Module in Financial Management - 01 Introduction to Financial Management PDF

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ForewordThe completion of this module in Financial Management is a result of the mutual desire of Cagayan State University and the author to help students gain better perspectives on the over-all aspects of the company operation, and deeper understanding on the financial management tools that focuse...

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Foreword The completion of this module in Financial Management is a result of the mutual desire of Cagayan State University and the author to help students gain better perspectives on the over-all aspects of the company operation, and deeper understanding on the financial management tools that focuses on maximizing the value of the firm, maximizing the shareholder’s wealth and exhibiting social responsibility and ethical behaviour. To achieve this goal, we banked on: a. the CHED Memorandum Order (CMO) Number 27, series of 2017; b. the summarized feedback from CSU Peace Corps Volunteers as well as the members of technical evaluators c. the consensus arrived at by the author in the series of module write shop sessions that are specifically conducted by the institution for this purpose Details of the module include: 1. The activation of prior knowledge of students through various activities. This section would allow students make use of their schema where new knowledge can be built on. 2. Enrichment activities were carefully chosen in order help students develop the 4Cs of the 21st Century Skills. Activities require students’ critical thinking as well be asked to solve real life industry-based problems. Further, this module contains learning task that will stimulate student’s creativity as some of the activities that are purposefully designed for students to be able to showcase their multiple intelligences. Also, majority of the activities are geared towards honing abilities of learners to work collaboratively and communicating effectively. 3. History on the development of fundamental financial management principles, theories, trend, and other developments are succinctly explained. This leads to understanding of the role of financial management in the business environment. 4. Emphasis on creation of sound financial decisions, based on the financial performance and position, capital structure and leverage, and working capital of the business is also being underscored in this material. 5. The application of different financial management tools and techniques are given prominence. 6. Multiple forms of feedback and/or assessment methods are also included in this module. Also, students are given the chance to reflect on the knowledge that they have learned at the end of each unit.

Financial Management Module 1

Finance is the foundation of the enterprise system – good financial management is necessary to the economic health of the business industry and hence to the nation and the world. Due to this very reason, it is a must that a business and accountancy student must have a profound understanding on financial management. The field is complex, and it undergoes constant change due to shifts in economic conditions and demands. Further, the world business arena has challenged by this pandemic – covid 19 situation. All of this makes finance stimulating and exciting, but challenging and sometimes perplexing. It is my hope and desire that, even in the smallest ways, I can contribute to the student’s better understanding of the financial management. -The Author

Financial Management Module 2

Unit 1: Introduction to Financial Management (3 hours) Introduction

Financial management continues to change at a rapid pace. Advancements are occurring not only in the theory of financial management but also in its realworld practice. One result has been for financial management to take on a greater strategic focus, as managers struggle to create value within a corporate setting. In the process of value creation, financial managers are increasingly supplementing the traditional metrics of performance with new methods that encourage a greater role for uncertainty and multiple assumptions. Corporate governance issues, ethical dilemmas, conflicting stakeholder claims, a downsized corporate environment, the globalization of finance, e-commerce, strategic alliances, the growth of outsourcing, and a host of other issues and considerations now permeate the landscape of financial decision making. It is indeed a time of both challenge and opportunity. This unit will allow you to have a glimpse on what is financial management is all about, its role in the business environment, and on nation building. This unit will formulate its own identity separate from accounting but still strengthen the basic accounting concepts and principles you learned in your lower years. Also, this unit will established basic ideas and principles that will be a foundation in learning financial management in totality.

Learning Outcomes At the end of this unit, you should be able to: 

Know and explain the evolution of finance as a recognized field of study; Financial Management Module 3

 

Know and explain the goals and functions of financial management. Research and discuss the recent economic developments establishing their implications to financial management.

Topic 1: An Overview of Financial Management

Learning Objectives At the end of this topic, you will be able to:     

Explain the role of finance and the different types of jobs in finance; Identify the advantages and disadvantages of different forms of business organization; Explain the links between stock price, intrinsic value, and executive compensation; Identify the potential conflicts that arise within the firm between stockholders and bondholders, and discuss the techniques that firms can use to mitigate these potential conflicts; Discuss the importance of business ethics and the consequences of unethical behavior;

Motivation Good day 3rd year BS Accountancy students! Welcome to our e-classroom! In the past years, I have read several outputs of your activities (recitations, case studies, and essay) and to be honest, I was inspired. Inspired because many of you have good written and oral communication skills. Evidently, there were many of you who are good in using the business language. It just shows that the passion to learn the rigors of business is already in your system. Keep it up! This is accounting. If you want to learn accounting effectively and efficiently, you must know how to relate it to other fields like finance. Learning accounting should go beyond the walls of accounting. And having a good grasp of finance is an edge in the accounting world. Some reminders before we proceed to the discussion proper: 1. Please be loyal in the power of learning. In today’s set-up, there are few possible means to complete your output. The most fulfilling among them is when you submit yourself to self-directed learning. Hence, we should always remind ourselves that in order to grow, leave your comfort zones. Financial Management Module 4

Work independently without any guilt of cheating. Remember, as future accounting professionals, honesty is our core foundation in all business transactions. So, keep that young vibe. The vibe to improve and grow. Keep the passion to learn! 2. I believe that online learning should go beyond accumulation of knowledge. It is more than reading and comprehending all forms of discussion – whether in a written form or in an oral form. It should direct you to a higher form of learning, i.e., learning how to learn. Being proactive is a must in today’s highly competitive accounting arena. Knowledge-based learning is an old-school concept. It is where spoonfeeding greatly resides. And as future accounting professionals, we do not want you to reside there. Instead, we want you to be accountants who can work with less supervision, who can work under pressure, who can work collaboratively with others, who can work with critical thinking and problem solving skills, and who can work with an end of self-improvement. Hence, for the weeks, months to come, expect for learning tasks that would challenge and excite you a lot. Your study hours should be devoted greatly doing learning tasks and not merely reading or watching video tutorials. You must apply that knowledge accumulated to reinforce a higher form of learning. No worries, we will provide you the best possible content discussion here. If you have concerns on the content or you cannot comprehend them, feel free to collaborate with your classmates, ates, kuyas, and to us – your mentors. (Adapted – Sir Jerome of USL)

Discussion Proper

Activating Prior Learning In order to facilitate learning, we must have a good understanding of ourselves. We must know where we came from, where we are, and where are going through. To start, let us embark on this activity. Your task is to fill in the K-W-L chart below by jotting down what you have known and what are the things that you would like to know about Financial Management. (You may use a separate sheet of paper for this activity) What I already Know

What I Want to know

What I have Learned

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Presentation of Contents The financial manager plays a dynamic role in a modern company’s development. This has not always been the case. Until around the first half of the 1900s financial managers primarily raised funds and managed their firms’ cash positions – and that was pretty much it. In the 1950s, the increasing acceptance of present value concepts encouraged financial managers to expand their responsibilities and to become concerned with the selection of capital investment projects. Today, external factors have an increasing impact on the financial manager. Heightened corporate competition, technological change, volatility in inflation and interest rates, worldwide economic uncertainty, fluctuating exchange rates, tax law changes, environmental issues, and ethical concerns over certain financial dealings must be dealt with almost daily. As a result, finance is required to play an ever more vital strategic role within the corporation. The financial manager has emerged as a team player in the overall effort of a company to create value. The “old ways of doing things” simply are not good enough in a world where old ways quickly become obsolete. Thus today’s financial manager must have the flexibility to adapt to the changing external environment if his or her firm is to survive. The successful financial manager of tomorrow will need to supplement the traditional metrics of performance with new methods that encourage a greater role for uncertainty and multiple assumptions. These new methods will seek to value the flexibility inherent in initiatives – that is, the way in which taking one step offers you the option to stop or continue down one or more paths. In short, a correct decision may involve doing something today that in itself has small value, but gives you the option to do something of greater value in the future. If you become a financial manager, your ability to adapt to change, raise funds, invest in assets, and manage wisely will affect the success of your firm and, ultimately, the overall economy as well. To the extent that funds are misallocated, the growth of the economy will be slowed. When economic wants are unfulfilled, this misallocation of funds may work to the detriment of society. In an economy, efficient allocation of resources is vital to optimal growth in that economy; it is also vital to ensuring that individuals obtain satisfaction of their highest levels of personal wants. Thus, through efficiently acquiring, financing, and managing assets, the financial manager contributes to the firm and to the vitality and growth of the economy as a whole. Financial Management Module 6

What is Finance? Before understanding the definition of financial management, let’s take a look first on the definition of finance. According to the Webster’s Dictionary, finance is a system that includes the circulation of money, the granting of credit, the making of investments, and the provision of banking facilities. In reality, it is hard to define finance - the term has many facets, which makes it difficult to provide a clear and concise definition. But as we go on with our discussion, you could developed a good perspective of finance in your minds. Areas of Finance 1. Financial Management, also called corporate finance, focuses on decisions relating to how much and what types of assets to acquire, how to raise the capital needed to purchase assets, and how to run the firm so as to maximize its value. Much of this course is concerned with financial management. 2. Capital Markets, relate to the markets where interest rates, along with stocks and bond prices, are determined. Also studied here are the financial institutions that supply capital to business. Banks, investment banks, stockholders, mutual funds, insurance companies, and the like bring together “savers” who have money to invest and businesses, individuals, and other entities that need capital for various purposes. 3. Investments, relate to decisions concerning stocks and bonds and include a number of activities: (1) Security analysis deals with finding the proper values of individual securities (i.e., stocks and bonds). (2) Portfolio theory deals with the best way to structure portfolios, or “basket,” of stocks and bonds. Rational investors want to hold diversified portfolios in order to limit risks, so choosing a properly balanced portfolio is an important issue for any investor. (3) Market Analysis deals with the issue of whether stock and bond markets at any given time are “too high,” “too low,” or “about right.” Although could be separated, these 3 areas could be closely interconnected. And because of these interdependencies, all those areas are covered in this course. Finance Versus Economics and Accounting Finance as we know it today grew out of economics and accounting. Economists developed the notion that an asset’s value is based on the future cash flows the asset will provide, and accountants provided information regarding the likely size of those cash flows. Finance then grew out of and lies Financial Management Module 7

between economics and accounting, so people who work in finance need knowledge of those two fields. Also, as discussed next, in the modern corporation, the accounting department falls under the control of the chief financial officer (CFO). Finance Within an Organization

The board of directors is the top governing body, and the chairperson of the board is generally the highest-ranking individual. The CEO comes next, but note that the chairperson of the board often serves as the CEO as well. Below the CEO comes the chief operating officer (COO), who is often also designated as a firm’s president. The COO directs the firm’s operations, which include marketing, manufacturing, sales, and other operating departments. The CFO, who is generally a senior vice president and the third ranking officer, is in charge of accounting, Corporate Governance Corporate governance refers to the system by which corporations are managed and controlled. It encompasses the relationships among a company’s shareholders, board of directors, and senior management. These relationships provide the framework within which corporate objectives are set and performance is monitored. Three categories of individuals are, thus, key to corporate governance success: first, the common shareholders, who elect the

Financial Management Module 8

board of directors; second, the company’s board of directors themselves; and, third, the top executive officers led by the chief executive officer (CEO). The board of directors – the critical link between shareholders and managers – is potentially the most effective instrument of good governance. The oversight of the company is ultimately their responsibility. The board, when operating properly, is also an independent check on corporate management to ensure that management acts in the shareholders’ best interests. Role of the Board of Directors The board of directors sets company-wide policy and advises the CEO and other senior executives, who manage the company’s day-to-day activities. In fact, one of the board’s most important tasks is hiring, firing, and setting of compensation for the CEO. Boards review and approve strategy, significant investments, and acquisitions. The board also oversees operating plans, capital budgets, and the company’s financial reports to common shareholders. Typically boards have 10 or 11 members, with the company’s CEO often serving as chairman of the board. Sarbanes – Oxley Act of 2002 Sarbanes-Oxley mandates reforms to combat corporate and accounting fraud, and imposes new penalties for violations of securities laws. It also calls for a variety of higher standards for corporate governance, and establishes the Public Company Accounting Oversight Board (PCAOB). The Securities and Exchange Commission (SEC) appoints the chairman and the members of the PCAOB. The PCAOB has been given the power to adopt auditing, quality control, ethics, and disclosure standards for public companies and their auditors as well as investigate and discipline those involved. Jobs in Finance Next to health care, jobs in finance have been growing faster than any other area. Finance prepares students for jobs in banking, investments, insurance, corporations, and the government. Accounting students need to know finance, marketing, management, and human resources; they also need to understand finance, for it affects decisions in all those areas. s. For example, marketing people propose advertising programs, but those programs are examined by finance people to judge the effects of the advertising on the firm’s profitability. So to be effective in marketing, one needs to have a basic knowledge of finance. The same holds for management—indeed, most important

Financial Management Module 9

management decisions are evaluated in terms of their effects on the firm’s value. This is called value-based management, and it is the “in” thing today. Forms of Business Organization 1. Proprietorship – an unincorporated business owned by one individual. Advantages: i) Easy and inexpensive to form; ii) Subject to few government regulations iii) Subject to lower income taxes than are corporations Limitations: i) Unlimited personal liability for the business’ debts, so they can lose more than the money they invested in the business. ii) Life of the business is limited to the life of the individual who created it. iii) Difficulty of obtaining large sum of capital. 2. Partnership – a legal arrangement between two or more persons who decide to do business together. Partnerships are similar to proprietorships in that they can be established relatively easily and inexpensively. Moreover, the firm’s income is allocated on a pro rata basis to the partners and is taxed on an individual basis. This allows the firm to avoid the corporate income tax. However, all of the partners are generally subject to unlimited personal liability, which means that if a partnership goes bankrupt and any partner is unable to meet his or her pro rata share of the firm’s liabilities, the remaining partners will be responsible for making good on the unsatisfied claims. 3. Corporation – is a legal entity created by a state, and it is separate and distinct from its owners and managers, having unlimited life, easy transferability of ownership, and limited liability. *Limited Liability Partnership *Cooperative *Sole Corporation . . . What is Financial Management? Financial management is concerned with the acquisition, financing, and management of assets with some overall goal in mind. Thus the decision function of financial management can be broken down into three major areas: the investment, financing, and asset management decisions.

3 Major Decision Function of FinMan 1. Investment Decision - The investment decision is the most important of the firm’s three major decisions when it comes to value creation. It begins Financial Management Module 10

with a determination of the total amount of assets needed to be held by the firm. Picture the firm’s balance sheet in your mind for a moment. Imagine liabilities and owners’ equity being listed on the right side of the balance sheet and its assets on the left. The financial manager needs to determine the pes...