Introduction to Managerial Finance/Financial Management

Finance

Finance and financial decisions are part of our daily lives. Individuals need finance; families need finance; society needs
finance; profit and non-profit organizations need finance. Obtaining and using credit, making investment, managing funds,
obtaining capital, and even spending for one’s daily needs like food, clothing, and shelter are all activities that involve finance
and financial decisions.

Finance consists of three interrelated areas. These are:

1. Managerial Finance;
2. Investment; and
3. Money and capital markets.

Management

Management is defined as utilizing the scarce resources of the organization to maximize attainment of the
organization’s goals and objectives. Apparently, it involves the utilization of limited resources on one end and the maximization
of goals and objectives on the other end. Balancing these two ends is the task of management.

The resources or 8Ms of management are:

1. Men – the human resources.

2. Money – referred to as capital.
3. Materials – raw materials for production/manufacturing process.
4. Methods – the process employed during production. 2 Techniques of production (Labor Intensive
& Capital Intensive)
5. Machine – resource produced by technology.
6. Market – refers to whom/where businesses sell their products.
7. Moment – refers to time.
8. Media – the resources that enables business to reach their markets.

Management can be alternatively defined as the process of designing and maintaining an environment in which individuals,
working together in groups, efficiently and effectively accomplish selected aims and targeted goals. It applies to all kinds of
organizations, to managers at all levels in the organization, and has only one objective – to create a surplus, i.e., to make profit
(for a profit-making concern) or to attain the organization’s goals and objectives. For a profit company, attainment of profit is the
ultimate objective. With such aim in mind, managers are concerned with efficiency and effectiveness to produce productivity. In
essence, productivity is equal to efficiency plus effectiveness.

Effectiveness is the prompt achievement of goals and objectives. It is the consistent attainment of goals. Given the limited
resources that every organization has, effectiveness is not enough. The organization has to achieve its objectives with least
amount of resources. Efficiency, therefore, is when the resources required to achieve an objective are weighed against what is
accomplish. It is attaining desired objectives with the least amount of resources.it is getting things done with least cost.
Management and effectiveness are both concerned with the achievement of goals and objectives. 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; and
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 least cost and
such funds need to be channeled (utilized) to fund projects of investments that will maximize benefits, including profit (although
not always), to the organization. The utilization of funds should be able to maximize:

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

Financial management is concerned with the maintenance and creation of economic value or wealth. At the same time,
management has social responsibility to all parties interested and affected by organizational decisions. Sometimes, this social
responsibility will take priority over profit. Such is the task of the financial manager.

The financial manager decides as to where to get financial resources like cash, inventories, equipment, and other assets
needed by the firm in its operation.

The person in charge of the finance function is called director of finance, Vice President for 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.

Functions of a Financial Manager:

- Financing – to determine the appropriate capital structure of the company and to raise funds from debt and equity.
- Investing – investments may either be short term or long term.

- Operating – determine how to finance working capital accounts such as accounts receivables and inventories (short
term vs. long term)
 - Dividend Policies – determine when the company should declare cash dividends.

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 finance manager to set his
goals. Financial goals should be aligned with the overall goals of a firm. Among these goals are:

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

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

3. Effective working capital management – current assets and current liabilities are used in current operations. Managing both
current assets and current liabilities and maintaining 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 company in the eyes of
creditors and suppliers.

4. Effective inventory management – 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.
Purchasing the right inventory at the right time from the right sources gives the company an edge over its competitors.

5. Effective investment decisions – determining where to invest excess funds to create additional income is making an investment
decision. Too much cash lying in the bank or checking accounts 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.

6. Proper asset selection – proper assets selection is important. Selecting the right machinery and equipment needed by a
company in its operation is important to attain its production goal that creates sales.

7. Proper risk management – risk management is a task so important to the firm to weigh risks associated with certain business
decisions. Buying stocks or investing in something needs risks analysis and assessment.