1.

Objectives of Financial Management

Meaning of Financial Management Financial Management means planning, organizing, directing and controlling the financial activities such as procurement and utilization of funds of the enterprise. It means applying general management principles to financial resources of the enterprise. Scope/Elements 1. Investment decisions includes investment in fixed assets (called as capital budgeting).Investment in current assets are also a part of investment decisions called as working capital decisions. 2. Financial decisions - They relate to the raising of finance from various resources which will depend upon decision on type of source, period of financing, cost of financing and the returns thereby. 3. Dividend decision - The finance manager has to take decision with regards to the net profit distribution. Net profits are generally divided into two: a. Dividend for shareholders- Dividend and the rate of it has to be decided. b. Retained profits- Amount of retained profits has to be finalized which will depend upon expansion and diversification plans of the enterprise. Objectives of Financial Management The financial management is generally concerned with procurement, allocation and control of financial resources of a concern. The objectives can be1. To ensure regular and adequate supply of funds to the concern. 2. To ensure adequate returns to the shareholders which will depend upon the earning capacity, market price of the share, expectations of the shareholders. 3. To ensure optimum funds utilization. Once the funds are procured, they should be utilized in maximum possible way at least cost. 4. To ensure safety on investment, i.e, funds should be invested in safe ventures so that adequate rate of return can be achieved. 5. To plan a sound capital structure-There should be sound and fair composition of capital so that a balance is maintained between debt and equity capital. 2. What are agency cost/problems? A type of internal cost that arises from, or must be paid to, an agent acting on behalf of a principal. Agency costs arise because of core problems such as conflicts of interest between shareholders and management. Shareholders wish for management to run the company in a way that increases shareholder value. But management may wish to grow the company in ways that maximize their personal power and wealth that may not be in the best interests of shareholders. Some common examples of the principal-agent relationship include: management (agent) and shareholders (principal), or politicians (agent) and voters (principal). Agency costs are inevitable within an organization whenever the principals are not completely in charge; the costs can usually be best spent on providing proper material incentives (such as performance bonuses and stock options) and moral incentives for agents to properly execute their duties, thereby aligning the interests of principals (owners) and agents.

An agency problem occurs when the interests of stockholders, the board of directors and/or the management of the company are not perfectly aligned or when these entities conflict. In publicly held companies, there are a variety of individuals with an interest in the performance of the company. The managers and executives who run the company on a day-to-day basis, the shareholders who own stock, and the board of directors who oversee the company's business development all may have different aims or ideas of how the business can be run. Since each of these entities has a vested interest in the corporation, an agency problem occurs when there is conflict among them. 3. Role and Functions of a Financial Manager The role of the financial manager is central in the flow of money from investors into the firm and then back to those same investors. There are two major decisions for the financial manager to make that greatly affect this process. In fact, they are central to the success or failure of the company as a whole. The capital budgeting decision asks how much money the company should invest and into what assets should this investment be made. The financing decision determines how the cash for the investment will be raised. Functions Forecasting and Planning The need to estimate/forecast the requirement of funds for both the short term(working capital requirements) and the long term purpose(capital investments). Forecasting the requirements of funds involves the use of budgetary control and long-range planning Financing Decision Helps to decide what type of Capital structure the company needs to have re: whether these funds would be raised re: from loans/borrowings or from internal source(share capital) To raise sufficient long term funds to finance fixed assets and other long term investments and to provide for the needs of working capital Investment Decision In projects using the various capital budgeting tools like Payback method, accounting rate of return, internal rate of return, net present value. Assets management policies are to be laid down regarding the various items of current assets like accounts receivable by coordinating with the sales personnel, inventory with production Dividend Decision Taking into consideration, earnings trend, share market price trend, fund requirement for future growth, cash flow situation and others. Financial negotiation Plays a very important role in carrying out negotiations with the various financial institutions, banks and public depositors for raising funds on favourable terms

Evaluating financial performance To need to constantly review the financial performance of the various units of organization generally in terms of ROI(return on investment. Such review assists management in seeing ow the funds have been utilized in the various divisions and what can be done to improve it. Dealing with relevant parties in the Financial Markets Where the company is a listed entity, the need to interact with the Stock Exchange To deal with money markets and capital markets for financing or investment of idling funds To foster relationships with bankers, investors, underwriters of equity and bond issuances and other government regulatory bodies. 4. Importance of Finance Manager One of the most important functions in any company is that of the finance manager. For those who are uninformed, they tend to think the sole function of this position is that of the head of Accounts Payable and Accounts Receivable, but it goes far beyond that capacity. In fact, the finance manager is in charge of any financing and accounting function throughout the company. 5. What are the areas of Financial Management? Discuss. 6. Determining financial needs:- A finance manager is supposed to meet financial needs of the enterprise. For this purpose, he should determine financial needs of the concern. Funds are needed to meet promotional expenses, fixed and working capital needs. The requirement of fixed assets is related to types of industry. A manufacturing concern will require more investments in fixed assets than a trading concern. The working capital needs depend upon scale of operations. Larger the scale of operations, the higher will be the needs for working capital. A wrong assessment of financial needs may jeopardize the survival of a concern. 7. Choosing the sources of funds:- A number of sources may be available for raising funds. A concern may be resort to issue of share capital and debentures. Financial institutions may be requested to provide long-term funds. The working capital needs may be met by getting cash credit or overdraft facilities from commercial bands. A finance manager has to be very careful & cautions in approaching different sources. 8. Financial analysis and interpretation:- The analysis & interpretation of financial statements is an important task of a finance manager. He is expected to know about the profitability, liquidity position, short term and long-term financial position of the concern. For this purpose, a number of ratios have to be calculated. The interpretation of various ratios is also essential to reach certain conclusions Financial analysis and interpretation has become an important area of financial management. 9. Cost-volume profit analysis:- This is popularly known as CVP relationship. For this purpose, fixed costs, variable costs and semi variable costs have to be analyzed. Fixed costs are more or less constant for varying sales volumes. Variable costs vary according

to the sales volume. Semi-variable costs are either fixed or variable in the short-term. The financial manager has to ensure that the income of the firm will cover its variable costs, for there is no point in being in business, if this is not accomplished. Moreover, a firm will have to generate an adequate income to cover its fixed costs as well. The financial manager has to find out the break-even point that is, the point at which the total costs are matched by total sales or total revenue. 10. Working capital management:- Working capital refers to that part of firms capital which is required for financing short-term or current assets such as cash, receivables and inventories. It is essential to maintain proper level of these assets. Finance manager is required to determine the quantum of such assets. 11. Dividend policy:- Dividend is the reward of the shareholders for investments made by them in the shares of the company. The investors are interested in earning the maximum return on their investments whereas management wants to retain profits for future financing. These contradictory aims will have to be reconciled in the interests of shareholders and the company. Dividend policy is an important area of financial management because the interest of the shareholders and the needs of the company are directly related to it. 12. Capital budgeting:- Capital budgeting is the process of making investment decisions in capital expenditures. It is an expenditure the benefits of which are expected to be received over a period of time exceeding one year. It is expenditure for acquiring or improving the fixed assets, the benefits of which are expected to be received over a number of years in future. Capital budgeting decisions are vital to any organization. Any unsound investment decision may prove to be fatal for the very existence of the concern. Business Organization 1. Discuss the different types of business organization that are existing and operating in the Philippines? Sole proprietorship: A sole proprietorship is a for-profit business owned by one person. The owner may operate on his or her own or may employ others. The owner of the business has unlimited liability for the debts incurred by the business. Partnership: A partnership is a for-profit business owned by two or more people. In most forms of partnerships, each partner has unlimited liability for the debts incurred by the business. The three typical classifications of partnerships are general partnerships, limited partnerships, and limited liability partnerships. Corporation: A corporation is a limited liability business that has a separate legal personality from its members. Corporations can be either privately-owned or government-owned, and privately-owned corporations can organize either for-profit or not-for-profit. A for-profit corporation is owned by shareholders who elect a board of directors to direct the corporation and hire its managerial staff. A for-profit corporation is either privately held or publicly held.

Cooperative: Often referred to as a "co-op", a cooperative is a limited liability business that can organize for-profit or not-for-profit. A for-profit cooperative differs from a forprofit corporation in that it has members, as opposed to shareholders, who share decisionmaking authority. Cooperatives are typically classified as either consumer cooperatives or worker cooperatives. Cooperatives are fundamental to the ideology of economic democracy. 2. Discuss the importance of these business organizations in the Philippines as well as in the Global Economy.

3. Discuss the advantages and disadvantages of these business organizations

Single or Sole Proprietorship. It is a form of business organization which is owned by one person. The owner personally manages his business. Most of businesses in the Philippines (including those which are not registered) belong to single proprietorship. Examples are retailers, market vendors, barbers, tailors, and so forth. a) Advantages of Single or Sole Proprietorship

1) It is easy to organize. Financial capital is small, and registration requirements are not difficult to comply with. In fact, in the remote rural areas small businesses do not even bother to apply for license. 2) The single proprietor is the boss. He makes the decisions and enjoys substantial freedom of action. Possibilities of conflicts or quarrels are minimized. 3) The owner acquires all the profits from his business. This gives him more incentives to make his business grow. b) Disadvantages of Single or Sole Proprietorship

1) In general the financial resources of a single proprietorship are not enough to transform the business into a large scale enterprise. Considering its small assets and high mortality rate, banks are reluctant to grant big loans to single proprietorship type of business organizations. 2) Benefits of specialization in business management are not present in small scale proprietorship. There is only one manager. In not a few cases, the owner is the only employee. 3) The owner has unlimited liability. This means that the owner of the business risks not only the assets of his small enterprise, but also his other personal assets like his piece of land, bank

deposits, and other personal properties which are not part of his business. In case of loss, such assets are subject to financial claims by creditors. c) Requirements for formation

Since it is the simplest form of business it is the easiest to register. It is registered through the Bureau of Trade Regulation and Consumer Protection (BTRCP) of the Department of Trade and Industry (DTI). d) Applicable Laws

Republic Act No. 9178 Barangay Micro Business Enterprises (BMBEs) Act of 2002 Partnership. It is a form of business organization in which two or more persons agree to own and operate a business. The partners agree to combine their resources (money, materials, and management). They also share their profits and losses. However, there are silent partners. They only provide the financial capital but they do not participate in the management. There is also the industrial partner. He does not contribute money to the business organization but he is responsible for its management. a) Advantages of Partnership

1) It is also easy to organize like single proprietorship. Legal red tape in connection with its registration is not much. 2) Better management because of the presence or more participants in the operations of the business. 3) Possibility of bigger resources than in the single proprietorship exists. Financial institutions may extend bigger loans to such business organization considering the combined resources of the partners. b) Disadvantages of Partnership

1) Conflicts or quarrels between or among the partners regarding the management or policies of the business are likely to crop up. In fact, under Filipino style, some partners cheat their other partners in matters of profits or expenses. 2) It lacks stability. The death or withdrawal of one partner dissolves the partnership. To continue its operation, a complete reorganization is needed. 3) Like the single proprietor, the partners are also subject to unlimited liability, except the limited partners. Such partners, liabilities are only confined to their share of capital contributions in the form of cash or property. c) Requirements for formation

A partnership consists of two or more persons who bind themselves to contribute money or industry to a common fund, with the intention of dividing the profits among themselves. The most common example of partnerships are professional partnerships, like in the case of law firms and accounting firms. Just like a corporation, it is registered with the Securities and Exchange Commission (SEC). A partnership, just like a corporation, is a juridical entity, which means that it has a personality distinct and separate from that of its members. A partnership may be general or limited. In a general partnership, the partners have unlimited liability for the debts and obligation of the partnership, pretty much like a sole proprietorship. In a limited partnership, one or more general partners have unlimited liability and the limited partners have liability only up to the amount of their capital contributions. Unlike a corporation, which survives even when a member/stockholder dies or gets out, a partnership is dissolved upon the death of a partner or whenever a partner bolts out. d) Applicable Laws

Unlike corporations whose governing law is a special law - the Corporation Code of the Philippines, partnerships in the Philippines are governed by and covered under Articles 1767 to 1867 of the Civil Code of the Philippines [circa 1950]. These are the provisions of law which govern all aspects of partnerships - from their creation, formation, existence, operation and management to their dissolution and liquidation, including the obligations of the partners to one another, to the public or third persons and to the government. Corporations. It is a company recognized by law as a single body with its own powers and liabilities, separate from those of the individual members. Corporations perform many of the functions of private business, governments, educational bodies, and the professions. a) Advantages of a Corporation 1) A member has unlimited liability. In case the corporation becomes bankrupt, only the capital contributions of the members are affected. The other personal properties of the stockholders of a corporation are excluded from financial claims of creditors of the corporation. 2) It has the most effective means of raising money capital for its operations, by selling stocks and bonds. Stocks are certificates of ownership while bonds are certificates of indebtedness. These are financial institutions which specialize in helping a corporation sell its securities (stocks and bonds). 3) It has permanent existence. The life-span of a corporation is 50 years, and subject to renewal for another 50 years. The death withdrawal of some officers and members does not affect the existence of the corporation. The corporation can easily get officers or managers from inside or outside the organization. Transfer of corporate ownership may take place any time through a sale of stocks, but this does not disrupt the continuity of a corporation. As a legal entity, the life of a corporation is independent from its owners and officials.

4) It is capable of getting the most efficient management considering its huge resources and large scale-corporations. b) Disadvantages of a Corporation

1) It is not easy to organize a corporation. Aside from complying with capital requirements, there is much paperwork involved in securing a charter. A charter is a written document which contains the objectives and activities of the corporation, among other things. It takes a longer time to secure the approval of the Securities and Exchange Commission regarding the organization and operation of a corporation. 2) Abuses of corporation officials are likely to emerge in situations where many stockholders do not participate actively in the affairs of their corporation. Not a few stockholders do not exercise their voting rights during important meetings. Either, they are absent or they let others cast their votes (proxy voting). Examples of abuses of corporate officials are large salaries and fat allowances for them. 3) Some corporations are engaged in questionable activities. For instance, they sell worthless securities; they pollute the environment; or sell substandard goods. In short, they do not comply with their social responsibility. 4) There is a very impersonal or formal relationship between the officers and employees of a corporation. In the case of single proprietorship and partnership, constant and close contact between owners and employees create a very personal and friendly atmosphere. Everybody knows everybody. In a giant corporation, it is not possible for the president or the board chairman to meet personally all his employees in a year. His very valuable time is devoted to planning and decision making. c) Requirements for their formation

A corporation is a juridical entity established under the Corporation Code and registered with the SEC. It must be created by or composed of at least 5 natural persons (up to a maximum of 15), technically called incorporators. Juridical persons, like other corporations or partnerships, cannot be incorporators, although they may subsequenly purchase shares and become corporate shareholders/stockholders. d) Applicable Laws

Batas Pambansa Blg. 68 The Corporation Code of the Philippines

5. Discuss how are these business organizations taxed under the Philippine taxation system