UNIT 1: OVERVIEW OF FINANCE

Presented by: Jackie Pearl Medrano-Astudillo BSBA - ETEEAP

FINANCE
An art and science of managing money
Concerned with the process, institutions, markets, and instruments involved in the transfer of money among individuals, business and governments

Finance includes saving and lending money

Importance of Finance
Informed economic decision
Provide Basic Knowledge of Investment Provide basic understanding of financial management Maximize the profit by minimizing the cost

Relationship of finance to
other business:
Accounting Management Operation Marketing
concerned with financial record keeping, the production of periodic reports, statements and analyses, and the dissemination of information to managers and, to some extent, to investors and the world outside the business. It is also much involved with the quality, relevance, and timeliness of its information output.
Ex. Balance Sheet, to check and balance financial recordings

Relationship of finance to
other business:
Accounting Management Operation Marketing
a vital role in the aspect of making business decisions. It allows managers to plan and look and strategize in terms of using an organizations resources.
Ex. Where to invest company recourses, investment in training of employees, incentive schemes and retirement schemes etc

Relationship of finance to
other business:
Accounting Management Operation Marketing
Production departments main duty is to produce the goods. For producing goods, it needs raw material, labor and other expenses
Ex. Paying all expenses (Raw Material etc.), production department needs money and fund which will be fulfilled by finance department.

Relationship of finance to
other business:
Accounting Management Operation Marketing
Marketing departments main duty is to sell maximum goods and satisfy the consumers. Its products input cost will decrease if all products are sold by marketers of company.
Ex. developing the product, promotion activities and distribution activities of marketing department need some money for paying salesmen, advertising budget and other promotional expenses. For this marketing department makes his marketing budget and it is cleared by finance department.

Legal Forms of Business

Sole Proprietorship Partnership
Limited partnership / LIMITED LIABILITY COMPANY

Corporation Cooperative

Sole Proprietorship
is a business owned and managed by one individual. sole proprietorship is not a legal entity. refers to an individual who owns the business and is personally responsible for its debts. Owners may freely commingle business and personal assets. Owners cannot raise capital by selling and interest in the business Owner reports all income and expenses on the owners personal tax return. Business terminates on the owners death or withdrawal. Owner can sell the business, but can no longer remain the proprietor.

Sole Proprietorship
Advantages
Easy and inexpensive to start legally Greater access to capital no business tax informal management and structure Greater access to skills, time, money, and so on. no written agreement required (but advisable)

Disadvantages
Unlimited personal liability Owner's limitations (skills, time, etc) limit business Harder to access capital Continuity of business - reestablish all contracts and relationships is sold or transferred; terminates with death of owner Personal assets subject to lien

Partnership
GENERAL PARTNERSHIPS A business organization formed when 2 or more individuals or entities form a business for profit. All partners share in the management and in the profits and decide on matters of ordinary business operations by majority of the partners or by percentage ownership of each partner. Each partner is liable for all business debts and bears responsibility for the actions of the other partners. Each partner reports partnership income on their individual tax return. A partnership dissolves on the death or withdrawal of a partner unless the partnership agreement provides otherwise. Partnerships are relatively easy and inexpensive to form and require few ongoing formalities.

Partnership

Advantages
Easy and inexpensive to start and stop legally Generally less expensive to start No profit sharing No business tax Owner is in charge and makes decisions sell or transfer business at your discretion Speed in decision making

Disadvantages
Unlimited liability of general partners Joint and several liability Harder to keep profit in the business for growth (Capital Accumulation) More difficult to raise capital Changing the partnership agreement may dissolve the partnership or be difficult Interest is not freely transferable Personal and authority conflicts Decision making is slow, shared, and partners are bound by the law of agency difficult or expensive to dissolve

Limited partnership / LIMITED LIABILITY COMPANY

A particular form of partnership that gives investors special tax advantages and protection from liability. The limited partnership is like a corporation in many respects. It allows people to invest in the business, but their liability is limited to the amount of their investment or as agreed in the limited partnership agreement. The partnership must include at least one general partner who has general liability for the debts of the limited partnership. The limited partner usually exercises no control over the business of the partnership, but is merely an investor. The general partner usually manages the business.

Limited partnership / LIMITED LIABILITY COMPANY

Advantages
General partner maintains control of business Limited partner can invest with limit on liability Easy way to secure financial resources The business is not directly taxed

Disadvantages
More complex organization Limited partner has no control of business General partner has general liability for the business

Corporation
a legal entity that has most of the rights and duties of a natural person but with perpetual life and limited liability. Shareholders of a corporation appoint a board of directors and the board of directors appoints the officers for the corporation, who have the authority to manage the dayto-day operations of the corporation. Share holders are generally liable for the amount of their investment in corporate stock. pays its own taxes and shareholders pay tax on their dividends. However, in a subchapter S corporation, shareholders report their share of corporate profit or loss in their individual tax return. Can survive with the death of owners, partners and shareholders. The best entity for eventual public companies. Corporations can raise capital through the sale of securities and can transfer ownership through the transfer of securities. Corporations require annual meetings and require owners and directors to observe certain formalities Corporations are more expensive to form than partnerships and sole proprietorships. Corporations require periodic filings with the state and also require annual fees.

Corporation
Advantages
No personal liability for stockholders (owners) Can attract capital easier and in large amounts Has a "perpetual" life Easy to transfer ownership/transfer may not affect operations Attract skilled people Easier to raise capital

Disadvantages
Cost and time to incorporate/paperwork, legalities to operate Double taxation (corporate profits, dividends/salaries) Potential loss of control by founder

Cooperative
a business organization owned and operated by a group of individuals for their mutual benefit. Cooperatives are defined as autonomous associations of persons united voluntarily to meet their common economic, social, and cultural needs and aspirations through jointly owned and democratically controlled enterprises. A cooperative may also be defined as a business owned and controlled equally by the people who use its services or by the people who work there. Cooperative enterprises are the focus of study in the field cooperative economics.

Cooperative

Advantages
Elimination of middlemen. Saving in management expenses Minimum stock Economy in distribution and production expenditure Integration

Disadvantages
Lack of capital External financial resources of the society are limited It cannot borrow money from non-members It cannot issue any kind of debentures. It share cannot be transferred to non-members. lack of prompt decision

Major Areas of Finance

Financial Institution Investment

Financial Management
Personal Finance Entrepreneurial Finance

Financial Institution
An establishment that focuses on dealing with financial transactions, such as investments, loans and deposits. Composed of organizations such as banks, trust companies, insurance companies and investment dealers. Everything from depositing money to taking out loans and exchange currencies must be done through financial institutions.

Financial Institutions
2 Types
An entity that acts as the middleman between two parties in a financial transaction. Financial intermediaries offer a number of benefits to the average consumer including safety, liquidity and economies of scale. Ex. investment banks, insurance companies, broker-dealers, mutual funds and pension funds.

1.
2. 3. 4.

Financial Intermediaries
Financial Markets
Securities Markets (Money market, Capital Market) Mortgaged Market Derivative Market Currency Exchange Market

Financial Institutions
2 Types
any marketplace where buyers and sellers participate in the trade of assets such as equities, bonds, currencies and derivatives. Financial markets are typically defined by having transparent pricing, basic regulations on trading, costs and fees and market forces determining the prices of securities that trade. There are 4 types of financial markets

1.
2. 3. 4.

Financial Intermediaries
Financial Markets
Securities Markets (Money market, Capital Market) Mortgaged Market Derivative Market Currency Exchange Market

Financial Institutions
2 Types
a place or places where securities are bought and sold, the facilities and people engaged in such transactions, the demand for and availability of securities to be traded, and the willingness of buyers and sellers to reach agreement on sales. Securities markets include overthe-counter markets, the New York Stock Exchange, the Chicago Board of Trade, the American Stock Exchange and Philippines Stock Exchange

Financial Intermediaries Financial Markets

1. Securities Markets (Money market, Capital Market)

2. 3. 4. Mortgaged Market Derivative Market Currency Exchange Market

Financial Institutions
2 Types
Primary Mortgage Market
The market where borrowers and mortgage originators come together to negotiate terms and effectuate mortgage transaction. Mortgage brokers, mortgage bankers, credit unions and banks are all part of the primary mortgage market.

1.

Financial Intermediaries
Financial Markets
Securities Markets (Money market, Capital Market)

Secondary Mortgage Market

The market where mortgage loans and servicing rights are bought and sold between mortgage originators, mortgage aggregators and investors. The secondary mortgage market is extremely large and liquid.

2. Mortgaged Market
3. 4. Derivative Market Currency Exchange Market

Financial Institutions
2 Types
The financial market for derivatives, financial instruments like futures contract or options, which are derived from other forms of assets

1. 2.

Financial Intermediaries Financial Markets

Securities Markets (Moneymarket, Capital Market) Mortgaged Market

The market can be divided into two, that for exchange-traded derivatives and that for over the counter derivatives. The legal nature of these products is very different as well as the way they are traded, though many market participants are active in both.

3. Derivative Market
4. Currency Exchange Market

Financial Institutions
2 Types
A business that allows customers to exchange one currency for another currency
A currency exchange may be a stand-alone business or may be part of the services offered by a bank or other financial institution.

1. 2.

Financial Intermediaries Financial Markets

Securities Markets (Money market, Capital Market) Mortgaged Market

3.

Derivative Market

4. Currency Exchange Market

The currency exchange profits from its services either through adjusting the exchange rate or taking a commission.

Investment
A monetary asset purchased with the idea that the asset will provide income in the future or appreciate and be sold at a higher price.

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.

Personal Finance
All financial decisions and activities of an individual, this could include budgeting, insurance, savings, investing, debt servicing, mortgages and more. Financial planning generally involves analyzing your current financial position and predicting short-term and long-term needs.

Entrepreneurial Finance
a discipline that studies ways to mobilize resources to take advantage of an opportunity identified by an entrepreneur. It is closely related to the fields of venture capital, private equity and innovation. Topics include pro forma financial statements, business valuation models, cash flow analysis, and raising capital from private investors, venture capitalists and banks