Introduction

This lesson discusses the introductory of business finance. As you read through this
lesson you will know the basic financial decision-making, and the framework in which
these decision are made. The introductory to finance is an accessible for those who want
to gain a better understanding of this field, but lack a strong background. This lesson
cover the essential concepts, tools, methods, strategies in finance, principles and their
applications in a business setting in includes the areas within the field of finance, finance
in business organization, and role of finance manager.

Content
Finance in Everyday Life
Begin by presenting a scenario in everyday life (try: the high school student and his
allowances).
Narrate the scenario in your own style and recall the following questions in activity:
My Daily Allowance.

Finance is the application of economic principles to decision-making that involves the

allocation of money under conditions of uncertainty. In other words, in finance we worry
about money and we worry about the future. Investors allocate their funds among
financial assets in order to accomplish their objectives, and business and government
raise funds by issuing claims against themselves and then use those funds for operations.

Finance may be defined as the study of the acquisition and investment of cash for the
purpose of enhancing value and wealth.

From the definition, we can summarize the tasks that finance entails. Finance therefore,
is the function of:
1. Allocating available funds
2. Acquiring needed funds; and
3. Utilizing these funds to achieve set goals

Allocation means determining where to use funds currently available to the firm.

Acquisition means obtaining funds from the right sources at the right time.

Utilization means using the funds. The definition will apply to persons and entities
(private and government enterprise) whether they are aiming for profit (increasing wealth)
or not (non-profit organization.) Funds are needed to finance operations of people and
organizations.

Question: If ever you are in a situation where you are short of cash, what would you do?
Where will you get extra cash? What sources of cash do you know? (Sources of funds)

The primary goal of business concern must therefore be as follows:

1. To earn profit
2. To increase its own value as an economic entity
3. To improve the quality of life in the community
 Finance

Private Finance Public Finance

Personal Finance Business Finance

Financial Financial
Capital Market
Investment Manager

Figure 1. Areas of Finance

Private Finance
Private Finance is the management of financial resources of private individuals, non-
government organizations, and private organization in accordance with prescribed
financial policy and priority of the person or business organizations.
This category deals with area of general finance not classified under public finance.
1. Personal finance
2. Finance of non-profit organizations
3. Business Finance

Public Finance
Public finance is the allocation of government income generated from either taxation of
borrowings and the government expenditure based on the approved national and local
appropriation or budget. Public finance also termed as fiscal administration.
Public finance is that category of general finance, which deals with the revenue and
expenditure patterns of the government and their various effects on the economy.
In the Philippines, the national agency primarily involved in the exercise of finance
function is the Department of Finance (DOF) with its collecting and regulatory offices such
as Bureau of Internal Revenue (BIR), the Bureau of Customs (BOC), the Land
Transportation Office (LTO), and the Land Transportation Franchising and Regulatory
Board (LTFRB). The DOF, however works closely with other national government agencies
such as the Department of Budget and Management (DBM), the Bangko Sentral ng
Pilipinas (BSP), the Securities and Exchange Commission (SEC) and even the two houses
of the Congress of the Philippines in the formulation of laws and policies, and
appropriation, allocation, administration, and spending of public funds.

Personal Finance
Personal finance concerned with the fundamentals of managing one’s own personal
money affairs. Income is allocated based on the individual’s personal needs such as
household expenses, education, hospitalization and acquisition of personal and real
properties.

Finance of Non-Profit Organizations

Includes private undertaking such as charity, religions, and some private educational
institutions

Business Finance
Business finance is an area of finance that focuses on the handling and management of
financial resources of business organization. The three major divisions of business finance
are financial management, capital market, and financial investment.
1. Capital Markets and Capital Market Theory
 The field of capital markets and capital markets theory focuses on the study of financial
system, the structure of interest rates, and the pricing of risky assets. The financial
system of an economy consist of the three components: (1) financial markets; (2) financial
intermediaries; and (3) financial regulators. For this reason, we often refer to this area as
financial markets and institutions.
Several important topics included in this specialty area of finance are the pricing
efficiency of financial markets, the role and investment behaviour of the players in
financial markets, the best way to design and regulate financial markets, the
measurements of risk and the theory of asset pricing.

2. Financial Management
Financial management, sometimes called business finance or corporate finance, is the
specialty are of finance concerned with financial decision-making within a business entity.
Although financial management is often referred to as corporate finance, the principles of
financial management also apply to other forms of business and to government entities.
Financial managers are primarily concerned with investment decision and financing
decisions within organization, whether that organization is a sole proprietorship, a
partnership, a limited liability company, a corporations or a government entity.
The capital structure of a company is the mixture of debt and equity that management
elects to raise to finance the assets of the company. There are several economic theories
about how the company should be financed and whether an optimal capital structure
(that is, one that maximizes a company’s value) exists.
Investment decision made by the financial manager involve the longterm commitment of
a company’s scarce resources in long-term investment. We refer to these decisions as
capital budgeting decisions. These decisions play a prominent role in determining the
success of a business enterprise.
A financial manager must also make decisions about a company’s current assets.
Current assets are those assets that could reasonably be converted into cash within one
operating cycle or one year, whichever takes longer.
Another critical task in financial management is the risk management of a company. The
process of risk management involves determining which risk to accept, which to neutralize
and which to transfer. The four key processes in risk management are risk:
1. Identification
2. Assessment
3. Mitigation
4. Transference

3. Investment Management/Financial Investment

Investment management is the specialty are within finance dealing with the
management of individual or institutional funds. Other terms commonly used to
describe this area of finance are asset management, portfolio management, money
management and wealth management.
In industry jargon, an asset manager “runs money”
Measuring and
Setting Selecting an evaluating investment investment investment objectives strategy performance

Establishing an Selecting investment spicific assets policy

Exhibit 2.Investment Management Activities

Categories of Business Finance:

1. Small business finance

2. Corporation finance
3. Multinational business finance
The Goals of Business Finance

1. Maximizing profit
Maximizing profit means realising the highest possible peso or dollar income.
A firm, for instance, may seek to double its peso or dollar income for the
current year. This framework, however, is not very useful in making sound
financial decision. The amount of profit earned by the firm is not adequate
to evaluate its performance. For instance, the net income of XYZ Company
for a certain year in the P 500M does not provide much useful information for
the investor or financial manager. This is true if the same amount represents
an increase from previous year’s profit of the firm.

2. Maximizing Profitability
When a firm decides on obtaining a higher rate of return on its investment, it
is said to be maximizing profitability. The following data show an
improvement in the company’s performance:
ABC Company

2019

2018 2019

Net Worth (PhP) 100,000,000 200,000,000

Net Profit (PhP) 10,000,000 50,000,000

Rate of ROI 10% 25%

3. Maximizing Profit subject to cash constraint

In the quest for profit maximization, undue emphasis is sometimes placed on
cash balance. Maintaining too large a cash balance reduces the chance of a
favourable rate of return, while running out of cash when needed is
disastrous. The ideal set-up is to maximize profits, while at the same time
maintaining a cash balance that can take care of cash requirements anytime.
This condition is especially critical in the operation of banks.

4. Maximizing Net Present Worth

Under the net present worth concept, the objective of the firms is to maximize
the current value of the company of its owners. The net present worth of the
firm is equal to the value now of the firm plus values arising in the future.
The present worth of values arising in the future are computed and added to
the present worth of the other values of the firm. Present values may be
better understood by way of knowing the concept of the time value of money.

Question1: What is the value today of P 100,000 to be received next year

assuming that the prevailing rate of interest is 10% per annum.
Solution: PV = FV/(1+rate of interest) =P 100,000/1.10= P 90,909.09

Question2: assume a learner bought 10 shares of Globe Teleco at P 2,510

each on September 9, 2018. This brings his investment to P 25,100. What
happens to the value of his investment if the price goes up to P 2,600 per share
or it goes down to P 2,300 per share?
 5. Seeking an Optimum Position along a risk-return frontier A firm can set a goal of
achieving the best possible combination of risk and return. A little more risk
may be accepted, for instance, for an expected additional rate of return.
Return on Investment (ROI) or Net worth refers to the net income generated
by the use of investment or the net worth of a firm. Risk refers to uncertainty
as to loss. When used in finance, the term applies to the potentially
incurrence of loss of money or its equivalent

Calculation of Expected value Using Risk and Return Factors

The optimum position of risk and return may be determined by calculating the expected
value of alternative decision. The expected value of a return on investment is equal to the
return multiplied by the percentage of probability that will happen (called the risk factor)
Option Return on Net Probability Expected Value
Worth (PhP) (PhP)
A B (A)*(B)
1 100,000,000 60% 60,000,000
2 200,000,000 50% 100,000,000

3 300,000,000 30% 90,000,000

Question: Explain why shareholder wealth maximization should be the overriding objective
of management?

Finance in Business Organization

In business organization, finance has elevated its status as one functional area. In a
typical arrangement of a business organization, four functional divisions are involved:

1. Production and operation division

2. General administrative or human resource division
3. Finance division
4. Marketing division
Shareholders

Figure 2.
Board of Directors Illustration of
the Corporate
Organization
President (CEO)
Structure
From the
diagram
VP for VP for VP for presented,
VP for Finance
Marketing Production Administration emphasize that
each line is
working for the interest of the person on the line above them, since the managers of the
company are making decisions for the interest of the board of directors and the bound of
directors does the same for the interest of the shareholders, it follows that the goal of each
individual in a corporate organization should have an objective of shareholders’ wealth
maximization

• Shareholders elect the board of directors (BOD).

• Board of Directors (BOD) 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.
 • President (CEO). The role of a president in a corporation may vary from one
company to another. Among the responsibilities of a president are overseeing the
operations of a company and ensuring that the strategies as approved by the board
are implemented as planned.
• 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
• 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
• VP for Administration: The following are among the responsibilities of VP for
Administration. Coordinating the functions of administration, finance, and
marketing departments; Assisting other department in hiring employees

Functions of Finance Manager

The finance officer plays a crucial role in the whole business organization. He or she acts
as the wary financial traffic officer to almost all business transactions with monetary
consideration. The finance officer is also expected to be the “shock absorber” of budgetary
request and requirement of other functional units of the business.

Finance Decision of the Chief Finance

Officer

Operating Decision Investing Decision FinancingDecision

Figure 3. Types of Financial Decisions Executed by the CFO

Credit and Equity

Non-current
collection financing
asset
Level of Debt
acquisition
inventory financing
Investment
Granting of Cost of
portfolio
discounts capital and
Pricing
Budgeting borrowing
decision of
Short-term
Payment stocks and
and control and
bonds
longterm
of operating Discounted
expenditure borrowings
cash flow
Interest
Daily analysis in
rate
operating capital
decision budgeting