Part 1

BUSINESS
FINANCE
ABM BFIN

Prof. Rodolfo Jose Gallego, MBA

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Primary Goals of a Business Slide 4 p4

Business is any lawful economic activity

that involves rendering service, buying and
selling goods.

To earn profit

To increase its own value as an economic

entity

To improve the quality of life in the

community

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Introduction to Financial Management p6

Finance – is the art and science of

managing the financial
resources(money) of a business.

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Introduction to Financial Management

FINANCE – It means a
management of money, the
monetary support for an enterprise,
or the money resources of a
government, company, or person.
According to Webster

The word finance is derived from Latin word finer, meaning “ to end or to pay. When a person pays his bill,
the financial matter is ended.

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Functions of Business Finance P6-7

1.Allocation of financial resources

2.Procurement of funds
3.Efficient and effective utilization
of financial resources.

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Classification of Finance Slide 6 P8-11

A.As to form of Negotiation

1. Direct Finance
2. Indirect Finance
B. As to User
1. Public Finance
2. Private Finance

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Direct Finance p9

Finance involves Flow of funds

Finance involved in direct borrowing

The security acquired(called direct security) by the

surplus and(lender) is the same security issued by
the deficit unit(borrower).

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Indirect Finance p10

Involves financial intermediaries. Financial intermediaries act as middlemen

when they buy securities for resale or simply facilitate the sale from the original
issuers to the final buyers.

Financial intermediaries buy securities for resale to other investors or

saving units.

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Public Finance
Deals with the revenue and expenditure patterns of the government.

It is concerned with government affairs – managing the government’s sources

and uses of funds.

When government issues treasury securities like Treasury bills, notes and
bonds, the government is in fact borrowing money from the public which is also
public finance.

Government spending and government borrowing are all public finance. E.g.
government revenues, like taxes and expenses like salaries of government
employees, Also government expenditures for infrastructure like uilding
streets, schools, bridges etc.

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Private Finance
All finance other than public finance is private finance. An individual borrowing money
from other individual is doing private finance.

According to Medina(2007) stated that private finance is that which deals with the
area of general finance not classified under public finance.

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Classification of Private Finance P11-12

1. Personal Finance – refers to finance conducted by

individuals/consumers. A family spending for their food, clothing,
shelter, recreation, education among others is personal finance.

2. Finance of non-profit organization – involves those conducted

by charitable, civic, religious organizations, among others. e.g.
Catholic church, rotary club among others.

3.Business finance – deals with financing

for business firms or for commercial use, the goal of which is to make
profit.

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BUSINESS FINANCE

Business finance deals with financing for business firms or

for commercial use, the goal of which is to make profit.

1. Where to obtain capital for a particular

company and
2. Where to use it are concerns of business
finance.

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BUSINESS FINANCE p12

In all these business activities, effectively and efficiently acquiring and utilizing
funds(finance) make the difference and that is what business finance is all about.

PRODUCTIVITY = EFFECIENCY + EFFECTIVENESS

Efficiency is all about saving time, money or effort.

Efficiency is a measure of speed and cost. While
effectiveness is a measure of quality. Producing the
desired result id effectiveness thus, Effectiveness is
doing the right things and efficiency is doing things
right. If we combine efficiency and effectiveness, we
obtain productivity.

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Three interrelated areas of Finance

1.Managerial Accounting;
2.Investment, and
3.Money and capital
markets

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Three interrelated areas of Finance s15

Investments focus on decisions of individuals,

financial institutions, and non-financial institutions
as they choose where to place excess funds.
Investments are assets of the people or entities
holding/owning them.

Money and Capital markets deal with the

different financial instruments.*

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Three interrelated areas of Finance

Financial Management / Managerial Finance,

is concerned with the management for funds. It is
the efficient and effective allocation, acquisition,
and utilization of funds. The acquisition of funds
should always be at the east cost and such funds
need to be channeled to fund projects or
investments that will maximize benefits, including
profit to the organization.

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Financial Management / Managerial Finance p13

Objective of FM in fund utilization should maximize :

1.wealth;

2.The value of the company; and

3.The value of stakeholders.

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Financial Management / Managerial Finance
Decision Making of Financial Manager :
Financial Manager decides as to where to get financial
resources like cash, inventories, equipment, and other
assets needed by the firm in its operation. If cash is
acquired, the financial manager decides where to use the
cash – finance a new project, pay outstanding obligations,
pay operating expenses, or buy equipment needed by the
firm.
The person in charge of the finance function is called the
Director of Finance; VP for Finance, or Finance
Manager.

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Financial Management / Managerial Finance P14-15

Primary activities of a Finance Manager :

a.Financial Planning and analysis;

b.Managing the firm’s assets and
c.Managing the firm’s liabilities
and owners’ equity

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Financial Management / Managerial Finance
Other terms used in charge for finance
function :

a. Director of finance
b. VP for finance
c. Finance manager

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Financial Management / Managerial Finance

Primary responsibility of a Finance Manager:

a. Allocation of the financial resources of a

company;
b. Acquisition of additional funds needed; and
c. Utilization of these financial resources to attain
organizational objectives.

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Controller and Treasurer Functions p.16

CONTROLLER TREASURER

1. Planning for control which includes budgeting 1. Determination of financial requirements and procurements of funds

2. Reporting and interpreting results of operations and systems 2. Cash management, banking, custody of funds, and foreign
installation exchange problems.
3. Evaluation of objectives, policies, and procedures and consulting 3. Investor relations
with all segments of management regarding the same
4. Tax administration and government reporting 4. Corporate investments
5. Protection of assets 5. Credit and collections
6. Economic appraisal (forward planning) 6. Insurance
7. Employees benefits

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Goals of the Finance Manager P17-18

1. Acquisition of funds with the least cost

from the right sources at the right time;
2. Effective cash management;
3. Effective working capital management;
4. Effective inventory management;
5. Effective investment decisions;
6. Proper asset selection; and
7. Proper risk management

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Financial Markets p19

Financial markets are institutions and

systems that facilitates transactions in all
types of financial claim. They are the
bridge between those with excess funds
and those who need funds. It is the
heart of the financial system,
determining the volume of credit
available, attracting savings, and setting
interest rates and security prices.

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Classification of Financial Markets P19-23

1.As to term or maturity

a. money market; and
b. capital market

2. As to type of issue
a. primary market
b. secondary market

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Classification of Financial Markets as to terms

A. Money markets cover markets for

short-term debt instruments. They consist
of a network of institutions and facilities
for trading debt securities with maturity
of one year or less (Saldana 1997). e.g.
short –term treasury bonds issued by the
government, bankers’ acceptances,
negotiable certificates of deposit, and
commercial papers and they often termed
as marketable securities.

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Classification of Financial Markets as to terms P20-21

B.Capital Markets – are markets for long-

term securities. By long-term is meant
maturity of more than a year. Both debt and
equity securities are traded in the capital
market. These instruments often carry greater
default and markets risks than money market
instruments. I return, they carry a higher
return yield.

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Classification of Financial Markets as to type of issuance

A. Primary Market – consists of

underwriters, issuers and instruments.
The primary transaction involves
either equity(stocks) or debt(bonds).
They are markets for new issues of
financial instruments like socks and
bonds.

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Classification of Financial Markets as to type of issuance
P23-24

B. Secondary Markets – are markets for

current outstanding securities. Shares held
by the public are termed outstanding
shares or securities. They involve in the
trading of previously issued money market
instruments. These securities were
previously bought and owned and now
being resold by these initial investors.
e.g. Philippine Stock Exchange

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Stakeholders of the Company

1. Management
2. Employees,
3. Suppliers
4. Customers
5. Creditors
6. Regulatory agencies and
7. Community where the company operates

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Financial System
Groups in the financial system

1. Savers
2. Financial Intermediaries
3. Users of Funds(Borrowers or
Investors)

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Financial System
Savers group:

a.Households
b.Individuals
c.Corporations / Companies
d.Government agencies

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Financial System
Groups of Financial Intermediaries :

a. Banks
b. Insurance Companies
c. Stock exchange
d. Stock brokerage firms
e. Mutual funds
f. Other Financial Institutions

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Financial System

Users of funds (borrowers/investors)

a. Households
b. Individuals
c. Corporations/companies
d. Government agencies

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Financial Intermediaries meaning

Financial institutions/intermediaries
are the firms that bridge the gap between
the surplus units or investors lenders and
the deficit units or borrowers, which issue
their own financial instruments.

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Financial Intermediaries

Classification of Financial Intermediaries

a. Depository – it refers to the institution tat

deposits from surplus units. It issues checking or
current account, savings and time deposit and help
depositors with money market placement. Current
checking account can be withdrawn by issuing a
check. Most current accounts do not earn interest,
although due to competition, there are now banks
offering interest on these checking or current
accounts

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Financial Intermediaries

Classification of Financial Intermediaries

b. Non-depository – unlike depository institutions,

which obtained funds from issuing deposits issue contracts
that are not deposits. Non-depository institution such
pension funds, life insurance companies, mutual funds, an
finance companies like depository institutions also perform
financial intermediation.

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Categories of Financial Intermediaries p30

Depository Institution:
a. Commercial banks
b. Thrift banks
c. Rural banks

Non-depository Institutions:
a. Insurance companies
1. Life insurance
2. Property/casualty insurance companies
b. Fund managers
c. Investment banks/ houses/companies
d. Finance companies
e. Securities dealers and brokers
f. Pawnshops
g. Trust companies and departments
h. Lending investors

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Financial Intermediaries

Banks - provides mechanism where savers

can put their excess funds through deposits.
Bank gives the depositors interest on the
money deposited to them.

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Financial Intermediaries
Insurance Companies – offer different products.
Insurance products can be broadly categorized into
life insurance products and non-life insurance
products protect the insured from the loss of or
damage to properties. In exchange for the
protection, the insured pays premiums to the
insurance companies. These premiums are used to
fund claims.

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Financial Intermediaries
Stock Exchange – provides a system for the
trading of equity securities of publicly listed
companies. These equity securities are common
stocks and preferred stocks. An individual who
wants to invest and trade in the stock market
cannot go directly to Philippine Stock
Exchange(PSE) to buy and sell stocks. He has to
open an account with an accredited stock
brokerage firm where he can channel his buy and
sell orders of equity securities.

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Financial Intermediaries P5*

Stock Brokerage Firms –

a brokerage company’s main duty is to act as a
middleman that connects buyers and sellers to facilitate a
transaction. Brokerage companies typically receive
compensation by means of a commission (either a flat fee
or a percentage of the amount of the transaction) once the
transaction has successfully completed. For example, when
a trade order for a stock is executed, an investor pays a
transaction fee for the brokerage company's efforts to
complete the trade.

Brokerage Company REVIEWED BY ADAM HAYES Updated May 8,

2019https://www.investopedia.com/terms/b/brokerage-company.asp

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Financial Intermediaries P5*

A Mutual fund is a type of financial vehicle

made up of a pool of money collected from
many investors to invest in securities such as
stocks, bonds, money market instruments, and
other assets. Mutual funds are operated by
professional money managers, who allocate the
fund's assets and attempt to produce capital
gains or income for the fund's investors. A
mutual fund's portfolio is structured and
maintained to match the investment objectives
stated in its prospectus.
Mutual fund REVIEWED BY ADAM HAYES Updated Jun 25, 2019
https://www.investopedia.com/terms/m/mutualfund.asp

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Financial Intermediaries
Other Financial Institutions

Includes pension fund like

1. Government Service Insurance System (GSIS)
2. Social Security System (SSS)

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Financial Instruments n2

Financial instruments are assets that can

be traded, or they can also be seen as
packages of capital that may be traded.
Most types of financial instruments provide
efficient flow and transfer of capital all
throughout the world's investors. These
assets can be cash, a contractual right to
deliver or receive cash or another type of
financial instrument, or evidence of one's
ownership of an entity.

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Financial Instruments n3

Classification of Financial Instruments :

a.Equity Securities –
1. common stocks*
2. preferred stocks*
b. Debt Securities*

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References :
Books:
Business Finance for Senior High School by Dr. Marivic Flores 2016
Business Finance by Arthur S. Cayanan, Daniel Vincent H. Borja 1st edition 2017

Online:
Financial Instruments REVIEWED BY WILL KENTON Updated Apr 20, 2019
https://www.investopedia.com/terms/f/financialinstrument.asp

Preferred vs. Common Stock: What's the Difference? BY ADAM HAYES Updated Jun 9, 2019
https://www.investopedia.com/ask/answers/difference-between-preferred-stock-and-common-stock/

Debt Security REVIEWED BY JAMES CHEN Updated Mar 23, 2019

https://www.investopedia.com/terms/d/debtsecurity.asp

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