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Introduction to Financial Management.docx

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This document provides an overview of financial management roles and responsibilities within a corporation. It discusses shareholders who elect the board of directors, whose primary responsibility is ensuring the corporation operates in the shareholders' best interests. The president oversees company operations and strategy implementation with assistance from vice presidents of different functional areas like marketing, production, and administration. Financial management decisions include funding long-term investments and working capital, considering factors like risk, return, and financing costs.

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Introduction to Financial Management • Shareholders: The shareholders elect the Board of Directors (BOD). Each share held is equal to one voting right. Since the BOD is elected by the shareholders, their responsibility is to carry out the objectives of the shareholders otherwise, they would not have been elected in that position. Ask the learners again what the objective of the shareholders is just to refresh. • Board of Directors: The board of directors is the highest policy making body in a corporation. The board’s primary responsibility is to ensure that the corporation is operating to serve the best interest of the stockholders. The following are among the responsibilities of the board of directors: - Setting policies on investments, capital structure and dividend policies. - Approving company’s strategies, goals and budgets. - Appointing and removing members of the top management including the president. - Determining top management’s compensation. - Approving the information and other disclosures reported in the financial statements (Cayanan, 2015) • President (Chief Executive Officer): The roles of a president in a corporation may vary from one company to another. Among the responsibilities of a president are the following: - Overseeing the operations of a company and ensuring that the strategies as approved by the board are implemented as planned. - Performing all areas of management: planning, organizing, staffing, directing and controlling. - Representing the company in professional, social, and civic activities. • Tell the learners that although the president carries out the decision making for all functions, it would be difficult for him/her to do this alone. The president cannot manage the company on his own, especially when the corporation has become too big. To assist him are the vice presidents of different functional areas: finance, marketing, production and administration. • Determine from the list of roles written on the board the functions that pertain to the respective VPs. Add the following functions if needed: • VP for Marketing: The following are among the responsibilities of VP for Marketing - Formulating marketing strategies and plans.
- Directing and coordinating company sales. - Performing market and competitor analysis. - Analyzing and evaluating the effectiveness and cost of marketing methods applied. - Conducting or directing research that will allow the company identify new marketing opportunities, e.g. variants of the existing products/services already offered in the market. - Promoting good relationships with customers and distributors. (Cayanan, 2015) • VP for Production: The following are among the responsibilities of VP for Production: - Ensuring production meets customer demands. - Identifying production technology/process that minimizes production cost and make the company cost competitive. - Coming up with a production plan that maximizes the utilization of the company’s production facilities. - Identifying adequate and cheap raw material suppliers. (Cayanan, 2015) • VP for Administration: The following are among the responsibilities of VP for Administration: - Coordinating the functions of administration, finance, and marketing departments. - Assisting other departments in hiring employees. - Providing assistance in payroll preparation, payment of vendors, and collection of receivables. - Determining the location and the maximum amount of office space needed by the company.Identifying means, processes, or systems that will minimize the operating costs of the company. (Cayanan, 2015) Financing decisions include making decisions on how to fund long term investments (such as company expansions) and working capital which deals with the day to day operations of the company (i.e., purchase of inventory, payment of operating expenses, etc.). Investments may either be short term or long term. - Short term investment decisions are needed when the company is in an excess cash position. • To plan for this, the Financial Manager should be able to make use of Financial Planning tools such as budgeting and forecasting which will be discussed in Lesson 3: Financial Planning Tools and Concepts. • Moreover, the company should choose which type of investment it should invest in that would provide an most optimal risk and return trade off. We will learn more about this on Lesson 6: Introduction to investments.
- Long term investments should be supported by a capital budgeting analysis which is among the responsibilities of a finance manager. • Capital budgeting analysis is a tool to assess whether the investment will be profitable in the long run and will be further discussed in Lesson 5: Basic Long Term Financial Concepts. This is a crucial function of management especially if this investment would be financed by debt. Operating decisions deal with the daily operations of the company. The role of the VP for finance is determining how to finance working capital accounts such as accounts receivable and inventories. The company has a choice on whether to finance working capital needs by long term or short term sources. Why does a Financial Manager need to choose which source of financing a company should use? What do they need to consider in making this decision? - Short Term sources are those that will be payable in at most 12 months. This includes short-term loans with banks and suppliers’ credit. For short-term bank loans, the interest rate is generally lower as compared to that of long-term loans. Hence, this would lead to a lower financing cost. - Suppliers’ credit are the amounts owed to suppliers for the inventories they delivered or services they provided. While suppliers’ credit is generally free of interest charges, the obligations with them have to be paid on time to maintain good supplier relationship. Such relationships should be nurtured to ensure timely delivery of inventories. - Short term sources pose a trade-off between profitability and liquidity risk. Because this source matures in a short period, there is a possibility that the company may not be able to obtain enough cash to pay their obligation (i.e. liquidity risk). - Long term sources, on the other hand, mature in longer periods. Since this will be paid much later, the lenders expect more risk and place a higher interest rate which makes the cost of long term sources higher than short term sources. However, since long term sources have a longer time to mature, it gives the company more time to accumulate cash to pay off the obligation in the future. - Hence, the choice between short and long term sources depends on the risk and return trade off that management is willing to take. The learners will learn more about this on Chapter 4: Sources and uses of funds. • Dividend Policies. Recall that cash dividends are paid by corporations to existing shareholders based on their shareholdings in the company as a return on their investment. Some investors buy stocks because of the dividends they expect to receive from the company. Non-declaration of dividends may disappoint these investors. Hence, it is the role of a financial manager to determine when the company should declare cash dividends.
Financial Institutions – intermediaries that channel the savings of individuals, businesses, and governments into loans or investments. channel the savings of individuals, businesses, and governments into loans or investments. Private Placements - the sale of a new security directly to an investor or group of investors. Public Offering - The sale of either bonds or stocks to the general public. Financial Instruments – is a real or a virtual document representing a legal agreement involving some sort-of monetary value (Source: Investopedia - Sharper Insight. Smarter Investing. | Investopedia. (2016). Investopedia. Retrieved 8 May 2016, from http://investopedia.com). These can be debt securities like corporate bonds or equity like shares of stock. - A Financial Asset is any asset that is: • 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 conditionsthat are potentiallyfavorable. (IAS 32.11) • Examples: Notes Receivable, Loans Receivable, Investment in Stocks, Investment in Bonds - A Financial Liability is any liability that is a contractual obligation: • To deliver cash or other financial instrument to another entity. • To exchange financial instruments with another entityunder conditionsthat are potentially unfavorable. (IAS 32) • Examples: Notes Payable, Loans Payable, Bonds Payable - An Equity Instrument is any contract that evidences a residual interest in the assets of an entity after deducting all liabilities. (IAS 32)
• Examples: Ordinary Share Capital, Preference Share Capital • Identify common examples of Debt and Equity Instruments. - Debt Instruments generally have fixed returns due to fixed interest rates. Examples of debt instruments are as follows: • Treasury Bonds and Treasury Bills are issued by the Philippine government. These bonds and bills have usually low interest rates and have very low risk of default since the government assures that these will be paid. • Corporate Bonds are 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 which issued the bonds goes bankrupt, the holder of the bonds will no longer receive any return from their investment and even their principal investment can be wiped out. - Equity Instruments generally have varied returns based on the performance of the issuing company. Returns from equity instruments come from either dividends or stock price appreciation. The following are types of equity instruments: • Preferred Stock has priority over a common stock in terms of claims over the assets of a company. This means that if a company were to be liquidated and its assets have to be distributed, no asset will be distributed to common stockholders unless all the claims of the preferred stockholders have been given. Moreover, preferred stockholders have also priority over common stockholders in cash dividend declaration. Dividends to preferred stockholders are usually in a fixed rate. No cash dividends will be given to common stockholders unless all the dividends due to preferred stockholders are paid first. (Cayanan, 2015)
• Holders of Common Stock on the other hand are the real owners of the company. If the company’s growth is spurring, the common stockholders will benefit on the growth. Moreover, during a profitable period for which a company may decide to declare higher dividends, preferred stock will receive a fixed dividend rate while common stockholders receive all the excess. - 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 general public is referred to as a public offering and the first offering of stock is called 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 previously 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. - Money Markets vs. Capital Markets • Money markets are a venue wherein securities with short-term maturities (1 year or less) are sold. They are created because some individuals, businesses, governments, and financial institutions have temporarily idle funds that they wish to invest in a relatively safe, interest-bearing asset. At the same time, other individuals, businesses, governments, and financial institutions find themselves in need of seasonal or temporary financing. • On the other hand, securities with longer-term maturities are sold in Capital markets. The key
capital market securities are bonds (long-term debt) and both common stock and preferred stock (equity, or ownership). Identify examples of financial institutions: - 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. - 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 are needed to pay off claims by policyholders. Because they often own large blocks of a firm’s stocks or bonds, they frequently attempt to influence the management of the firm to improve the firm’s performance, and ultimately, the performance of the securities they own. - Mutual Funds - Mutual funds are owned by investment companies which enable small investors to enjoy the benefits of investing in a diversified portfolio of securities purchased on their behalf by professional investment managers. When mutual funds use money from investors to invest in newly issued debt or equity securities, they finance new investment by firms. Conversely, when they invest in debt or equity securities already held by investors, they are transferring ownership of the securities among investors. - Pension Funds - Financial institutions that receive payments from employees and invest the proceeds on their behalf. - Other financial institutions include pension funds like Government Service Insurance System (GSIS) and Social Security System (SSS), unit investment trust fund (UITF), investment banks, and credit unions, among others

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Introduction to Financial Management.docx

  • 1. Introduction to Financial Management • Shareholders: The shareholders elect the Board of Directors (BOD). Each share held is equal to one voting right. Since the BOD is elected by the shareholders, their responsibility is to carry out the objectives of the shareholders otherwise, they would not have been elected in that position. Ask the learners again what the objective of the shareholders is just to refresh. • Board of Directors: The board of directors is the highest policy making body in a corporation. The board’s primary responsibility is to ensure that the corporation is operating to serve the best interest of the stockholders. The following are among the responsibilities of the board of directors: - Setting policies on investments, capital structure and dividend policies. - Approving company’s strategies, goals and budgets. - Appointing and removing members of the top management including the president. - Determining top management’s compensation. - Approving the information and other disclosures reported in the financial statements (Cayanan, 2015) • President (Chief Executive Officer): The roles of a president in a corporation may vary from one company to another. Among the responsibilities of a president are the following: - Overseeing the operations of a company and ensuring that the strategies as approved by the board are implemented as planned. - Performing all areas of management: planning, organizing, staffing, directing and controlling. - Representing the company in professional, social, and civic activities. • Tell the learners that although the president carries out the decision making for all functions, it would be difficult for him/her to do this alone. The president cannot manage the company on his own, especially when the corporation has become too big. To assist him are the vice presidents of different functional areas: finance, marketing, production and administration. • Determine from the list of roles written on the board the functions that pertain to the respective VPs. Add the following functions if needed: • VP for Marketing: The following are among the responsibilities of VP for Marketing - Formulating marketing strategies and plans.
  • 2. - Directing and coordinating company sales. - Performing market and competitor analysis. - Analyzing and evaluating the effectiveness and cost of marketing methods applied. - Conducting or directing research that will allow the company identify new marketing opportunities, e.g. variants of the existing products/services already offered in the market. - Promoting good relationships with customers and distributors. (Cayanan, 2015) • VP for Production: The following are among the responsibilities of VP for Production: - Ensuring production meets customer demands. - Identifying production technology/process that minimizes production cost and make the company cost competitive. - Coming up with a production plan that maximizes the utilization of the company’s production facilities. - Identifying adequate and cheap raw material suppliers. (Cayanan, 2015) • VP for Administration: The following are among the responsibilities of VP for Administration: - Coordinating the functions of administration, finance, and marketing departments. - Assisting other departments in hiring employees. - Providing assistance in payroll preparation, payment of vendors, and collection of receivables. - Determining the location and the maximum amount of office space needed by the company.Identifying means, processes, or systems that will minimize the operating costs of the company. (Cayanan, 2015) Financing decisions include making decisions on how to fund long term investments (such as company expansions) and working capital which deals with the day to day operations of the company (i.e., purchase of inventory, payment of operating expenses, etc.). Investments may either be short term or long term. - Short term investment decisions are needed when the company is in an excess cash position. • To plan for this, the Financial Manager should be able to make use of Financial Planning tools such as budgeting and forecasting which will be discussed in Lesson 3: Financial Planning Tools and Concepts. • Moreover, the company should choose which type of investment it should invest in that would provide an most optimal risk and return trade off. We will learn more about this on Lesson 6: Introduction to investments.
  • 3. - Long term investments should be supported by a capital budgeting analysis which is among the responsibilities of a finance manager. • Capital budgeting analysis is a tool to assess whether the investment will be profitable in the long run and will be further discussed in Lesson 5: Basic Long Term Financial Concepts. This is a crucial function of management especially if this investment would be financed by debt. Operating decisions deal with the daily operations of the company. The role of the VP for finance is determining how to finance working capital accounts such as accounts receivable and inventories. The company has a choice on whether to finance working capital needs by long term or short term sources. Why does a Financial Manager need to choose which source of financing a company should use? What do they need to consider in making this decision? - Short Term sources are those that will be payable in at most 12 months. This includes short-term loans with banks and suppliers’ credit. For short-term bank loans, the interest rate is generally lower as compared to that of long-term loans. Hence, this would lead to a lower financing cost. - Suppliers’ credit are the amounts owed to suppliers for the inventories they delivered or services they provided. While suppliers’ credit is generally free of interest charges, the obligations with them have to be paid on time to maintain good supplier relationship. Such relationships should be nurtured to ensure timely delivery of inventories. - Short term sources pose a trade-off between profitability and liquidity risk. Because this source matures in a short period, there is a possibility that the company may not be able to obtain enough cash to pay their obligation (i.e. liquidity risk). - Long term sources, on the other hand, mature in longer periods. Since this will be paid much later, the lenders expect more risk and place a higher interest rate which makes the cost of long term sources higher than short term sources. However, since long term sources have a longer time to mature, it gives the company more time to accumulate cash to pay off the obligation in the future. - Hence, the choice between short and long term sources depends on the risk and return trade off that management is willing to take. The learners will learn more about this on Chapter 4: Sources and uses of funds. • Dividend Policies. Recall that cash dividends are paid by corporations to existing shareholders based on their shareholdings in the company as a return on their investment. Some investors buy stocks because of the dividends they expect to receive from the company. Non-declaration of dividends may disappoint these investors. Hence, it is the role of a financial manager to determine when the company should declare cash dividends.
  • 4. Financial Institutions – intermediaries that channel the savings of individuals, businesses, and governments into loans or investments. channel the savings of individuals, businesses, and governments into loans or investments. Private Placements - the sale of a new security directly to an investor or group of investors. Public Offering - The sale of either bonds or stocks to the general public. Financial Instruments – is a real or a virtual document representing a legal agreement involving some sort-of monetary value (Source: Investopedia - Sharper Insight. Smarter Investing. | Investopedia. (2016). Investopedia. Retrieved 8 May 2016, from http://investopedia.com). These can be debt securities like corporate bonds or equity like shares of stock. - A Financial Asset is any asset that is: • 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 conditionsthat are potentiallyfavorable. (IAS 32.11) • Examples: Notes Receivable, Loans Receivable, Investment in Stocks, Investment in Bonds - A Financial Liability is any liability that is a contractual obligation: • To deliver cash or other financial instrument to another entity. • To exchange financial instruments with another entityunder conditionsthat are potentially unfavorable. (IAS 32) • Examples: Notes Payable, Loans Payable, Bonds Payable - An Equity Instrument is any contract that evidences a residual interest in the assets of an entity after deducting all liabilities. (IAS 32)
  • 5. • Examples: Ordinary Share Capital, Preference Share Capital • Identify common examples of Debt and Equity Instruments. - Debt Instruments generally have fixed returns due to fixed interest rates. Examples of debt instruments are as follows: • Treasury Bonds and Treasury Bills are issued by the Philippine government. These bonds and bills have usually low interest rates and have very low risk of default since the government assures that these will be paid. • Corporate Bonds are 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 which issued the bonds goes bankrupt, the holder of the bonds will no longer receive any return from their investment and even their principal investment can be wiped out. - Equity Instruments generally have varied returns based on the performance of the issuing company. Returns from equity instruments come from either dividends or stock price appreciation. The following are types of equity instruments: • Preferred Stock has priority over a common stock in terms of claims over the assets of a company. This means that if a company were to be liquidated and its assets have to be distributed, no asset will be distributed to common stockholders unless all the claims of the preferred stockholders have been given. Moreover, preferred stockholders have also priority over common stockholders in cash dividend declaration. Dividends to preferred stockholders are usually in a fixed rate. No cash dividends will be given to common stockholders unless all the dividends due to preferred stockholders are paid first. (Cayanan, 2015)
  • 6. • Holders of Common Stock on the other hand are the real owners of the company. If the company’s growth is spurring, the common stockholders will benefit on the growth. Moreover, during a profitable period for which a company may decide to declare higher dividends, preferred stock will receive a fixed dividend rate while common stockholders receive all the excess. - 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 general public is referred to as a public offering and the first offering of stock is called 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 previously 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. - Money Markets vs. Capital Markets • Money markets are a venue wherein securities with short-term maturities (1 year or less) are sold. They are created because some individuals, businesses, governments, and financial institutions have temporarily idle funds that they wish to invest in a relatively safe, interest-bearing asset. At the same time, other individuals, businesses, governments, and financial institutions find themselves in need of seasonal or temporary financing. • On the other hand, securities with longer-term maturities are sold in Capital markets. The key
  • 7. capital market securities are bonds (long-term debt) and both common stock and preferred stock (equity, or ownership). Identify examples of financial institutions: - 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. - 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 are needed to pay off claims by policyholders. Because they often own large blocks of a firm’s stocks or bonds, they frequently attempt to influence the management of the firm to improve the firm’s performance, and ultimately, the performance of the securities they own. - Mutual Funds - Mutual funds are owned by investment companies which enable small investors to enjoy the benefits of investing in a diversified portfolio of securities purchased on their behalf by professional investment managers. When mutual funds use money from investors to invest in newly issued debt or equity securities, they finance new investment by firms. Conversely, when they invest in debt or equity securities already held by investors, they are transferring ownership of the securities among investors. - Pension Funds - Financial institutions that receive payments from employees and invest the proceeds on their behalf. - Other financial institutions include pension funds like Government Service Insurance System (GSIS) and Social Security System (SSS), unit investment trust fund (UITF), investment banks, and credit unions, among others