Chapter 1

An Overview of Financial
Management

Guir, Livebert P.
In the year 2008, the stability of leading U.S and
European investment banks, insurance companies and
mortgage banks to started to wane and weaken. Among
the reasons pinpointed by experts were the
misapplication of risk controls for bad debts,
collateralization of debt insurance and fraud.
 The effects are in term of European band
Failures, declines in various stocks indices, and
massive declines in market value of equities and
commodities . The de-leveraging of financial institution
lead to further liquidity problem and further decrease
the international trade.
 The goals of financial management could be
synonymous to the goals of the enterprise. One may
consider that the utmost aspiration of the economy is to
yield the highest possible profit for the firm, then
company would be evaluating each decision based on
the amount of income that would be flowing into
company.
 Let us consider the first drawback. Changes in
profit may also means changes in risk. An enterprise
with an earnings per share (EPS) of say P150/share
may be less acceptable if its EPS would be
P175/share. But deeper consideration of this would
lead you to think that intrinsic risk or the risk that goes
with those two alternatives increase.
 Now the second drawback of the maximizing
profit approach is that it does not fully take the
account the timing when the profit /gain would be
received. Consider the matrix below which shows
two alternative as to which one would your firm
consider investing into:
 Earning Per Share

Year 2010 Year 2011 Total

Nico
Corporation’s P300 P450 P750
Ordinary
Shares
Riel
Corporation’s
450 300 750
Ordinary
Shares
 If the company’s framework of mind maximizing
profit, one may say that can invest in either Nico or
Riel corporation since the yield is the same. However ,
the Riel Corporation is definitely a better choice. Why?
Because, Riel corporation ‘s benefits occur earlier.
 Maximization of the of the of the firm (Valuation
Approach)

 Maximization of the Shareholder Wealth

 Social Responsibility and Ethical Behavior

What does this mean? This mean that the main
goal of financial management is maximize not profit
alone, but the maximization of overall value of firm,
thus is called the Valuation approach. Therefore in
considering investment proposal or decision, the
financial manager should not only consider profit,
he/she must also consider among other things the:
 Risk attached to the investment proposal or the
company ‘s operation.

 Time design as to when and how profit will flow into

the company.

 The quality and reliability of the profits reported by

the firm.
 Financial management involves the prudent
allotment and spreading of company funds to
current assets and non-current assets. And effective
and efficient financial management entail the
creation of a well-balanced blend of financing
activities and to formulate the suitable dividend
policy that is coherent with the firm’s business
objective.
 Some of these general functions are carried out
on a daily basis like cash management , inventory
management , credit management, and fund
receipt, and disbursement management. Other
activities not done on a daily basis but rather
irregularly would include company stock and bond
issuance, capital budgeting and creating dividend
policies.
 Forecasting and planning.

 Making Crucial Investment and Financing

Decisions.

 Coordinating and Controlling.

 Trading in Financial markets.

 Risk Management.
 Sole Proprietorship- This considered as the
oldest, most common, and simplest form of
business organization. This a form of business
entity, where there is only one owner, hence the
word sole. This means that the owner is liable to
pay with his personal properties, liabilities not
covered by their assets.
 Partnership

This exist when two or more person combine

their resources to conduct business, earn profit, and
distribute among themselves the results of their
operation. The contract evidencing its existence is
called the articles of partnership.
 Corporation
This is a legal business entity created by the
government. This does not follow the same entity
concept. It is considered as separate and distinct from
its owners and executives. The contract evidencing
the existence of a corporation is called articles of
incorporation. The articles of incorporation present
the rights and limitations entity.
 There are a number of ways to encourage
managers to perform for the interest of shareholders.
Some of them are:

 Provide Performance-based Incentive Plans.

 Straight Involvement by Shareholders
(Institutional).
 Takeovers.