TYPES OF FINANCIAL DECISIONS

ROLE OF THE FINANCE MANAGER

The four (4) major types of decisions that the Finance Manager of a
modern business firm will be involved in are:
1. Investments decisions

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Learning Objectives: 2. Financing decisions
1. Explain the rule of Financial Manager in 3. Operating decisions
achieving the primary goal of the business 4. Return of capital decisions
firm All these decisions aim to maximize the owners’ wealth through
2. Explain briefly the major types of decisions maximization of the firm’s wealth.
that the Finance Manager makes

Role of Financial Manager Investment decisions

One of the most important and complex
The investment decisions are those which determine how
activities of a firm is handling the financial activities of a firm. The one
scarce or limited resources in terms of funds of the business firms are
who takes care of these activities is a financial manager who also
committed to projects.
performs all the requisite monetary undertakings.
A financial manager is a qualified person who does have a lot The investing decisions should aim at investments in assets
of experiences in handling all the important financial functions of an only called as hurdle rate. This minimum return should consider
organization. He or she should maintain far sightedness in order to whether the money rose from debt or equity meets the returns on
ensure that the funds are utilized in the most efficient manner. The investments made elsewhere o similar investments.
results of his or her actions will directly affect the profitability, growth
and goodwill of the firm.
Financing decisions
Main Functions of a Financial Manager
Financing decisions assert that the mix of debt and equity
1. Raising of Funds
chosen to finance investments should maximize the value of
2. Allocation of funds
investments made. These decisions should consider the cost of
3. Profit Planning
finance available in different forms and the risks attached to it.
4. Understanding Capital Markets
 The finance manager is concerned with the ways in which the distribution policy therefore can lead to the maximization of
firm obtains and manages the financing it needs to support its shareholder’s wealth.
investments. Financing decisions call for good knowledge of costs of
raising funds, procedures in hedging risk, different financial
instruments and obligation attached to them. In fund raising decisions,
the finance manager should keep in view how and where to raise
money, determination of the debt-equity mix, impact of interest and
inflation rates on the firm and so forth.

Operating decisions
The third responsibility area of the finance manager concerns
working capital management. The term working capital refers to a firm
short-term asset (i.e., inventory, receivables, cash, and short-term
loans.) managing the firm’s working capital is a day-to-day
responsibility that ensures that the firm has sufficient resources to
continue its operations and avoids costly interruptions. This also
involves a number of activities related to the firm’s receipts and
disbursements of cash.

Returns of capital decisions

The return of capital policies and retention of profits will have
ultimate effect on the form’s wealth. The business firm should retain
its profits in the form of appropriations or reserves for financing its
future growth and expansion schemes. In the firm, however, adopts a
very conservative return of capital payments policy, the firm’s share
prices in the market could be adversely affected. An optimal dividend
  Primary Market
Primary market refers to original sale of securities by
FINANCIAL ENCIRONMENT, PART I governments and corporations. In a primary market
transaction, the corporation or the government is the seller
LEGAL FORMS OF BUSINESS ORGANIZATION,and the transaction raises money for the corporation or the
FINANCIAL MARKETS AND INSTITUTIONS
government.

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 Secondary Market
After the securities are sold to the public (institutions and
Learning Objectives:
individuals) they can be traded in the secondary market
1. Explain the legal forms of business
between investors. Secondary market is popularly known as
organization
Stock Market or Exchange.
2. Describe what financial markets are
3. Be familiar with the structure and functions of
There are two broad segments of the stock markets:
the financial markets
1. The Organized Stock Exchange. The stock exchanges will
4. Describe the nature and categories of financial institutions
have a physical location where stocks buying and selling
transactions take place in the stock exchange floor (e.g.,
Differences among Financial Markets and Financial Institutions Philippines Stock Exchange, New York Stock Exchange,
Japan Nikkei, Shanghai Components, NASDAQ)
Financial Markets 2. The Over-the-Counter (OTC) Exchange. Where shares,
Financial markets are the mechanisms used to trade the bonds, and money market instruments are traded using a
financial instruments. system of computer screens and telephones.
There are many different financial markets in a develop
economy each dealing with a different type of security serving a
Stock Exchange
different set of customers, or operating in a different part of the
country. The following markets are most of interest to the financial
manager:

Financial Market functions as both primary and secondary markets for

debt and equity securities.
Stock exchange is an organized secondary market where securities
like shares, debentures of public companies, government securities
and bonds issued by municipalities, public corporations, utility
undertakings, port trusts and such other local authorities are
purchased and sold. In order to bring liquidity, the stocks are traded
systematically in a stock exchange.
securities and other financial assets are traded among
investors after they have been issued by corporations.
5. Private markets versus public markets. Private markets are
markets in which transactions are worked out directly
between two parties. Public markets are markets which
standardized contracts are traded on organized exchanges.

Structure and Functions of the Financial Markets

Types of Markets
1. Physical asset markets versus financial asset materials.
Physical asset markets (also called tangible or real asset
markets) are for products such as wheat, autos, real estate,
computers and machinery. Financial asset markets, on the
other hand, deal with stocks, bonds, notes and mortgages.
2. Spot markets versus future markets. Spot markets are
financial markets in which assets are both and sold for “on-
the-spot” delivery. Future markets are markets in which
participants agree to buy or sell an asset at some future date.
3. Money markets versus capital markets. Money markets are
financial markets in which funds are borrowed or loaned for
short periods (less than one year). Capital markets are
financial markets for stocks and for intermediate or long-term
debt (one year or longer).
4. Primary markets versus secondary markets. Primary markets
are the market in which corporations raise capital by issuing
new securities. Secondary markets are the markets in which
Financial Institutions
3. Credit Cooperatives
Financial institutions are the ones that facilitate the transfer of
Credit cooperatives are not-for-profit financial institutions that
resources among those investors who are involved in buying and
exist to serve its members. Credit cooperatives provide products and
selling of financial instruments.
services to people who share something in common, such as where
they work or live, or even their nationality.
Various Financial Institutions and their Services
It is important to understand the difference between the types 4. Savings and Loan associations
of institutions and their services to Savings and loan associations are financial institutions that
Identify which financial institution is the most appropriate in serving a are mutually held and provide no more than 20% of total lending to
specific need. The major categories of financial institutions include businesses.
central banks, commercial banks, credit cooperatives, savings and
loans associations, investment companies, brokerage firms, 5. Investment Banks and Companies
9insurance companies and mortgage companies. Investment banks help individuals, businesses and
governments by raising capital through the issuance of securities
1. Central Bank instead of accepting deposits.
A central bank is the financial institution responsible for the
oversight and management of all other banks. In the Philippines, the
6. Brokerage Firms
central bank is the Bangko Sentral Ng Piliplinas (BSP) with the
Brokerage firm is the one that provides services to individuals
primary objective of maintaining the price stability conductive to a
and institutions who are willing to buy and sell available investment
balanced and sustainable economic growth. BSP’s goals are also to
securities.
promote and preserve the stability and the convertibility of the national
currency which is the Philippine Peso.
7. Insurance Companies
Insurance companies are financial institutions that help
2. Commercial Banks
individuals to transfer risk of loss.
Commercial banks work directly with businesses. The
majority of large banks offer deposit accounts, lending and financial
8. Mortgage Companies
advice to any business in different industries.
Mortgage companies are financial institutions that provide
funds through loans subject to the availability of property used as
collaterals.
Basic Types of financial Instruments
Investing the hard earned money requires understanding of
the basic types of investments. Investment options are generally
available in the investment marketplace like the following financial
instruments:
1. Savings Accounts
Savings accounts are a safe haven to store emergency funds.
It provides easy access to extra money and is generally insured with
Philippine Deposit Insurance Company for maximum amount of P500,
000.00. The main drawback of such accounts is that interest rates
tend to be lower compared with that of other financial instruments.
2. Time Deposits
Time deposits are deposits that cannot be withdrawn over a
fixed term or period. Since, they will not be withdrawn for certain
duration, time deposits earn higher interest rates compared to savings
and checking accounts, depending on the amount placed and term.
3. Money Market Funds
Money market funds are relatively conservative and low-risk
instruments invested in highly marketable and “near-cash”
instruments like short term government securities, and other highly
marketable fixed-income instruments.
4. Stocks
The stock market gives the opportunity to buy shares of
companies under normal circumstances. Companies list or sell
portions of the shares of stock to raise capital instead of borrowing
from financial institutions or using its cash flow.
5. Bonds
A bond is a debt security wherein someone is borrowing
money and there’s another one lending it. As a security, it means the
borrower is under a legal obligation to pay the lender. A bond is a
certificate of debt issued by the government or a company with a
promise to pay a specified sum of money at a future date and carries
interest at a fixed rate.
In the Philippines, there are two basic types of bonds:
government bonds and corporate bonds.
 Government bonds are also called retail treasury bonds,
treasury notes, T-bills, and many others. When investing in
government bonds, it means that the investors are lending
money to the government.
 Corporate bonds are sometimes called long-term commercial
papers. Investing in corporate bonds, it means that the
investors are lending money to a corporation.
6. Mutual Funds
A mutual fund is generally a pool of money from a group of
investors entrusted to a financial institution for investment purposes.
The fund is usually professionally managed by a mutual fund manager
for investments in securities, like, shares, of stock, bonds, and money
market instruments.
7. Annuities
An annuity is an insurance product that pays out income on a
predetermined amount during the lifetime or upon its maturity. It is
being used as part of a retirement strategy. Annuities are popular
choice for investors who want to receive a steady income stream
upon retirement.