ST.

VINCENT COLLEGE OF CABUYAO

Brgy. Mamatid, City of Cabuyao
Laguna 4025

Introduction to Managerial Finance

Finance consist of three interrelated areas. These are:

1. Managerial Finance
2. Investment
3. Money and capital market

Managerial Finance – these are functions of managing finance related to buying assets, paying employees, paying
rents, paying creditors and paying taxes. Also called financial management.

Investments – are assets of the people or entities holding/owning them.

Money and capital markets – deal with the different financial instruments.

Financial managers need to be able to do all the three areas if they are to be effective financial managers.

Management: Definition

Management is defined as utilizing the scarce resources of the organization to maximize attainment of the
organization’s goals and objectives. Krietner (1995) defined management as the social process of working with and
through others to achieve organizational objectives in a changing environment.

8Ms of Management

1. Men – the human resources (employees and consultants); the most important of all resources;
2. Money – sometimes referred to as capital, although in accounting, money of only a part of capital;
3. Materials – an important resource, particularly for manufacturing industries, referring to the items needed
to make a product as wood for furniture and leather for shoes and bags;
4. Methods – the way things are done which in this present time has been tremendously improved with the
advancement of technology;
5. Machine – the resource produced by technology which has been replacing people in some, if not, most
organizations;
6. Market – refers to whom/where business sell their products; not only a place; people and organizations who
are in demand of a product are its market; the market for an organization’s product could be local (domestic
business) or foreign (international business);
7. Moment – or time; the resource management and other employees need to learn how to manage effectively
and efficiently to achieve objectives as needed; while time do not literally cost anything, it is so important
as deadlines have to be met; time is needed to produce a product; decisions have to be made on time or
 undesirable consequences will happen; this puts the importance of time/ moment at the forefront of
effective and efficient management; and
8. Media – the resource that enables businesses to reach their markets; are printed media (newspaper,
magazine, journal), the audio/radio, and video (televisions, movies or other films); Internet is now a very
important medium to advertise products and job opportunities in firms.

Effectiveness – is the prompt achievement of goals and objectives. It is the consistent attainment of goals.

Efficiency – is when the resources required to achieve an objective are weighed against what is accomplished. It is
attaining desired objectives with the least amount of resources.

Productivity – is the output/input ratio (output/input) within a time period taking into consideration quality.

Productivity can be improved by:

1. Increasing output with the same input;

2. Decreasing input with the same output;
3. Increasing output with decreased input.

Input consists of labor, materials, and capital. Management is part of labor; hence, improved management practices
lead to greater efficiency and effectiveness and, consequently, productivity.

The following are the four basic components of management.

1. Achievement of goals and objectives

2. Working with and through people
3. Maximization of limited resources by achieving productivity through efficiency and effectiveness

4. Coping with a changing environment

Financial Management

Financial management, otherwise, called managerial finance, is concerned with the management of funds. It is the
efficient and effective allocation, acquisition and utilization of funds. The acquisition of funds should always be at
the least cost and such funds need to be channeled (utilized) to fund projects or investments that will maximize
benefits, including profit (although not always), to the organization. The utilization of funds obtained should be able
to maximize:

1. Wealth;
2. The value of the company; and
3. The value of the stockholders.

The person in charge of the finance function is called the director of finance, VP-Finance, or finance manager. He is
responsible for the allocation of the financial resources of a company, the acquisition of additional funds needed,
and the utilization of these financial resources to attain organizational objectives. Therefore, managerial finance is
the management of funds.

Goals of the Financial Manager

A goal sets directions and keeps those concerned focused. It provides a reference to measure performance and
progress. It is the target toward which members of the organization need to move forward to. Members of the
organization need to hit their goals. Acquiring funds at the least cost and utilizing them for their most productive
use require the financial manager to set his goals. Financial goals should be aligned with the overall goals of the firm.
Among these goals are:

1. Acquisition of funds with the least cost from the right sources at the right time;
2. Effective cash management;
3. Effective working capital management;
4. Effective inventory management;
5. Effective investment decision;
6. Proper asset selection; and
7. Proper risk management.

Acquiring funds from the right sources at the right time with the least cost provides an advantages toward goal
attainment. Establishing the right connection or networking is important in this respect. Sources of funds include
banks, financial institutions, and other financial intermediaries, insurance companies, mortgage and loan associations,
and individual and corporate investors.

Effective cash management needs a detailed cash flow budget so that the sources and uses of funds can be carefully
planned. Taking advantages of cash discounts in paying trade payables, prioritizing the use of cash, and other similar
strategies help in managing cash.

Managing both current assets and current liabilities and maintaining the right combination (working capital
management) allow the company to enjoy a good working capital position that enhances the firm’s stability and
liquidity. This favors the eyes of the creditors and suppliers of the company.

Similarly, inventories need to be managed effectively. Overstocking is undesirable; it ties up capital.

Understocking, likewise, is undesirable because the firm misses sales opportunities that could have increased profits.

Determining where to invest excess funds creates additional income is making an investment decision. Too much cash
lying in the bank or checking account that do not earn interest are not advisable. Any excess cash needs to be
invested to earn income, either in the form of interest or dividends.

Proper asset selection is important. Deciding on buying a computer and the type of computer to buy will help the
company attain improvement in organizational efficiency.

Risk management is a task very important to the firm to weigh risk associated with certain business decision. In
general, the higher the risk the higher the return.

Tools of Financial Managers

1. Financial Policy-making

Included in the financial policy-making function are the task of selecting financial goals, developing financial policies,
and designing the finance organization to carry out finance function.

It is important that financial goals are made clear, especially to all managers and employees so that the organization
is guided in choosing the right course of action to attain these goals. Financial policies need to be developed to guide
members of the organization and set boundaries on the actions to take.
 2. Financial Planning and Budgeting

The set financial goals are the guidelines in the preparation of the financial plan. This plan needs to ensure attainment
of the goals set. It is the blueprint to follow to reach the goal set. All plan should be geared toward goal attainment.

Forecasting is an integral part of the planning process. Financial planning sets the course (steps) to take to reach
set goals. A company forecasts future demand for its product, and based on this forecast prepares the sales budget.

Financial forecast is a financial plan that projects income and expense, future sales, future demand for a product,
or anything that is expected to happen in the future.

Cash flow forecast projects cash inflow or sources of cash and cash outflow or uses of cash.

Investment forecast details where to place excess funds to earn maximum return.

Projected financial statements are prepared to guide managers on how to attain their objectives.

Actual performance is compared to these forecast/budgets to measure attainment of goals or objective. This
comparison of actual vs. budget yields variances that need to be analyzed to determine which needs correction, i.e.
determining future courses of action to take to correct deficiencies and enhance strengths, leading to attainment
of the set objectives/goals.

Budgeting is a sort of forecasting.

Income statement budget is the financial plan that details forecasted revenues and expenses to attain projected
profit. The projected profit should conform to the desired ROI or return on investment (rate of return).

Investment budget forecasts investment activities for the firm to determine where to place (invest) funds not
needed for the current operations (savings) to produce extra income.

Cash flow budget shows the forecasted cash inflow (source of cash) and cash outflow (use of cash) to obtain the
desired cash position for the company.

Working capital budget details the company’s working capital. Working capital is equal to the firm’s current assets
minus its current liabilities. The ratio of current assets to current liabilities or liquidity ratio reflects the liquidity
of the firm, which means the ability of the firm to pay its debts. The capital budget plans a firm’s capital expenditure
(for a fixed assets and long-term investment). The process determines which assets to acquire or to invest in and
how much to spend or invest in this assets. The process is termed capital budgeting. Capital budgeting is important
as it deals with the non-current aspects of the business operations. These capital expenditures are for long-term
purposes. Capital expenditures takes the form of activities such as land acquisition, building construction, or plant
expansion.

3. Financial Analysis

Financial analysis is the process of evaluating business performance, projects, investment options, and other finance
–related activities to determine feasibility and profitability. It includes the analysis of the financial statement of a
company to determine financial stability, liquidity and profitability.

Feasibility is practicality and applicability in an existing environment. A project is feasible if it attains its objective,
say ears a specific rate of return or higher return. Manufacturing a certain product is feasible if a market for the
product is already existing or will be created with its introduction.
Careers in Finance

1. Managerial Finance – is the broadest of the three areas and has the greatest number of career
opportunities. Examples are bankers and security analysts.
2. Investment (three main functions of investments are):
a. Sales
b. Analysis of individual securities
c. Determination of optimal mix of securities for a given investor (portfolio management)