MABALACAT CITY COLLEGE

Rizal St. Brgy. Dolores, Mabalacat City, Pampanga

CYCLE 1
1st Semester | A.Y. 2021-
2022

September 6 - September 11,

2021

FINMAN
Financial Management
1
Ian Paulo N. Punsalan,
MM

Institute of Business Education

BSA 2-A

Start Here, Be Successful Page 1 of 6

 MABALACAT CITY COLLEGE
Institute of Business Education
Cycle 1, 1st Semester, Academic Year 2021-2022

FINMAN: FINANCIAL MANAGEMENT 1

MODULE 1: THE ROLE OF MANAGERIAL
FINANCE

I. LEARNING OBJECTIVES:
After this module, you should be able to:
1. Define finance and the managerial finance function.
2. Describe the legal forms of business organization.
3. Describe the goal of the firm, and explain why maximizing the value of the firm is
an appropriate goal for a business.
4. Describe how the managerial finance function is related to economics and
accounting.

II. TOPIC OUTLINE:

 Finance and Business
 Goal of the Firm
 Managerial Finance Function

III. LESSON PROPER

FINANCE AND
BUSINESS
The field of finance is broad and dynamic. Finance influences everything that firms do, from
hiring personnel to building factories to launching new advertising campaigns. Because
there are important financial dimensions to almost any aspect of business, there are many
financially oriented career opportunities for those who understand the basic principles of
finance described in this course. Even if you do not see yourself pursuing a career in
finance, you’ll find that an understanding of a few key ideas in finance will help make you a
smarter consumer and a wiser investor with your own money.

What is Finance?
Finance can be defined as the science and art of managing money. At the personal level,
finance is concerned with individuals’ decisions about how much of their earnings they
spend, how much they save, and how they invest their savings. In a business context,
finance involves the same types of decisions: how firms raise money from investors, how
firms invest money in an attempt to earn a profit, and how they decide whether to reinvest
profits in the business or distribute them back to investors. The keys to good financial
decisions are much the same for businesses and individuals, which is why most students
will benefit from an understanding of finance regardless of the career path they plan to
follow. Learning the techniques of good financial analysis will not only help you make better
financial decisions as a consumer, but it will also help you understand the financial
consequences of the important business decisions you will face no matter what career path
you follow.

Career Opportunities in Finance

Careers in finance typically fall into one of two broad categories: (1) financial services and
(2) managerial finance. Workers in both areas rely on a common analytical “tool kit,” but the
types of problems to which that tool kit is applied vary a great deal from one career path to
the other.

 Financial Services — Financial services is the area of finance concerned with the
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design and delivery of advice and financial products to individuals,
businesses, and

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 governments. It involves a variety of interesting career opportunities within the areas
of banking, personal financial planning, investments, real estate, and insurance.

 Managerial Services — Managerial finance is concerned with the duties of the

financial manager working in a business. Financial managers administer the financial
affairs of all types of businesses—private and public, large and small, profit seeking
and not for profit. They perform such varied tasks as developing a financial plan or
budget, extending credit to customers, evaluating proposed large expenditures, and
raising money to fund the firm’s operations.

Legal Forms of Business Organizations

One of the most basic decisions that all businesses confront is how to choose a legal form
of organization. This decision has very important financial implications because how a
business is organized legally influences the risks that the firm’s owners must bear, how the
firm can raise money, and how the firm’s profits will be taxed. The three most common legal
forms of business organization are the sole proprietorship, the partnership, and the
corporation. More businesses are organized as sole proprietorships than any other legal
form. However, the largest businesses are almost always organized as corporations. Even
so, each type of organization has its advantages and disadvantages.

 Sole Proprietorship — A sole proprietorship is a business owned by one person

who operates it for his or her own profit. The typical sole proprietorship is small,
such as a bike shop, personal trainer, or plumber. The majority of sole
proprietorships operate in the wholesale, retail, service, and construction
industries.

 Partnership — A partnership consists of two or more owners doing business

together for profit. Partnerships are common in the finance, insurance, and real
estate industries. Public accounting and law partnerships often have large numbers
of partners.

 Corporation — A corporation is an entity created by law. A corporation has the legal

powers of an individual in that it can sue and be sued, make and be party to
contracts, and acquire property in its own name.

Strengths and Weaknesses of the Common legal Forms of Business Orgonizohon

• Lacks
Sole proprietorship Partnership
continui
Strengths • Ow'ner receives all profits (and • Sian raise more funds than ty when
sole prr›priet
sunainsalllosses proprietorships or lies
• Low organizational costs • 8rirrowing power enhanced
by
• Income included and taxed on more owners
proprietor’s personal tax return • More ava ilable brain power
and
• lndepende rice WHnagerial skill
• Se crecy • Income included and taxed
on
q q$ dissoluiir›n partner’s personal tax return

Wea Lne
sse*

• Ow ner has oiifiinr/eJ finfzifr/y— • Owners have mil/mile I

I/ufJJfi/3' total wealth can be taken to and may have to
cover riebts of satisfy riebts other partners
• Limited fund-raising power • Partnership is dissolved
when a tends to inhibit growth partner dies
• Proprietor must be jack-of-all- • Difficult to liqni date or
transfer trades partnership
• Difficult to give employees long-

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Corporation they invested
• O • t.an achieve large size via sale of
w ownership {stock)
n • Ownership (stock) is readily
e transferable
r • Long life of firm
s
• t:an hire professional managers
• Has better access to financing
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e corporate income is taxed, and
dividends paid to n›vners are also taxed
at a maximum 15 *ñ
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Why Study Managerial Finance?
An understanding of the concepts, techniques, and practices presented throughout this text
will fully acquaint you with the financial manager’s activities and decisions. Because the
consequences of most business decisions are measured in financial terms, the financial
manager plays a key operational role. People in all areas of responsibility—accounting,
information systems, management, marketing, operations, and so forth—need a basic
awareness of finance so they will understand how to quantify the consequences of their
actions

GOAL OF THE FIRM

What goal should managers pursue? There is no shortage of possible answers to this
question. Some might argue that managers should focus entirely on satisfying customers.
Progress toward this goal could be measured by the market share attained by each of the
firm’s products. Others suggest that managers must first inspire and motivate employees; in
that case, employee turnover might be the key success metric to watch. Clearly the goal
that managers select will affect many of the decisions that they make, so choosing an
objective is a critical determinant of how businesses operate.

Maximize Shareholder Wealth

Finance teaches that managers’ primary goal should be to maximize the wealth of the firm’s
owners the stockholders. The simplest and best measure of stockholder wealth is the firm’s
share price, so most textbooks (ours included) instruct managers to take actions that
increase the firm’s share price. We argue that the goal of the firm, and also of managers,
should be to maximize the wealth of the owners for whom it is being operated, or
equivalently, to maximize the stock price. This goal translates into a straightforward decision
rule for managers—only take actions that are expected to increase the share price.

Maximize Profit?
It might seem intuitive that maximizing a firm’s share price is equivalent to maximizing its
profits, but that is not always correct. Profit maximization may not lead to the highest
possible share price for at least three reasons:

1. Timing is important—the receipt of funds sooner rather than later is preferred

2. Profits do not necessarily result in cash flows available to stockholders
3. Profit maximization fails to account for risk

What About Stakeholders?

Although maximization of shareholder wealth is the primary goal, many firms broaden their
focus to include the interests of stakeholders as well as shareholders. Stakeholders are
groups such as employees, customers, suppliers, creditors, owners, and others who have a
direct economic link to the firm. A firm, with a stakeholder, focusses consciously avoids
actions that would prove detrimental to stakeholders. The goal is not to maximize
stakeholder well-being but to preserve it.

MANAGERIAL FINANCE FUNCTION

People in all areas of responsibility within the firm must interact with finance personnel and
procedures to get their jobs done. For financial personnel to make useful forecasts and
decisions, they must be willing and able to talk to individuals in other areas of the firm. For
example, when considering a new product, the financial manager needs to obtain sales
forecasts, pricing guidelines, and advertising and promotion budget estimates from
marketing personnel. The managerial finance function can be broadly described by
considering its role within the organization, its relationship to economics and accounting,
and the primary activities of the financial manager.

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Organization of the Finance Function
The size and importance of the managerial finance function depend on the size of the firm.
In small firms, the finance function is generally performed by the accounting department. As
a firm grows, the finance function typically evolves into a separate department linked
directly to the company president or CEO through the chief financial officer (CFO).

Reporting to the CFO are the treasurer and the controller. The treasurer (the chief financial
manager) typically manages the firm’s cash, investing surplus funds when available and
securing outside financing when needed. The treasurer also oversees a firm’s pension
plans and manages critical risks related to movements in foreign currency values, interest
rates, and commodity prices. The controller (the chief accountant) typically handles the
accounting activities, such as corporate accounting, tax management, financial accounting,
and cost accounting. The treasurer’s focus tends to be more external, whereas the
controller’s focus is more internal.

If international sales or purchases are important to a firm, it may well employ one or more
finance professionals whose job is to monitor and manage the firm’s exposure to loss from
currency fluctuations. A trained financial manager can “hedge,” or protect against such a
loss, at a reasonable cost by using a variety of financial instruments. These foreign
exchange managers typically report to the firm’s treasurer.
CHIEF
EXECUTIVE
OFFICER

CHIEF
FINANCE
OFFICER

TREASURER CONTROLLER

Relationship to Economics
The field of finance is closely related to economics. Financial managers must understand
the economic framework and be alert to the consequences of varying levels of economic
activity and changes in economic policy. They must also be able to use economic theories as
guidelines for efficient business operation. Examples include supply-and-demand
analysis, profit- maximizing strategies, and price theory. The primary economic
principle used in managerial finance is marginal cost—benefit analysis , the
principle that financial decisions should be made and actions taken only when the added
benefits exceed the added costs. Nearly all financial decisions ultimately come down to
an assessment of their marginal benefits and marginal costs.

Relationship to Accounting
The firm’s finance and accounting activities are closely related and generally overlap. In
small firms, accountants often carry out the finance function, and in large firms,
financial analysts often help compile accounting information. However, there are two basic
differences between finance and accounting; one is related to the emphasis on cash flows
and the other to decision making.

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 IV. REFERENCES

Brigham, E.F. & Houston, J.F. (2009). Fundamentals of Financial Management. Mason,
Ohio: South- Western Cengage Learning.

Gitman, LJ., & Zutter, T.J. (2012). Principles of Managerial Finance. Boston, Massachusetts:
Pearson Education, Inc.

V. DISCLAIMER

OFFICIAL MCC MODULE DISCLAIMER

It is not the intention of the author/s nor the publisher of this module to have monetary
gain in using the textual information, imageries, and other references used in its
production. This module is only for the exclusive use of a bona fide student of
Mabalacat City College.

In addition, this module or no part of it thereof may be reproduced, stored in a retrieval

system, or transmitted, in any form or by any means, electronic, mechanical,
photocopying, and/or otherwise, without the prior permission of Mabalacat City
College.

Prepared by:

IAN PAULO N. PUNSALAN, MM

Instructor

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It is already well-known in the field of business that every firm or enterprise is measured using
its financial status or in other words, the status, transactions, decisions and strategies that a
firm use completely revolves or correlates with finance. All of the departments or divisions
inside a company includes finance as a factor of decision making but there some areas that
priorities or give more importance to the overall financial status of the firm and that is the
financial department or to be more specific, accounting. Accountancy is one of the backbones
of the company since the main reason why most business exist is to earn money and
Accountancy’s role in every enterprise is to maximize the profit or earnings of the owners.
Learning and reaching the highest proficiency to financial management is a must for all of the
accountants since the life of a business depends on it. It is the work of an accountant to report
all of the financial status of a business in a form of financial statements like Statement of
Financial Position, Statement of comprehensive Income and Cash Flow Statement. With this
tool, not only does that business can identify its financial standing with full transparency but it
could also identify problems, find a solution, implement solution and for forecasting or
predicting the possible future direction of the business which is all under the process of
managerial financial function or financial management. Considering the aforementioned
statements, it is safe to assume that financial management plays a vital role in accountancy
since most of the formal statements that accountants use and make have a symbiotic
relationship with financial management in a way that the financial statements and other
accounting tool are materials used in implementing a decisive and effective financial
management while accountancy use financial management to identify what is the situation
inside and outside the company and what is the most suitable path to choose.

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