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• Finance
➢ Finance is the study and system of money, investments, and other financial instruments.
➢ Finance is always of great importance, be it in a business or one's everyday life. It is important to manage
risks in business, it is equally important to manage risks in life as well. Risk is nothing but an uncertain
event that might damage your assets and when it is financial risk, it creates a loss of Finance. Some books
define Finance as the science and art of managing money. (Gitman & Zutter, 2012)
➢ There are Three Categories of Finance
▪ Public Finance - Public finance includes tax systems, government expenditures, budget procedures,
stabilization policy and instruments, debt issues, and other government concerns.
▪ Personal Finance- Personal finance defines all financial decisions and activities of an individual or
household, including budgeting, insurance, mortgage planning, savings, and retirement planning
▪ Corporate Finance - Corporate finance involves managing assets, liabilities, revenues, and debts
for a business.

• Financial Management
➢ Financial Management is defined as the planning, organizing, and controlling of financial activities such as
the enterprise's procurement and utilization of funds.
➢ Financial Management deals with those decisions that are supposed to maximize the value of
shareholder’s wealth (Cayanan). These decisions will ultimately affect the market’s perception of the
company and influence the share price. The goal of Financial Management is to maximize the value of
shares of stocks. Managers of a corporation are responsible for making the decisions for the company that
would lead toward shareholder wealth maximization.

• Financial Manager
➢ The Financial manager is a person who takes care of all the important financial functions of an
organization. The person in charge should ensure that the funds are utilized most efficiently.
➢ Another role of the Financial Manager is to determine the appropriate capital structure of the company.
Capital structure refers to how much of your total assets are financed by debt and how much is financed
by equity. To be able to acquire assets, our funds must have come somewhere. If it has been bought using
cash from our pockets, it has been financed by equity. On the other hand, if we used money from our
borrowings, the asset bought has financed by debt.

➢ Functions of a Financial Manager

▪ Raising of Funds – It is the process a business goes through to raise money, so the business can
get off the ground, expand, or transform in some way.
▪ Three Types of Funds Raising
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o Retained Earnings - Considered the most primitive source of funding. Retained earnings from
business operations are used to expand the enterprise or distribute dividends to their
shareholders.
o Debt Capital - The borrowed funds that must be repaid at a later date. This is any form of growth
capital a company raises by taking out loans (long-term or short-term)
o Equity Capital - Funds come from investments by shareholders. While there is no debt,
investors expect an ROI based on their investments.
▪ Allocating of Funds – Once the funds are raised, financial managers are tasked to effectively
manage the allocation of funds. These financial decisions, directly and indirectly, influence other
managerial activities. Hence the proper allocation of funds is one of the most important activities of
a financial manager
▪ Profit Planning – Profit planning refers to the set of actions taken to achieve a targeted profit level.
The planning process may involve a significant number of analyses, to see what happens to projected
profits in different scenarios.
▪ Understanding Capital Markets - Shares of a company are traded on the stock exchange and there
is a continuous sale and purchase of securities. Hence, a clear understanding of the capital market
is an important function of a financial manager. When securities are traded on the stock market, a
huge amount of risk is involved. A financial manager understands and calculates the risk involved in
this trading of shares and debentures.
➢ Other Duties of Financial Managers***
▪ Financing decisions- include making decisions as to how to finance long-term investments and
working capital - which deals with the day-to-day operations of the company.
▪ Investing Decisions- To minimize the probability of failure, long-term investments have been
supported by a capital budgeting analysis.
▪ Operating Decisions – deal with the daily operations of the company, especially on how to finance
working capital accounts such as accounts receivable and inventories.
▪ Dividend Policies – Dividends are part of profits that are available for distribution, to equity
shareholders. The Finance manager must decide whether the firm should distribute.

• Financial Institutions
➢ Companies in the financial sector that provide a broad range of business and services including banking,
insurance, and investment management.
▪ Examples:
o Commercial Banks - Individuals deposit funds at commercial banks, which use the deposited
funds to provide commercial loans to firms and personal loans to individuals, and purchase
debt securities issued by firms or government agencies.
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o Insurance Companies - Individuals purchase insurance (life, property and casualty, and
health) protection with insurance premiums. The insurance companies pool these payments
and invest the proceeds in various securities until the funds needed to pay off claims by
policyholders
o Mutual Funds – A company that pools money from many investors and invests the money
in securities such as stocks, bonds, and short-term debt. The combined holdings of the mutual
fund are known as its portfolio. Investors buy shares in mutual funds.
o Pension Funds - Financial institutions that receive payments from employees and invest the
proceeds on their behalf.
o Government agencies such as the Government Services Insurance System (GSIS) and the
Social Security System (SSS) are also classified as financial Institutions

• Financial Instruments

➢ A document that represents a legal agreement involving some monetary value. These can be debt
securities like corporate bonds or equity-like shares of stock. Once a financial instrument is issued, it
gives rise to a financial asset on one hand and a financial liability or equity instrument.

➢ Financial Assets

▪ Cash
▪ An equity instrument of another entity.
▪ A contractual right to receive cash or another financial asset from another entity.
▪ A contractual right to exchange instruments with another entity under conditions that are potentially
favorable

➢ Financial Liabilities - Any liability which is a contractual obligation

▪ To deliver cash or another financial instrument to another entity.

▪ To exchange financial instruments with another entity under conditions that are potentially
unfavorable

➢ Equity Instruments- Any contract that evidences a residual interest in the assets of an entity after
deducting all liabilities. No fixed rate of return. Generally, equity instruments will have varied returns
based on the issuing company's performance. Returns from equity instruments come from either
dividends or stock price appreciation.

▪ Preferred Stock has priority over common stock in terms of claims over a company's assets. This
means that if a company has liquidated and its assets have to be distributed, no asset be distributed
to common stockholders unless all the claims of the preferred stockholders has given.
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▪ Holders of Common Stock on the other hand are the real owners of the company. If the company’s
growth is encouraging, the common stockholders will benefit on the growth.

➢ Debt Instruments - Generally have fixed returns due to fixed interest rates

▪ Treasury Bonds and Treasury Bills issued by the Philippine Government - These bonds and
bills have usually low-interest rates and have a very low risk of default since the government
assures that these have been paid.
▪ Corporate Bonds - issued by publicly listed companies. These bonds usually have higher interest
rates than Treasury bonds. However, these bonds are not risk-free. If the company issued the
bonds goes bankrupt, the holder of the bonds will no longer receive any return from their investment
and even their principal investment has wiped out.

• Financial Markets

➢ A marketplace, where the creation and trading of financial assets, such as shares, debentures, bonds,
derivatives, currencies, etc. take place.
➢ Primary vs. Secondary Markets - To raise money, users of funds will go to a primary market to issue
new securities (either debt or equity) through a public offering or a private placement. The sale of new
securities to the public is referred to as a public offering and the first offering of stock is named an initial
public offering. The sale of new securities to one investor or a group of investors (institutional investors)
is referred to as a private placement.
➢ However, suppliers of funds or the holders of the securities may decide to sell the securities that have
been purchased. The sale of previously owned securities takes place in secondary markets.
➢ The Philippine Stock Exchange (PSE) is both a primary and secondary market.

• Financial Planning Process

➢ A financial plan is a document that details a person’s or company's current financial circumstances and
their short- and long-term monetary goals. It includes strategies to achieve those goals.
➢ In financial planning, another management function is involved. That is controlling. Both functions go
hand in hand in contributing to the success of an organization.
➢ In financial planning, resources must be identified. These resources include workforce resources,
production capacity, and other financial resources.
➢ Once a plan is finalized, it must be stated in a quantitative manner.
➢ Quantified plans are in form of budgets and projected financial statements. A comparison is made
between the actual performance of the company and the quantified financial plans. This is where
controlling takes place. If actual performance is below expectations, it is vital to determine the problems
and come up with and implement corrective measures to address such problems
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➢ Steps in the Financial Planning Process

▪ Set Goals & Objectives - A company's Vision statement serves as its goals, be it short- or long-
term. The Mission statement, however, shows how the company plans to achieve those goals.
▪ Identifying Resources - Resources include production capacity, human resources who will
operate the operations, and financial resources.
▪ Identifying Goal-Related Tasks - Consider which goals should be accomplished by a specific
task. For example, if the company is aiming to increase the manufacturing of their products, then
the appropriate task would be to hire more manpower or to purchase new equipment.
▪ Establish The Chain of Responsibility and Accountability- Determine which department of the
company would be responsible for which goal and which tasks. These departments will then be
held accountable for problems that may arise.
▪ Determine Contingency Plans - Consider all possible circumstances and problems that may arise
and prepare solutions for them.
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Preparation of Budget
• Budget
➢ A budget is an estimation of revenue and expenses over a specified future period of time and is utilized by
governments, businesses, and individuals at any income level.
➢ The main goal of a budget is to ensure that expenses do not exceed income and to help people or
organizations make sound financial decisions. By tracking expenses and income, a budget can help
identify areas where spending can be reduced and provide a roadmap for achieving financial goals.
➢ Types of Budgets
▪ Sales Budget - A prediction of the firm’s sales over a specific period, based on external and internal
information. The sales budget is computed by: [FORECASTED SALES x SELLING PRICE]
▪ Production Budget- Manufacturing companies use production budgets to specify the number of
product units to be manufactured. The production budget is determined based on sales forecasts.
Forecasted Unit Sales + Planned Finished Goods Inventory = Total Production Required - Beginning
Finished Goods Inventory = Products to be Manufactured
▪ Cash Budget- A type of budget that estimates cash inflows and the use of cash during a specific
period. It forecasts the timing of cash outflows and matches them with cash inflows from sales and
other receipts. The cash budget is also a control tool to monitor the way the company handles cash.
• Projected Financial Statements - A tool of the company to set an overall goal of what the company’s
performance and position will be for and as of the end of the year. It sets targets to control and monitor the
activities of the company.

Working Capital Management

• Working Capital
➢ Working capital is essential for a business to operate effectively, as it enables a company to pay its bills,
purchase inventory, and cover other short-term expenses.
➢ A business with sufficient working capital can operate smoothly without running into cash flow problems,
while a business with insufficient working capital may struggle to meet its obligations and may be forced
to borrow funds or even go out of business.
➢ Maintaining an appropriate level of working capital is an important aspect of financial management for
businesses. It requires careful monitoring of cash flow, inventory levels, and other factors that affect a
company's ability to generate cash and meet its financial obligations.
➢ Two Types of Capital:
▪ Fixed Capital - Businesses require investment in assets, which is utilized over a longer period.
These long-term investments are considered as fixed capital. For example, buildings, machinery,
etc.
▪ Working Capital - Refers to the short-term assets and liabilities used to run day-to-day
operations. such as paying suppliers, meeting payroll, and managing inventory. Working capital
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is typically made up of short-term assets such as cash, accounts receivable, and inventory, and
short-term liabilities such as accounts payable and short-term debt. Working capital is
considered a short-term investment, and it is usually financed through short-term debt or
operating cash flow.
▪ In summary, fixed capital refers to the long-term assets a company uses to produce goods or
services while working capital refers to the short-term assets and liabilities used to run day-to-
day operations. Both fixed capital and working capital are essential for a company to operate
effectively, and managing them effectively is an important aspect of financial management.
• Net Working Capital
➢ Net working capital is the difference between a company's current assets (such as cash, inventory,
and accounts receivable) and its current liabilities (such as accounts payable and short-term debt).
It shows how much money a company has available to meet its short-term financial obligations.
➢ Positive net working capital is generally considered a good sign, indicating that the company has the
resources it needs to operate and grow.
➢ IF Current Assets > Current Liabilities = Positive Net Working Capital
➢ IF Current Liabilities > Current Assets = Negative Net Working Capital
• Working Capital Management
➢ The efficient management of the firm’s current assets (cash, receivables, and inventory) and current
liabilities (short-term payables)
➢ Managers are tasked to balance the risk and profitability that comes along with each current asset &
liability to contribute positively to the firm’s value.
• Cash Management System
➢ A cash management system refers to the process of managing cash flows within a business to ensure
that there is enough cash available to meet its financial obligations
➢ One aspect of cash management is holding cash, which involves maintaining a certain amount of cash
on hand to cover short-term expenses and unexpected events.
➢ HOLDING CASH-
▪ Holding cash is an important aspect of cash management, as it provides a buffer against
unexpected cash outflows and helps to ensure that a business can continue to operate smoothly
even during periods of financial uncertainty.
▪ However, holding too much cash can also be problematic, as it can lead to idle cash balances
that earn little or no return. Therefore, businesses need to strike a balance between holding
enough cash to cover their short-term needs and investing any excess cash in higher-yielding
opportunities such as short-term investments, which can earn a return while still providing
liquidity.
▪ Reasons for Holding Cash:
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a. Transactional Motive - The first motive for holding cash is to fulfill the transaction
requirements of the business, which means having enough cash to carry out normal buying
and selling activities.
b. Precautionary Motive - The second motive for holding cash is precautionary, where cash
is held above the normal operating requirements to provide a safety net against unforeseen
events such as delayed accounts receivable collection or unexpected increase in cash
needs.
c. Speculative Motive - The third motive for holding cash is speculative, which involves
holding cash for investment purposes or taking advantage of opportunities such as
purchasing discounted raw materials inventory or considering a merger proposal.
d. Contractual Motive - The fourth motive for holding cash is contractual, where a company
may need to maintain a certain level of cash balance in its demand deposit account as a
condition of a loan agreement with a bank.
• Inventory Management
➢ A method utilized by companies to establish an overarching objective for their performance and position
at the conclusion of a given year.
➢ This approach outlines specific targets that enable companies to regulate and oversee their operations
effectively.
➢ The aim of inventory management is to transform inventory into cash as swiftly as possible while avoiding
lost sales due to insufficient stock. As a result, the financial manager has a critical role in ensuring that the
company maintains the correct amount of inventory, neither too much nor too little.
➢ Excessive inventory can result in higher costs associated with inventory carrying, while insufficient
inventory can result in potential stock-outs, resulting in lost sales and customers.
➢ Three Types of Inventories
▪ Raw materials – these are purchased materials not yet put into production
▪ Work in process – these are goods and labor put into production but not finished.
▪ Finished goods – these are goods put into production and finished. These are ready to be sold.
The ABC Inventory system categorizes inventory items into three groups based on their value. "A" items are
high-value and require the most protection, "B" items are average-cost and require moderate protection, while
"C" items are low-cost and require the least amount of protection.

Financing (Short Term and Long Term)

• Financing
➢ Financing is a critical component of any business as it provides funds for activities such as purchasing and
investing. Financial institutions like banks, cooperatives, and other companies provide loans to businesses
to help them achieve their goals
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➢ Financing can be classified as either short-term or long-term. Short-term financing refers to debt that is
due to be paid within a year, while long-term financing refers to debt that is due to be paid in more than
a year.
➢ Debt financing involves borrowing funds, either short-term or long-term, with interest and other charges
referred to as the cost of borrowing or the cost of debt. Examples include bank loans, debt instruments like
bonds, financing from nonbank institutions, and selling of notes receivables. Compliance with requirements
is usually required.
➢ Equity financing involves selling ownership interest, usually represented by shares, to raise funds for
business purposes. Dividends or profits are declared, set aside, and paid to compensate for the use of
funds. Examples include funds raised from friends and family, capital infusion through direct sale of shares
or initial public offerings, and financing by private companies. It involves an investee-investor relationship.
➢ Sources of Funds - Common sources of funds are banks, cooperatives, and commercial finance
companies, with the latter two being nonbank institutions. Banks are supervised and regulated by the
Bangko Sentral ng Pilipinas and offer various services, while credit cooperatives promote savings and
lending among members to generate a common pool of funds for financial assistance. Commercial finance
companies offer funding to businesses through various means.

TIME VALUE OF MONEY

Interest is the amount paid or received for the use of money over a period. Economists refer to it as the time value
of money. It is the difference between the amount of money borrowed or loaned, known as the principal, and the
amount of money paid or received, which is usually in the form of cash.

➢ Formula: Interest = Principal x Rate x Time

➢ Simple interest is a type of interest that is calculated only on the principal amount borrowed or
invested, and not on any previously accumulated interest.
▪ Formula: I = P * r * t
Where:
I = Interest
P = Principal amount
r = Interest rate (per year)
t = Time period (in years)
➢ Compound Interest is a type of interest that considers not only the principal amount borrowed or
invested but also the interest earned on previous interest payments. As a result, the amount of
interest earned increases exponentially over time, making it a more profitable option for long-term
investments or loans.
▪ Formula: FV = 𝐏 (𝟏 + 𝒊)𝒏
where:
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FV = Future Value
P = Principal
i = Interest rate per compound interest period or periodic rate
n = Time period or number of compound interest periods

Amortization refers to the process of spreading out the cost of a large expense over a period by making regular
payments. It is commonly used for loans or other large purchases, where the borrower repays the borrowed amount
over a set period with interest, typically through fixed payments made on a regular schedule.

➢ The goal of amortization is to reduce the burden of a large expense by breaking it down into smaller,
more manageable payments over time.
➢ TAKE NOTE: It is usually preferable to take up a loan rather than to pay cash upfront because of the
Opportunity cost: If the borrower has an investment opportunity with a higher rate of return than the
interest rate on the loan, it may make sense to take out a loan and invest the cash upfront rather than
paying for the purchase in cash.

INVESTMENTS
Investment refers to the act of allocating resources, usually money, with the expectation of generating income or
profit in the future. It involves putting money into an asset or a project with the goal of generating income,
appreciation of value, or both.
➢ Investments can be made in a variety of assets, such as stocks, bonds, real estate, commodities,
and businesses, among others.
➢ The primary objective of the investment is to increase wealth over time, either through capital gains
or through the generation of income, such as dividends or interest.
➢ TYPES OF INVESTMENTS
▪ Stocks: The stock is a share in the ownership of a company. When you purchase a stock, you
become a shareholder and have a claim to a portion of the company’s assets and earnings.
o There is no ceiling in the earning opportunity, but there are also no guaranteed returns, as
such this is the riskiest of all assets
▪ Bank Deposits: Bank deposits can be considered an investment as they provide a safe and
reliable way to store and grow money. Depositors earn interest on their deposits, which can
increase the value of their savings over time. Bank deposits are also insured by the government
up to a certain amount, making them a low-risk investment option.
o However, the returns on bank deposits may be relatively low compared to other investment
options, and may not keep up with inflation.
o Types of Bank Deposits
a) Savings accounts: These are accounts designed for individuals to deposit their money
and earn interest. Usually, savings accounts offer lower interest rates than other types of
investments, but they are also generally considered low-risk.
b) Checking accounts: These accounts are primarily used for day-to-day transactions such
as paying bills, withdrawing cash, and making purchases using a debit card. Unlike
savings accounts, checking accounts generally do not earn interest.
c) Time deposits: These are deposits that are held in the bank for a fixed period, ranging
from a few months to several years. Time deposits generally offer higher interest rates
than savings accounts, but they also come with penalties for early withdrawal.
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d) Certificate of deposit (CD): This is a type of time deposit where the depositor agrees to
keep their funds in the account for a fixed period, typically ranging from 3 months to 5
years. CDs usually offer higher interest rates than savings accounts or money market
accounts, but early withdrawal penalties can apply.
▪ Bonds: A bond is a loan made to a company or government, and in exchange for the loan, the
borrower pays interest to the investor. Bonds are generally considered to be a lower-risk
investment compared to stocks.
▪ Mutual Funds: A mutual fund is a type of investment fund that pools money from many investors
to purchase a diversified mix of stocks, bonds, or other securities
▪ Currencies: Investing in currencies involves buying and holding different currencies to potentially
earn a profit from fluctuations in their exchange rates. Currencies are traded in the foreign
exchange market (Forex), which is the largest financial market in the world
▪ Real Estate: Real estate investments can take many forms, such as buying a rental property or
investing in a real estate investment trust (REIT)
o Generally, real estate assets appreciate over time. Properties may be a source of income
through rental or lease agreements.
▪ Insurance – Can be considered as a form of investment in the sense that it provides financial
protection against potential risks and uncertainties. By paying premiums to an insurance
company, individuals can transfer the risk of financial loss to the insurer. In return, the insurance
company provides a guarantee of financial compensation in case of an event covered by the
policy, such as illness, disability, or death.
• When deciding where to invest, there are important factors to consider.
➢ First, the amount of cash available for investment should be considered, as an investor should not
invest beyond their means.
➢ Second, the level of risk associated with an investment should be considered, as higher-risk
investments typically offer higher returns. It is also important to diversify investments to spread out risk.
➢ Finally, the investor's intent, whether it is short or long term, should influence the type of investment
they choose. Short-term deposits and stocks may be suitable for short-term goals, while bonds and
stocks can be held as long-term investments.