOVERNANCE is the process of monitoring managers and aligning their

incentives with shareholders’ goals.

Board of Directors – are the monitors inside a public firm. These are appointed to represent
the shareholders’ interest.

Auditors, analysts, investment banks, and credit rating agencies – are the monitors outside
of the firm.

LEGAL FORMS OF BUSINESS ORGANIZATIONS

1. Sole Proprietorship – business owned by a single person who has complete control
over business decisions.

Advantages of Sole Proprietorship Disadvantages of Sole Proprietorship

a. Ease of entry and exit a. Unlimited liability
b. Full ownership and control b. Limitations in raising capital
c. Tax savings c. Lack of continuity
d. Few governments regulations

2. Partnership – is a legal agreement wherein two or more persons bind themselves to

contribute money, property or industry to a common fund with the intention of dividing
profits among themselves.

General Partnership – all partners have unlimited liability for the debts incurred by the
business. General partners usually manage the firm and may enter into contractual
obligations on the firm’s behalf. Profits and asset ownership may be divided in any way
agreed upon by the partners.
Limited Partnership – containing one or more general partners and one or more limited
partners. The personal liability of a general partner for the firm’s debt is unlimited while the
personal liability of limited partners is limited only to the extent of their investments. Limited
partners cannot be active in management.
 FM 2401 OVERVIEW OF FINANCIAL MANAGEMENT

Advantages of partnership Disadvantages of partnership

a. Ease of formation a. Unlimited liability
b. Additional sources of capital b. Lack of continuity
c. Management base c. Difficulty of transferring ownership
d. Tax implications d. Limitations in raising capital

3. Corporation – is an artificial being created by operation of law having the right of

succession and the powers, attributes, and properties expressly authorized by law or
incident to its existence.

The incorporation process is initiated by filing the articles of incorporation and other
requirements to the Securities and Exchange Commission (SEC). The articles of
incorporation include among others the following:

• Incorporators
• Name of the corporation
• Purpose of the corporation
• Capital Stock
• Authorized Shares
Exercises:

1. What is the primary goal of financial management?

a. Increase earnings
b. Maximizing cash flows
c. Maximizing shareholder’s wealth
d. Minimizing risk of the firm
2. Proper risk return management means that
a. The firm should take as few risks as possible
b. Consistent with the objectives of the firm, an appropriate trade-off between risk and
return should be determined
c. The firm should earn highest return possible
d. The firm should value future profits more highly than current profits
3. Which of the following is not a major area of concern and emphasis in modern financial
management?
a. Inflation and its effect on profits
b. Stable short-term interest rates
c. Changing international environment
d. Increased reliance on debt
4. Which of the following is not a major area of concern and emphasis in modern financial
management?
a. Marginal analysis
b. Risk-return trade-off
c. Commodity trading
d. Changing financial institutions
5. A financial manager’s goal of maximizing current or short-term earnings may not be
appropriate because
a. It fails to consider the timing of the benefits
b. Increased earnings may be accomplished by unacceptably higher levels of risk
c. Earnings are subjective; they can be defined in various ways such as accounting or
economic earnings
d. All the given choices.
6. Which of the following statements is true?
a. The higher the profit of a firm, the higher the value of the firm is assured of receiving
in the market.
b. Social responsibility and profit maximization are synonymous.
c. Maximizing the earnings of the firm is the primary goal of financial management
d. There are some serious problems with the financial goal of maximizing the earnings
of the firm
FM 2401 OVERVIEW OF FINANCIAL MANAGEMENT

7. Corporate social responsibility is

a. Effectively enforced through controls envisioned by classical economics
b. The obligation to shareholders to earn a profit
c. The duty to embrace service to the public interest
d. The obligation to serve long-term organizational interests.
8. A common argument against corporate involvement in socially responsible behavior is
that:
a. It encourages government intrusion in decision making
b. As a legal person, a corporation is accountable for its conduct.
c. It creates goodwill
d. In a competitive market, such behavior incurs costs that place the company at a
disadvantage
9. Which of the following statements is false?
a. Because socially desirable goals can impede profitability in many instances,
managers should not try to operate under the assumption of wealth maximization.
b. As finance emerged as a new field, much emphasis was placed on mergers and
acquisitions.
c. Timing is a particularly important consideration in financial decisions
d. During the 1930s, the government assumed a much greater role in regulating the
securities industry
10. Which of the following statements is false?
a. In the mid-1950s, finance began to change to a more analytical, decision-oriented
approach.
b. Recently, the emphasis of financial management has been on the relationships
between risk and returns
c. Inflation has led to phantom profits and undervalued assets
d. For as long as satisfactory level of profit is earned, the financial manager need not to
be concerned with unethical behavior.
11. All of the following are functions of the financial manager except
a. Analyzing and planning the company’s performance
b. Anticipating the company’s financial needs
c. Assigning the market price of the company’s stock
d. Allocating funds to the most profitable asset
12. Which of the following statements is false?
a. Financing decision involves the process of allocating funds for investment in
competing assets
b. The treasurer would be responsible for activities such as managing cash balances,
granting credit to customers and managing the process of issuing new securities.
c. The optimal capital structure is the best combination of long-term debt and equity
d. It is necessary to determine the appropriate risk-return trade-off to maximize the
market value of the firm for its shareholders.
13. Regine is a financial manager who has discovered that her company is violating
environmental regulations. If her immediate superior is involved, her appropriate action
is to
a. Do nothing since she has a duty of loyalty to the organization
b. Consult the audit committee
c. Present the matter to the next higher managerial level
d. Confront her immediate superior
14. If a financial manager discovers unethical conduct in his/her organization and fails to act,
he/she will be in violation of which ethical standard(s)?
a. “Actively or passively subvert the attainment of the organization’s legitimate and
ethical objectives”
b. “Communicate unfavorable as well as favorable information”
c. “Condone the communication of such acts by others within their organizations”
d. All the answers are correct
FM 2401 OVERVIEW OF FINANCIAL MANAGEMENT

15. Integrity is an ethical requirement for all the financial managers. One aspect of integrity
requires
a. Performance of professional duties in accordance with applicable laws
b. Avoidance of conflict of interest
c. Refraining from improper use of inside information
d. Maintenance of an appropriate level of professional competence
16. A financial manager discovers a problem that could mislead users of the firm’s financial
data and has informed his/her immediate superior. He/she should report the
circumstances to the audit committee and/or the board of directors only if
a. The immediate superior, who reports to the chief executive officer, knows about the
situation but refuses to correct it.
b. The immediate superior assures the financial manager that the problem will be
resolved
c. The immediate superior reports the situation to his/her superior.
d. The immediate superior, the firm’s chief executive officer, knows about the situation
but refuses to correct it.
17. One of the major disadvantages of a sole proprietorship is
a. There is unlimited liability to the owner
b. The simplicity of decision making
c. Low organizational costs
d. Low operating costs
18. The partnership form of organization:
a. Avoids the double taxation of earnings and dividends found in the corporate form of
an organization
b. Usually provides limited liability to the partners
c. Has unlimited life
d. Simplifies decision making
19. A corporation is
a. Owned by stockholders who enjoy the privilege of limited liability
b. Easily divisible between owners
c. A separate legal entity with perpetual life
d. All of the above

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