Introduction to Financial Management

Business is an entity in which the skills, energy and enterprise of owners and partners are linked with money, its sources and investment, and its success is measured by wealth or profit the business earned.

Elements to be successful in business finance function:

  • The business entity must obtain money from the right sources and invest it in the right places;
  • It must continue to attain its purpose of gaining profit;
  • Cash must be available when it is needed, and its availability can be crucial in some decision-making situations.

 

Finance is the study of money and its management.

 

Finance as a discipline has three area:

  • Financial institution – is concerned with the creation of financial assets, the market for trading and securities, and the regulation of financial markets
  • Investment – the study of investments is concerned with the analysis of individual assets and the planning for well-diversified portfolio.
  • Business Finance – Corporate or Business finance studies the role of financial manager, his abilities to meet obligations as they come due, identify the best sources of funds, allocating resources among available investment alternatives.

 

In the financial decision in Business Finance are:

  • Financing Decisions – involves generating funds internally or from external sources. Funds may be generated externally from borrowing and by issuing debt or equity securities.
  • Investment Decisions – determine the real assets that a business has. These assets generate the cash flows that are needed to meet operating expenses, pay interest to creditors, taxes to government and dividends to stockholders

 

Functions of Business Finance

Business Finance is both art and science of managing the financial resources of an organization. It is concerned with the functions of allocating the financial resources of the company; procurement of funds needed; and the efficient and effective utilization of funds.

 

Roles of Financial Managers

Financial Managers have a major role in a company’s management. this role is essentially the same in all companies,  To acquire the necessary funds and to ensure that they are used effectively.

Top 10 Major Roles of Financial Managers are:

  • Managing investment in noncurrent assets through evaluation of capital Projects.
  • Evaluating, obtaining and servicing long term financial requirements through borrowing, leasing, retaining funds or issuing stocks and securities.
  • Distribution of dividends to shareholders
  • Collection and custody of cash and payment of bills
  • Managing investment in current assets such as cash, marketable securities and inventories
  • Obtaining and servicing short term finance.
  • Managing risks associated with changes in interest rates and exchange rates.
  • Assessing the viability of growth through acquisition of other businesses
  • Planning the future development of the business.
  • Development and implementation of financial policies.

 

Decision made by Financial Managers

  • Capital Budgeting – this concerns the planning and managing of the firm’s long term investments.
  • Capital Structuring – this evaluates ways in which the firm obtains and manages the long term financing it needs to support long term investments.
  • Working capital management – refers to administration of the firms short term assets, including inventory, its short term liabilities such as money owed to suppliers. Managing the firms day to day to activity that ensures that the company’s has sufficient resources to continue its operation.

 

Business Organizations

When a business is being organized, one of the first decisions that has to be made concerns the form of business ownership.

 

Business Ownership

  • Sole Proprietorship – is a business owned by one person, such as small service businesses, retail stores, professional practices, this is the simplest type of business to start and is the least regulated form of organization.
    • Advantage
      • One individual Control, Relatively making it easy to make decision, no disagreements may exists between owners
      • Easy and inexpensive to organize and dissolve. Owner contributes equity to business, or may borrow funds to supplement investments. If for dissolution, owner can simply cease operations, pay creditors and keep any remaining proceeds.
      • Retention of all profits to the owner, except those for government in the form of taxes
    • Disadvantage
      • Unlimited liability of the owner for all the debts incurred as a result of business operations. All obligations of business are personal obligations of the owner.
      • Size of business is limited to the wealth of the owner and the amount that can be borrowed.
      • Management deficiency, since the manager is also the owner, he performs a wide range of managerial and operational activities.
      • Lack of long term continuity cause by death, bankruptcy, retirement or change in personal interest of the owner.
    • Organizing a Sole Proprietorship – in organizing a sole proprietorship, the following are required:
      • Register the business name with the Department of Trade and Industry;
      • Pay the city or municipal licenses with the local government;
      • Apply for VAT or non-VAT number;
      • Register with the Bureau of Internal revenue the books of accounts (journal and ledgers), and business forms to be used (official receipts, sales invoices).

 

  • Partnership is an association of two or more persons who operate a business as co-owners by voluntary legal agreement.
    • General Partnership is one in which partners are liable for the business debts. Partners share in gain or losses, and all have unlimited liability for all partnership debts. The way the partnership divides their gain or loss is described by the partnership agreement.
    • Limited Partnership is composed of partners whose liability is limited to the amount of capital contributed. Provided the person plays no active role in the business, or not participating in its operation.
      • Classifications of Partnership
        • Based on object of contribution or subject matter:
          • Universal Partnership refers to the contribution by partner of all present property or of all profits.
          • Particular Partnership includes objects which are determinate things such as their use; fruits, undertaking or the exercise of a profession or vocation.
        • Based on liability of partners for obligations:
          • General Partnership refers to partners who are all liable for the debts of the business; including their personal property after all the partnership assets have been exhausted.
          • Limited Partnership consist of one or more general partners and one or more limited partners who are liable for business debts only to the extent of their capital contributions.
        • Based on their contribution:
          • Capital Partner contributes money or property to the funds of the partnership.
          • Industrial Partner shares work, labor or industry to the business.
          • Capitalist-Industrial partner contributes money or property as well as his work or industry to the capital of the partnership.
            • Partnership profits and losses are divided based on the articles of co-partnership. In the absence of stipulation in the partnership contract, the same shall be divided based on their capital contributions. An industrial partner shares in the profit based on what is fair and just, he is given priority in the division of profits and does not share losses. If a partner is industrial-capitalist, he shall also receive a share in the profits in proportion to his capital, excluding his share for his services.
          • Organizing a Partnership –provision of the civil code on partnership formation states that:
            • Article 1771: a partnership may be constituted in any form except where immovable property or real rights are contributed thereto, in which case a public instrument shall be necessary.
            • Article 1772: every contract of partnership having a capital of three thousand pesos (Php 3,000) or more, in money or property, shall appear in a public instrument, which must be recorded in the office of the Securities and Exchange Commission.

Failure to comply with the requirement of the preceding paragraph shall not affect the liability of the partnership and the members thereof to third parties.

  • Article 1786: every partner is a debtor of the partnership for whatever he may have promise to contribute thereof.
  • Article 1826: a person admitted as a partner into an existing partnership is liable for all the obligations of the partnership arising before his admission as though he had been a partner when such obligations were incurred, except that this liability shall be satisfied only out of partnership property, unless there is a stipulation to the contrary.
  • A partnership
    • Has a juridical personality separate and distinct from that of each of the partners even if the contract between the partners are not registered with the SEC. under this case, the partnership can acquire and possess property, may have obligations and bring civil and criminal actions in conformity with laws.
  • However, the registration with the SEC is a requirement for the issuance of licenses by the municipal or city government. In organizing a partnership, the following are required:
    • Register the business name with the Department of Trade and Industry;
    • Prepare the articles of co-partnership, and have it notarized;
    • Secure a tax account number for the partnership from the Bureau of Internal Revenue;
    • Register the notarized articles of partnership with the SEC;
    • Secure the municipal or City licenses from the local government;
    • Apply for VAT or non-VAT number, as the case maybe;
    • Register with the Bureau of Internal revenue the books of accounts (journal and ledgers), and business forms to be used (official receipts, sales invoices).
  • The articles of co-partnership, an agreement between the partners, contains the following:
    • Name of the Partnership
    • Names of the partners
    • Place of Business
    • Effective date of the partnership
    • Name of Business
    • Investment of each partner and corresponding capital credit
    • Duration of the agreement
    • Rights, powers, duties of the partners
    • Accounting period
    • Share system on profits and losses
    • Liabilities of partners for company debts
    • Compensation for service partners
    • Partners’ additional Investments and withdrawals policy
    • Procedures for settlement of partners’ interest upon dissolution
    • Provision for settlement of partners disputes.

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