Module 1: Introduction to d) Management, allocation, and

utilization
Finance In this context, management implies
the efficient handling of business
Lesson 1 – Understanding Finance resources, particularly those that are
financial in nature. Allocation connotes
I. FINANCE the wise distribution of financial resources
- usually related to money. to the different functional areas. Financial
- management of money, banking, resources that are properly managed,
investments, and credit.(American allocated and utilized significantly
Heritage Desk Dictionary) influence the financial performance of the
- a science of management of money, business.
and other assets.
e) Financial resources, investments,
a) Finance both a science and an art and expenditures
Finance, as a field of specialization, Financial resources refer to the funds
deals with and is strictly governed by of a business which are provided by the
financial facts and truths that is a product owner or by the creditors intended to
of scientific business processes, supports handle the current operating activities and
and provides the basis for making other activities that will have long-term
financial decisions. effects. Financial investments are
Finance is also considered an art. resources that are expected to provide
The financial practices do not remain the income and achieve appreciation or
same but become more adaptive to the growth of the business. Financial
changes in the business environment expenditures of a business may cover the
overtime. These new developments and operating expenditures and the capital
trends are a clear manifestation that expenditures. Operating expenditures are
finance will continue to evolve in the period costs that include business
future. expenses such as salaries, electricity and
water, traveling expenses, and the like.
b) Application of Economic and
Accounting concepts and principles
Finance used to be considered an II. AREAS OF FINANCE
integral part of economics. Today, finance
functions as a separate specialized field
that operates closely with economics and
accounting. Hence, finance is not merely
a part of economics but application of the
concepts and principles of both
economics and accounting.

c) System, structure, and process

The term system connotes that the
financial activities of the business are
properly coordinated with the whole
structure. A clear financial procedure
directs all the human resources of the
business towards the attainment of the
a) Private Finance
ultimate objective. Through the proper
It is the management of financial
application of the system, structure, and
resources of private, individuals, non-
process, nothing in the financial sphere of
governmental organizations, and private
the business happens by chance or
organizations in accordance with the
accident. Every financial activity has a
prescribed financial policy and priority of
purpose.
the person or business organizations
b) Public Finance system as one functional area. In large
The allocation of government income corporate entities, the finance department
generated from either taxation or is headed by the vice president for
borrowings and the government finance while in medium or small
expenditure based on the approved organizations, the common designation of
national and local appropriation or the of finance department is a comptroller
budget. Public finance is also termed as or a finance officer.
fiscal administration

c) Personal Finance Lesson 2 Financial Institutions,

A sub-category of private finance Instruments, and Markets
which is directed towards the
management of personal resources of an The business does not operate in a
individual. The income of an individual is vacuum but in an environment influenced
sourced from compensation, exercise of by various forces, variables, and systems.
profession, or business income as a sole In marketing or entrepreneurship, the
proprietor. environment where the business operates
is classified as either macro or
d) Business Finance microenvironment. In finance, the
An area of finance that focuses on the business environment is divided into
handling and management of financial international, national, regional, and local
resources of a business organization levels.
 Financial Management – focuses
Political system
on capital budgeting decision or
investment decision on the
acquisition of assets and its Financial system
Economic
corresponding financing scheme
system
 Capital market – is an area of
business finance that studies the Socio-cultural
different financial institutions and system
their functions that provide Technological
assistance to both private and system
public borrowers of funds Legal system
 Financial investment – includes
business decisions about the value The Business
and price of stocks and bonds,
portfolio analysis, market analysis,
security analysis, and behavior of
the investors. This area of
business finance is likewise
discussed lengthily in a finance
course in college
The financial system is one of the
factors that directly or indirectly affect the
III. FINANCE IN A BUSINESS
financial operation of a business
ORGANIZATION organization. A system is composed of
several parts with interrelated functions. If
one part of the system is dysfunctional,
the operation of the whole system is
expected to be adversely affected.

Some business organizations also

elevate information technology and
 products in addition to the
regular banking service of
accepting deposits.
Compared to a universal
bank, it has more limited
banking services.
o Thrift bank – includes
savings and mortgage
banks, private development
In the Philippine financial system, the
banks, and stock savings,
government plays an active role in the
loan associations, and
flow of money in the economy through the
microfinance thrift banks.
Bangko Sentral ng Pilipinas (BSP). The
o Rural bank – organized
BSP regulates the operations of financial
and operating in rural areas.
institutions and financial intermediaries.
They intended to promote
and expand the rural
IV. FINANCIAL INSTITUTIONS economy by providing the
people with basic financial
People commonly equate financial services.
institutions with banks. However, the term o Islamic bank – created and
does not simply refer to banks. Financial organized under R.A. No.
institutions are organizations that provide 6848, aims to promote, and
financial services, among others, in the accelerate the socio-
form of loan, credit, fund administration, economic development of
financing, depository, and safekeeping. the Autonomous Region of
Financial institutions, therefore, is a broad Muslim Mindanao by
term that encompasses all organizations performing banking,
that provide the aforementioned financial financing, and investment
services. operations.

a.) Depository institutions  Savings and Loan association –

Institutions that accept deposits sometimes referred to as financing
(savings, current, and time deposits) from and mortgage loan company, is a
individuals and corporate entities, extend financial institution that is engaged
loans to borrowers, transfer funds, and in the business of accumulating
manage funds for investment purposes. the savings of its members and
stockholders, and using such
 Banks – are institutions authorized accumulations for loans or
to operate and regulated by the investments in securities of
BSP under the General Banking productive enterprises.
Law of 2000. They accept deposits  Trust companies – is a legal
and bills payment, provide loans, business entity , usually a major
and facilitates the transfer of funds division of a universal or
domestically or abroad. commercial bank, that acts a
o Universal Bank – fiduciary agent or trustee o behalf
considered the biggest bank of an individual person or
in terms of assets, loan corporate entity for the purpose of
portfolio, and revenue. It management, and administration,
has the widest scope of and final transfer of property to the
banking activities authorized beneficiary.
by the BSP and usually has  Credit Unions – a financial
the greatest number of depository institution that is mainly
branches nationwide and controlled and operated by its
abroad. members by extending credit to
o Commercial bank – members, offering competitive
provides commercial loans interest rates, promoting the
and offers investment
 concept of thrift, and providing transaction happening in the financial
other types of financial services. market is called trading activity.

b. ) Financial Intermediaries a.) The Capital Market

A type of financial institution that acts A financial market where stocks and
as the middleperson between two parties- bonds are issued for medium-and-long-
the investors and the borrowers. Financial term periods. Stocks are treated as equity
intermediaries raise and accumulate securities while bonds are technically
money from investors and offer the considered debt securities.
accumulated money to individuals or
corporate entities in need of financial b.) Money Market
assistance. A financial market wherein the
 Mutual funds – accumulate financial securities being traded have a
money by selling shares of stocks period of less than a year. This type of
or bonds of publicly-listed financial security is called short-term
corporations to individuals or security. Since short-term securities are
corporate investors. The funds not intended to be held for more than a
from the proceeds of the sale are year, they are also referred to as trading
pooled together and channeled to securities.
the borrowers.
 Pension fund – is set up by a c.) Primary Market
business for the purpose of paying A financial market where a
the pension requirements of all corporation can issue new shares of
private-sector employees who stock. Stock corporation that need fresh
retire from the business capital can raise the required funds by
organization upon reaching their issuing new shares of stock. The primary
retirement age. market facilitates the raising of required
 Insurance companies – acts as a amount when the investors directly buy
financial intermediary by pooling the new shares from the issuing
together the proceeds of insurance corporation.
policies sold to the public and
investing the accumulated funds in d.) Secondary Market
high-yield maturing securities from A financial market where financial
investments houses securities are traded between or among
investors. In the secondary market, there
C.) Investment Institutions is no issuance of new shares from the
A company engaged in buying corporation.
securities of other companies which are
listed in the stock exchange for e.) Public Market
investment purposes only. Hence, the A market in which the financial
buying and selling of financial securities securities of publicly-listed corporation
are not the primary business activities of are traded following a standardized
an investment institution. contract agreement and procedures. A
corporation is classified as publicly-listed
when its shares are available for sale to
V. FINANCIAL MARKETS the public. Basically, a public market is an
organized financial market.
Market refers to the place where
the sellers and the buyers of goods or
services meet. In the market, the major VI. FINANCIAL INSTRUMENTS
business happening is the selling-buying
activity, in which exchange occurs. Without financial instruments,
Financial market refers to the place were financial institutions and financial markets
the selling-buying activity occurs to trade can hardly exist. The financial institutions
equity securities such as bonds and and financial markets carry out their
stocks, currencies, derivative securities, activities through the financial
notes, and mortgages. The selling-buying
instruments. The most common forms of evidenced by the stock certificate are
financial instruments are as follows: called shareholders or stockholders
1. Cash – cash is a financial asset on
the part of the holder while on the  Common stock – also called
part of the government such as the ordinary shares are financial
BSP, it is a financial liability instruments whose holders do not
-- readily made for use have preferences over each other.
2. Check – a financial asset of the  Preference share – the
payee, but a financial liability of the preference share is a kind of stock
drawer that is preferred over common
3. Loan – It is a financial asset of the stock.
lender or creditor and financial
liability of the borrower or debtor
4. Bond – It is a financial asset of the
holder or investor but considered a
financial liability of the issuing
company.
5. Stock – a financial asset of the
investor or shareholder but an
equity of the issuing company

Bonds
A bond is a financial instrument that
represents the contractual debt of the
party issuing the bond. The issuing party
may either be private business entity or
government. This type of financial
instrument is evidenced by a certificate
called bond indenture.

 Term bond – a bond that has a

single maturity date.
 Serial bond – a bond that has a
series of multiple maturity dates
instead of a single maturity date.
 Secured bond – a bond that is
secured by the issuing company.
The security is issued in the form
of real property which serves as
collateral in the event the debtor
default in payment.
 Debenture bond – a bond that is
not supported by any collateral or
security.
 Convertible bond – a bond which
can be converted to shares of
stock in a later date.
 Callable bond – the bond is
callable when the issuing company
has the option to redeem the bond
prior to its maturity date.

Stocks
A financial security that signifies the
ownership of the assets of a corporation.
The holders of the shares of stock as