FINANCE REVIEWER allocating the funds received or acquired

• Assists organizations in making critical financial

Financial Management decisions
• Helps in improving the profitability of organizations
Finance- the science and art of managing money • Increases the overall value of firms or organizations
-divided into 3 areas; • Provides economic stability
 Financial Institutions • Encourages employees to save money, which helps
 Investments them in personal financial planning
 Business Finance
Money - anything that is generally accepted in payment
Key Financial Concepts
for goods and services or the retirement of debt
• Balance Sheet - shows what a firm owns, owes, and its
- may also be used to transfer purchasing power to the
net worth
future
• Sources of finance
•Debt
Financial Management
• Equity
-otherwise called managerial finance or corporate
• Financial leverage - use of borrowed funds
finance
• Valuation -Determination of what an asset is currently
-deals with the decisions that are supposed to maximize
worth
the value of shareholder’s wealth
• Goal of management: Maximization of shareholder
- refers to the strategic planning, organizing, directing
value
and controlling of financial activities and processes of an
organization
Roles of Financial Management
Financial decisions and controls
Shareholder Wealth Maximization
-play a crucial role in making financial decisions and
- measured based on the current market price of the exercising control over finances in the organization
corporation’s stocks - make use of techniques like ratio analysis, financial
- the market price changes across different periods forecasting, profit and loss analysis, etc
hence, the value of your investment changes in different
points on time based on the market value at that time Financial Planning
- finance managers are responsible for the planning of
financial activities and resources in the organization
Factors that Influence Market Price
- they use available data to understand the needs and
Controllable by Management priorities of the organization
 Profitability
 Good liquidity and reasonable leverage position Capital Management
 Dividends - responsibility of financial management to estimate the
 Competent management – visionary, decisive, capital requirements of the organization from time to
time
people-oriented, inspiring, innovative, respected
- determines the capital structure and composition and
and experienced/seasoned manager
makes the choice of source of funding for the capital
 Corporate plans that improve the business needs
prospects
Uncontrollable External Factors Allocation and Utilization of Financial Resources
 Macroeconomic conditions - ensures that all financial resources of the organizations
 Political stability are used and invested effectively and efficiently so
that the organization is profitable, sustainable and viable
 Prospects of the industry
in the long-run
 General market sentiment
 Flow of foreign funds invested in PH stock market Cash Flow Management
-tracks account payable and receivable to ensure there is
always sufficient cash flow available to meet operational
Importance of Financial Management expenses

• Helps organizations in financial planning

Disposal of Surplus
• Assists organizations in the planning and acquisition of - decide if dividends should be distributed and how
funds much as well as the proportion of profits that must be
• Helps organizations in effectively utilizing and retained and ploughed back into the business
 company identify new marketing opportunities, e.g.,
Financial Reporting variants of the existing products/services already offered
- maintains all necessary reports related to the in the market.
finance of the organization and uses this as the database Promoting good relationships with customers and
for forecasting and planning financial activities distributors.

Risk Management VP for Production

- prepares the organization to forecast risks, put in place Ensuring production meets customer demands.
mitigation plans as well as to meet unforeseen risks and Identifying production technology/process that
emergencies effectively minimizes production cost and make the company cost
competitive.
Corporate Organization Structure Producing a production plan that maximizes the
utilization of the company’s production facilities.
Identifying adequate and cheap raw material suppliers.

VP for Administration
Coordinating the functions of administration, finance,
and marketing departments.
Assisting other departments in hiring employees.
Helping in payroll preparation, payment of vendors,
and collection of receivables.
Determining the location and the maximum amount of
Shareholders
office space needed by the company. Identifying means,
- owners/investors with 1 share= 1 voting right processes, or systems that will minimize the operating
- elect the Board of Directors (BOD) costs of the company.

Board of Directors Functions of a Financial Manager

- highest policy making body in a corporation 1. Financing
-determine the appropriate capital structure of the
- primary responsibility is to ensure that the corporation
company
is operating to serve the best interest of the stockholders -include making decisions on how to fund long term
investments and working capital which
Responsibilities of the board of directors: deals with the day-to-day operations of the company
Setting policies on investments, capital structure and • Capital structure - how much of your total assets is
dividend policies financed by debt and how much is financed by equity
Approving company’s strategies, goals and budgets.
2. Investing
Appointing and removing members of the top
•Short term investment - needed when the company is
management including the president in an excess cash position
Determining top management’s compensation. •Long term investments - should be supported by a
Approving the information and other disclosures capital budgeting analysis which is among the
reported in the financial statements responsibilities of a finance manager.
• Capital budgeting analysis - tool to assess whether the
President (CEO) investment will be profitable in the long run
Overseeing- the operations of a company and
ensuring that the strategies as approved by the 3. Operating
board are implemented as planned. -Deal with the daily operations of the company.
- Determines how to finance working capital accounts
Performing - all areas of management: planning, such as accounts receivable and inventories.
organizing, staffing, directing and controlling.
4. Dividend Policies
Representing - the company in professional, - determine when the company should declare cash
social, and civic activities. dividends.
• Cash dividends - paid by corporations to existing
VP for Marketing shareholders based on their shareholdings in the
Formulating marketing strategies and plans. company as a return of their investment
Directing and coordinating company sales.
Performing market and competitor analysis. Primary Activities of a Financial Manager
Analyzing and evaluating the effectiveness and cost of
marketing methods applied.  Financial Planning and Analysis
Conducting or directing research that will allow the  Managing the Firm’s Asset
  Managing the Firm’s Liabilities and Owner’s - returns come from either dividends or stock price
Equity appreciation
 Acquisition of funds with the least cost from the •Preferred Stock
right sources at the right time - has priority over a common stock in terms of claims
over the assets of a company.
Goal of a Financial Manager - has no voting rights
 Effective cash management • Common Stock
 Effective working capital management - real owners of the company
 Effective inventory management - during a profitable period for which a company may
 Effective investment decision decide to declare higher dividends, preferred stock will
 Proper asset collection receive a fixed dividend rate while common stockholders
 Proper risk management receive all the excess.

Debt Instruments
The Financial System •Treasury Bonds and Treasure Bills
-issud by the PH government
- have usually low interest rates and have very low risk of
default
•Corporate Bonds
- issued by publicly listed companies
- higher interests, not risk free
• Commercial Paper
- an unsecured, short-term debt issued bu corpos
- used to finance short-term liabilities
- maturities range from 1-270 days, average 30
• Private Placements – the sale of a new security directly • Certificate of Deposits
to an inverstor -savings product that earns interest on a lump sum of
• Financial Market – organzied forums in which the money for a fixed period of time
suppliers and userts of various types of funds can make -the money must remain untouched for
transactions directly the entirety of their term or you risk
• Financial Institutions- intermediaries that channel the paying a penalty
savings of individuals, businesses, and government into
loans or investments Financial Markets
• Public Offering – the sale of either bonds or stocks to - a marketplace, where creation and trading of financial
the general public assets, such as shares, debentures, bonds, derivatives,
• Financial Instruments – a real or virtual document currencies, etc. take place.
representing a legal agreement involving some sort of • Public offering – sale of new securities to the public
monetary value • Initial public offering – the first offering of stock

Financial Instruments • Primary market- users of funds will go to this to issue

-When a financial instrument issued, it gives rise to a new securities (either debt or equity) and raise money
financial asset on one hand and a financial liability or through a public offering or a private place
equity instrument on the other • Secondary Markets –suppliers of funds may decide to
-These can be debt securities like corporate bonds or sell the securities that have previously been purchased,
equity like shares of stock. the sale of previously owned securities takes place here
• Money Markets - venue wherein securities with short-
Financial Asset term maturities are sold
- An equity instrument of another entity • Capital Markets – where securities with longer-term
- A contractual right to exchange instruments maturities are sold
with another entity under conditions that are
potentially favorable. Financial Institutions
1) Thrift Banks
Financial Liability - savings and mortgage banks, private development
- any liability that is a contractual banks, stock savings and loan associations, and
obligation microfinance thrift banks.
- To exchange financial instruments with - engaged in accumulating savings of depositors and
another entity under conditions that are investing them, providing short-term working capital
potentially unfavorable. and medium- and long-term financing to businesses

Equity Instruments 2) Commercial Banks

- any contract that evidences a residual interest in the -individuals deposit funds at commercial banks, which
assets of an entity after deducting all liabilities use the deposited funds to provide commercial loans to
firms and personal loans to individuals, and purchase activity.
debt securities issued by firms or government agencies. • Accounting Process (or cycle) – Procedures used for
analyzing, recording, classifying, and summarizing the
3) Insurance Companies
information to be presented in accounting reports.
- insurance companies pool payments and invest the
• Special Journals – An accounting record used to list a
proceeds in various securities until the funds are needed
to pay off claims by policyholders particular type of frequently recurring transaction.
• General Journal – An accounting record used to record
4) Mutual Funds all business activities for which a special journal is not
-owned by investment companies which enable small maintained.
investors to enjoy the benefits of investing in a •Account – A record used to classify and summarize the
diversified portfolio of securities purchased on their
effects of transactions.
behalf by professional investment managers
•Ledger – collection of accounts maintained by business.
5) Pension Funds •Posting – The process of summarizing transactions by
- receive payments from employees and invest the transferring amounts from the journals to the ledger
proceeds on their behalf accounts.
•General Ledger – collection of all the accounts used by a
6) Other Financial Institutions
business that could appear on the financial statements.
- Government Service Insurance System (GSIS) and
•Subsidiary Ledgers – The grouping of supporting
Social Security System (SSS), unit investment trust
fund (UITF), investment banks, and credit unions accounts that in total equal the balance of a control
• Universal Banks account in the general ledger.
• Private equity funds
• Investment Companies Accounting
• Leasing Companies - the systematic and comprehensive recording of
financial transactions pertaining to a business
Role of Financial Institutions - the basic accounting equation is:
ASSETS = LIABILITIES + OWNER’S EQUITY

The Accounting Cycle

Step 1: Analyze Business Transactions.
Step 2: Record this in the journal.
Step 3: Post the transactions on a ledger.
Step 4: Prepare an unadjusted trial balance.
Step 5: Make adjustments. Journalize adjusting entries.
Step 6: Prepare an Adjusted Trial Balance.
Step 7: Prepare the financial statements.
Step 8: Make the closing entries.

Financial Statements Step 9: Make a Post-Closing Trial Balance.

• Accounting System – Procedures and methods used,

Financial Ratios
including data processing equipment, to collect and
report accounting data. • Liquidity
•Debit – An entry on the left side of an account. measures the capacity of the firm to meet its current
•Credit – An entry on the right side of an account obligations as they come due
• Solvency
•Transactions – Exchanges of goods or services
indicates whether a company's cash flow is sufficient to
between/among two or more entities or some other meet its long-term liabilities and thus is a measure of its
event having an economic impact on a business financial health.
enterprise. • Leverage
• Double-Entry Accounting – A system of recording measure the firm’s use of debt financing
transactions in a way that • Efficiency
also known as Activity Ratio, used to measure how well
maintains the equality of the accounting equation.
the company is utilizing its assets and resources
• Journal Entry – The recording of a transaction in which
• Profitability
debits equal credits. It usually measures of performance that indicate what the firm is
includes a date and an explanation of the transaction. earning on its sales, its assets, or its equity.
• Journals – Records in which transactions are first • Market Value
entered, providing a chronological record of business used to evaluate the share price of a company’s stock
 LIST OF FORMULAS

LIQUIDITY RATIOS

LEVERAGE RATIOS

or

or

PROFITABILITY RATIOS
SOLVENCY RATIOS

(Gross profit = net sales – COGS)

MARKET VALUE RATIOS

(Earnings Per Share)

(Operating profit = Sales – COGS- Depreciation and
Amortization + Operating Income)

(Price to Earnings)

(Market value per share = market/book ratio x book value per share)

Financial Analysis
Basic Earning Power = - to guide different users of financial statements in their
decisions

Vertical Analysis
- also known as common size analysis
- can be used to benchmark a company's performance
ACTIVITY RATIOS against industry averages
- technique for evaluating data of financial statements
that express each item in terms of a percent of a base
amount
or  Balance Sheet – based on % of total assets
 Income Statement – based on % of net sales

Horizontal Analysis
- also known as trend analysis
- percentage changed of accounts from one period to
another is made

Amount of Change = Current year amount – Base year amount

or Percent of Change = Amount of change / Base year amount
Financial Planning Tools and Concepts

Long-term financial plan

- set of goals that lays out the overall direction of the
company
- an integrated strategy that takes into account various
departments such as sales, production, marketing, and
operations for the purpose of guiding these
departments towards strategic goals
- considers proposed outlays for fixed assets, research  Sales forecast - an estimate of future sales and is
and development activities, marketing and product used as basis for creating sales budget.
development actions, capital structure, and major
sources of financing Points to take in creating a Sales Budget
- could include termination of existing projects, product 1. Choose a time period
lines, or lines of business; repayment or retirement of - Quarterly if the demand changes depending on the
outstanding debts; and any planned acquisitions season
- 2-10 years - Monthly if the demand changes monthly
2. Identify the product/service categories you have.
Short-term financial plan Know your prices.
- specifies short-term financial actions and the - note upcoming price changes due to changes in
anticipated impact of those actions. demand
- includes setting the sales forecast and other forms of 3. Examine previous sales data on the same month or
operating and financial data. This would then translate quarter and compare it with industry benchmarks
into operating budgets, the cash budget, and financial 4. Know more about consumers’ spending patterns for
statements products in your industry
- 1 year or less 5. Consider sales team’s capacity
6. Examine data on the conversion of prospective
Financial Planning Process customers toactual customers
1. Understanding your financial status
2. Identify which of your goals can be met and what Production Budget
could be your goal-related tasks
3. Track which you can adjust to address/try to imporove -provides information regarding the number of units
financial data (can condusct cash flow analysis, that should be produced over a given accounting period
assessement, etc.) based on expected sales and targeted level of ending
4. Creating a budget, investment strategies, and risk inventories.
management
5. Prioritizing actions, allocating resources, considering
professional advice Direct Materials Budget
6. establishing the evaluation system for monitoring and -determine the number of direct materials that are
controlling needed to
fulfill the requirements of the production budget.
 a plan is useless if not quantified
 Quantified plan- represented through budgets Direct Labor Budget
and projected or pro-forma financial statements -determine how many hours of labor are required to
 Budgets and pro-forma financial statements - produce each type of product listed in the production
useful for controlling and serve as the bases for budget
monitoring actual performance. -helps businesses plan how many employees they will
 Failing to meet the plans is not equivalent to need
failure if the reasons for not meeting such plans
can be justified or beyond the control of mgt Overhead Budget
-contains all other manufacturing costs
BUDGETING - costs that are assigned to the overhead budget include
Sales Budget supervisor salaries, payroll taxes, logistics, rent, and
- a financial document that allows a business owner to utilities
estimate the revenue they expect their company to make  Fixed cost
in a specified period  Variable cost
- the most important account in the financial statement  COGS= overhead, direct materials, direct labor
since most of the expenses are correlated with sales
The following factors should be considered in Selling and Administrative Budget
forecasting sales: -estimate of all operating costs other than production
-direct and indirect expenses of a business Turnovers needed for cash conversion cycle
that cannot be assigned to a specific product or service
the business manufactures or performs
-management salaries, business licenses, accounting,
legal, and human resources expenses, rent, advertising,
marketing, and more.  As the operating cycle and cash conversion cycle
increase, more funds are tied up in the working
Cash Budget capital accounts.
- estimates cash outflows and matches them with cash  If the CCC is negative, it indicates that the
inflows from sales and other receipts. company has excess cash to invest.
- a control tool to monitor the way the company handles  A CCC of -10 indicates that the company has
cash and whether the entity has sufficient cash to excess cash to invest for 10 days.
operate over a specific time.
-Set a minimum required cash balance maintained in Managing Cash Conversion Cycle
case contingencies arise. - reduce operating cycle days to ensure that it will be
- If the net cash flow is above the minimum cash shorter than the payable days.
balance, the company is in excess cash and may consider - the quickness of completing the operating cycle is
putting it in short term investments measured by the operating cycle days.
-if it is below, the company should make a short term
borrowing during that period. The following are some of the strategies in efficiently
managing the cash conversion cycle:
Projected Financial Statements 1. Turn over inventory as quickly as possible without
- tool of the company to set an overall goal of what the stockouts that result in lost sales.
company’s performance and position will be for and as 2. Efficiently manage the accounts receivable consistent
of the end of the year. with thecompany’s credit policies. You need to also
consider accelerating the
Projected Income Statement collection of receivables through:
A. Shorter credit terms.
- an estimate of the profits and losses in a future period
B. Offering special discounts to customers who pay their
of time
accounts within a specified period.
Projected Statement of Financial Position C. Speeding up the mailing time of payments from customers
- an estimate of how much will be owned and will be to the firm.
owed D. Minimizing the float or reducing the time during which
Projected Statement of Cash Flows payments received by the firm remain uncollected funds.
- an estimate of how much to gain and spend in a 3. Manage mail, processing, and clearing time to reduce
certain time period them when collecting from customers and to increase
them when paying suppliers.
Working Capital Management 4. Pay accounts payable as slowly as possible without
-the company’s investment in current damaging the firm’s credit rating.
assets such as cash, accounts receivable, and inventories.
- difference between current assets and current liabilities. Working Capital
 operating cycle - the sum of days of inventory 1. Permanent Working Capital - the minimum level of
and days of receivables current assets required by a firm to carry-on its business
operations given its production capacity or relevant sales
Cash Conversion Cycle range.
-also called the net operating cycle, is computed as the 2. Temporary working capital - the excess of working
operating cycle less days of payable. capital over the permanent working capital given its
- length of time it takes for the initial cash outflows for production capacity or relevant sales range.
goods and services to be realized
Working Capital Policies
1. Maturity-matching working capital financing policy -
-CCC is the days between the cash outlay and when the permanent working capital requirements should be
cash is received. financed by long-term sources while temporary working
capital requirements should be financed by short-term
Days of Payables Outstanding sources of financing.
- average number of days for the company to pay its -each asset should be financed with a financial
creditors instrument having almost the same maturity
2. Aggressive Working Capital Financing Policy
- some of the permanent working capital requirements
are financed by short-term sources of financing.
- long- term sources of funds have higher cost as
compared to short-term sources of financing. By
financing some of the permanent working capital 5C’s used in credit evaluation
requirements with short-term sources of financing,
financing cost is minimized which in turn, improves net - Character –willingness of borrower to repay the loan
income. - Capacity – a customer’s ability to generate cash flows
- Trade off: - Collateral – security pledged for payment of the loan
- debt has to be paid soon and the company may not - Capital – a customer’s financial resources
yet have enough cash by the time the debt matures; - Condition – current economic or business conditions
liquidity risk increases
-Proper management of accounts receivable entails
3. Conservative Working Capital Financing Policy having a good billing and collection system.
- even some of the temporary working capital
requirements are financed by long-term sources of Managing Inventory
financing. -Proper inventory management involves the
- minimizes liquidity risk but it also reduces the determination of reasonable levels of inventories
company’s considering the size and nature of business.
profitability because long-term sources of financing - Maintaining too much inventories has costs such as
entail higher cost. carrying or
holding costs, possible obsolescence or spoilage.
Managing Cash - On the other hand, too low inventory can result to
Primary Reasons stockout, and
a. Transactional -the cash used for paying expenses such eventually lost sales
as salaries, utilities, rent and taxes, among others.
b. Compensating balance - the cash held to meet bank 3 types of inventory:
requirements such as the minimum cash balance you Raw materials – these are purchased materials not yet
maintain for checking accounts and if you have existing put into production.
loans, banks may also require a minimum amount of Work in process – these are goods and labor put into
deposit with them. production but not yet finished.
Finished goods – these are goods put into production
Secondary Reasons and finished. These are ready to be sold.
a. Precautionary - the cash maintained for emergencies
such as the additional cash you keep during political and One way to control inventory is to classify inventory into
economic uncertainties a classification system called ABC Analysis.
b. Speculative- the cash held by the company to take ★ Inventories classified as “A” are high valued items
advantage of opportunities (e.g. buying stocks during which should be safeguarded the most
major ★ “B” items, on the other hand, are average-cost items
corrections) that should be safeguarded more than C items but not
as much as A items
 Cash collections should be supported by official ★ While “C” items have low cost and is the least
receipts which are summarized in a daily safeguarded
collection report
 A good internal control over cash is by XYZ analysis is a framework to classify products based on
depositing all collections intact their variability of demand and their
 If all collections need to be deposited, then tendency to face stock-outs.
payments must be made through a check ★ Class X with Coefficient of Variation less than 0.5.
voucher system. There must also be two ★ Class Y with a Coefficient of Variation between 0.5
signatories in the check to provide a check and and 1.
balance. ★ Class Z with Coefficient of Variation greater than 1.
 Have a petty cash fund of PHP10,000 or
PHP20,000 supported by a petty cash voucher

Managing Accounts Receivable

- The collectability of accounts receivables depends

largely on the quality of customers. The quality of
customers depends on the standards or credit policies
set up and used by an organization.
- Credit policies are an integral part of the credit
evaluation