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Chapter 1 - Introduction To Financial Management
Chapter 1 - Introduction To Financial Management
Introduction to
Financial Management
Objectives
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“ Beware of little expenses. A
small leak will sink a great
ship.
-Benjamin Franklin
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FINANCIAL MANAGEMENT
Starts with a plan. This applies to both individuals and companies.
From the perspective of a corporation, financial management deals with decisions that are
supposed to maximize the value of a shareholder’s wealth. This means maximizing the
market value of the shares of stocks. Shares of stocks represent the form of ownership in a
corporation.
To illustrate, Globe Telecom Inc. shares closed at P2,200 on April 25, 2016. As of that
date, Globe’s total shares outstanding was P132,742,402. The market value of the shares
as of that date was more than P292 billion. ( P2,200 X 132,742,402 = P292,033,284,400 ). This
amount represents the value of the shareholders’ wealth.
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Factors that influence the price of a stocks
1. Profitable operation
2. Nature of business
3. Prospects of the business
4. Projected earnings and timeframe
5. Ability to meet maturing obligations
6. Appropriate capital structure
7. Dividend policies
8. Investing decisions
9. Management and market sentiments
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Shareholders’ Wealth Maximization
Paying suppliers and creditors on time is good business practice that will improve
relationships with these parties.
Compliance with the requirements of regulatory agencies also ensures more smooth
operations.
Supporting the community where the company operates, in whatever capacity it can,
increases the company’s chances of continuous operations in the area.
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Financial System
As shown in Figure 1, the same entities can be savers and users of funds. One entity may
have savings today but maybe needing funds in the future, for example, for expansion.
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Different functions that each financial
intermediary may perform
Paying suppliers and creditors on time is good business practice that will improve
relationships with these parties.
Compliance with the requirements of regulatory agencies also ensures more smooth
operations.
Supporting the community where the company operates, in whatever capacity it can,
increases the company’s chances of continuous operations in the area.
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Board of Directors
President
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Presidents
Responsibilities of a Presidents
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VP for Sales and Marketing
The following are among the responsibilities of VP for Sales and Marketing
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VP for Production
The following are among the responsibilities of VP for Production
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VP for Administration
The following are among the responsibilities of VP for Administration
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VP for Finance
Shown in Figure 3 are the functions of VP for Finance
Financing
Investing
Operating
Dividend Policies
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Operating Decisions
Operating decisions deal with the daily operations of the company.
The role of the VP for Finance is determining how to finance working capital accounts
such as accounts receivable and inventories.
Should the company finance these two accounts substantially by short-term sources of
financing or long-term sources of financing?
The decision regarding the financing of these working capital accounts depends on the
appetite of top management for risk. If the company is more aggressive, then these
accounts receivable and inventories can be substantially financed by short-term sources.
Basically, short-term sources of funds are cheaper. Interest on short-term loans is generally
lower than the interest on long-term loans. Hence, using short-term loans can boost the
profitability of a company.
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Operating Decisions
While financing through short-term sources of financing may minimize the financing cost
of the company, this however, has a trade-off.
Financing working capital accounts mostly through short-term sources may expose the
company to a liquidity problem where obligations are already due but the company does
not have sufficient cash to pay for the obligations.
A more conservative management will opt to finance working capital accounts mostly
trough long-term sources.
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Dividend Policies
Some investors buy stocks because of the dividends they expect to receive from the
company.
Non-declaration of dividends may disappoint these investors.
PLDT and GLOBE are two of the Philippine-listed companies which have generously
distributed cash dividends for the last 5 years.
Two conditions must exist before a company can declare cash dividends. (1) The company
must have enough retained earnings to support cash dividend declaration. When cash
dividends are declared, the retained earnings of the company go down to the extent of such
declaration. (2) The company must have cash.
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Dividend Policies
How much cash dividends of a company declares is within the purview of the VP for Finance.
There are several factors considered in declaring cash dividends. Listed below are among
these considerations.
Availability of investments opportunities – this is especially true for small and medium enterprises
(SMEs) which access to long term sources of funds is limited. These SMEs may rarely heavily on internally
generated funds to finance expansion. Hence, the decision to declare cash dividends can be substantially influenced
by the availability of investments opportunities.
Access to long-term sources of funds – Publicly listed companies like PLDT, GLOBE, or PETRON
have a better access to long-term sources of funds. These companies can afford to declare cash dividends even if
they are faced with huge amounts of investments, for as long as their retained earnings can support such
declarations. The reason is these companies are big, publicly listed, and have much better access to long term
sources of funds.
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Dividend Policies
Capital Structure – The capital structure of a company can depend largely on the nature of its
business. As previously stated, companies which are capital intensive have to be more conservatively
financed. Therefore, the amount of cash dividends to be declared depends on how such declarations
can affect the structure of a company.
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