Karl Joshua M.
De Leon AC21
Financial Management
 It starts with a plan – both individual
and companies;
 Deals with decisions that are supposed
to maximize the value of shareholders’
wealth;
 While profits significantly affect the
price of a stock, finance literature states
that profit maximization should not be
the overriding objective of company’s
management, but shareholders’ wealth
maximization.
Finance plays a very important part in
people’s and business enterprises’
lives.
- NO ORGANIZATION AND
HOUSEHOLD CAN LIVE
- OR EXIST WITHOUT FINANCE.
- PEOPLE NEED FUNDS.
- ORGANIZATIONS NEED FUNDS.
Etymology of the word “finance”
 “Finance”
 “Finer”
 “To End” or “To Pay”
Why is finance important?
 Family needs financing to survive.
 Companies need financing to
survive.
 Economic activities
 Government needs to be financed
for a country tos urvive.
Shetty et al (1995)
“Finance is the operational or practical side
of economics, the practical science of the
production and distribution of wealth.
Production is the acquisition while
distribution is the utilization”
Saldana (1997)
“Finance is the efficient allocation of scarce
resources.”
Saldana (1997)
“Finance, as a discipline, is concerned with
identifying, evaluating, and managing
resources and use of funds in order to
NO increase value of the business enterprise to
its present owners.”
Medina (2007)
“Finance is the study of the acquisition and
investment of cash for the purpose of
enhancing value and wealth.”
Functions of Finance (AAU!)
 Allocating available funds;
Determining where to use funds
currently available to the firm
 Acquiring needed funds; and
Obtaining funds from right sources
at the right time.
 Utilizing these funds to achieve
set goals.
Means using the funds.
Karl Joshua M. De Leon
Primary Goals of Finance
- To earn profit;
- To increase your own value as
an economic entity; and
- To improve the quality of life in
the community
Factors That Can Affect Price of
Stock:
- Profitable operation
- Nature of the business
- Prospects of the business
- Projected earnings and
timeframe for the realization
of such projected earnings
- Ability to meet maturing
obligations
- Appropriate capital structure
- Dividends policies
- Investing decisions
- Management and market
sentiments
To Earn Profit
 Funds are invested in a business to
earn sufficient return on
investment.
 Goods and services are made
available to the public and are billed
to customers/clients with sufficient
markup to cover expenses.
 Part of the net profit may be
distributed to the owners of the
AC21
business (or declared dividendsin
the case of a corporation)
 The remainder will be left in the
business (or plowed back into it)
Earning Per Share
 This refers to how much net income
is earned for every share of capital
stock outstanding.
 This is the summary figure that
investors use in evaluating past
performance of a business firm.
EPS= Net Income Related to Common Stock
Weighed Average Number of Shares
a Outstanding of Common Stock
Increasing The Value of a
Business
 Growth and stability are the primary
bases in measuring the value of a
business entity.
 Growth may be measured in terms
of increase in assets that appreciate
in value, improved production
capacity accompanied by increase in
sales volume and increase in owners
equity.
 Stability of a company refers to its
ability to weather the ups and
downs in the economy or its ability
to continue operations despite
anticipated risks in a business.
Karl Joshua M. De Leon
 It is measured primarily based on
the relativeamount of owners
equity.
Owners Equity
 The difference between total asset
and total liabilities of an entity so
that it is also called net asset or net
asset value (NAV).
 It is reduced by losses and
distribution of earnings (called
dividends in the case of
corporations)
 For corporations the owners’ equity
or stockholders’ equity is divided by
the number of shares of capital
stock outstanding to arrive at the
book value per share.
 Book Value per Share – accounting
value of each share of stock.
Social Responsibility of
Businessmen
This refers to his contribution to the
improvement of the quality of life in the
community.
Multiplier Effect of A Business In A
Community
 This refers to the chain effects of
business activities.
 It affect not only the earning power
of people directly involved with it
(such as the employees, suppliers
and customers) but also those
indirectly affected by its economic
activities.
AC21
Concept and functions of
business finance
Functions of business finance
- Allocation of financial resources;
To assure that funds are channeled
to activities that are considered
profitable and/or will increase the
value of the business itself and that
company costs and risks are
minimized.
- Procurement of funds; and
Capital must be made available at
the least cost when it is needed.
Source of funds can be in short-term
and long- term.
Funds are also generated from
operations.
- Efficient and effective utilization of
financial resources
Refers to their economical use.
Financial resources are actually
being used for what they have been
intended for.
Questions asked in evaluating
project proposals
 How long will it take to recover our
investment or what is the payback
period?
 What is the rate of return on
investments?
 Is the rate of return than the cost of
capital to be used?
 What are the risks involved in the
proposals?
Karl Joshua M. De Leon
Payback Period
PP= Costs of Project
Annual Cash Inflows
ROI
The percentage of the amount invested
Steps:
1. Determine the company’s net
profit
2. Calculate the total investment
by adding the total debt to
total equity
3. Divide the net profit by the
total investment and multiply
by 100
Few things to remember:
 The more risky a project is, the
higher is the standard set as
minimum desired rate of
return on investment.
 Risks may be in the form of
costs and expenses, and
decline in property value.
Cost of capital On borrowed
funds
Form of financing charges (Interest,
commissions, and service-charges)
AC21
Cost of capital On capital contributed
by owners or stockholders
Form of dividends or shares in profit
Operating requirements For
Working Capital
 Form of Salaries, Rentals, Purchase
of Merchandise, Raw Materials, and
Taxes.
 It is not also advisable to have
excessive balances of cash,
receivables, inventories and other
financial resources because the
enterprise loses opportunities to
earn on capital tied up in these
items
 Idle cash may be invested on short-
term basis.
 Too much receivables entail more
collection expenses and greater risk
from bad debts.
 Inventories, over investment
therein may result in more handling
and storage costs aside from greater
risk from obsolescence.
Karl Joshua M. De Leon AC21

CLASSIFICATION OF FINANCE As To User – Public Finance

1. As to form of Negotiation  Deals with the revenue and
a. Direct Finance expenditure patterns of the
b. Indirect Finance government.
2. As to User  Concerned with government
a. Public Finance revenues, like taxes, and
b.Private Finance government expenses, like paying
3. a. Personal Finance salaries of government employees.
4. a. Finance of Non-Profit  Government spending and
Organizations government borrowing are all public
5. a. Business Finance finance.

Direct Finance As To User – Private Finance

 A company going to a bank to obtain
loan.
 A friend borrowing money from
another
 Corporation selling shares to its
incorporators
 What distinguishes direct finance
from indirect finance is security
issued.
 Surplus Unit – Lenders
 Deficit Unit – Borrowers
 Direct Security
 Promissory Note – Direct Security
issued by the Deficit Unit.
 All finance other than public
finance, is private finance.
 An individual borrowing money
from another individual
 A company borrowing from financial
institutions.
As To User – Private Finance –
Personal Finance
 Refers to finance conducted by
individuals/consumers.
 A family spending for their food.
Shelter, recreation, education, etc.

Indirect Finance
Involves financial intermediaries in the real
As To User – Private Finance –
sense of the word. Financial intermediaries Finance of Non-Profit
act as middlemen when they buy securities Organizations
for resale or simply facilitate the sale from
original issuers to the final buyers.  Involves those conducted by
charitable, civic, religious
organizations, among others.
Karl Joshua M. De Leon AC21

As To User – Private Finance –

Business Finance
 Deals with financing for business
firms or for commercial use, the goal
of which is to make profit.

Finance In The Business World

 Business needs efficient and
effective financing.
 Efficiency is all about saving time,
money, and effort. It is the
relationship between the input and
the output. It is also a measure of
speed and cost.
 Effectiveness is a measure of
quality.
 “Effectiveness is doing the right
things and efficiency is doing things
right”
 Efficiency + Effectiveness =
Productivity