INTERNATIONAL ACADEME OF ENSCIEMA School Year 2020-2021

Subject: Business Finance Grade Level: Grade 12 (ABM) Semester: 1st Semester

Lesson 1 Introduction to Financial Management

Finance can be defined as the science and art of managing money (Gitman & Zutter, 2012).
Competent management.
Budgeting is the act of estimating revenue (in the form of their allowance) and expenses over a period of time (in this case, on
• Competent managers may have any of the following attributes: 1) visionary 2) decisive 3) people-oriented, 4)
a daily basis).
inspiring, 5) innovative, 6) respected and 7) experienced/seasoned manager.
When faced with financial difficulties (in this case, the lack of funds to meet the current expenses) we look for people or
Corporate plans that improve the business prospects.
institutions that will give us the money we need.
• Example: Company A which is in the business of selling Halo-halo in the Dapitan area (or any other area) for 5
years. Company A is consistently earning profits and has a positive cash flow. When asked how Company A sees
Finance is concerned with decisions about:
itself after 5 more years, Company A answered that it would continue to sell Halo-halo in Dapitan (or any other
- How much of their earnings they spend
area).
- How much they save or how much they need
• On the other hand, Company B sells Buko Juice in Katipunan area (or any other area different from Company A’s
- How they invest their savings
area) for 5 years. Company B is consistently earning profits and has a positive cash flow. When asked how Company
- How they raise additional funds they need
B sees itself after 5 more years, Company B answered that it has generated enough cash to expand its business to
Cubao area (or any other area) to take advantage of the growing demand of Buko Juice in Cubao.
Forms of business organizations:
• Between Company A and Company B, which would be a better investment? Company B. Since it has more
- Sole Proprietorship - A business owned by one person and operated for his or her own profit.
concrete future prospects allowing investors to hope for better revenues and net income.
- Partnership - A business owned by two or more people and operated for profit.
- Corporation – An entity created by law owned by shareholders.
External Factors
- These factors influences the general reaction of investors in making an investment decision.
- Corporations may either be privately owned or publicly owned.
- Its effect is not only to a specific company but on all companies or a group of companies under similar
- Privately owned corporations are often owned by family members whose stocks may not be offered to outsiders unless
circumstances.
consent by the family members is secured.
- Such factors are a result of the environment a company operates in rather than the decisions of the company’s
- Companies which are publicly listed are owned by unrelated investors and are traded in organized exchanges like the
management.
Philippine Stock Exchange. While there are many stockholders, there is generally a group of investors or a family which
controls each listed company. For example, in the case of BPI, the biggest stockholder is Ayala Corporation and in the case of
Role of Financial Management
Banco De Oro, it is SM Investment Corporation. Prices of stocks of listed corporations are driven by several factors such as
Financial management deals with decisions that are supposed to maximize the value of shareholders’ wealth.
the earnings of the companies, the prospects of the industry where these companies operate, the general market sentiment,
- These decisions will ultimately affect the markets perception of the company and influence the share price.
and the economic prospects of the country, among others.
- 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
The overall objective of a shareholder should be wealth maximization.
shareholders’ wealth maximization.
ACTIVITY
Factors which can affect prices
Answer the following questions briefly and concisely.
1.Controllable
What is thebyrole
Management
of financial management in a business enterprise?
• profitability
• having a good liquidity and reasonable leverage position
• dividends
2. When•running
competent management
a business, which
why is affects the
it important company’s
to develop the operating efficiency
skill in budgeting?
• coming up with corporate plans that improve the business prospects of the company

Uncontrollable External Factors

3. How • macroeconomic
can conditions affect the operating efficiency of a business?
a competent management
• political stability
• prospects of the industry where the company operates
• general market sentiment
4. When•running
flow of foreign funds
a business, invested
what in the
good will Philippine
it bring if onestock
has amarket
good background in the field of finance?

Profitability
• Profit is a measure of the financial performance of a company for a period of time.
5. When•running
Although it is a major
a business, why driver for increasing
do entrepreneurs the value
consider of stock,
external factorsanthat
investor should not rely on profits alone. As
affect prices?
discussed earlier, it is possible that the company has profits but its cash flow is negative.

Good liquidity and reasonable leverage 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.

Dividends.
• Holders of shares receive dividends from a corporation as returns on their investments in form of cash or other
properties. Companies which have better dividend policies are generally more attractive than companies who do not
pay out dividends.
• Note that there may be times that companies do not pay out dividends because of future expansions. Same with
the other factors affecting share price, dividend policies should go hand in hand with other factors in determining
market price.