,CHAPTER I

OVERVIEW OF FINANCIAL MANAGEMENT

LEARNING OUTCOMES
At the end of this discussion, the student must be able to:
1. Define business;
2. Understand the aims and objectives of business;
3. To be able to identify and differentiate the types of business based on
nature of operations and the different forms of business organizations;
4. Know the meaning and objectives of financial management;
5. Identify and explain the roles and functions of financial management;
6. Be familiar with the Philippine Financial System and its organizational
structure, and;
7. Know and understand the role of the Bangko Sentral ng Pilipinas in the
Philippine Financial System.

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 BUSINESS, ITS AIMS AND OBJECTIVES

Business
Business is an undertaking where one seeks to make profit by selling goods
or rendering services. Some enterprises, however, are organized as non-profit
organizations to provide certain benefits to society. It is defined as an organized
effort of individuals to produce and sell goods and services in order to satisfy the
needs of society. It is also defined as an organization of people with varied skills,
which uses property or talents, to produce goods and services, which can be sold
to others for more than their cost. In essence, business is effort primarily geared
to meet the interested public’s legitimate needs, at the required time and place,
at an evitable price and for reasonable returns to compensate for the
businessman’s efforts and risks taken.
Business is also known as an enterprise, a company or a firm. Some
enterprises however are organized as non-profit organizations to provide certain
benefits to the society.
Aims and Objectives of Business
The aim of a business is the goal it wants to achieve. An aim is where the
business wants to go in the future. It is a statement of a purpose. A primary aim
for all business is to add value and it involves making profit.
Objectives are the stated, measurable targets of how to achieve business
aims. They give the business a clearly defined target. Plans can be made to
achieve these targets.
The most effective business objectives meet the following criteria:
S – Specific – objectives aimed at what the business does such as a hotel might
have an objective of filling 60% of its rooms a night during December; an
objective specific to that business.
M- Measurable – the business can put value to the objective such as assigning a
certain percentage or threshold in the target. It must be quantifiable. Example:
P1,000,000 revenue generated from hotel occupancy for two weeks.
A-Attainable – It must be doable, achievable and feasible.

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R- Realistic – the objective should be challenging but it should also be able to
achieved by the resources available.
T- Time-specific – they have a time limit of when the objective should be
achieved such as for one week and the like. (It must be restricted as to time.)
Aims and objectives are the “ends” that an organization seeks to achieve.
It then has to decide the means it will use to achieve those ends, draw up a plan
and devise a strategy. Most organizations have general or overall claims which
they can break down into specific objectives or targets.
By setting aims and objectives, companies give themselves a sense of
purpose and direction. This provides a framework around which to create their
plans. With an overall plan in place, a company can set particular targets and
monitor its progress towards reaching them.
The main objectives that a business might have are:
1. Profit Maximization. Profit is the amount of money left from the firm’s
income made after all costs of producing, marketing and distributing the
goods and services have been paid. Profit distinguishes business from
charity, philanthropy and government services. To maximize profit, make
sure that revenue stays ahead of the cost of doing business. Try to make
enough profit to keep the owners comfortable. This is referred to as profit
satisficing. To maximize profit, it would require optimized efforts to
increase sales. The higher the sales the better the profitability of the firm.
2. Fulfill social responsibilities. This is a concept whereby organizations
(business) consider the interest of society by taking responsibility for the
impact of their activities on customers, suppliers, employees,
shareholders, communities and other stakeholders, as well as
environment. It includes the following:
 Produce goods and services
 Conduct business based on the standard of ethics
 Price fixing
 Not giving false or misleading advertisement
 Not practicing direct- attack competitor

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  Equal employment opportunities
 Consumer safety
 Participation in social and civic activities contributing to worthwhile
causes like programs, researches.
 Helps in the equal distribution of wealth
3. Growth. This leads to the improvement in the company’s ability to
compete within its market. It is planned based on historical data and future
projections. It requires a careful use of resources such as finances and
personnel. This means increasing the total assets, production capabilities
and eventually increasing rates of return.
4. Survival of the firm. This refers to the continued existence of the firm. A
business firm tries to attain survival through substantial growth and
profitability. Survival dictates that funds are managed efficiently in such a
way that it is always available when needed, and the excess not needed is
productively invested.
5. Productivity. Employee training, equipment maintenance and new
equipment purchases all go into company productivity. The firm’s objective
should be to provide all the resources that the employees need to remain
as productive as possible.

A business may change its objectives overtime due to the following reasons:
1. A business may have achieved an objective and will move onto another
(i.e. survival in the first year may lead to an objective of increasing profit in
the second year)
2. The competitive environment might change, with the launching of new
products from competitors.
3. Technology might change designs, so sales and production targets might
need to change.

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Types of Business Based on the Nature of Operations
A business organization may be classified based on the nature of
business operation. The purpose for which the business was established will
determine the nature of activities. The classifications are service, trading or
merchandising, manufacturing and hybrid business.
Service business is one which is engaged in the rendering of services to
others for a fee. Examples are law firms, accounting firms, medical clinics, barber
shops, beauty parlors, stock brokerage firms, recruitment agencies, and the like.
Trading or merchandising business is engaged in the buying and
selling of goods or commodities produced by other businesses which are called
merchandise, hence, it is otherwise called a merchandising business. It is a link
in the physical distribution chain acting as a wholesaler or a retailer firm. They
are known as “buy and sell” businesses. They make profit by selling products at
prices higher than their purchase costs, without changing the form. Examples are
car dealers, grocery stores, supermarkets, cell phone and accessories traders,
gift shops and many more.
Manufacturing business is engaged in the buying of raw materials,
converting them into finished products and selling to traders or final consumers. It
combines raw materials, labor and factory overhead in its production process.
Examples are car manufacturers, food processors, soft drink bottling companies,
drug manufacturers, paper mills and many others.
The main difference between a trading and a manufacturing business is
that, a trading business buys goods and sells these goods in the same form while
a manufacturing business buys raw materials and sells goods that were
produced or processed out of the raw materials.
Hybrid business is one which is involved in more than one type of
business activity (service, merchandising and manufacturing). A restaurant for
example combines ingredients in making a fine meal (manufacturing), sells cold
bottle of wine (merchandising), and fills customer orders (service).
These companies may be classified according to their major business
interest. Restaurants are more of a service-type they provide dining services.

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Forms of Business Organization
A business operates in a complex environment that affects decision-
making. Two of the most important factors making up the firm’s operating
environment are the legal form of business organization and taxes. The
accounting procedures depend on which form the organization takes. The three
forms of business organizations are the following:
Single or Sole Proprietorship. This business organization is owned by
an individual who has complete control over business decisions. The owner is
called proprietor, who generally is also the manager. The owner is entitled to all
the profits, but absorbs all losses. He owns all the firm’s assets and is
responsible for all the debts of the business.
From a legal point of view, the proprietor is not separable from the
business and is personally liable for all debts of the business. However, from an
accounting perspective, the business has a separate and distinct personality
from that of the owner. The owner is neither paid salaries nor wages from the
business but may withdraw funds or properties from the firm, instead.
Advantages:
1. It is easily and inexpensively formed, since no formal charter for
operations is required and it is subject to few government
regulations.
2. The business pays no corporate income taxes; however all
earnings of the firm, whether reinvested in business or withdrawn
are subject to personal income taxes.
Disadvantages:
1. The assets of the business are treated in law as part of the owner’s
personal assets, making them liable in case of bankruptcy.
2. It is difficult for a sole proprietor to obtain large sums of capital
3. The proprietor has unlimited personal liability for business debts
and can loss assets beyond those invested in the company.

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 Partnership is a business owned and operated by two or more persons
known as partners, who bind themselves to contribute money, property or
industry to a common fund, with the intention of dividing the profits among
themselves. The Articles of Co-Partnership which is to be filed at the Securities
and Exchange Commission (SEC) is a written agreement between the partners
governing the formation, operation and dissolution of the partnership.
Advantages:
1. It is easy and inexpensive to organize, as it is formed by a simple
contract between two or more persons.
2. The unlimited liability of the partners makes it reliable from the point
of view of creditors.
3. The combined personal credit of the partners offers better
opportunity for obtaining additional capital than does a sole
proprietorship.
4. The participation in the business by more than one person makes it
possible for a closer supervision of all the partnership activities.
5. The direct gain to the partners is an incentive to give close attention
to the business.
6. The personal element in the characters of the partners is retained.

Disadvantages:
1. The personal liability of partner for firm debts deters many from
investing capital in a partnership.
2. A partner may be subject to personal liability for the wrongful acts
or omissions of his associates.
3. It is less stable because it can easily be dissolved.
4. There is divided authority among the partners.
5. There is constant likelihood of dissension and disagreement when
each of the partners has the same authority in the management of
the firm.

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 Corporation is an artificial being created by the operation of law, having
the rights of succession and the powers, attributes and properties expressly
authorized by law or incident to its existence. The incorporation process is
initiated by the filing of the Articles of Incorporation with the SEC. The owners are
called shareholders or stockholders. These owners are not directly involved in
the management of the firm, instead, they select managers designated by the
Board of Directors to run the firm for them. The Corporation Law provides that
the number of directors be not less than five but not more than 15.
Advantages:
1. The corporation’s power of succession enables it to enjoy a
continuous existence.
2. The continuity of corporate existence enables it to obtain a strong
credit line.
3. Large scale business undertakings are made possible because
many individuals can invest their funds in the enterprise.
4. The liability of its investors or shareholders is limited to the extent of
their investment in the corporation.
5. The transfer of shares can be done without the need for prior
consent of other shareholders.
6. Its smooth operation is guaranteed because of centralized
management.
Disadvantages:
1. It is not easy to organize because of complicated legal
requirements and high costs in its organization.
2. The limited liability of its shareholders may weaken its credit
capacity.
3. It is subject to rigid governmental control.
4. It is subject to more taxes.
5. Its centralized management restricts a more active participation by
shareholders in the conduct of corporate affairs.

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 Cooperative. Cooperative has some elements of a large partnership and
also many features of a corporation, although it is distinct from both. The
principal theory of cooperative is elimination of profit.
Advantages:
1. Each member has only one vote which make it impossible for one
person to run the business according to his/her will and democracy will
prevail;
2. The cooperative is owned and controlled by the members;
3. It is not based on profit-making principles but rather on service-
rendering principles to its members, and as such members are sure of
the highest quality of quality at the lowest possible prices;
4. The members work together because they have the same needs and
goals. They are united around these goals and needs and
management comes from the members;
5. The cooperative is a voluntary organization and thus easy to form and
end.
Disadvantages:
1. Longer decision-making process – decisions to be made can take very
long because of the principle that all members have voting power;
2. People do not work very hard because the incentive to earn a profit is
not present;
3. There is a possibility of conflict among the members; and
4. There is a less incentive to invest additional capital.

Micro, Small and Medium Enterprises (MSMEs)

In 2008, Republic Act 9501 was signed into law. This law seeks to
address problems faced by MSMEs particularly the lack of capital and
access to credit. It also updated the definition of MSMEs as: micro
enterprises are those with assets, before financing of P3 million or less
and employ not more than nine workers; small enterprises are those with
assets, before financing of above P3 million to P15 million and employ 10

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to 99 workers; medium enterprises have assets, before financing of above
P15 million to P100 million and employ 100 to 199 workers. These
MSMEs are registered as any of the legal forms and nature of business.
Enterprises with assets and employees above the MSME threshold are
considered large enterprises.

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 DISCUSSION QUESTIONS

1. Define Business.
2. Enumerate the aims and objectives of business.
3. Explain and discuss, “to fulfill social responsibilities” as one of the aims
and objectives of business.
4. Identify one business organization and discuss how they achieve “to fulfill
social responsibilities” as one of the aims and objectives of business.
5. What are the different types of business based on nature of operations?
6. Differentiate merchandising business from manufacturing business.
7. What are the different forms of business organization?
8. Enumerate and discuss the advantages and disadvantages of the
following:
a. Sole Proprietorship
b. Partnership
c. Corporation
9. If you are to establish a business of your own, what would you choose as
a form of business organization? And why?
10. How do you distinguish from each other, Micro, Small and Medium
enterprises?

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 EXERCISE 1.1

Identify the form of business organization related to the keywords below.

_____________1. Members
_____________2. Partners
_____________3. Proprietor
_____________4. Retained Earnings
_____________5. Share Premium
_____________6. Right of succession
_____________7. CDA registration
_____________8. One Owner
_____________9. Elimination of Profit
_____________10. Savings
_____________11. Can be easily dissolved
_____________12. Unlimited liability
_____________13. Profit is taxed on the owner
_____________14. Dividends
_____________15. Stocks

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 EXERCISE 1.2

Identify what type of business organizations basing on their nature of operations.

_____________1. Asia Brewery

_____________2. Chooks-to-Go
_____________3. Ayala Corporation
_____________4. Computer Repair Shops
_____________5. M Lhullier
_____________6. Cebu Pacific
_____________7. Mercury Drug
_____________8. San Miguel Corporation
_____________9. Monde Nissin
_____________10. O Shopping

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 OVERVIEW OF FINANCIAL MANAGEMENT

FINANCIAL MANAGEMENT
Financial Management means planning, organizing, directing and
controlling the financial activities such as procurement and utilization of funds of
the enterprise. It means applying general management principles to financial
resources of the enterprise. It denotes the effective acquisition and use of money.
The entrepreneur as financial manager must determine the best way to raise
money. It is also important that the money should be used effectively in realizing
the goals of the enterprise.

Scope of Financial Management

Some scopes of the financial management are:
Investment Decision. This involves the evaluation of risk, measurement of cost
of capital and estimation of expected benefits from a project. Capital budgeting
and liquidity are the two major components of investment decision. Capital
budgeting is concerned with the allocation of capital and commitment of funds in
permanent assets which would yield earnings in the future. A measure of the
extent to which a person or organization has cash to meet immediate and short-
term obligations, or assets that can be quickly converted to cash. It is the ability
of current assets to meet current liabilities.
Financing Decision. While the investment decision involves decision with
respect to composition of mix of assets, financing decision is concerned with the
financing mix or financial structure of the firm. The raising of funds requires
decisions regarding the methods and sources of finance, relative proportion and
choice between alternative sources as well as time of floatation of securities. In
order to meet its investment needs, a firm can raise funds from various sources.
Dividend Decision. In order to achieve the wealth maximization objective, an
appropriate dividend policy is to decide whether to distribute all the profits in the
form of dividends or to distribute a part of the profits and retain the balance.
Working Capital Decision. This is concerned with making decisions related to

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the investment in current assets and current liabilities. Current assets are
convertible into cash within one year. Similarly, current liabilities are those which
are likely to mature for payment within an accounting year.

Functions of Financial Management

Financial management functions in the following areas:
1. Estimation of capital requirements. Estimation have to be made in an
adequate manner which increases the earning capacity of an enterprise.
2. Determination of capital composition. Once the estimation has been
made, the capital structure has to be decided. This involves short-term
and long-term debt equity analysis. This will depend upon the proportion
of equity capital a company is processing and additional funds which is to
be raised.
3. Choice of sources of funds. For additional funds needed, a company has
many choices such as issuance of shares of stocks, loans from banks and
financial institutions and issuance of bonds.
4. Investment of funds. The financial manager has to decide to allocate
funds into profitable ventures so that there is safety on investment.
5. Disposal of surplus. This can be through dividend declaration or using the
retained earnings for expansion, innovation and diversification of the
company.
6. Management of cash. The financial manager has to make decision as
regards cash management.
7. Financial controls. The financial manager has to exercise control over
finances. This can be done through many techniques like ratio analysis,
financial forecasting, cost and profit control, etc.

Objectives of Financial Management

1. Financial Planning generally refers to the allocation of financial
resources. In accordance with the company’s financial objectives and
standards, projects or activities and operations are carefully planned,

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 evaluated based on certain criteria and subsequently ranked for the
allocation of financial resources.
2. Financing involves the procurement of funds. Procurement function
requires awareness of different sources of funds with varying
requirements and conditions.
3. Investment entails the effective and efficient utilization of financial
resources. Financial resources must be utilized in a manner that
minimizes company costs arising from wastage and loss of opportunities
due to delays in operations and idle and nonproductive resources. It
requires adoption of effective control measures.
Efficient utilization of financial resources refers to their
economical use. In other words, one sees to it that financial resources are
actually being used for what they were intended. Inefficiency in the usage
of resources maybe caused by extravagance in the choice of property or
equipment, unnecessary expenditures, tardiness of personnel and non-
productive resources.
Effective utilization of resources refers to their use towards the
attainment of predetermined objectives. This requires a periodic review of
operations to determine whether they are in accordance with plans and
whether the plans, as prepared, will enable the company to attain short
term and long term objectives considering the changes brought about by
economic development.

Financial Manager
The financial manager is a member of the firm’s top management with
expertise in the management of financial assets. He participates in the corporate
strategic planning, makes financial decisions to promote the successful
operations and growth of the firm. He is an adviser of the firm regarding
advantages and costs in the prevailing market using his expertise because of his
wide imagination and proficiency in costing. He can project to a certain degree of
accuracy the organization’s capital structure based on available statistics. He

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supervises the efficient utilization of the firm’s assets in order to achieve
adequate profit as management goal.

The Role of the Financial Manager

1. Analyze and plan the company’s performance. Analyzing and planning
company’s operations occupy much of the financial manager’s time.
Company progress depends on the management’s knowing where the
company now and where in the future it wants the company to be. The
financial manager gives opinion on the consequences of the different
alternative courses of action.
Assessing the financial strengths and weaknesses of the company
requires the financial manager to work with people from accounting,
marketing and production. Company accountants develop the income
statement showing sales revenues and expenses for a period of time; they
also prepare the balance sheet which is a listing of company assets ,
liabilities and the owner’s equity. Based on these financial statements and
projected versions of these statements, the financial manager assesses
company strengths and weaknesses, both currently and in the future to a
large degree, the plans of the production department and sales forecasts
of the marketing department.

2. Anticipate the company’s financial needs. The need to anticipate future

events is one of the roles of the financial manager. Forecasting company
expenditures for assets and their required financing avoids surprises and
the problems these surprises create.
 Being involved in the planning process of other departments and
top management.
 Monitoring developments in the economy that impinge on the
company’s products.
 Keeping track of what is happening in the markets for the
company’s securities.

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 To develop reliable forecasts and plans, a financial manager must
understand not only finance and accounting but company operations as
well; product lines, manufacturing processes, customer groups,
potential suppliers of raw materials, vendors of equipment and so on. A
basic understanding of the operations enables the financial manager to
identify and anticipate costs of future asset acquisitions and needed
financing.

3. Procure the funds the company needs. Financial managers procure

and manage funds that a company needs to finance operations. To obtain
these funds, the company can issue shares of stocks, borrow money or
use a combination of the two. The company that borrows must repay its
debts at maturity.

4. Allocate funds to acquire the most profitable assets. Equally critical as

the financing decision to the success of a company is the investment
decision, the process of allocating funds for investment in competing
assets. The investment decision must not overemphasize one sort of
asset and slight another. For instance, it would be unwise to use so much
cash to invest in a building that the company could not pay its bills when
due. The financial manager plays a key role in the allocation of funds to
competing assets. The goal is to select fixed assets that will generate
large returns and minimal risks.

Vital Functions of the Financial Manager

1. Identification and analysis. The financial manager is partly in charge of
the management of the financial assets of the corporation. He is also
responsible in identifying the present strengths and weaknesses of the
organization.

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 2. Financial planning and strategy. The financial manager considers the
major financial factors to make the firm survive or develop, including
activities such as fund raising, maximization of profit, financing and
expansion development and many others. It includes the preparation of
different budgets as they form an important part of financial planning.
3. Capital structure of the organization - The financial manager is an
adviser of the organization regarding the advantages and costs of
investments in the financial markets and any other future plans. With his
expertise as an accountant, he has a wide imagination and proficiency in
costing. He can project with a certain degree of accuracy and based on
statistics and costs, expenses of a certain project; the required capital
outlays, any change that may take place in the organization’s assets.
4. Stock price and dividends - The financial manager gives advice to the
firm if dividends should be declared or not. Likewise, when the firm has
such highly profitable undertaking that should retain most of the earnings,
stockholders are properly warned of such a plan, and gives the assurance
of possible equivalent appreciation of the price of the stock certificates in
their possession.
5. Control of cash and other assets - It is also the intention of the financial
manager to strive to achieve adequate profits as a management goal,
done in such a way that cash is always available when needed. The
needed cash should be with the level needed by the operation of the
business. Since cash is a non-productive asset, any excess cash must be
invested into placements that are possibly easily convertible to cash as an
assurance to fill any cash deficiency falling below the minimum cash
requirements of the operation of the business.

The Financial Manager in a Business Organization

The finance manager in a business organization is not always called as
such. His title varies depending on the size of the company and its
organizational set up. In small business firms, the finance functions are

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discharged by the sole proprietor, the accountant or the manager. As the
organization grows bigger, the organizational set up becomes more sophisticated
so that we may have the finance functions delegated to the controller or the
treasurer. In some cases, there is a vice president for finance to whom the
controller and treasurer reports. The finance functions are usually divided
between the controller and treasurer as follows:
CONTROLLER TREASURER
1. Planning for control which includes 1.Determination of financial
budgeting. requirements and procurement of
funds
2. Reporting and interpreting results 2. Cash management, banking,
of operations and system custody of funds and foreign
installation exchange problems
3. Evaluation of objectives, policies 3.Investor relations
and procedures in all segments of
management regarding the same
4. Tax administration and government 4.Corporate investments
reporting
5. Protection of assets 5.Credit and collection
6. Economic appraisal ( forward 6.Insurance and employee benefits
planning)

From the foregoing distribution of functions, it may be noted that the

controller takes care of the internal finance functions while the treasurer takes
care of the external ones.

Overview of Financial System

A financial system can be defined at the global, regional or firm specific
level. The firm's financial system is the set of implemented procedures that track
the financial activities of the company. On a regional scale, the financial system
is the system that enables lenders and borrowers to exchange funds. The global
financial system is basically a broader regional system that encompasses all
financial institutions, borrowers and lenders within the global economy. There are
multiple components making up the financial system of different levels. Within a
firm, the financial system encompasses all aspects of finances. For example, it
would include accounting measures, revenue and expense schedules and wages

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and balance sheet verification. Regional financial systems would include banks
and other financial institutions, financial markets, financial services. In a global
view, financial systems would include the International Monetary Fund, Central
Banks, World Bank and major banks that practice overseas lending.
The Global Financial System (GFS) is the financial system consisting of
institutions and regulators that act on the international level, as opposed to those
that act on a national or regional level. The main players are the global
institutions, such as the following:
 International Monetary Fund (IMF). It is an international organization
that was created on July 22, 1944 at the Bretton Woods Conference and
came into existence on December 27, 1945 when 29 countries signed the
Articles of Agreement. It originally had 45 members. The IMF's goal was
to stabilize exchange rates and assist the reconstruction of the world’s
international payment system post-World War II. Countries contribute
money to a pool through a quota system from which countries with
payment imbalances can borrow funds temporarily. Through this activity
and others such as surveillance of its members' economies and policies,
the IMF works to improve the economies of its member countries. The IMF
describes itself as “an organization of 188 countries (as of April 2012),
working to foster global monetary cooperation, secure financial stability,
facilitate international trade, promote high employment and sustainable
economic growth, and reduce poverty.” The organization's stated
objectives are to promote international economic cooperation,
international trade, employment opportunities, and exchange rate stability,
and making financial resources available to member countries to meet
balance of payments needs. The International Monetary Fund keeps
account of international balance of payments accounts of member states.
It acts as a lender of last resort for members in financial distress, e.g.,
currency crisis, problems meeting balance of payment when in deficit and
debt default. Membership is based on quotas, or the amount of money a

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 country provides to the fund relative to the size of its role in the
international trading system.
 World Bank. It is an international financial institution that provides loans
to developing countries for capital programs. The World Bank's official
goal is the reduction of poverty. According to the World Bank's Articles of
Agreement (as amended effective 16 February 1989), all of its decisions
must be guided by a commitment to promote foreign investment,
international trade, and facilitate capital investment. The World Bank aims
to provide funding, take up credit risk or offer favourable terms to
development projects mostly in developing countries that could not be
obtained by the private sector.
 World Trade Organization (WTO). It is an organization that intends to
supervise and liberalize international trade. The organization officially
commenced on January 1, 1995 under the Marrakech Agreement,
replacing the General Agreement on Tariffs and Trade (GATT), which
commenced in 1948. The organization deals with regulation of trade
between participating countries; it provides a framework for negotiating
and formalizing trade agreements, and a dispute resolution process aimed
at enforcing participants' adherence to WTO agreements which are signed
by representatives of member governments and ratified by their
parliaments. Among the various functions of the WTO, these are regarded
by analysts as the most important:
 It oversees the implementation, administration and operation of the
covered agreements.
 It provides a forum for negotiations and for settling disputes.
Additionally, it is the WTO's duty to review and propagate the
national trade policies, and to ensure the coherence and transparency of
trade policies through surveillance in global economic policy-making.
Another priority of the WTO is the assistance of developing, least-
developed and low-income countries in transition to adjust to WTO rules
and disciplines through technical cooperation and training. The WTO is

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 also a centre of economic research and analysis: regular assessments of
the global trade picture in its annual publications and research reports on
specific topics are produced by the organization. Finally, the WTO
cooperates closely with the two other components of the Bretton Woods
system, the IMF and the World Bank.

The Philippine Financial System

It composed of different institutions serving different markets and
competing each other in attaining the process of intermediation, providing a link
between economic suits with excess funds and those who use these funds. In
the Philippines setting, financial system is composed of banking institutions and
nonbank financial intermediaries, including commercial banks, specialized
government banks, thrift banks and rural banks.   It is also composed of offshore
banking units, building and loan associations, investment and brokerage houses
and finance companies.
1. Commercial Banks. Commercial Banks constitute the bulk of the banking
system. These are institutions that accept deposits, including demand
deposits, which are subject to withdrawal by checks. They also perform
other functions like lending, essentially on a short-term basis, and accept
drafts and letters of credit, and can discount and negotiate promissory
notes, drafts, bills of exchange and other forms of indebtedness. They can
also invest in allied undertaking up to a limit, including trading in bonds
and securities.
2. Government Commercial Banks. These serve as banks for the
government. The role of the government in the banking system in the
country is to supplement the credit facilities of the private financial
institutions. The Government sector establishes banks with special lending
programs like the socio-economic development of the small farmers, the
Moslem regions, and the rural areas.
3. Thrift Banks. These are institutions designed to accumulate the savings
of depositors (in case of savings and mortgage banks) of their members or

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 stockholders (in case of stock savings and loan associations). These
savings are then invested in various ways to earn income through loans,
interest-bearing deposits, real estate investments, personal finance and
home-building and home development activities. Savings Banks are the
most obvious example of thrift banks.
4. Small Private Banks. These small banking units were designed to meet
the financial requirements of small rural or town units that do not have the
services provided by normal banking institutions. The first are the rural
banks, for short term financial requirements and the others are the private
development banks.
a. Rural Banks. These banks were designed primarily to mobilize
rural savings by accepting savings and time deposits and to provide
channel for funds from urban areas and the government sector for
agricultural and individual activities in the countryside. They also
provide credits to small scale farmers and enterprises in the rural
sector. They receive government assistance mainly for the support
of food production program.
b. Private Development Banks. These banks are modeled to serve
like the Development Bank of the Philippines (DBP) at the
community or provincial level. They are allowed to accept time and
savings deposits and provide medium and long term credit to small
and medium scale industries. At the community level, these banks
assist the financing of development projects by providing loan
assistance to entrepreneurs.
5. Non-Banking Financial Institutions. These are financial institutions that
provide banking services without meeting the legal definition of a bank,
i.e., one that does not hold a banking license. These institutions are not
allowed to take deposits from the public. Nonetheless, all operations of
these institutions are still exercised under bank regulation.
a. Government Non-Banking Financial Institutions. As the banking
system is evolving, there was a parallel development of other

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 financial institutions. On the government side, for instance,
Government Service Insurance System (GSIS) for the government
employees was developed. In fact insurance for workers under the
GSIS was in operation by 1936. Compulsory social security
insurance in private sector was founded in 1937 with the creation of
Social Security System (SSS). These institutions were created
essentially to protect the welfare of employees. But in
consequence, they set up large trust funds that were generated
from the insurance premiums of members and their counterpart
institutions.
b. Private Non-Banking Financial Institutions. Other non-bank
financial institutions serve primarily as further intermediaries of
units with excess funds, facilitation of their investments. There is an
interaction between the position of the bank, the most important
financial institution, and other financial institutions.

Role of Bangko Sentral ng Pilipinas (BSP) in the Philippine Financial

System
Central Banks are financial institutions vested by the State with the
function of regulating the supply, cost and use of money with a view to promoting
national and international economic stability and welfare.

Development of the Bangko Sentral ng Pilipinas

The central bank of countries within the region of Southeast Asia were
established mostly only after the end of the Second World War. The Philippines
is not an exception. It established its central bank on January 3, 1949.  The
concept of a central bank was developed in 1933 by Miguel Cuaderno, the first
governor of the Central Bank of the Philippines. The Central Bank of the
Philippines was patterned after similar central banks established in Paraguay and
Guatemala, two countries which, like the Philippines have the same export
economies. The Central Bank of the Philippines came to existence as a result of

25
the approval by the former President Elpidio Qurino of Republic Act No. 265,
otherwise known as the “Central Bank Act” on June 15, 1948. However, actual
operations did not commence until January 3, 1949 when the bank opened its
doors for business in the old Intendencia Building located at Intramuros, Manila.
With the accumulation of losses incurred by the Central Bank, P317B as
of December 1992, there emerged the CMA bill to transform the Central Bank
into Central Monetary Authority. This bill is also in response to a call of the
International Monetary Bank and World Bank to ease the foreign debt burden
and strengthen the credit standing of the Philippines. And then when the CMA
law also known as “The New Central Bank Act” took effect on June 14, 1993
there is established an independent Central Monetary Authority which is known
as the “Bangko Sentral ng PilipInas” and has a capital of P50billion.

Objectives of The Bangko Sentral ng Pilipinas (BSP)

1. To maintain price stability conducive to a balanced and sustainable growth
of the economy, and
2. To promote and maintain monetary stability and convertibility of the
Philippine peso.
The BSP monitors and compiles various indicators on the Philippine banking
system which is composed of universal and commercial banks, thrift banks, rural
and cooperative banks. As prescribed by the “New Central Bank Act, the main
functions of the Bangko Sentral are:
1. Liquidity management, by formulating and implementing monetary policy
aimed at influencing money supply, consistent with its primary objective to
maintain price stability;
2. Currency issue, the BSP has the exclusive power to issue the national
currency. All notes and coins issued by the BSP are fully guaranteed by
the Government and are considered legal tender for all private and public
debts;
3. Lender of last resort, by extending discounts, loans and advances to
banking institutions for liquidity purposes;

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4. Financial supervision, by supervising banks and exercising regulatory
powers over non-bank institutions performing quasi-banking functions;
5. Management of foreign currency reserves , by maintaining sufficient
international reserves to meet any foreseeable net demands for foreign
currencies in order to preserve the international stability and convertibility
of the Philippine Peso;
6. Determination of exchange rate policy , by determining the exchange rate
policy of the Philippines. Currently, the BSP adheres to a market-oriented
foreign exchange rate policy, and;
7. Being the banker, financial advisor and official depository of the
Government, its political subdivisions and instrumentalities and GOCCs.

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 DISCUSSION QUESTIONS

1. Define Financial Management.

2. Enumerate and discuss the objectives of financial management.
3. Who is a financial manager?
4. What are the different roles of a financial manager in a business
organization?
5. Enumerate and discuss the vital functions of the financial manager.
6. Distinguish a controller from a treasurer.
7. What is Global Financial System? And what are the institutions that
compose a global financial system?
8. Differentiate the functions and roles in the global financial system of the
following main players:
a. International Monetary Fund
b. World Bank
c. World Trade Organization
9. What are the different institutions that compose of a Philippine Financial
System?
10. Distinguish a commercial bank from a savings bank.
11. Briefly discuss the history of development of the Bangko Sentral ng
Pilipinas (BSP).
12. What is the importance of the BSP in the Philippine Financial System?
13. Enumerate and discuss the main functions of the BSP.

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 EXERCISE 1.3

True-or-False

_______1. From a legal point of view, the proprietor is not separable from the
business and is personally liable for all debts of the business.
_______2. The International Monetary Fund is an international financial
institution that provides loans to developing countries for capital
programs.
_______3. Effective utilization of financial resources refers to their economical
use.
_______4. The corporation’s power of succession enables it to enjoy a
continuous existence.
_______5. The BSP monitors and compiles various indicators on the
Philippine banking system which is composed of universal and
commercial banks, thrift banks, rural and cooperative banks.
_______6. The controller is responsible for credit and collection.
_______7. Profit is the amount of money left from the firm’s income made after
all costs of producing, marketing and distributing the goods and
services have been paid.
_______8. All notes and coins issued by the BSP are fully guaranteed by the
Government and are considered legal tender for all private and
public debts.
_______9. Company accountants develop the income statement showing
sales revenues and expenses for a period of time; they also put
together the balance sheet listing company assets and the
corresponding liabilities and the owner’s equity.
_______10. The Central Bank of the Philippines came to existence as a result
of the approval by the former President Elpidio Qurino of Republic
Act No. 265, otherwise known as the “Central Bank Act” on June
15, 1948.

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 EXERCISE 1.4

Write the letter corresponding to the classification to the Philippine Financial

System of the given institutions.

A. Commercial Bank
B. Government Commercial Bank
C. Thrift Bank
D. Rural Bank
E. Private Development Bank
F. Government Non-Banking Financial Institution
G. Private Non-Banking Financial Institution

____1. Banco de Oro

____2. City Savings Bank
____3. Rizal Commercial Banking Corporation
____4. Philippine National Bank
____5. UCPB Savings Bank
____6. Citibank
____7. Bank of the Philippine Islands
____8. Maybank
____9. Government Service Insurance System
____10. Land Bank of the Philippines
____11. Security Bank
____12. China Banking Corporation
____13. Rang-ay Bank, Inc.
____14. CARD Bank, Inc.
____15. Bangko Kabayan, Inc.

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