Business Finance PDF

Business Finance **Finance** - is a term generally [used for matters related to cash management] and the identification and funding of investments. - It can be classified into personal finance, corporate finance, and public finance. **Personal Finance Corporate Finance Public Fin...

Business Finance **Finance** - is a term generally [used for matters related to cash management] and the identification and funding of investments. - It can be classified into personal finance, corporate finance, and public finance. **Personal Finance Corporate Finance Public Finance** **FINANCIAL SYSTEM** Overview: - Saver can be a user at the same time. - To facilitate intermediation, financial institutions may issue financial instruments. - The original issuance of a financial instrument, be it an equity or debt security, is called a primary issue. - A company that is issuing new ordinary shares to the public for the first time is called an **Initial public offering (IPO).** - **PSE** provides facilities for a secondary market where investors can buy and sell shares of companies. - The **Philippine Dealing and Exchange Corporation** (PDEx) provides a venue for secondary trading of fixed income instruments which includes trading of Treasury bills which have maximum tenor of 364 days. 1. **Banks** - Banks provide a mechanism where savers can put their excess funds through deposits. - Banks give the depositors interest on the money deposited to them. - Banks can also serve as conduits for investors in buying and selling both gov. securities and corporate bonds. 2. **Insurance Companies** - Insurance products can be broadly categorized into life insurance products (insured from loss of life) and non-life insurance products (insured from the loss of or damage to properties). 3. **Stock Exchange** - The **Philippine Stock Exchange (PSE)** provides a system for the trading of equity securities (ordinary shares and preference shares) of publicly listed companies. 4. **Stock Brokerage Firms** - Investing in the stock market has to be coursed through stock brokerage firms. - With online brokers, one can trade in the stock market through the internet. - With live brokers, one needs a telephone to call brokers and place orders. 5. **Mutual Funds** - With mutual funds, investments are pooled and the funds are invested by professional managers for a fee. - It must be noted that when one invests in a mutual fund, he becomes a part-owner of that fund. **Financial Instruments:** 1. **Equity Instrument** -- generally have varied returns based on the performance of the issuing company. Returns from equity instruments come from either dividends or stock price appreciation. Ex: - **Preferred Stock** - priority in terms of claims over the assets of a company. - Have also priority over common stockholders in cash dividend declaration. - **Common Stock** - The real owners of the company - In profitable period, preferred stock will receive a fixed dividend rate while common stockholders receive all the excess. 2. **Debt Instruments** -- generally have fixed returns due to fixed interest rates. Ex: - **Treasury Bonds and Treasury Bills (government)** - Risk free - Low interest rate - **Corporate Bonds (publicly listed companies)** - Not risk free - High interest rate 1. **Primary Market** - Sale of [new securities] to the public -- **Initial public offering (IPO)** - Sale of new securities to one investor or group of investors -- **private placement** 2. **Secondary Market** - Sale of [previously owned] securities. **Money Markets** - Are a [venue wherein securities with short-term maturities] (1 year or less) are sold. **Capital Markets** - [Securities with longer-term maturities] sold in Capital markets. - The key capital market securities are bonds (long term debt) and both common stock and preferred stock (equity, or ownership). **Organizational Roles** 1. **Shareholders** - [Elect the Board of Directors.] - Their responsibility is to carry out the objectives of the shareholders. 2. **Board of Directors** - The [highest policy making body in a corporation.] - The board's primary responsibility is to ensure that the corporation is operating to serve the best interest of the stockholders. - **Responsibilities:** - Setting policies on investments, capital structure and dividend policies. - Approving the company's strategies, goals and budgets. - Appointing and removing members of the top management. - Determining top management's compensation. - Approving the information reported in the financial statements. 3. **President (CEO)** - **Responsibilities:** - Overseeing the operations of a company. - Performing all areas of management - Representing the company in professional, social and civic activities. 4. **VP for Marketing** - **Responsibilities:** - Formulating marketing strategies and plans. - Directing and coordinating company sales. - Performing market and competitor analysis. - Promoting good relationships with customers and distributors. 5. **VP for Operations** - **Responsibilities:** - Ensuring production meets customer demands. - Coming up with a production plan that maximizes the utilization of the company's production facilities. - Identifying adequate and cheap raw material suppliers. 6. **VP for Administration** - **Responsibilities:** - Coordinating the functions of administration, finance, and marketing departments. - Assisting other departments in hiring employees. - Determining the location and the maximum amount of office space needed by the company. - Providing assistance in payroll preparation, payment of vendors, and collection of receivables. 7. **VP for Finance** - **Functions:** - Helping the board in: - Setting financing policies and making financing decisions. - Setting investment policies and making investment decisions. - Setting dividend policies for corporations - Providing advice regarding the distribution of profits. - Setting Operating policies that have financial implications such as: - Working capital financing policies. - Credit terms given to customers. - Whether to avail of trade discounts offered by suppliers. **Financial Ratios** **Profitability Ratios** 1. Return on Equity (ROE) = (Net Income / Equity) x 100% 2. Return on assets (ROA) = (Operating income / Total Assets) x 100% 3. Gross Profit Margin = (Gross profit / Net sales) x 100% 4. Operating Profit margin = (operating income / Net sales) x 100% 5. Net Profit margin = (Net Income / Net sales) x 100% **Efficiency Ratios** 1. Total asset turnover ratio = Net sales / Total Assets 2. Fixed asset turnover ratio = Net Sales / PPE 3. Accounts receivable turnover ratio = Net sales / gross trade accounts recei. 4. Inventory turnover ratio = cost of sales / Inventories 5. Accounts payable turnover ratio = Cost of sales / trade accounts payable **Liquidity Ratios** 1. Current Ratio = Current Assets / Current liabilities 2. Quick Asset Ratios = (Cash + Current acct. recei. + short-term marketable sec.) / current liabilities 3. Altern. Quick asset ratio = (current assets -- inventories) / Current liabilities **Stability or Solvency Ratios** 1. Debt ratio = Total liabilities / Total assets 2. Debt-to-equity ratio = Total Liabilities / Equity 3. Interest coverage ratio = Operating income / Interest expense 1. **Set goals/ objectives** - Long-term - Medium-term - Short-term 2. **Identify Resources** - Human Resources - Production Capacity 3. **Determine the Financial Cost** - Operating Budget - Capital Budget 4. **Identify sources of financing** - Equity infusion - Borrowing 5. **Establish a timeline or schedule of activities** 6. **Establish an evaluation system for monitoring and controlling** - Comparing actual performance with budgets. - Establishing rewards and punishment system. 7. **Determine contingency plan's** - Alternative plans if the original plan does not work.