BUSINESS FINANCE

1.1 DEFINITION OF FINANCE

 What is Finance?
- Finance can be defined as the science
and art of managing money. (Gitman & Zutter,
2012)

American Heritage Desk Dictionary

Defines finance as the management of

money, banking, investments, and credit. It is
also defined as a science of management of
money and other assets.
Finance is both a science and an art of
correct application of the economic and
accounting concepts and principles that
define the system, structure, and other
process of management, allocation, and
utilization of financial resources,
investments, and expenditures.
1.2 AREAS OF FINANCE
 Finance

Private Finance Public Finance

Personal Finance Business Finance

Financial Management Capital Market Financial Investments

Division of Finance

Based on the different finance subjects prescribe by the Commission on Higher

Education ( CHED ) for the tertiary business curriculum.

Finance is broadly classified into two:

1. Private Finance
2. Public Finance

Private Finance is subdivided into:

1. Business Finance
2. Personal Finance

Business Finance is further subdivided into following areas:

1. Financial Management
2. Capital Market
3. Financial Investments
Private Finance

is a management of financial income of private individuals, non-governmental

organizations, and private organizations in accordance with the prescribed financial
policy and priority of the person or business organizations.

Public Finance

Is allocation of government income generated from either taxation or borrowings and

the government expenditure based on the approved national and local appropriation
or budget. Public finance is also termed as FISCAL ADMINISTRATION.
National Agency primarily involved in the
exercise of function.

• DOF ( Department of Finance )

• BIR ( Bureau of Internal Revenue )
• BOC ( Bureau of Customs )
• LTO ( Land and Transportation Office
• LTFRB ( Land Transportation Franchising
Regulatory Board )
DOF works closely with other national government agencies

• DBM ( Department of Budget and Management

• BSP ( Bangko Sentral ng Pilipinas
• SEC ( Securities and Exchange Commission )

Even the two houses of the congress of the Philippines in the formulation of laws,
and appropriation , allocation, administration and spending of public funds.

Public Finance or Fiscal Policy and administration is taken up in

college under the business program.
Personal Finance

Is a sub-category of private finance which is directed towards the management

of personal resources of an individual.

The income of an individual is sourced from compensation, exercise of

profession, or business income as a sole proprietor.

INCOME is allocated based on the individual’s personal need such as household

expenses, education, hospitalization, and acquisition of personal and real property.
Business Finance

Is a area of finance that focused on the handling and management of

financial resources of a business organization.

3 Major Divisions of Business Finance

1. Financial Management
2. Capital Market
3. Financial investment

Financial Management

Focuses on capital budgeting decision or investment decision on the

acquisition of assets and its corresponding financing scheme.
Capital market

Is an area of business finance that studies the different financial

institution and their functions that provide assistance to both private
and public borrowers of funds. It also includes the study of the cost of
borrowing the funds as interest and other financing charges.

Financial investment

Includes business decisions about the value and price

of stocks and bonds, portfolio analysis, market
analysis, security analysis, and behaviour of the investors
1.3 Corporate organization
Structure
 Shareholders

Board of
Directors

President (CEO)

VP for VP for VP for

VP for Finance
Marketing Production Administration
SHAREHOLDER

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

BOD ( 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)
CEO ( CHIEF EXECUTIVE OFFICER ) / PRESIDENT

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.

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 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 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)
Message from the CFOs

Unilever:

“Finance plays a critical role across every aspect of

our business. We enable the business to turn our ambition
and strategy into sustainable, consistent and superior
performance” - Jean-Marc Huët (Unilever)

Jollibee:

“It’s very exciting because you are not just thinking of

today but what the company will need in the future” -
Ysmael V. Baysa (Morales, 2013)
Globe Telecom:
“Yesterday’s solutions are never adequate for
the future” - Albert De Larrazabal (Klobucher, 2015) –

SM Corporation:
“Now, we don’t go out because we need funds.
We go out because it’s an opportunity.” – Jose T. Sio
(Montealegre, 2015)
1.4 FUNCTIONS OF A FINANCE
OFFICER
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
considerations.

The finance officer is also expected to be the

“shock absorber” of budgetary requests and
requirements of other functional units of the business.
 FINANCIAL DECISIONS OF THE Chief Finance Officer

FINANCING DECISIONS OPERATING DECISIONS

• Equity financing • Credit and collection
• Debt financing • Level of inventory
• Cost of capital and borrowing • Granting of discounts
• Short-term and long-term • Budgeting
borrowings • Payment and control of operating
• Interest rate expenditure
• Daily operating decisions

INVESTING DECISIONS
• Non-current asset acquisition
• Investment portfolio
• Pricing decision of stocks and
bonds
• Discounted cash flow analysis in
capital
Financing decision
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.). .

A business can raise money from the following activities

or sources:

1. Operation
2. Investors or lenders
3. Owners
The role of the VP for Finance of the Financial Manager is to determine
the appropriate capital structure of the company.

the total assets is financed by 60% debt and

40% equity. Accordingly, the capital structure is
60% debt and 40% equity.

Do you think there is an ideal mix of debt and

equity across corporations?
Investment Decision
Deals with choosing small and large projects
with several investment opportunities. The different
projects are critically evaluated in terms of return of
investment and expected cash flows. However,
investment decision are made only when investment
opportunities come.
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.
 In borrowing funds from outside sources, the business pays
interest for the use of money. The finance officer must weigh and
evaluate the cost of borrowing funds. The right mix of debt portfolio
must be properly evaluated.

In making financial decision, the following questions must be

answered.

1. How much should be borrowed from external users

2. What is the allocation of the borrowed funds into short term and
long term?
3. Will the much needed funds be sourced from creditors or
company owner’s
4. What is the expected cost of borrowing the funds?
 FINANCIAL INSTITUTIONS,
INSTRUMENTS, AND MARKETS
 2.1 THE FINANCIAL SYSTEM
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.

The financial system is one of the factors that directly or

indirectly affect the financial operations of a business
organization.

The financial system controls, regulates, and facilitates the

saving, borrowing, lending and investing activities happening
among different players in the system.
 Cash Returned Cash payments

Household
savings/surplus cash Cash
Investments
Cash loans
• Financial Institution
Cash • Financial markets Borrowers:
Investments • Financial • Individuals
instruments • Corporate entities

Business savings/surplus
cash

Cash Returned Cash payments

 In the Philippines Financial system, the government
plays an active role in the flow of money on the
economy through the BSP Bangko Sentral ng Pilipinas.
The BSP regulates the operation of the financial
institutions and financial intermediaries.

The basic elements of financial systems are as follows

1. Financial Institutions
2. Financial markets
3. Financial instruments
4. Lenders and Borrowers
2.2 FINANCIAL INSTITUTION
 Financial Institutions or organization that provide
financial services, among others, in form of loans, credit,
fund administration, financing, depository, and
safekeeping. Serves as an intermediary to the suppliers
and users of funds.
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.
Examples of financial institutions:

- 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.
Examples of financial institutions:

- 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.
Examples of financial institutions:

- Pension Funds - Financial institutions that receive payments

from employees and invest the proceeds on their behalf.
How Financial Institutions Provide Financing for Firms
(Gitman & Zutter, 2012)
2.3 FINANCIAL MARKETS
 MARKET

Refers to the place where sellers and

buyers goods or services meet. In the market,
the major business happening is the selling-
buying activity
 FINANCIAL MARKET

Refers to the place where the selling-

buying activity occurs to trade equity securities
such as bonds and stocks, currencies, notes,
and mortgages. The selling-buying transaction
happening in the market is called Trading
Activity.
Classify Financial Markets into comparative
groups:

Money Markets vs. Capital Markets

Primary vs. Secondary Markets
 CAPITAL MARKET

A market that enables suppliers and users of

long-term funds to make transactions. The key
capital market securities are bonds (long-term debt)
and both common stock and preferred stock
(equity, or ownership). securities with longer-term
maturities are sold in Capital markets
 In the Philippines, the capital market is the
Philippine Stock Exchange ( PSE ) created in 1994 rom
the two defunct capital markets

a. Manila Stock Exchange

b. Makati Stock Exchange
 MONEY MARKET

A financial relationship created between suppliers and

users of short-term funds and a venue wherein securities with
short-term maturities (1 year or less) are sold.
 PRIMARY MARKET

Is a financial market where a corporation

can issue new shares of stock. Stock
corporation that need fresh capital can raise
the required funds by issuing new investors
directly buy the new shares from the issuing
corporation.
 PRIMARY MARKET

Public offering - The sale of either bonds or stocks

to the general public and the first offering of stock is
called an initial public offering

Private placement - The sale of a new security

directly to an investor or group of investors
(institutional investors)
 SECONDARY MARKET

Financial market in which preowned securities

(those that are not new issues) are traded. Takes place
when suppliers of funds or the holders of the securities
decides to sell the securities that have previously been
purchased.
 FINANCIAL INSTRUMENTS

Refer to contracts that give rise to the

formation of financial assets of one entity and
at the same time the creation of financial
liability or an equity instrument in another
entity.
 Financial Instruments has two parties
involved. One party has the contractual
right to receive the financial assets, and
the party has the contractual obligations
to pay or deliver the financial assets

• Debt Instruments.
• 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
• Corporate Bonds
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.
Examples of debt instruments are as follows:

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
• Common Stock
 PREFERENCE SHARE

Is a kind of stock that is preferred over

common stock. These preferences are in terms
of following:
1. Distribution of earnings or dividend
distribution
2. Net assets at the time of liquidation.
 COMMON STOCK

- Is a financial instrument whose holder do not

have preference over each other.
-they are the real owners of the company.
-If the company’s growth is spurring, the common
stockholders will benefit on the growth.