Business Finance Week 1

INTRODUCTION TO FINANCIAL MANAGEMENT

Definitions

​Finance

• ​the science and art of managing money (Gitman & Zutter, 2012)

​Budgeting

• ​the act of estimating revenue (in the form of their allowance) and expenses over a period of time (in this case, on a daily basis)

Finance is concerned with decisions about...

• How much of their earnings they spend​

• ​How much they save or how much they need

• ​How they invest their savings

• ​How they raise additional funds they need

​Forms of business organizations

• ​Sole Proprietorship

​ - A business owned by one person and operated for his or her profit

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• ​Partnership

  - A business owned by two or more people and operated for profit

​

• ​Corporation

  - An entity created by law owned by shareholders

​In the case of corporations...

​The objective of a shareholder is WEALTH MAXIMIZATION

​Fators that affect prices

​Two categories:

​

1. ​Controllable by management

2. ​Uncontrollable external forces

​Controllable by management

• Profitability​

  - Profit is a measure of the financial performance of a company over a period of time.

  - Although it is a major driver for increasing the value of stock, an investor should not rely on profits alone. As discussed earlier, it is possible that the company has profits but its cash flow is negative.

​Controllable by management

• Good liquidity and reasonable leveraged position

  - Liquidity and leverage refers to the company's management of the type and amount of assets and liabilities that it will hold in the course of its operations.

​Controllable by management

• Dividends

  - Holders of share receive dividends from a corporation as returns on their investments in form of cash or other properties.

​Controllable by management

• Competent management

  - Competent managers may have any of the following attributes:

  1. Visionary

  2. Decisive

  3. People-oriented

  4. Inspiring

  5. Innovative

  6. Respected

  7. Experienced/Seasoned manager

​Controllable by management

• Corporate plans that improve the business prospects

  - Having more concrete future prospects allowing investors to hope for better revenues and net income is good for the business.

​Uncontrollable external forces

• Macroeconomic conditions

• ​Political stability

• ​Prospects of the industry where the company operates

• ​General market sentiment

• ​Flow of foreign funds invested in the Philippine stock market

​Uncontrollable external forces

• These factors influence the general reaction of investors in the investment decision.

• ​Its effect is not only to a specific company but on all companies or a group of companies under similar circumstances.

• ​Such factors are a result of the environment a company operates in rather than the decisions of the company's management.

​Role of Financial Management

• Financial management deals with decisions that is supposed to maximize the value of shareholder's wealth

  - These decisions will ultimately affect the market's perception of the company and influence the share price.

  - The goal of financial management is to maximize the value of shares of stocks.

  - Managers of a corporation are responsible for making the decisions for the company that would lead towards shareholders' wealth maximization.

​Money Markets vs. Capital Markets

​Money markets are a venue wherein securities with short-term maturities (1 year or less) are sold.

​

​On the other hand, securities with longer-term maturities are sold in Capital markets.