Business Finance PDF
Document Details
Uploaded by StateOfTheArtVulture1132
Marcelo H. del Pilar National High School
Tags
Summary
These are lecture notes on business finance, covering topics such as the science and art of managing money, budgeting, and investment. The notes include discussions of financial resources, allocation, and the application of economic and accounting concepts.
Full Transcript
**BUSINESS FINANCE** ***Lesson No. 1 INTRODUCTION TO FINANCIAL MANAGEMENT*** ***Key terms;*** **FINANCE**- Defined as the Science and art of managing money (Gitman & Zutter, 2012) **BUDGETING**- Act of estimating revenue and expenses over a period of time. (Financial planning tools and concepts)...
**BUSINESS FINANCE** ***Lesson No. 1 INTRODUCTION TO FINANCIAL MANAGEMENT*** ***Key terms;*** **FINANCE**- Defined as the Science and art of managing money (Gitman & Zutter, 2012) **BUDGETING**- Act of estimating revenue and expenses over a period of time. (Financial planning tools and concepts). **INVESTMEN**T- Come in forms that will generate money in the future. **SOURCES OF FUNDS**- Where there is a lack of funds to meet the current expenses, we look for people for institution that will give us money. **Finance**- both a science and an art of correct [application of the economic and accounting concepts] and principles that define the [system, structure, and process of management, allocation, and utilization of financial resources, investments, and expenditures]. **SCIENCE** - - *Example*: Financial decisions are made based on financial statements **ART** - - - *Example:* Businesses have to adapt and change business operations due to the COVID19 pandemic. **Application of Economic and Accounting Concepts and Principles** -Finance operates closely with economics and accounting. It is an application of the concepts and principles of both economics and accounting, - - **System, structure, and process** - - - **Management, allocation, and utilization** - - - - **Financial resources, investments, and expenditures** - - - **PUBLIC FINANCE**- e allocation of government income generated from either taxation or borrowings and the government expenditure based on approved national and local budget. Fiscal Administration. **PRIVATE FINANCE**- management of financial resources of private individuals, non-governmental organizations and private organizations in accordance with the prescribed financial policy and priority of the person or business organization. **Personal Finance** - - - **Business Finance**- area of finance that focuses on the handling and management of financial resources of a business organization. - - - [FINANCE IN A BUSINESS ORGANIZATION] The place of finance in a business structure depends on different factors. *Examples:* - - - - ![](media/image9.png) **FINANCIAL MANAGER**- primarily responsible for managing the finances of the business organization. Requires substantial knowledge of economics and accounting. - - - ***Operating Decision*-** - - ***Investment Decision*-** - - - ***Financing Decision*-** - - - **Qualifications of a Finance Officer** - - - - - - - **Stakeholders of a Company** - - - - - - - - **Goals or objectives that a company should achieve** 1.To be profitable 2\. Meet or pay maturing obligations 3\. Have more efficient operations 4.Expand operations or the productive capacity of the company 5\. To manufacture and sell good products or provided good services if the company is service oriented 6.To innovate product and services offered in the market 7\. To provide employment 8\. To provided career opportunities for employees within a company 9.To help the community where the company operates. 10.To pay the right amount of taxes 11\. To increase the value of investment in the company MAXIMIZING SHAREHOLDERS WEALTH- Through maximization of the stock price should be overriding objective of the management. +-----------------------------------+-----------------------------------+ | **PROFIT** | **WEALTH MAXIMAZATION** | | | | | **MAXIMIZATION** | | +===================================+===================================+ | By taking more risks which may | Considers risk-return trade-off | | result in operating losses. | | +-----------------------------------+-----------------------------------+ | Investors factor these risks in | Long-term perspective and growth | | valuing a stock. | opportunities | +-----------------------------------+-----------------------------------+ | Too much focus on profitability | Considers the different | | may affect production and | stakeholders of a company | | operation. | | +-----------------------------------+-----------------------------------+ ***Lesson No.2 THE FINANCIAL SYSTEM*** **The Business Environment** - - - - - - **The Basic Elements of a Financial System** - - - - **Bangko Sentral ng Pilipinas** - A. Mabini St. cor. P. Ocampo St., Malate Manila, Philippines 1004 **Financial System** 1\. Financial Institutions 2\. Financial Intermediaries 3\. Investment Institutions **Financial Institutions** - - - - **Financial Markets** - - - - - **Financial Instruments** - - - - - **[FINANCIAL INSTITUTIONS]** **BANKS** **-** Institutions authorized to operate and are regulated by the BSP. **-** General Banking Law of 2000 **-** BSP Circular No. 271 (major classifications of banks) **Universal Bank** **-** Biggest bank in terms of assets, loan portfolio, revenue. **-** Has the widest scope of banking activities authorized by BSP **-** Less than 50 universal banks operating in the Philippines **-** Minimum capital requirement of a universal bank with 100 branches is P20 billion - - - **Commercial Bank** **-** Ranked next to universal banks in terms of assets, revenues, general loan portfolio and number of branches across the country. - - - **Thrift Bank** Republic Act No. 7906 **-** Accumulating and investing savings of depositors **-** Providing working capital to businesses engaged in agriculture, service and housing - individuals and small and medium enterprices **-** Savings and mortgage banks, private development banks, stock savings, loan associations, microfinance thrift banks **Rural and Cooperative Banks** Organized and operating in rural areas Promote and expand the rural economy Primary targets are farmers in need of financial help in the production and marketing of agricultural products Microfinancing to assist small individual entrepreneurs Rural banks are privately owned Cooperative banks are organized and owned by cooperatives or federation of cooperatives. **Islamic Banks** Republic Act No. 11439 Promote and accelerate the socio-economic development of the ARMM Banking, financing, and investment operations All business dealings and activities of Islamic Banks are subject to the basic principles and rulings of Sharia (Islamic Law). **Savings and Loan Associations** Financing and mortgage loan company R.A. No. 3779, amended by R.A. No. 4378 Depositors are also member-borrowers of the association. (Armed Forces Police Savings & Loan Association, Inc.(AFSLAI Manila Teachers\' Savings And Loan Association, Inc.) **Trust Companies** Legal business entity Usually a major division of a universal or commercial bank Custodian of property for and on behalf of a beneficiary for a fee Asset management Ownership registration beneficiary Stock transfer Custodial arrangement like court proceedings **Credit Union** Financial depository institutions controlled and operated by its members Extending credit to members Offering competitive interest rates Promote the concept of thrift Providing other types of financial services **Financial Intermediaries** Financial institution that acts a middleperson between two parties-the investors and borrowers. Raise and accumulate money from investors and offer the accumulated money to individuals or corporate entities in need of financial assistance. Includes all types of financial institutions that receive money from one party and offer it to another as financial aid. 1. 2. 3. **Mutual Funds** Mutual funds accumulate money by selling shares of stocks or bonds of publicly-listed corporations to individual or corporate investors. Funds from the proceeds of the sale are pooled together and channeled to borrowers. **Pension Funds** It is set up by a business for the purpose of paying the pension requirements of all private-sector employees depending on the type of pension plan. **Insurance Companies** It acts as a financial intermediary by pooling together the proceeds of insurance policies sold to the public and investing the accumulated funds in high-yield maturing securities from investment houses. Money is lent in either medium-or long-term loan to companies engaged in commercial real state. 1\. Life insurance 2\. Health insurance 3\. Car insurance 4\. Fire insurance 5\. Crop insurance 6\. Marine insurance **Investment Institutions** A company engaged in buying securities of other companies which are listed in the stock exchange for investment purposes only. Buying and selling of financial securities are not the primary business activities. Holds securities acquired from other companies up to the time of their maturity. Earns in forms of interest or dividends. **[FINANCIAL MARKET]** **Market** -- the place where sellers and buyers of good or services meet. **Financial Market** -- refers to the place where the selling-buying activity occurs to trade equity securities **Trading Activity** -- selling-buying transactions **Capital Market** Financial market where bonds and stocks are issued for medium- and long-term periods. Medium-term securities- 3 to 5 years Long-term securities- more than 5 years Large volume of trading can reach millions everyday. Philippine Stock Exchange (1994) **Money Market** Financial securities being made have a period of less than one year. (short-term security or trading securities) Commercial paper and treasury bills have maturity period of less than one year. Securities are highly liquid or readily marketable. PSE is both a capital and money market **Primary Market** Facilitates the raising of required amount when the investors directly buy the new shares from an issuing corporation Trading happens between the issuing corporation and the investors or investment banks. Trading proceeds go to the issuing corporation. **Secondary Market** Financial securities are traded between or among investors. There is no issuance of new shares. **Public Market** Financial securities of publicly-listed corporations are traded following a standardized contract agreement and procedures. A corporation is publicly-listed when its shares are available for sale to the public. An organized financial market. Trading starts during the day once the market has been officially opened. Investors are informed of the current price of stocks and bonds and other information at any point during the day **[FINANCIAL INSTRUMENTS]** Contracts that give rise to the formation of financial assets of one entity. The creation of a financial liability or an equity instrument in another entity. - **Cash** -- a financial asset of the holder but a financial liability of the government (BSP) **Check** -- a financial asset of the payee, but a financial liability of the drawer or issuer **Loan** -- a financial asset of the lender or creditor and a financial liability of the borrower or the debtor **Bond** -- a financial asset of the holder or investor but a financial liability of the issuing company **Stock** -- a financial asset of the investor or shareholder but an equity of the issuing company **BONDS** A financial instrument that represents a contractual debt of the party issuing the bond. Issuing money may either be a private business entity or a government. **Bond indenture** - certificate that evidences a bond The holder of the bond earns income through interest. **Term Bond** Single issue bonds All bonds mature on the same date **Serial Bond** Serial bonds have a series of maturity dates set at regular intervals **Secured Bond** A bond that is secured by an asset of the bond issuer. The asset serves as a collateral in case of default. **Debenture Bond** Unsecured by a collateral Investors rely on the reputation of the issuer of the bonds. **Convertible Bond** A bond that can be converted into common stock. The conversion of the bond is done during the bond's life at the discretion of the bondholder. **Callable Bond** These are bonds that can be recalled by the issuer prior to the bond's maturity date. When a callable bond is called by its issuer, the call price together with the accrued interest is paid by the bond issuer to the bondholders. **STOCKS** Signifies ownership of the assets of the corporation Only stock corporations are authorized by the Security of Exchange Commission to issue stocks Evidenced by a stock certificate Shareholder has claim on the net assets of the business as owners of the corporation. **Common Stocks** Ordinary share Voting rights **Preferred Share** No voting rights Paid first of the dividends Fix rate Claims on assets are prioritized ***Lesson No. 3 HORIZONTAL, VERTICAL AND TREND ANALYSIS*** **HORIZONTAL ANALYSIS-** tool that evaluates the present performance of a company compared to last year's. It reflects differences in absolute amount and in percentage using two periods only. Same day and month but with different years. ![](media/image7.png) **HORIZONTAL ANALYSIS** ![](media/image10.png) **VERTICAL ANALYSIS-** Determines the size or proportion of an item in the financial statement in relation to the total. There is only one accounting period involved in the mathematical process.Guide in resource allocation policy. ![](media/image5.png) ![](media/image1.png) **TREND ANALYSIS-** Analyze financial statements that extend beyond two years through the use of index numbers or percentages.Convert absolute peso into percentages. ![](media/image6.png) ***Lesson No. 4 FINANCIAL MIX RATIO*** ***NOTE**: Hindi na po lalagyan ng formula since may formula card naman. tnx :)* **FINANCIAL MIX RATIO**- An analytical tool.It employs ratio or proportion of a certain item in the financial statement in relation to other related items in the same financial statements or other financial statements to determine comparative performance. [LIQUIDITY RATIO ] - - - *UNDER LIQUIDITY RATIO;* **Current Ratio** - - **Quick Ratio or Acid Test Ratio** - - **Receivable Turnover** - - - - **Inventory Turnover** - [SOLVENCY RATIO] - - - - *UNDER SOLVENCY RATIO;* **Debt Ratio** - - **Equity Ratio** - **Debt-To- Equity Ratio** - **Times Interest Earned** - [PROFITABILITY RATIO ] - *UNDER PROFITABILITY RATIO;* **Gross Profit Rate** - **Operating Profit Margin** - **Net Profit Margin** - - **Return on Equity** - **Return on Investment/Assets** - ***Lesson No. 5 FINANCIAL PLANNING & SALES FORECAST*** **[THE FINANCIAL PLANNING PROCESS]** **Financial Planning** Applied in both public and business finance It does not exist and operate as an independent activity in the organization. The result of interrelated planning activities happening in various sections and levels of the organization. Financial planning considers the long-term and short-term directions of the business. **Vision** Conveys the ultimate goal of the organization. It outlines the final map of what the business will be and where the business is going. The guiding star for all the plans, policies, and strategies of the business. Long-term The basic principle in the preparation of a financial plan is to align it with the vision of the business. **Mission** Sets the current business activities and outlines what the business if for. Defines the nature of the business. It lists relevant undertakings and carries out or implements various projects for the realization of the vision. Short-term and medium-term **Goal** States where all the activities and operation of the business are directed. Refined version of the company's vision. Sets a more specific end-state of the business. **Objective** Specific and short-term Expressed in quantifiable terms to highlight the specific details. It states in clear terms the actions that a business must take in order to meet its goals. A refined version of the mission statement **Financial Planning** - **[SALES FORECAST]** It is the process of estimating the volume of sales. The mother of all the budgets that every subsequent operating and financial budget will rely on. A sales forecast should be as reasonable and accurate as possible to be useful. An accurate sales forecast makes cash, production, and disbursements budgets meaningful and realistic. **Sample Forecasting Techniques** Simple Moving Average Weighted Moving Average Arithmetic Straight Line Arithmetic Geometric Curve High-low Point Method Method of Least Square ![](media/image19.png) [Arithmetic Geometric Curve:] Based on the average percentage of 12.43%, the projected sales of the company for 2019 will be 40,868 units (36,350 x 112.43%). **Factors that Influence the Result of the Projection** Environmental Analysis Consumer Buying Behavior Competitor's possible marketing move Government programs and priorities Possible new entrants and threats of suppliers and buyers Marketing mix (price, promotion, product, place) **The Production Schedule** It is highly dependent on the sales forecast. Every time a change is made on the sales forecast, the production the schedule is likewise changed. It reflects the following information Number of units and cost of raw materials Direct labor cost Manufacturing overhead cost Desired inventory level **Production Schedule Solving** I. Expected Sales in terms of units: 40,868 There are three types of raw materials required to produce one unit of finished product. - - - II\. To produce 40,868 finished products, the total requirements are as follows: Material A (2 x 40,868) 81,736 Material B (3 x 40,868) 122,604 Material C (5 x 40,868) 204,340 III\. Total cost of materials required: Material A (0.50 x 81,736) P40,868 Material B (0.25 x 122,604) 30,651 Material C (1.50 x 204,340) 306,510 (\*multiply the number of materials required by the prevailing price of raw materials.) **Labor Cost:** \- Assume that 3 hours is required to finish one product. \- The labor rate per hour is P10.00. - - **ADDITIONAL FUNDS NEEDED** **Dividend Payout Ratio-** the ratio of dividends to the earnings of the business. **Retention Ratio-** the ratio of earnings invested back to the business. **FORMULAS!!** ![](media/image16.jpg) ![](media/image14.jpg)