LESSON 1 - Working with and through people (dividing

task by their expertise)

OVERVIEW OF FINANCIAL MANAGEMENT
- Effectively and efficiently maximizing
“FINANCE” limited resources
- Copying with a changing environment
- Was derived latin word "FINER", meaning "to
end" or "to pay".
• Is the efficient acquisition (acquiring
“8 M'S OF MANAGEMENT”
goods), allocation (allocating budgets
for specific locations of funds) , and • MANPOWER
utilization of funds (identify if the - Considered as the most important of all the
allocated budgets is utilize well) . resources.
- Referred to as "HUMAN
“FINANCE FUNCTIONS”
RESOURCE"(employees and consultants).
- Allocating available funds • MONEY
- Acquiring needed funds - Sometimes referred as "CAPITAL", although
- Utilizing this fund to achieving set goals in accounting money is only a part of
capital.
• MATERIALS
FINANCE SERVICE VS FINANCIAL MANAGEMENT - An important resource, particularly for
manufacturing industries.
“FINANCIAL SERVICE”
• METHOD
- Advisory services - The way things are done which in this
- Designing financial products present time has been improved with the
- Investments, real estates & insurance aid of technology.
- Personal Financial planning • MACHINE
- The resource produced by the technology
“FINANCIAL MANAGEMENT”
which has been replacing people.
- Management of finance department in a • MARKETS
firm - Refers to whom (customers)/where
- Financial/non-financial/public/private/ (location) the business sell their products.
NGO • MOMENT (time)
- Budgeting, Forecasting (planning cash - The resource management and other
flow), Cash and Credit Management, employees need to learn how to manage
Investment Analysis etc. effectively and efficiently to achieve
objectives as needed.
• MEDIA
MANAGEMENT - The resource that enables business to
reach their markets. (Platforms like tv, radio,
- is concerned with utilizing the scarce newspapers or online platforms fb, ig,
resources (limited) of the organization to tiktok, or how you advertise your business)
maximize the attainment of the
organizations goals and objectives
FINANCIAL MANAGEMENT

“COMPONENT OF MANAGEMENT” - Finance is needed to buy assets, end

liabilities, and pay expenses.
MANAGER IS RESPONSIBLE IN: - Managing finance for a company is called
"MANAGERIAL FINANCE" (FM)
- Achievement of goals
- FM is about proper allocation of money
TYPES OF BUSINESS ORGANIZATION DISADVANTAGES

SOLE PROPRIETORSHIP (one person who manage, - Limited life - disolve once the partners will
owner and capitalize their own business but more dead or one partners wants to cease the
than one in company (employees) business business
- Unlimited liability - once the business is
insolvent the creditors can run after the
ADVANTAGES personal properties of the partners
- Mutual agency - an act of one partner is act
- Ease of Formation - simple to establish
of the partnership
because they don't need many
- Difficulty in raising capital - need to
requirements to comply.
convince other partners before the
- Control Over Operations - (no co-
decisions of raising capital has made
ownership) the owners only has a right to
decide.
- No Sharing of Profits - all profits is only for
CORPORATION
the owner.
- Simplicity - less government regulations ADVANTAGES
and requirements.
- Limited liability - creditors can run after
- No Taxation - they are not subject to tax
only the contributions of the stockholders
because the income is low.
- Indefinite life - even one stockholder will
dead or cease to operate in the corp, the
corporation will continue
DISADVANTAGES
- No mutual agency - the corp is separated
- Limited Life - any moment that the owner to their stockholders
and they decide to discontinue the business - Easy to obtain capital - has many
will dissolve. stockholders who will contribute to corp,
- Unlimited Liability - creditor can run the that will be thier capital
personal assets of the owner. - Ease transfer of ownership - don't need
- Difficulty of Raising Fund - only one the consent of the stockholders before
person who raise the fund since they don't selling the stock or thier stocks
have co-ownership or stockholders. - Separate legal entity - the corp has
- Limitation of Skills - all skills came from separate legal personality means
the owner only. stockholders is not be liable to the liabilities
of the corporation.

PARTNERSHIP (two or more person who manage

and capitalize the business) DISADVANTAGES

- Double taxation - tax for personal tax of

stockholders and employees and also tax of
ADVANTAGES
the corporation
- Easy to organize - only consent of the - More government control - controlled by
partners the needed to organize the the government and need to comply with
partnership thier rules and regulations and also their
- Easy to manage due to their shared requirements
expertise in business manage - owner can - More costly to organize - means need
ask help to manage with thier partners more money to comply with all the
- Better capitalization - two or more persons requirements or legal documents to fully
may give thier contributions for capital organized the corporation
 - More involved decision - making process - - Investment and management of asset is
many decisions makers and approvals of called WORKING CAPITAL MANAGEMENT.
the BODs • WORKING CAPITAL MANAGEMENT -
- Dilusion of earnings and control - management of cash, inventory and
earnings, controls and dividends will be receivables, profitability and liquidity
separated to all the stockholders o WORKING CAPITAL
MANAGEMENT (WCM) involves
balancing a company's short-
term assets and liabilities to
ensure liquidity, prevent liquidity
NATURE OF FINANCIAL MANAGEMENT
issues, and support sustainable
- Financial Management is mainly concerned growth.
with the proper management of funds.
• FINANCIAL MANAGER - sees that the
fund are procured so that risk, cost, and 2. FINANCING DECISIONS
control consideration or properly - Financial decisions are concerned with the
balanced in the given situation and that CAPITAL STRUCTURE DECISION of the firm
there is optimum utilization of funds. (proportion of debt and equity)
- Creating a proper mix between debt and
equity - optimum capital structure
SCOPE OF FINANCIAL MANAGEMENT - Tradeoff between risk and return

- The scope covers acquisition and efficient

utilization/allocation of funds to various
a) Financial decisions are concerned with
uses.
the CAPITAL STRUCTURE DECISION of the
• Financial management involves
firm (proportion of debt and equity)
providing solution for major financial
• CAPITAL STRUCTURE - refers to the
operation of the firm:
amount of debt or equity employed by a
- Investment decision
firm to fund its operations and finance
- Financing decisions
its assets. An expressed as a "debt to
- Dividend policy decisions
equity" or "debt to capital ratio"

DEBT AND EQUITY CAPITAL - are used to fund a

1. INVESTMENT DECISIONS businesses operation, capital, expenditures,
- Related to the selection of assets (FIXED acquisitions, and other investments. There are
AND CURRENT ASSETS) in which funds will tradeoffs firms have to make when they decide
be invested by firm. whether to use debt or equity to finance operations,
- Investment and fix and long-term assets and managers will balance the two to find the
and projects is called CAPITAL BUDGETING optimal capital structure.
• CAPITAL BUDGETING - volume of
investment risk and returns, cost of
capital DEBT TO CAPITAL and DEBT TO EQUITY
o CAPITAL BUDGETING in
- are financial ratios used to evaluate a
corporate finance involves
COMPANY'S FINANCIAL HEALTH.
assessing the value of long-term
capital investments like What's the difference?
machinery, plants, products,
DEBT TO CAPITAL - measures the proportion of a
and research development
company's TOTAL DEBT TO ITS TOTAL CAPITAL,
projects through capitalization
structures
DEBT TO EQUITY - focuses on the RELATIONSHIP PERFORMING FINANCIAL ANALYSIS
between DEBT AND EQUITY FINANCING.
- Transforming financing data into a form that
- Both ratios are crucial for investors and can be used for decision making.
analysts. - Determining the need for
additional/reduced finance (what
department need funds the most)
b) Creating a proper mix between debt and
equity - optimum capital structure
• CAPITAL STRUCTURE - is a crucial MAKING INVESTMENT DECISIONS
decision for a firm, determining the mix
- Determining the mix of current and fixed
of debt and equity used to finance
assets to be held by a firm (determine what
operations and growth, impacting
will sell and hold)
profitability, risk, valuation, and future
- Determining the type of asset in the
funding ability, influence by industry,
category
size, growth potential, and tax situation.

MAKING FINANCIAL DECISIONS

- Determining the mix of short-term and long-

c) TRADE OF BETWEEN RISK AND RETURN
term financing (decide it long- or short-term
RISK RETURN TRADEOFF - states that the potential liability)
return rises with an increase in risk. Using this - In depth analysis of available financing
principle, individuals associate low levels of alternatives, their cost and long-term
uncertainty with low potential returns, and high implications.
levels of uncertainty or risk with high potential of
returns.

CHALLENGES FOR FINANCIAL MANAGERS IN A

3. DIVIDEND POLICY DECISION
CHANGING ECONOMIC ENVIRONMENT
DIVIDENDS - are a top investment please due to
Regulations - different officials so different
their steady revenue and potential for capital
preparations, makes hard to cope and adopt
appreciation. The dividend payout ratio, measures a
changing rules
company's ability to continue paying or increasing
dividends over time, providing valuable insights into Globalization - need to be competitive to keep up
its financial health. with other entities and other contries

Financial Manager will: Technology - go with the trend, need to utilize

available technologies
- Deciding the dividend payout ratio
considering the benefit of the shareholder Risk - need to handle risk
and firm.
Transformation - chsnges in environment that
- Dividend decisions should be analyzed
affects organizations or internal business
about the financing decision of the film.
Stakeholders' management - need to value them
because they are the sources of funds
ROLE FINANCIAL MANAGER
Strategy - strategies how to manage finances and
- Performing financial analysis also how to allocate funds and capital, and also
- Making investment decisions how/when we borrow money and hadle risk,
- Making financial decisions interest and cost.
Reporting - report all the problems, changes, also between a company's management and the
ideas to make a solution, and all the needs to report company's stockholders.
to give information about finances to the higher - The MANAGER, acting as the agent for the
ups. shareholders or PRINCIPLES is supposed to
make decisions that will maximize
Talent and Capability - need to consider it and also
shareholder wealth.
to know if we are capable to handle finaces.

MISCONCEPTIONS ABOUT FINANCIAL

MANAGEMENT
FINANCIAL GOALS
- Financial Management is accounting
PROFIT MAXIMIZATION - Financial Management is a review of
mathematics
- Maximizing the Rupee Income of Firm
- Financial Management is a branch of
- Resources (8 M's) are efficiently utilized
statistics
- Appropriate measure of firm performance
(evaluation)
- Serves interest of society also (giving back
to society)

SHAREHOLDERS' WEALTH MAXIMIZATION

- Maximizes the net present value

- Fundamental objective - maximize the
market of the firms shares

MAXIMIZING EXPENSE PER SHARES (EPS)

- Ignores timing and risk of the expected

benefit.
- Maximizing EPS will not result in highest
price for company's shares.

NON-FINANCIAL OBJECTIVES

- General welfare of employees - Cares, love

and value with the employees
- General welfare of society - helps society
- Fulfillment of responsibilities towards
customers, suppliers etc. - giving solutions
to customers by providing thier needs
- Leadership in Research and Development
- Effective utilization of funds

AGENCY PROBLEM

- In corporate finance, the agency problem

usually refers to a conflict of interest
LESSON 2 — PT 1 ELEMENTS OF INCOME STATEMENT

FINANCIAL STATEMENT ANALYSIS NET SALES vs NET INCOME

FINANCIAL STATEMENT Net Income XX Net Sales XX

Cost of Sale XX Cost of Sale XX
- These are written reports created by a
Gross Profit XX Gross Profit XX
company's management to summarize the
Operating Exp.: Operating Exp.:
business financial condition over a certain
Resch & Devmt XX Resch & Devmt XX
period (quarterly, semi annually, annually)
Sell gen & Admin XX Sell gen & Admin XX
Total Ope. Exp. XX Total Ope. Exp. XX
ELEMENTS OF FINANCIAL STATEMENT Operating Inc. XX Operating Inc. XX
Other Inc(Exp) XX Other Inc(Exp) XX
1. Income statement Inc Bef. Inc. Tax XX Inc Bef. Inc. Tax XX
2. Statement of owners equity Prov. For Inc. Tax XX Prov. For Inc. Tax XX
NET INCOME XX NET INCOME XX
3. Cash flow statement, and FORMULA:
4. Balance sheet Net Income/Loss = Total Revenue — Total Expense

NET INCOME - if the revenues are higher than the

INCOME STATEMENT expenses

- it is also called the profit and loss NET LOSS - if the revenues are lower than the
statement, is a report that shows the expenses
income, expenses, and resulting profits or
losses of a company during a specific time
period. OWNERS EQUITY

1. Revenue - a statement of owner's equity is usually

prepared after the income statement.
• refers to the money earned through the - It shows the amount of equity for a given
sales of goods and payment of services reporting period, which is usually a year.
generated by the company.

2. Expenses

• refer to the cost that businesses incur in

running their operations.

3. Net income or profit and loss

• the costs are deducted from the

revenue to calculate the total profit.
BALANCE SHEET • OPERATING ACTIVITIES
- the section outlines the primary revenue-
- it is a statement that is used to evaluate
generating activities of a business, including
company's financial position and condition.
cash flows from selling goods or services,
- it shows the company's assets, liabilities
paying wages, purchasing inventory, and
and equity.
other daily business operations.

Common items in operating activities

ELEMENTS OF BALANCE SHEET
▪ Cash received from customers
• ASSET - refers to the company's economic ▪ Cash paid to suppliers and employees
resources goods and services. ▪ Cash paid for operating expenses (rent,
• LIABILITY - refers to the firm's financial utilities)
obligation where the company's resources ▪ Interest paid or received
are financed through borrowing. ▪ Income taxes paid or refunded
• EQUITY - refers to the amount owned by the
owners/stockholders of the business.

• INVESTING ACTIVITIES
- this section details the business's spending
or cash receipt related to its investment,
involving the purchase and sale of long-
term assets and investments.

Common items in investing activities

▪ Purchase or sale of property, plant, and

equipment (PPE).
▪ Investments in securities or other
companies (stocks, bonds).
▪ Loans made to others or repayments
received.

CASHFLOW STATEMENT

- it refers to the net amount of cash and cash

equivalents that are transferred into and out • FINANCING ACTIVITIES
of a business. - this involves cash flows between a
- it is a key indicator of a company's financial company and its creditors, encompassing
health, representing the money the transactions that raise capital or pay down
business receives (inflows) from its debt.
operations, investments, and financing,
Common items in financing activities
minus the money it spends (outflows).
▪ Issuance or purchase of stock
▪ Borrowing or repaying loans (both short and
ELEMENTS OF CASH FLOW STATEMENT long-term debt)
▪ Payment of dividends to shareholders
- the cash flow statement is categorized into three
main areas, each highlighting a distinct aspect of a
company's operations.
ELEMENTS OF CASH FLOW STATEMENT 1. Income statement

2. Statement of changes in owner's equity

ILLUSTRATION:

GIVEN:

3. Balance sheet
FINANCIAL STATEMENT ANALYSIS 2. VERTICAL ANALYSIS

- is an evaluation of past and current COMMON SIZE ANALYSIS

performance of the firm and its forecast in
- it shows a significant item on a financial
the future.
statement used as the base value and all other
- financial statement analysis involves
items are compared with it.
calculations. Firms compute by combining
accounts coming from an income FORMULA:
statement to the balance sheet or vice
PERCENTAGE DECREASE OR INCREASE OF AN
versa or by simply relating an account
ACCOUNT = Comparison Value x 100% / Bas
within the statement.
year

TOOLS AND TECHNIQUES OF FINANCIAL

STATEMENT ANALYSIS

1. HORIZONTAL ANALYSIS

COMPARATIVE ANALYSIS - evaluation of the

changes or behavior patterns of the different
accounts in the financial statements for two or
more years.

FORMULA:

PERCENTAGE DECREASE OR INCREASE OF AN

ACCOUNT = Later year - Base year x 100% / Base
year

HORIZONTAL ANALYSIS INCOME STATEMENT

LESSON 2 — PT 2 • CASH CONVERSION CYCLE
= DIO (Ave. inventory / COGS x No. Days)
FINANCIAL STATEMENT ANALYSIS
+ DSO (A/R / Total Credit Sales x No. Days)
FINANCIAL RATIO ANALYSIS - DPO (A/P / COGS x No. Days)
• DAYS SALES IN INVENTORIES
- It involves analyzing the mathematical
= Inventories / COGS per day (COGS / 365)
relationship between accounts in the
• ACCOUNT PAYABLE DEFERRAL PERIOD
financial statement.
= Accounts Payable / COGS per day (COGS
- It is calculated from statements provided to
/ 365
investors, creditors, analysts, and otherFS
users with helpful information to assess a
company’s LIQUIDITY, SOLVENCY,
SOLVENCY measures the following:
PROFITABILITY, and ACTIVITY RATIO.
• DEPT RATIO
= Total Liabilities / Total Assets
• LONG-TERM DEBT RATIO
CATEGORY OF FINANCIAL RATIOS = Longterm Debt / Total Assets
• EQUITY MULTIPLIER RATIO
LIQUIDITY = Equity / Total Assets
• It is the sufficiency of cash and near cash to • INTEREST COVERAGE RATIO
pay it current liability as it fall due. = EBIT / Interest Expense
• FIXED CHARGE COVERAGE
SOLVENCY = EBIT / Lease Payments / Interest
Payments / Lease Payments
• It is the ability of the company to pay its
long-term liability.

PROFITABILITY PROFITABILITY measures the following:

• It is the ability of the company to pay its • GROSS PROFIT RATIOS
long-term liabilities. = Gross Profit from Sales / Net Sales
ACTIVITY RATIO • OPERATING PROFIT MARGIN
= Operating Profit or EBIT / Net Sales
• It pertains to the ability of the company to • NET PROFIT MARGIN
quickly sell its product and collect its = Net Profit / Net Sales
receivables • RETURN ON EQUITY
= Net Income – Preferred Divided / Average
Equity
LIQUIDITY measures the following:

• CURRENT RATIO • RETURN ON ASSET

= Current Assets / Current Liabilities = Net Asset / Average Total Assets
• QUICK RATIO • OPERATING RETURN ON ASSETS
= Cash + Trading Securities + A/R / = EBIT / Total Assets
Current Liabilities • EARNINGS PER SHARE
• DEFENSIVE INTERVAL = Net Income – Preferred Dividends /
= Cash + Trading Securities + A/R / Weighted Average Common Shared
Average Daily Expenses Outstanding
(add expenses / 365)
• OPERATING CASHFLOW
= Cashflow from Operation / Sales
ACTIVITY measures the following: MARKETING MANAGER

• INVENTORY TURNOVER RATIO - Makes use of forecast to estimate how

= COGS / Average Inventory many sales should be made in a particular
• ACCOUNTS RECEIVABLE TURNOVER RATIO period, and to plan promotional and
= Net Credit Sales (Net Sales) / Average advertising activities for the products.
Accounts Receivable
FINANCE MANAGER
• ACCOUNT PAYABLE TURNOVER
= Net Credit Purchases / Average Accounts - Uses the forecast to anticipate the funding
Payable needed by the firm. The finance manager
must establish the firm’s cash flow and
outflows and indicate the exact moment
when the firm will need additional funding.

HR MANAGER

- Utilize the forecast to supply the human

resources needed the achieving the firm’s
LESSON 3 objectives. The HR manager must specify
FORECASTING when to hire additional people to support
the firm’s operations.
- It refers to future financial activities that are
helpful in the firm’s operation COLLEGE & UNIVERSITIES

- Makes use of the forecast to identify

possible enrollees the school year. The
USERS OF FORECASTING figures help them to determine the
grevenues to be obtained from the tuition
TOP MANAGEMENT fees, the faculty hired, the planning of
- Weeks use of the forecast as a tool for long rooms assignments, and building of
range planning, particularly in providing a facilities.
basis for performance targets,
implementing long range strategic
objective, and making capital budgeting
decision. FORECASTING APPROACHES
PRODUCTION MANAGER
• QUALITATIVE FORECASTING
- Utilize the forecast to determine the - Incorporate factors based on intuition,
amount of role materials needed in the emotion, personal experiences, and value
production, the budget, the schedule of system.
production activities, inventory levels to
maintain so as not to disturb the • QUANTITATIVE FORECASTING
production, labor hours, and the schedule - Uses of variety of mathematical models
of shipments. that rely on historical data and or causal
variety to forecast demand.
PURCHASING MANAGER

- Uses the forecast to ascertain the volume

or bulk of materials that should be
purchased for a particular period. This
avoids overstocking or understocking of the
inventories.
QUALITATIVE FORECASTING

1. EXPERT OPINIONS

Under this method, the views of the managers or a

group with a high level of expertise, often in
combination with statistical models, are
synthesized to generate consensual for forecasts
are considered.

2. DELPHI METHOD

Similar to the expert opinions, it is also done by a

group of experts. The difference is that the
members are asked to answer individual through a
questionnaire about their forecasts of future 3. WEIGHTED MOVING AVERAGE
events. - Weighted can be used to place more
emphasis on recent value when there is a
3. SALES FORCE (POLLING)
trend or pattern. This makes the technique
Oftentimes, the sales force is used by the more responsive to changes since a more
companies to arrive at their sales forecast recent period may be more heavily
weighted.
4. CONSUMER (MARKET SURVEY)

Firms, at times, conduct their own consumer or

potential consumer surveys to accumulate
information regarding future plans. Surveys are
conducted through cellphone inquiries,
questionnaire and interviews.

QUANTITATIVE FORECASTING (TIME SERIES)

1. NAIVE FORECASTING
- This is considered the benchmark model
- This indicates that the previous data will be
used to forecast the next period.

4. EXPONENTIAL SMOOTHING
- It is a continuous adjustment process can
uses alpha as a smoothing parameter to
minimize the error.

2. MOVING AVERAGE
- It is the simplest among the time series
models in which a series of average will be
computed.
5. TREND PROJECTION (trend line forecast)
- It is refers to a trend line series of historical
data point and then projects the line into
future for medium to long term forecast.