Business Finance 3rd Quarter Reviewer PDF

BUSINESS FINANCE Mid Term (2nd Semester) | A.Y. 2024-2025 POINTERS SHAREHOLDER They elect the Board of Directors (BOD). Each share is equal to 1. Intro...

BUSINESS FINANCE Mid Term (2nd Semester) | A.Y. 2024-2025 POINTERS SHAREHOLDER They elect the Board of Directors (BOD). Each share is equal to 1. Introduction to financial management one voting right. a. Organizational structure They buy shares to earn a profit in a form of dividend. b. Sources of funds BOARD OF DIRECTOR is the highest position in a corporation. 2. Financial institution, financial instrument, financial Some of their responsibilities are providing direction of the market company, setting the policies on investments, approving the 3. Financial planning process (steps) company’s strategies, goals, and budgets, appointing, and 4. Cash Conversion & Operating Cycle removing members of the top management. 5. Loan Process & Loan Requrement of Bank & Non-Bank PRESIDENT supervises the company’s operations and ensures that the strategies are well executed and planned. W1: INTRODUCTION TO BUSINESS FINANCE He/She also performs all areas of management such as planning, organizing, staffing, directing, controlling, and evaluating. VP FOR SALES AND MARKETING TOPIC OVERVIEW They are formulating business strategies and plans, directing and coordinating sales, making environmental scanning or A. FINANCE research that will allow the company to increase sales, or B. OWNERS AND MANAGERS identifying new market opportunities, analyzing and assessing C. DECISIONS the effectiveness and efficiency of the plans, methods and strategies applied and establishing a good relationship with D. ROLES OF FINANCIAL MANAGER customers and distributors. VP FOR ADMINISTRATION is responsible for the coordination of the different departments, A FINANCE providing assistance to the other department by determining the staff needed and assisting other departments in hiring employees and in payroll preparation. FINANCE VP FOR PRODUCTION It is a process that includes raising money or resources and makes sure that the production meets the demand, finds ways allocating them effectively and efficiently to achieve the firm’s to minimize cost in producing a competitive quality product, goals or objectives. maximizes the utilization of the production facilities and solves It includes financial management, the study of investment, and production issues. the study of institutions and markets. VP FOR FINANCE makes decisions including planning, acquiring and utilization of FINANCIAL MANAGEMENT funds. It is a decision-making process that includes planning, The functions of the Finance Manager are investing decisions, analysis, utilization, and acquisition of funds in order to financing decisions, operating decisions, and declaring achieve the desired goals of the business. dividends. It includes planning, organizing, controlling, and directing to acquire and utilize the funds or resources effectively and efficiently. Every activity of the finance manager should be C DECISIONS according to plan. It should be organized, controlled, monitored, and evaluated FINANCIAL MANAGEMENT GOAL INVESTING DECISION deals with managing the It deals with decisions that are supposed to maximize the value assets of the firms. of shareholders’ wealth. FINANCING DECISION includes making decisions on SOURCE OF FINANCE how to finance the long-term investments (expansions or An INTERNAL SOURCE of An EXTERNAL SOURCE of acquisition of new land) and finance does not increase finance is provided by people the debts of the working capital which deals business-like profit, or institutions outside the with the day-to-day savings, and sale of business that creates debt and operations of the company unwanted assets. requires payment like loans. (payment of rent and utilities, purchase of raw materials). B OWNERS AND MANAGERS OPERATING DECISION deals with working capital management. Working capital refers to short-term assets and short-term liabilities DECLARATION OF DIVIDENDS refers to the determination of how much dividends are to be distributed to the shareholders MiDTERM 2ND SEMESTER | BF D ROLES OF FINANCIAL MANAGER G FINANCIAL MARKET ANALYSIS AND PLANNING FINANCIAL MARKET Strategic planning are the meeting places of suppliers and users of various types of AQUISITION OF FUNDS funds that can make transactions directly. Internal Funds KEY TERMS IN FINANCIAL MARKET UTILIZATION OF FUNDS Investment in marketing and expansion PRIMARY MARKET Transact business without an intermediary W2: INTRODUCTION TO FINANCIAL MANAGEMENT PART 2 SECONDARY MARKET Previously issued securities TOPIC OVERVIEW are bought and sold E. FINANCIAL INSTITUTION MONEY MARKET are venues wherein F. FINANCIAL INSTRUMENT securities with short-term G. FINANCIAL MARKET maturities are borrowed or H. DIFFERENT TYPES OF FINANCIAL loaned. INSTITUTION a. Bank CAPITAL MARKET are financial markets for b. Non-bank stocks for a long-term period E FINANCIAL INSTITUTION H DIFFERENT TYPES OF FINANCIAL INSTITUTION FINANCIAL INSTITUTION It;s role is to act as a financial intermediary. A financial intermediary serve as a link between the depositor BANK who has the money and the lender who needs money. THRIFT BANKS deposit-taking financial KEY INDIVIDUAL ROLE institutions that extend credit to the consumer DEPOSITOR BORROWER market that is in the countryside or rural areas. Is the one who has the money is the one who needs funds and puts in a savings account and borrows it from a bank. COMMERCIAL BANK are mainly deposit-taking with a bank that pools this together with the savings financial institutions that from other depositors. extend credit to the retail and consumer market, and their transactions are F FINANCIAL INSTRUMENT usually many but small, using the local currency. FINANCIAL INSTRUMENT are contracts that represent a financial asset or liability. They can be used by businesses to manage and raise capital, UNIVERSAL BANK lend money to handle cash flow, and achieve various financial objectives. multinational companies These instruments can take many forms, such as loans, stocks, The transactions are larger bonds, derivatives, and short-term securities. are the tools that help a business’ daily operations and help than commercial banks and the finance manager handles his/her cash, his/her short-term denominated in multi operating requirements , and long-term business requirements. currencies not just to the local currency. MONEY MARKET CAPITAL MARKET INVESTMENT COMPANIES provide loans to big Money market instruments Money market instruments corporations and are funds available for a are funds available for a governments and can raise short time (1 year or less funds through bond than a year). long time (more than a Provide low return year). issuances and initial public Provide high return offerings. LONG-TERM DEBTS STOCKS are types of security that represent ownership in a NON - BANK corporation and a claim on part of the corporation’s assets and earnings BONDS is an example of long-term debt. It is a security LEASING COMPANIES extend financing to reflecting the debts of a government’s or business’ debt companies that need funds promising to pay a fixed interest to the bondholder for a definite for their business. They are time. A NOTE is another example of long-term debt that has a not banks and are not longer term than a money market instrument. Notes are similar regulated by central bank. to bonds that have regular interest payments and have a specified maturity term. MiDTERM 2ND SEMESTER | BF INVESTMENT COMPANIES perform similar functions as J STEPS IN FINANCIAL PLANNING banks in the manner that they can provide financing to companies or raise funds 1. SET GOALS OR Short-term goal (1 year) OBJECTIVES Mid-term goal (3-5 years) through bonds or Initial Public Offerings. Long-term goal (+5 years) They are regulated by the Securities and Exchange 2. IDENTIFY THE Resources comprise RESOURCES NEEDED production capacity, human Commission (SEC). resources, and financial MUTUAL FUNDS are types of investments or resources. funds of small investors pooled together and 3. IDENTIFY A GOAL THAT The management must find IS RELATED TO THE out how to achieve the managed to be able to TASK generate maximum returns goal. For example, if they want to INSURANCE COMPANIES sell life and non-life increase sales, they can insurance products that train their sales agent to offer security during times become more skilled in of death, illness, accident, dealing with clients. They and damage to property. can also make sales promotions as a marketing PRIVATE EQUITY FUNDS are managed by private strategy fund managers or investors, allowing owners to invest 4. ASSIGN TASK TO After identifying the task to RESPONSIBLE TEAM AND achieve the goal, the more aggressively in the HAVE A TIMELINE financial markets company must identify who will be accountable for the activity. W3: FINANCIAL PLANNING PROCESS There should be a specific timeline for it. TOPIC OVERVIEW 5. ESTABLISH AN The management must EVALUATION SYSTEM establish a process that I. FINANCIAL PLANNING FOR MONITORING & CONTROLLING allows them to supervise J. STEPS IN FINANCIAL PLANNING the plan. This can be done by comparing the budgets and I FINANCIAL PLANNING projecting financial FINANCIAL PLANNING statements with the actual is the process of deciding how an organization can accomplish results. its financial goals and objectives. It is divided into: ○ the long-term financial plan, also known as strategic financial plan and; 6. DETERMINE The management has ○ the short-term financial plan, also known as the operating CONTINGENCY PLAN alternative plans to financial plan. minimize the risk or bad effect to the company SHORT-TERM PLANNING LONG-TERM PLANNING W4: TOOLS IN MANAGING WORKING CAPITAL, 1 year or less 2 to 10 years RECEIVABLES AND INVENTORY More participation in the More participation in top lower management Daily operations of the management TOPIC OVERVIEW company Sets direction of the company K. OPERATING AND CASH CONVERSION CYCLE L. RECEIVABLE AND INVENTORY MANAGEMENT M. WORKING CAPITAL MANAGEMENT IMPORTANCE OF FINANCIAL PLANNING 1. It helps managers assess the impact of the strategy or actions K OPERATING AND CASH CONVERSION CYCLE on their company’s financial position, cash flows, and earnings OPERATING CONVERSION CYCLE and if there is a need for additional financing. The length of time in which the firm purchase inventories, sell 2. It helps the company in the survival when uncertainties come it and receive cash from sale. along. Risks are calculated and alternatives can be done. 3. It gives directions to the organization. Since plans are made, the firm can make necessary actions MiDTERM 2ND SEMESTER | BF RISK AND RETURN TRADE OFF - the higher the risk, the higher the return Current assets are the least profitable assets of the company Investment in working capital involves lower return Lower risk = lower return Lower default risk Investment in working capital has given the company a greater liquidity OPERATING CYCLE = DAYS INVENTORY + DAYS ACCOUNT PROFITABILITY is INVERSELY related to LIQUIDITY RECEIVABLE CASH CONVERSION CYCLE WORKING CAPITAL POLICY The length of time between paying for working capital and collecting cash from sale of inventory. PERMANENT ASSET TEMPORARY ASSET Are current and fixed asset Seasonal assets are current that remained unchanged assets that vary over the over the year Is the minimum level of year current asset Highest amount - lowest CASH CONVERSION CYCLE = OPERATING CYCLE - DAYS amount ACCOUNT PAYABLE L RECEIVABLE AND INVENTORY MANAGEMENT EXAMPLE ACCOUNT RECEIVABLE MANAGEMENT January 90,000 The collectability of accounts receivables depends largely on the quality of customers. February 120,000 The quality of customers depends on the standards or credit policies set up and used by an organization. Credit policies are March 100,000 an integral part of the credit evaluation and there are 5C’s used in credit evaluation. April 110,000 QUALITY OF BORROWER May 115,000 CHARACTER Willingness of the Permanent Current Assets = 90,000 borrower to repay the loan Temporary Current Assets = (120,000 - 90,000) = 30,000 CAPACITY Ability to generate cash FINANCING COMPANY flow AGGRESSIVE POLICY 75% of permanent asset be COLLATERAL Security pledge for financed with long term debt payment and 25% of permanent asset be financed with short term CAPITAL Financial resources debt and the whole temporary asset be financed with short term deb CONDITION Current economic or business condition MATURITY MATCHING POLICY 30% of temporary assets be INVENTORY MANAGEMENT financed with short-term debt It involves the formulation and administration of plans and and 70% of permanent assets policies to efficiently and satisfactorily meet production and be financed by long term debt merchandising requirements and minimize costs relative to inventories. CONSERVATIVE POLICY 50% of temporary assets be Critical assessment of the nature of the product (fragile, toxic, financed with long term debt perishable, etc) INVENTORY IN A MANUFACTURING COMPANY Three types of inventory in a manufacturing company ○ Raw materials ○ Work in process / Labor ○ Finished goods ABC ANALYSIS Classification of inventory; ○ A - High value and safeguarded the most ○ B - average value or cost and averagely safeguarded ○ C - Low Cost and least safeguarded M WORKING CAPITAL MANAGEMENT WORKING CAPITAL MANAGEMENT Management of current assets and liabilities To achieve a balance between profitability and risk MiDTERM 2ND SEMESTER | BF INVESTING POLCY O LOAN REQUIREMENT OF BANK 1. Application Form ○ Refers to your personal data, income sources and credibility 2. Valid Personal Identification Documents ○ Supporting documents that back up the data presented in application form. 3. Financial Statements ○ To support credibility of the entity applying for laon 4. Bank Statements ○ Are client record of bank transaction which is used to see the liquidity of cash flow of the business W5-6: LOAN REQUIREMENT OF BANK AND NON-BANK 5. Certificate of Business Registration INSITUTION ○ Rfers to the legality of the business organization and its operation 6. Company Profile TOPIC OVERVIEW ○ May be present in business proposal. 7. Collateral Documents ○ Include land title, tax declaration, vicinity map, and N. DEPOSIT AND LOANS special power of attorney (If Applicable) O. LOAN REQUIREMENT OF BANKS P. LOAN REQUIREMENT OF NON-BANK Q. IMPORTANT REMINDER P LOAN REQUIREMENT OF NON BANK 1. Application form ○ Refers to your personal data, income sources and credibility N DEPOSIT AND LOANS 2. Valid Personal Identification Documents BANKS ○ Supporting documents that back up the data presented in Banks are financial institutions that accept deposits from or application form. offer loans to an individual or entity. 3. Credit Information/Collateral File NON-BANKS ○ are documents offered by the client submitted to and held Offers bank-like services but cannot accept deposits due to absence of banking license. by a Custodian. 4. Credit Investigation ○ may be required to determine the credit standing of the EXAMPLES OF NON-BANK INSTITUTION applicant and the fair market value of the collateral being offered INSURANCE COMPANIES In the event of uncertain loss of the business, insurance may cover the loss for them. Q IMPORTANT REMINDER Government owned insurance The Banko Sentral ng Pilipinas mandates that the purpose of the providers are GSIS and SSS, loan or any other credit accommodation shall be clearly stated in and private insurance the loan application and in the contract between the lender and the providers borrower. The proceeds of the loan must be utilized only for the purpose(s) stated in the application and contract. However, the CURRENCY EXCHANGE Currency exchange is an borrower may still use the loan proceeds to other purposes industry of buying and selling provided that these are among those which are permitted to be currencies. (Ex. Western granted under existing laws and regulations. Union, Cebuana Lhuillier Mlhuiller, Villarica Pawnshop, WHY BANK AND NONBANK FINANCIAL INSTITUTION etc) DEMAN LOAN REQUIREMENT MICROLAON are lending companies or ORGANIZATION To assess of the loan amount matches the financial capacity organizations that usually of the borrower and sustain loan payments offer small credits to Verify identity to avoid identity theft individual or business. These Credit ratings will serves as the borrower’s scoreboard that organizations help small will reflect their credit history. businesses to fund their short- term finances with less requirements. PAWNSHOP are institutions that offer quick cash loans or “sanla”. The process is too simple that a pawner offers a collateral in the form of jewelry (gold, silver, diamond and other precious metals or stones) to loan money.