Finance and Budgeting Misconceptions

• "Finance" originates from the Latin word "finer", signifying "to end" or "to pay"
• It involves raising and providing funds and the science and art of managing money

Functions of Finance

• Allocating available funds
• Acquiring needed funds
• Using funds to achieve goals

Organizational Structure

• Illustrates employee roles and functions, varying by company size and form
• Shareholders own company shares, with each share granting one vote to elect directors
• The Board of Directors, elected by shareholders, represents the highest policy-making entity in a corporation
• The President/Chief Executive Officer oversees company operations and resources, ensuring strategy implementation

Financial Management

• Financial Accounting is external
• Financial Management is internal
• Deals with decisions aimed at maximizing shareholder wealth by maximizing company/stockholder value with strategic planning, acquisition, direction, and control to achieve goals

Focus

• Capital budgeting or investment decisions
• Asset acquisition and financial schemes

Wealth vs Profit Maximization

• Wealth Maximization manages financial resources to increase stakeholder value
• Profit Maximization manages resources to increase company profitability

Profit Maximization Conflicts with Wealth Maximization

• Profit Maximization aims to earn large amounts of money in the short term, ignoring the time value of money, risks/uncertainties, and timing of return
• Wealth Maximization maximize the market value of company stocks over the long term, valuing the time value of money, recognizing risks/uncertainties, and timing of return

Classification of Finance

Negotiation

• Direct Finance involves direct borrowing, where the lender's security equals the borrower's issuance
• Indirect Finance uses financial intermediaries in a financial intermediation

As to Users

• Public Finance deals with government revenue/expenditure patterns, managing its fund sources and uses
• Private Finance is all finance besides public

Business Finance

• Focuses on handling/managing a business organization's financial resources
• Financial management, capital markets, and financial investment comprise its three major divisions

Capital Market studies

• Different financial institutions and functions aiding private and public borrowers

Financial Investment

• Concerns business decisions on stock/bond values and prices, portfolios, markets, security analysis, and behaviors

Roles of Financial Managers

Financing Decisions

• Include funding long-term investments and managing working capital for daily operations, involving decisions on liability and equity

Investing Decisions

• Involve managing assets or deciding where the company should invest money for long-term gains

Operating Decisions

• Focus on day-to-day company operations, primarily working capital, and balancing income and expenses

Dividend Policy

• Involves policy decisions to maximize firm market value and deciding on profit distribution to shareholders

Qualities of a Financial Manager

• Knowledge of accounting and economic principles
• Understanding of operation science, statistics, and marketing research
• Gains technical finance experience and provides professional judgement
• Demonstrates communication skills
• Maintains relationships with banks/financial institutions and within the business

Competent Managers posses these attributes

• Visionary
• Decisive
• Inspiring
• Innovative
• People-Oriented
• Respected
• Seasoned/Experienced Manager

The Financial Environment

• Consists of individuals/entities needing financing, financial markets, and instruments within a country's financial system

Financial Institutions

• Provide financial services like loans, credit, fund administration, financing, depository, and safekeeping

Depository Institutions

• Accept deposits and extend loans
• Banks are authorized/regulated by BSP, accepting payments, providing loans, and facilitating fund transfers
• Savings and Loan Associations accumulate member/stockholder savings for loans/investments

Trust Companies

• Legal entities acting as fiduciary agents/trustees for managing, administrating, and transferring property

Credit Unions

• Member-controlled institutions extend credit, offer competitive rates, promote thrift, and provide financial services
• Financial Intermediaries act as go-betweens connecting investors and borrowers

Mutual Funds

• Accumulate money by selling shared stocks/bonds of publicly-listed corporations, pooling sale proceeds for channeling to borrowers

Pension Funds

• Set up by businesses to pay private-sector employee pensions post-retirement

Insurance Companies

• Function as financial intermediaries pooling insurance policy proceeds for investment in high-yield securities

Investment Institutions

• Companies engaged in buying other companies' listed securities for investment

Financial Market

• Institutions and systems facilitating transactions in all types of financial claims, bridging those with excess funds and those needing funds
• A place for selling/buying equity securities, currencies, derivatives, notes, and mortgages

Types of Financial Market

• Money Market is for short term
• Capital Market is for long term
• Primary Market is for original issues
• Secondary Market is for re-acquired/owned securities

Financial Instruments

• Contracts that give rise to the formation of financial assets of one entity and creation of financial liability
• Instruments or securities evidencing debt, bonds, equity (ownership), or stock covering financial transactions in the different markets

Most Common Financial Instruments

• Cash: financial asset, financial liability
• Check: financial asset, financial liability
• Loan: financial asset, financial liability
• Bond: financial asset, financial liability
• Stock: financial asset, equity

Bond

• Represents a contractual debt evidenced by a bond indenture certificate

Bond Maturity Types

• Term Bond matures on a single date or several bonds share that date
• Serial Bond matures on a series of dates, paying out a debt portion at each one

Bond Security Types

• Secured Bonds are secured by the issuing company, backed by real property for collateral
• Debenture Bonds are not security backed

Bond Convertibilty Types

• Convertible Bonds can become shares of stock at a later date
• Callable Bond is redeemable at the issuing company's option before stated maturity with a premium payment

Stocks

• Signify ownership of a corporation's assets and holders are evidenced by a stock certificate

Types of Stocks

• Common Stocks have least priority to earnings during distribution and do not have a fixed return
• Preference Stocks are given higher payback but have no vote

Money Market Instruments, Maturities, and Function

Cash Management Bills

• Government issued securities with less than 91 day maturity

Treasury Bills

• Government issued securities with 91, 182, and 364 day maturities

Commercial Papers (CPs)

• Marketable securities issued by financially secure firms lasting from 30 to 270 days

Banker's Acceptance

• Bank drafts support traders paying expenses using the bank's short term credit via letters of credit

Negotiable Certificates of Deposit

• Negotiable time deposits with maturity dates up to one year

Repurchase Agreements or Repos (RPs)

• Securities sale with a promise to repurchase at a specified date and price

Money Market Deposit Accounts (MMDAs)

• Savings accounts pay competitive interest with check writing privileges

Money Market Mutual Funds (MMMFs)

• Investment pools buy short-term securities from investment companies, yielding slightly higher returns than MMDAs

Securities of Assignment

• Transfer security rights to the buyer.

Certificate of Participation

• Share in security promising payment at fixed date, used for large underlying securities

Capital Market Instruments (Non-negotiable or non-marketable)

• Loans result from one-on-one lenders and borrowers
• Leases arrange property-leasing for fixed payments
• Mortgages involve using real properties as collateral for loans
• Letters of Credit bank payment guarantees for transactions
• Corporate Stocks evidence ownership in a corporation
• Corporate Bonds evidence obligation of the issuing corporation

Government Bonds and Notes

• T-notes and T-bonds securities issued by the Government
• Municipal Bonds are sercurities issued by the municipalities
• Mortgage-backed Bonds are bonds issued collateralized by mortgages

Tools of the Financial Manager

• Financial Policy Making, selects financial goals, policies, and finance organization design
• Financial Planning/Budgeting prepares plans, forecasts, and budgets to attain goals, comparing performance with budgets to correct variances
• Financial Analysis evaluates operations, financial standing, investments, and finance activities

Steps in Financial Planning

• 1. Forecast sales, costs, expenses, and capital expenditures
• 2. Prepare projected financial statements
• 3. Analyze and evaluate the projected financial statements
• 4. Review the projected plan

Budget Benefits

• Forces management planning
• Sets performance targets
• Controls organization happenings
• Coordinates business center activities
• Facilitates manager idea exchange
• Motivates staff involvement

Budget Limitations

• Estimates, not facts
• No sound management practices
• May need ammendment
• Preparation does not guarantee success
• Aspects of people's behaviour may undermine the value of the process

Budget Stages

• Planning stages forces management to consider their goals and objectives to reach the means of achieving them
• Control stage evaluates performance according to budget

Causes of Budget Deviation

• budget poorly conceived
• Conditions have changed since the budget was prepared
• Managers have good or poor performance

Definition

• Budgeting develops a formal, written statement of the management's future plans in financial terms

Developing the Budget

• Budget Committee approves budgets with senior managers
• Budget Time Period covers a month, quarter, year, or longer
• Zero-Base Budgeting justifies all budget amounts, even if prior ones were supported, but is costly

Types of Budget

• Cash Budget reflects the expected cash receipts, expected cash disbursement on payments, cash balance at the end of the period
• Capital Budget is a long-range plan incorporating major plant/machinery expenditures
• Revenue/Sales Budget estimates income from goods and services sales for a specific period
• Operating Budget estimates activities affecting profit. This budget reflects the sales and production budget
• Production Budget shows the cost of producing goods/services, includes direct overhead materials, direct labor, and factory overhead(Variable costs)
• Fixed Budget is prepared based only on one level production capacity
• Flexible Budget shows the projected costs at varying production capacity levels with budgets
• Budgeted Financial Statements (Master Budget) show the estimated results and projected financial position of a business. That is budgeted revenue, balance sheet, and statement of cash flows

Budget Formula

• Sales budget: Projected sales × Selling price =Budgeted Sales Revenue
• Production Budget Budget: total needs-Beginning inventory=units produced
• Direct Materials Budget Cost: total needed-Beginning Inventory of parts=cost of purchases
• Direct Labor Budget: Direct labor hours per unit × Labor rate per hour=Direct labor budget
• Overhead Budget: VTotal variable overhead+ Budgeted fixed overhead=Overhead Disbursements

Cash Receipts and Disbursements Budget

• Final formula: Cash receipts-Cash disbursements+Beginning cash balance=Ending cash balance

Budget Processes

• Zero-base sets initial figures for each activity to zero
• Period develops for a specific period of time
• Rolling (continuous) are continually updated by periodically incremental period and finished the period that just completed

Cash Management

• it is the goal of Forecasting, collecting, disbursing, investing, and planning for the cash a company needs to operate smoothly

The Entrepreneur

• Roles of an Entrepreneur: cash finder, planner, distributor, collector and conserver

Working Capital Management

• Successful businesses require adequate capital.
• businesses require Fixed capital and Working capital.
• Working Capital is company investment in short term assets.
• Net Working capital- difference between current and liabilites
• Working Capital Management is the management of current assets and current liabilities

Operating Cycle

• Time it takes from raw materials purchase to time goods are sold

Cash Conversion Cycle

• Time for cash inflows and ouflows
• cycle of time it takes from material to point the cash is reached

Cash budget

• cash "how much of what you doing in a period of time.
• Preparing a cash budget needs several methods of budget preparation

The Cash Budget

• Determine a minimum cash balance
• Forecast sales Heart of cash budget
• Sales Sales are transformed into cash receipts and cash disbursements

The Methods to Forecast

1. Forecast receipt Record all receipts that come in

How to deteremine the Collection Pattern

• How to deteremine the payment pattern:
• Record as the expected
• Always use methods such as murphy's law and others to have more accurate outcomes Estimate end of month result: Beginning +Reciipts-Disbursemnts=Surplus of shortage

causes of flow cash in a Business

• Difficulty with money flow by collecting accounts Receviables
• Have Sales patterns that will change throughout the period

Cash Management: to what exent you have to maintance to keep the business going

• Maintaince the appriorate level of investment

reasons for Maintaing Cash Management

• Transaction purposes:
• transaction requirments
• Precaunary Measures
• Investment opportinities
• Speculations

float managment

• Mainting that their is no delay: to try and help the payers

Accounts Payable: to try and slow payments so the receivers slow

• The Stretch the time as much as possible. Be honest with the other creditors
• Have schedule that will reduce and increase throughout the year

Effective INterst Rate-Effective method to see the rate

• Have good effiency to see how much you are spending

Inventory managment

• formulatiion and mainating that the requirments are meet

Functions

Invertory Class ABC: high, mod, low

ABC Analysis: low, mod, high

• See the movement of everything

Ecomomic Order: have quantity where you have the most amount to sell

When to reorder in a cycle: you want a good amount to sell at all times and keep moving foward

• Safety stock
• Reorder point you dont want any stock

Avoind Cash cruch will always help

• consider bartering, to exchange that all is up to par

How to get your Cash Cruches, when to invest money

• be on the look out for other issues, and employee theft

Exploring misconceptions in finance and budgeting, covering topics from credit usage and budget rigidity to the roles of financial managers and boards. Understand common misunderstandings related to operational leases and fixed budgets. Examines the importance of adapting to change in financial planning.