Financial Management

And Banking

What this module all about?

Hello Good day! I hope you’re fine! And find this module interesting to
you. This module really helps you to develop your knowledge about financial
management and banking. This module provides a different accounting term
so when you grow old and plan to go on banking work, you have a merely
knowledge about this.

What you are expected to learn?

Students who successfully complete this course will be able to:

1. Understand the common techniques used to improve cash flows in

working capital accounts.
2. Know the different accounting terminologies that will able you to used
the term if necessary in a correct way.
3. Learned what are the electronic cash management techniques?

Starting Out: Begin Funding for Your Financial Security

How to learn from this module?

I’d like you to imagine that you are the manager of the famous
bank in the world.

Do you have a great desire to make your business continuously

provide services in the society?

Don’t afraid to go in accounting world because most of the

billionaire in the world belongs to this field.

Be interested to this module and open your mind to learned and

study this module very well. I believe that you can do it ..
Good luck!
 Pre-Test:
Encircle the correct answers.

This is the effective acquisition and use of money.

a. Operation Management
b. Accounting Management
c. Advertising Management
d. Financial Management

This includes stocks, bonds, and money-market funds.

a. Securities
b. Cash
c. Savings Account
d. None of the above

Which is not a responsibility of a financial manager?

a. Improve cash flows
b. Developing financial plan
c. Budget plan
d. None of the above

In order to manage finances properly, a company must have a(n):

a. Capital Investment
b. Operating budget
c. Financial plan
d. Financial manager

Which is a working capital account?

a. Cash
b. Executive benefits
c. Capital budgeting
d. None of the above

Which is not an electronically based system that eases banking

chores?
a. ATM
b. Online banking
c. EFT
d. ENC

These small plastic cards allow users to buy products immediately

through a short-term loan.
a. Smart Card
b. Debit Card
c. Bank Card
d. Credit Card
This bank account pays interest and requires advance notice before
customers can withdraw money.
a. Checking account
b. Passbook account
c. Time deposit
d. Demand Deposit

A company creates this to provide retirement benefits for

employees.
a. Line of Credit
b. Credit Union
c. Pension fund
d. Insurance

This includes bills and coins that makes up a country’s cash.

a. Money
b. Checks
c. Currency
d. Line of Credit

This is a government-appointed group that oversees the U.S.

central banking system.
a. SEC
b. FDIC
c. MIS
d. Federal Reserve system

This money is available immediately upon request.

a. Demand deposit
b. Time deposit
c. Currency
d. CD

This includes bills and coins that make up a country’s cash money.
a. Cash
b. Money
c. Currency
d. Moola

This is anything generally accepted as a means of paying for goods

and services.
a. Cash
b. Money
c. Currency
d. Peso
This is another name for the Federal Reserve System.
a. Fed
b. SEC
c. FDIC
 d. Homeland society
The Role of Financial Management

Key Terms

Accounts payable is a file or account sub-ledger that records amounts that a

person or company owes to suppliers, but has not paid yet (a form of debt),
sometimes referred as trade payables. When an invoice is received, it is added to
the file, and then removed when it is paid. Thus, the A/P is a form of credit that
suppliers offer to their customers by allowing them to pay for a product or service
after it has already been received.

Accounts Receivables (A/R) is one of a series of accounting transactions dealing

with the billing of a customer for goods and services they have ordered.

A budget (from old French bougette, purse) is generally a list of all planned
expenses and revenues. It is a plan for saving and spending.[1] A budget is an
important concept in microeconomics, which uses a budget line to illustrate the
trade-offs between two or more goods. In other terms, a budget is an organizational
plan stated in monetary terms.

In finance, capital structure refers to the way a corporation finances its assets
through some combination of equity, debt, or hybrid securities. A firm's capital
structure is then the composition or 'structure' of its liabilities. For example, a firm
that sells $20 billion in equity and $80 billion in debt is said to be 20% equity-
financed and 80% debt-financed. The firm's ratio of debt to total financing, 80% in
this example, is referred to as the firm's leverage. In reality, capital structure may
be highly complex and include dozens of sources. Gearing Ratio is the proportion of
the capital employed of the firm which come from outside of the business finance,
e.g. by taking a short term loan etc.

Cash refers to money in the physical form of currency, such as banknotes and coins.

In bookkeeping and finance, "cash" refers to current assets comprising currency or currency
equivalents that can be accessed immediately or near-immediately (as in the case of money
market accounts). Cash is seen either as a reserve for payments, in case of a structural or
incidental negative cash flow or as a way to avoid a downturn on financial markets.

The discount rate is an interest rate a central bank charges depository institutions that borrow
reserves from it.

Finance- Finance is the science of funds management. The general areas

of finance are business finance, personal finance, and public finance. Finance
includes saving money and often includes lending money. The field of
finance deals with the concepts of time, money, risk and how they are
interrelated. It also deals with how money is spent and budgeted.

The financial control factors fall into the categories of:

• Significant investment
• Unreimbursed expenses
• Opportunity for profit or loss
• Services available to the market
• Method of payment

Inventory means goods and materials, or those goods and materials themselves,
held available in stock by a business. This word is also used for a list of the contents
of a household and for a list for testamentary purposes of the possessions of
someone who has died. In accounting, inventory is considered an asset.

Investment is the commitment of money or capital to purchase financial

instruments or other assets to gain profitable returns in the form of interest, income
{dividend}, or appreciation of the value of the instrument.[1] It is related to saving
or deferring consumption. Investment is involved in many areas of the economy,
such as business management and finance no matter for households, firms, or
governments. An investment involves the choice by an individual or an organization
such as a pension fund, after some analysis or thought, to place or lend money in a
vehicle, instrument or asset, such as property, commodity, stock, bond, financial
derivatives (e.g. futures or options), or the foreign asset denominated in foreign
currency, that has certain level of risk and provides the possibility of generating
returns over a period of time

Marketable securities are very liquid as they tend to have maturities of less than
one year. Furthermore, the rate at which these securities can be bought or sold has
little effect on their prices.
 The major responsibilities of financial managers are to develop a financial
plan, improve cash flow, develop budgets, set financial controls, and budget
capital. Financial management is the effective acquisition and use of money.
In order to manage finances properly, a company must have a financial plan.
This is a forecast of financial requirements and the future financing sources.
Financial management focuses on cash flows. Companies with relatively high
accounting profits generally have relatively high cash flows. Financial
managers improve a company's cash flows by monitoring the working capital
accounts:

• Cash
• Inventory
• Accounts receivable
• Accounts payable

Common techniques used to improve cash flows in working capital accounts

are:

• Shrinking accounts receivable collection periods

• Dispatching bills on a timely basis
• Paying bills no earlier than necessary
• Controlling level of inventory
• Investing excess cash to earn interest

Aggressive financial managers also use these electronic cash management

techniques:

• Move cash between accounts on a daily basis

• Invest excess cash on hand in short-term investments called
marketable securities

Marketable securities include stocks, bonds, money-market funds, and other

investments that can convert into cash quickly. They are interest-bearing or
dividend-paying investments. Marketable securities are usually contingency
funds. Most managers invest these funds in relatively risk-free investments
like government securities or well-grounded companies.

Financial managers are also accountable for developing a budget. This is a

planning and control tool reflecting expected revenues, operating expenses,
and cash receipts and outlays. It is the financial blueprint. Accountants
provide most data for the budgets because they understand the company's
operating costs. Once the financial manager develops the budget, the
manager compares actual results to projections. The variances give the
manager an idea of what corrective action, or financial control, to take. The
master operating budget:

• Sets a standard for expenditures

• Provides guidelines for controlling costs
• Offers an integrated and detailed plan for the future

Capital budgeting is the process for evaluating proposed investments in

select projects that provide the best long-term financial return. Financial
managers do this to develop capital budgets and plan for the firm's capital
investments. Before the financial manger makes investments, the manager
must decide:

• Whether to make capital investments

• Which capital investments to make
• How to finance those investments made

The cost of capital is the average interest rate it must pay on financing. It is
similar to the interest rate you must pay when purchasing a house. It is not
included in the initial price of the house, but is an additional expense that
should be considered. There are three main factors that affect the interest
rate a particular company must pay:

• Risk associated with the company - how likely is it that the company
will repay?
• Most common interest rate currently available - rates fluctuate with
economic environment
• What type of financing is chosen

The prime interest rate (prime) is the lowest interest rate banks offer on
short-term loans to preferred borrowers. The discount rate is the interest
rate the Federal Reserve Banks charge on loans to commercial banks and
other depository institutions. Companies must take the fluctuations of these
rates into account when making financial decisions. Internal financing may
not have an associated interest rate, but it does have an opportunity cost.
This means that your cost is affected by what you cannot otherwise do with
that money - investing, for example. The company's capital structure is the
mix of debt to equity.
 Financial System

Key terms:

Money is any object that is generally accepted as payment for goods

and services and repayment of debts in a given country or socio-economic
context.[1][2] The main functions of money are distinguished as: a medium of
exchange; a unit of account; a store of value; and, occasionally, a standard
of deferred payment.

In economics, the term currency can refer to a particular currency, for

example, the American Dollar, or to the coins and banknotes of a particular
currency, which comprise the physical aspects of a nation's money supply.
The other part of a nation's money supply consists of money deposited in
banks (sometimes called deposit money), ownership of which can be
transferred by means of cheques or other forms of money transfer such as
credit and debit cards. Deposit money and currency are money in the sense
that both are acceptable as a means of exchange, but money need not
necessarily be currency.

A demand deposit or bank money refers to the funds held in demand

deposit accounts in commercial banks.[1] These account balances are usually
considered money and form the greater part of the money supply of a
country.

There are two types of financial institution: deposit institutions and

nondeposit institutions. Deposit institutions accept deposits from customers
or members, and they offer checking and saving accounts, loans, and other
banking services. Nondeposit institutions offer specific financial services but
do not accept deposits. In the past each category was strictly defined, but
the Depository Institutions Deregulation and Monetary Control Act of 1980
deregulated banking and made it possible for all financial institutions to offer
a wider range of services. This blurred the differentiation between
institutions.

A time deposit (also known as a term deposit, particularly in Canada,

Australia and New Zealand; a bond in the United Kingdom; fixed deposit in
India and in some other countries) is a money deposit at a banking
institution that cannot be withdrawn for a certain "term" or period of time.
When the term is over it can be withdrawn or it can be held for another term.
Generally speaking, the longer the term the better the yield on the money. A
certificate of deposit is a time-deposit product.

A credit card is a small plastic card issued to users as a system of

payment. It allows its holder to buy goods and services based on the holder's
promise to pay for these goods and services.[1] The issuer of the card creates
a revolving account and grants a line of credit to the consumer (or the user)
from which the user can borrow money for payment to a merchant or as a
cash advance to the user.

A debit card (also known as a bank card or check card) is a plastic card
that provides an alternative payment method to cash when making
purchases. Functionally, it can be called an electronic check, as the funds are
withdrawn directly from either the bank account, or from the remaining
balance on the card. In some cases, the cards are designed exclusively for
use on the Internet, and so there is no physical card.

A smart card, chip card, or integrated circuit card (ICC), is any pocket-
sized card with embedded integrated circuits. There are two broad
categories of ICCs. Memory cards contain only non-volatile memory storage
components, and perhaps dedicated security logic. Microprocessor cards
contain volatile memory and microprocessor components. The card is made
of plastic, generally polyvinyl chloride, but sometimes acrylonitrile butadiene
styrene or polycarbonate . Smart cards may also provide strong security
authentication for single sign-on within large organizations.

The money market is a component of the financial markets for assets

involved in short-term borrowing and lending with original maturities of one
year or shorter time frames. Trading in the money markets involves Treasury
bills, commercial paper, bankers' acceptances, certificates of deposit, federal
funds, and short-lived mortgage- and asset-backed securities.[1] It provides
liquidity funding for the global financial system.
 A commercial bank is a type of financial intermediary and a type of
bank. Commercial banking is also known as business banking. It is a bank
that provides checking accounts, savings accounts, and money market
accounts and that accepts time deposits.[1] After the implementation of the
Glass-Steagall Act, the U.S. Congress required that banks engage only in
banking activities, whereas investment banks were limited to capital market
activities. As the two no longer have to be under separate ownership under
U.S. law, some use the term "commercial bank" to refer to a bank or a
division of a bank primarily dealing with deposits and loans from
corporations or large businesses. In some other jurisdictions, the strict
separation of investment and commercial banking never applied.
Commercial banking may also be seen as distinct from retail banking, which
involves the provision of financial services direct to consumers. Many banks
offer both commercial and retail banking services.

Thift- A savings and loan association in the United States

A credit union is a cooperative financial institution that is owned and

controlled by its members and operated for the purpose of promoting thrift,
providing credit at reasonable rates, and providing other financial services to
its members.[1][2][3] Many credit unions exist to further community
development[4] or sustainable international development on a local level.

Commercial finance companies have in recent years become a favorite

option for entrepreneurs seeking small business loans. These institutions
generally charge higher interest rates than banks and credit unions, but they
also are more likely to approve a loan request. Most loans obtained through
finance companies are secured by a specific asset as collateral, and that
asset can be seized if the entrepreneur defaults on the loan.

Insurance is a form of risk management primarily used to hedge

against the risk of a contingent, uncertain loss. Insurance is defined as the
equitable transfer of the risk of a loss, from one entity to another, in
exchange for payment. An insurer is a company selling the insurance; an
insured or policyholder is the person or entity buying the insurance policy.
The insurance rate is a factor used to determine the amount to be charged
for a certain amount of insurance coverage, called the premium. Risk
management, the practice of appraising and controlling risk, has evolved as
a discrete field of study and practice.

A line of credit is any credit source extended to a government,

business or individual by a bank or other financial institution. A line of credit
may take several forms, such as overdraft protection, demand loan, export
packing credit, term loan, discounting, purchase of commercial bills, etc. It is
effectively a bank account that can readily be tapped at the borrower's
discretion. Interest is paid only on money actually withdrawn. Lines of credit
can be secured by collateral or unsecured.

An automated teller machine (ATM), also known as a Cash Machine

and by several other names (see below), is a computerised
telecommunications device that provides the clients of a financial institution
with access to financial transactions in a public space without the need for a
cashier, human clerk or bank teller. On most modern ATMs, the customer is
identified by inserting a plastic ATM card with a magnetic stripe or a plastic
smart card with a chip, that contains a unique card number and some
security information such as an expiration date or CVVC (CVV).
Authentication is provided by the customer entering a personal identification
number (PIN).

Financial institutions offer lines of credit to make money available for

use any time after the institution grants the loan. This working capital has a
usual term of one year. Banks can cancel line of credit at any time.

Checking accounts are demand deposit - money that customers use

anytime, whereas time deposits are bank accounts that pay interest and
require advance notice before customers can withdraw the money. Savings
accounts are time deposit accounts. Money in savings accounts can be
withdrawn at any time, but may be subject to fees. The most common type
of savings account is the statement savings account, also called the
passbook savings account. This type of account earns nominal interest, but
offers the most flexibility for users. A money-market savings account earns
more interest, but has restrictions such as a limited number of withdrawals
per month. A certificate of deposit (CD) earns even more interest than a
money-market account, but again it has more restrictions. Money in a CD
remains for a set period. Early withdrawal presents a penalty fee.

Credit cards are small plastic pieces that allow users to buy products
immediately with a short-term loan. For that convenience, credit card
companies charge a high interest and annual fees for any balance remaining
in the account after the monthly books close. Another alternative to currency
is a debit card. It looks like a credit card, but functions like a check. It
immediately debits the checking account for the purchase. A smart card is
the newest addition to card convenience. In addition to tracking checking
account balances, a debit card can contain information like the customer's
address, frequent flyer account, or health insurance records. It stores this
information on a chip embedded in the card.
Financial
Description
institution
 Deposit institution
 Profit-oriented
 Operates under state or national
Commercial
charter
bank
 Makes profit by charging customers
fees and interest rates higher than they
pay for the money
Thrift  Deposit institution
 Profit oriented
 Savings and loans - use most deposits
 to make mortgage home loans
 Mutual savings banks - owned by
depositors
 Deposit institution
 Non-profit member-owned
organization
Credit union
 Take deposits only from members
 Pay favorable interest rates because
they are tax-exempt
 Non deposit institution
 Provides insurance coverage for life,
Insurance property, and other potential losses
company  Invests payments in real estate,
construction projects, and other
investments
 Non deposit institution
 Set up by companies to provide
Pension retirement benefits for employees
fund  Money contributed by the company
and its employees is put into securities
and other investments
 Non deposit institution
 Lends money to consumers and
Finance
businesses for home improvements,
company
expansion, purchases, and other
purposes
 Non deposit institution
 Allows investors to buy and sell
Brokerage stocks, bonds, and other investments
firm  Many offer checking accounts, high-
paying savings accounts, and loans to
buy securities

Three electronically based systems ease banking chores: ATMs, EFTS,

and online banking. Deposit institutions offer automatic teller machines
(ATMs) for companies to perform basic transactions anytime. Withdraws and
deposits are available anytime. Electronic funds transfer system (EFTS) is
another form of electronic banking. This computerized system completes
financial transactions. More than one third of all workers use EFTS if their
paychecks are direct deposited. The third electronically based system is
online banking. Withdrawals, transfers, bill paying, and balance inquiries are
common online tasks. This is the most convenient for customers, and the
most cost effective for institutions.
Nearly 9,000 banks failed during the Great Depression from 1929 to 1934.
The Banking Act of 1933 established the Federal Deposit Insurance Company
(FDIC) that insures money on deposit, up to $100,000, in U.S. banks. The
FDIC collects insurance premiums from member banks and deposits the
premiums into the U.S. Treasury's Savings Association Insurance Fund for
thrifts, or Bank Insurance Fund for banks. The National Credit Union
Association protests deposits in credit unions. In addition to insurance, the
federal government has agencies that supervise and regulate banks, and
comply with regulations.

• State banking commissions regulate state-chartered banks

• Federal Office of the Comptroller of the Currency regulates nationally-
chartered banks
• Federal office of the thrift supervision regulates thrifts
• Federal Reserve System regulates banking system in general

The number of U.S. financial institutions has declined since the banking
industry deregulation in 1980 - from 14,146 to 8,358. Bank combinations,
competitive pressure, and financial problems caused this decline. The 1999
Financial Services Modernization Act repealed the Glass-Steagall Act
(Banking Act of 1933) and portions of the 1956 Bank Holding Act that kept
banks out of securities and insurance. The repeal of these created both
mega-banks offering full service, and community banks concentrating
services for a small area. The Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 reverse legislation dating back to 1927 that restricted
consumers from making deposits, cashing checks, and handling banking
transactions to one branch of their bank.

Regulators refer to the separation of securities research functions and bank

lending functions within the same company as a Chinese wall. This invisible
wall prevents bankers and securities personnel from influencing one another.
Community banks are smaller banks that concentrate on serving the needs
of local consumers and businesses. According to a recent Federal Reserve
study, small banks are now earning more on assets than their huge
competitors.
 The Functions of the Federal
Reserve System

The U.S. Federal Reserve Board (Fed) is a government-appointed group that

oversees the U.S. central banking system. It is a network of 12 district banks
that controls the nation's banking system. Members are appointed by the
president to 14-year terms, staggered at two year intervals. All national
banks are required to be members, but state-chartered banks are optional.

The Fed regulates the nation's money supply to help stabilize the economy
and control inflation by managing the amount of money available. This
monitory policy will increase or decrease interest rates. The discount rate is
the interest rate that the Fed charges on loans to commercial banks. The
prime interest rate (prime) is the lowest interest rate banks offer on short-
term loans to preferred borrowers. There are four key ways the Fed changes
the money supply. The first is to change the reserve requirement. If the Fed
increases the reserve requirement, the money supply will decrease. The
second way the Fed can change the money supply is to change the discount
rate. If the Fed lowers the discount rate, the money supply is increased. The
third way is to conduct open market operations, or sell government bonds. If
the Fed buys open-market operations, then the money supply is increased.
The last way the Fed can change the money requirement is to establish
selective credit controls. This changes the margin requirements. If there are
fewer controls, then the money supply is increased.

Currency includes bills and coins that make up a country's cash money, while
money is anything generally accepted as a means of paying for goods and
services. Money exists in three forms: currency, demand deposit, and time
deposit. To be an effective medium of exchange, money must have these
characteristics:

• Divisible
• Portable
• Durable
• Difficult to counterfeit
• Stable value

The Fed keeps a close eye on the money supply. To do this, they look at
various combinations of currency. Money is measured on a scale of M1-M3.

• M1 - narrow measure that consists of currency, demand deposits, and

NOW accounts.
 • M2 - broader measure that includes all M1 plus savings deposits,
money market funds, and time deposits under $100,000, and other
restricted deposits
• M3 - broadest measure of the money supply includes M2 plus time
deposits of $1000+, and other restricted deposits

Activity:
Picture-Picture
Group the class into 4. The class will picture out the situation prepared
by the teacher

1. Picture out the situation inside the bank.

2. Picture out that the businessman transact in other businessman.
3. Picture out the common responsibility of a financial manager.
4. Choose one financial institution then picture out the common situation
based on its description above.
 Post Test
Encircle the correct answer.

Which is not a working capital account?

a. None of the above
b. Accounts payable
c. Accounts payable
d. Accounts receivable

Which is a common technique used to improve a working capital

account?
a. Dispatching bills when necessary
b. Paying bills early
c. Leaving excess cash in checking accounts
d. Expanding accounts receivable collection periods

Which statement is never true?

a. Marketing securities are low risk
b. Marketable securities are dividend-paying investments
c. Marketable securities are interest bearing investments
d. None of the above

This offers an integrated and detailed plan for the future.

a. Financial statements
b. Financial plan
c. Master budget
d. Budge

This is corrective action.

a. Limit order
b. Budgeting
c. Financial control
d. Margin trading

This is an example of a demand-deposit account.

a. A checking account
b. A passbook savings account
c. A statement savings account
d. A CD

Which is an example of a deposit institution?

a. Finance company
b. Brokerage firm
c. Commercial bank
d. Pension fund
This institution invests payments in real estate, construction
projects, and other investments.
a. Thrift
b. Insurance company
c. Credit union
d. Commercial bank

Nearly 9,000 banks failed during this time.

a. The Great Depression
b. World War II
c. World War I
d. The 1980s recession

The Glass-Steagall Act established this.

a. NCUA
b. FDIC
c. FTC
d. SEC

This measure of the money supply includes currency, demand

deposits, and NOW accounts.
a. M1
b. Smart cards
c. M2
d. Fed supply

What does the monitory policy do?

a. Determine which banks are certified
b. Control the stock market
c. Regulate supply and demand
d. Increase or decrease interest rates

This is activity of the Federal reserve to buy and sell government

bonds on the open market.
a. Reserve activity
b. Mutual funds
c. Open market operations
d. M3

If the Fed buys open market operations, what happens?

a. The money supply is increased
b. The interest rates rise
c. The cash reserves are decreased
d. The discount rates rise
This is the Federal Reserve’s power to set credit terms on various
types of loans.
a. Selective credit controls
b. Credit monitor
c. Congressional appointment
d. Span of authority

Answer Keys:
Pre test
1. d
2. d
3. d
4. c
5. c
6. a
7. d
8. a
9. c
10. c
11. d
12. a
13. c
14. b
15. a

Post test
1. a
2. b
3. a
4. b
5. c
6. c
7. c
8. b
9. a
10. a
11. a
12. a
13. c
14. b
15. b

Bibliography:

www.yahoo.com
www.google.com

Webster dictionary.