Roles of a Financial Manager

Financial Statements: I. Capital Budgeting

Review, Analysis, and Interpretation - What long term investments or projects
should the business take on?
Participants in the Economy II. Capital Structure
No Extra Money With Extra
- How should we pay for our assets?
Money
No economically Type 1: no Type 2: with - Should we use debt or equity?
viable business money and no money but no III. Working Capital Management
ideas ideas ideas - How do we manage the day-to-day
With Type 3: no Type 4: with finances of the firm?
economically money but with money and with
viable business ideas ideas
ideas Forms of Business Organizations
Advantages Disadvantages

Sole •Easiest to start •Limited to life of

•Least regulated owner
Financial Statements Proprietorship •Single owner •Equity capital
- art and science of managing money keeps all the limited to owner’s
profits personal wealth
- how people acquire, spend, manage, •Taxed once as •Unlimited
and make financial decisions concerning personal income liability
money •Difficult to sell
ownership
- management of funds which includes, interest
circulation of money, granting of credit, Partnership •Two or more •Unlimited
owners liability
making of investments, and provision of •More capital •General
banking facilities available partnership
- structured representation of the •Relatively easy •Limited
to start partnership
financial position and financial position •Income taxed •Partnership
of an entity once as personal dissolves when
income one partner dies
or wishes to sell
Pillars of Finance •Difficult to
1. Risk transfer
ownership
2. Return
Corporation •Limited liability •Separation of
•Unlimited life ownership and
Functions of Finance •Separation of management
ownership and •Taxation of
1. Analysis economically company profits
2. Decision Making •Transfer of can be an issue
ownership is easy
•Easier to raise
Financial Manager capital
- Top financial manager within a firm is
usually the chief financial officer (CFO) The Agency Problem
 Treasurer: oversees cash Agency Relationship
management, credit management, - Principal hires an agent to represent
capital expenditure and financial their interests
planning - Shareholders (principals) hire managers
 Accountant: oversees taxes, cost (agents) to run the company
accounting, financial accounting Agency Problem
and data processing - conflict of interest between principal
and agent
Do Managers Act in Shareholder’s Interest  Ex: BDO
Managerial Compensation Savings Bank  accept the savings of
individuals and lend
- incentives can be used to align in the form of
management and shareholder interests mortgage loans
- the incentives need to be structured  Ex: BPI Family
carefully to make sure that they achieve Thrift Bank  noncommercial
their goals banks composed of
savings and
Corporate Control mortgage
- the threat of a takeover may result in  provides short-term
better management working capital and
medium and long-
term financing to
Goals of Financial Management
business engaged in
 maximize profit agriculture services
 maximize costs and small medium
 maximize market share enterprise
 Ex: BPI Family, PS
 maximize the current value per share of Banks, RCBC
the company’s existing stock Rural and Cooperative  promotes and
 maximize the market value of the expand the rural
existing owner’s equity economy
 Rural Banks: privately
owned and managed
Areas of Finance  Cooperative Banks:
I. Corporate and Business Finance owned and organized
- The activity concerned with planning, by cooperatives
raising, controlling, and administering  Ex: Bank of Makati,
Rang-ay Bank
of funds used in business
- Involves budgeting, financial
2. Insurance Companies
forecasting, cash management, and
- supervised and regulated by
investment analysis
the Insurance Commission
II. Portfolio Management and
- operate on the principle of
Investment
“pooling of risks”
 Shares: represent an ownership
- make money by investing
in a corporation
the premiums collected
 Bonds: form of long-term debt
from policy holders
with the promise to pay the
3. Lending Institutions
principal amount plus interests
- make loans available to
 Dividends: distribution of a individuals and business
corporation’s profit B. Financial Markets
III. Financial Markets and Institutions 1. Money Market
A. Financial Institutions - transactions involving short-
1. Bank term debt
- supervised and regulated by - includes treasury bills,
the BSP commercial paper, and
Type Function
Commercial and Universal  largest single group
certificates of deposits
in the Philippines 2. Capital Market
 accepts deposits - transactions involving long-
 makes loans to term debt
individuals and
- buying and selling of stocks
businesses
IV. International Finance Assets Liabilities
- deals with the monetary Cash Accrued wages and salary
interactions that occur Receivables Accounts payable
between two or more Supplies Notes payable
Inventory
countries
Equipment Equity
- involves international Land Retained earnings
aspects of corporate finance
- need to be familiar with Current Assets
exchange rates and political  can be converted to cash within one
risk year
V. Public Finance
 includes marketable securities,
- Deals with how
accounts receivable, and inventory
governments raise money,
spend the money, and its
Marketable Securities
overall effects to the
 corporate and government bonds,
economy
treasuries, and stock shares
VI. Personal Finance
- Process of determining a
Fixed
person’s financial needs,
 have a useful life exceeding one year
future goals, and how to
 includes physical assets such as
achieve them
equipment, plants, land, and long-
term assets
3. Income Statement
 revenue and expense
Current Liabilities
 revenue = sales
 firm’s obligations within one year
 expenses = cost of goods sold,
 includes accrued wages and salary,
operating, depreciation, interest,
accounts payable, and notes payable
taxes
Long-term Debt
4. Statement of Changes of Owner’s
 long-term loans and bonds with
Equity
- changes in owner’s capital maturities of more than a year
 Ex: mortgage loans
5. Balance Sheet (Statement of Financial
Position) Owner’s Equity
- reports a firm’s assets, liabilities, and Stockholder’s Equity
owner’s equity at a particular time  Common Stock
- Liquidity: ease of conversion of an - ownership claim in a public and
asset into cash at a fair value private company
- assets and liabilities are listed in - expressed in shares
descending order of liquidity - owners of the company
- most liquid assets are listed first  Retained Earnings
followed by the fixed assets - If the firm’s manager decide to
reinvest cumulative earnings
6. Statement of Cash Flow rather than pay the dividends to
- shows the cash that flows in and out stockholders
of the company  Preferred Stock
 - security that has a characteristic the other hand, fixed assets are
of both long-term debt and illiquid, but provide the means to
common stock generate revenue.”
- have preferential treatment over
common stock holders 3. Debt vs Equity Financing
- investors - Leverage in Finance: firm chooses
to finance its assets by issuing
debt securities
Managing the Balance Sheet - The more debt a firm issues as a
 manager must monitor a number of percentage of its total assets, the
issues on their firms’ balance sheets greater its financial leverage
These issues are: - Bondholders: debt holders; usually
1. the accounting method for fixed demand first claim to a fixed
asset depreciation amount; their claims are fixed
- Depreciation: charge against because of the promised interest
income that reflects the estimated - Stockholder: buy equity or stocks;
peso cost of the firm’s fixed assets claim any cash flows after debt
- Straight Line Method: results in holders are paid; when a firm does
the same equal amount of well, financial leverage increases
depreciation expense for each full shareholders’ rewards
year over the life of the asset - Leverage is highly practiced by
- results in lower depreciation businesses
expenses and higher taxable - How can financial leverage
income increase risk?
- If the firm cannot make its
2. The level of net working capital scheduled debt payments, debt
- Net working capital = current holders can force the firm into
assets – current liabilities bankruptcy
- Why should the net working - What role should the manager
capital be positive? play?
- A firm needs cash and other liquid - Decide upon the firm’s capital
assets to pay its bills as expenses structure
come due
- Sign of a healthy firm 4. Book Value vs Market Value
 Book Value – historical cost
Liquidity: Two Dimensions  Market Value – amount that the assets
1. Ease with which a firm can would fetch if the firm sold them; how
convert an asset to cash much it is in the actual market
2. Degree to which such a  Balance sheet assets are listed at
conversion takes place at a fair historical cost
market value
 Highly liquid asset can be sold quickly Ex:
at its fair market value Book Value Market Value
 Illiquid asset cannot be easily sold Equipment 50,000 80,000
unless you reduce the price far below Land 100,000 500,000
fair value Cash 500,000 500,000
 “Cash is the most liquid of all assets,
but it earns no return for the firm. On Current Assets 10 M 11 M
Fixed Assets 25 M 32 M
TOTAL 35 M 43 M
Current Liab. 6M 6M
Long-term Liab. 15 M 15 M
TOTAL 21 M 21 M
Stock Holders Equity 14 M 22 M

Income statement
- Reports the firm’s operating income
- Step 1: gross profit = revenue – costs of
goods sold
- Step 2: EBIT (earnings before income and
taxes): represents the profit earned
from the sale
- EBIT = Gross profit – (operating expense
+ depreciation)
- Step 3: EBT (earnings before
taxes/taxable income of the company):
EBT = EBIT – interest expense
- Step 4: net income = EBT - taxes

How will the company pay its stockholders?

 Preferred stockholders are the first to
receive the dividends
 Net income available to common
stockholders (NIACS)
 Addition to the retained earnings
(income returned to company) = NIACS
– common stock dividends

1. Earnings per share (EPS)

Net income available to common stockholders
(NIACS) / total shares of common stock
2. Dividends per share (DPS)
Common stock dividend paid / number of
shares of common stock outstanding

Gross Profit = revenue – costs of goods sold

EBIT = gross profit – (operating expense +
depreciation)
EBT = EBIT – Interest Expense
Net Income = EBT - taxes
NIACS = net income – preferred stock
Addition to retained earnings = NIACS –
common stock dividends
EPS = NIACS / total common shareholders
DPS = common stock dividends / # of common
stock outstanding