INTRODUCTION TO FINANCIAL MANAGEMENT

FINANCIAL MANAGEMENT deals with decisions that are supposed to

maximized the value of shareholders’ wealth. This means maximizing the
market value of the shares of stocks. Share of stocks represents the form of
ownership in a corporation.
 deals with a plan
 deals with decision that suppose to maximize the vaue of shareholder’s
wealth. This means maximizing th value of shares of stocks.
 maximize wealth to continuously to function

Share of stocks - form of ownership in stocks.

CHANGE OF STOCK CAN BE A CONFLUENCE OF MANY FACTORS:

❑ profitable operation
(how your operation go after a year)
(it is set that you will set the profitability in a year)

❑ nature of the business

Example:
Department Store Supermarket/ Retail store
Most margins increase upto 15% Most margins are 5%, transition of
products are fast
Kaya mag sale ng 70% Products are perishable, companies
want to move their products and
lessen inventories

❑ prospects of the business

❑ projected earnings
Projections of how long will you get it.

❑ timeframe for the realization of such projected earnings

Financials
Is it in 10 years time?

❑ability to meet maturing obligations

Umuutang/debt

❑ appropriate capital structure

❑ dividends policies
Can be stored in different businesses
Dividing of profits

❑ investing decisions
Decision making
- When is the right time to invest?
- Paghahatian na ba or invest it(equipments, cars, etc.)
❑ management and market sentiments
Ano ang nakakapekto sa stocks?
Baka masyadong mababa ang stocks
It depends on the traders

Comparison
Shareholder’s Wealth Maximization Profitability
Maximizing shareholders’ wealth Is a major driver for increasing the
through maximization of stock price value of stock, there are other
should be the overriding objective of factors that influence share prices.
management as it covers different The reasons why profit maximization
facets of operating a company and it should not be the overriding
considers the different stakeholders objective of a company. First, the
in the organization. company may need to borrow more
to increase sales or augment
production capacity.
-any profit should be maximized - not wise
-any other means that could raise - companies need t borrow more
the profit funds
Should not be the overriding
objective of a company, exposes
company to risks.

STAKEHOLDER INCLUDES; (different from Shareholders)

❑ MANAGEMENT
❑ EMPLOYEES
❑ SUPPLIERS
❑ CUSTOMERS
❑ CREDITORS
Umuutang sayo
❑ REGULATORY AGENCIES
FDA, DOA, DPWH, etc.
❑ COMMUNITY WHERE IT OPERATES

EMPLOYEES INTEREST
Has to consider in managing a company, chances are, happy employees
mean more productive employees the sense of “belongingness” they will
protect the interest of the company. In the Filipino culture, it is called
“malasakit” or “solicitude” or “empathy”.

PAYING SUPPLIERS & CREDITORS ON TIME

Is a good business practice that will improve relationships with these parties
to ensure good quality of materials at reasonable prices .

COMPLIANCE WITH REQUIREMENTS OF REGULATORY AGENCIES

Also ensure smooth operations, non - compliance may result in suspension of
operations or unnecessary penalties . Disruption in operation as a result of
 non - compliance with the regulatory requirements may also taint the image
of the company .

FINANCIAL SYSTEM
SAVERS FINANCIAL USERS OF FUNDS
INTERMEDIARIES (Borrowers/Investors)
•Household •Banks •Household
•Individuals •Insurance companies •Individuals
•Corporations/companies •Stock exchange •Corporations/companies
•Government agencies •Stock brokerage •Government agencies
firms •Mutual funds
•Otherfinancial
institutions
Can also be users of Provides a
funds, their inflows are mechanism from
bigger than outflows where these savings
can be channeled to
users of funds.

The financial system links the savers and users of funds.

Deposits money Lend/invest
SAVERS FINANCIAL INTERMEDIARIES USERS OF FUNDS

Pays back interest

And sends it back to
Financial
savers
Intermediaries
keeps some of it.

Some of the financial instruments issued by the users of funds such as

the shares of stocks and corporate bonds of publicly listed companies( a
company can become publicly listed through IPO - initial public offering,
this is where shares will be offered to many investors).

CASH INFLOW Refers to the money received by the business. eg. Sales
revenue, capital and loans

OUTFLOWS Refers to the money paid out by the business. eg. Purchases,
rent and rates, wages and salaries.

FUNCTIONS OF FINANCIAL INTERMEDIARIES

BANKS
Banks can provide mechanism where savers can put their excess funds
through deposits.
• Give depositors interest on the money deposited to them.
• Bank lend money to borrowers after performing a credit investigation to
cover the interest given to the depositors.

To cover for the interest given to depositors, banks lend money to

borrowers after performing a credit investigation. Some of the deposits can
also be invested in some financial instruments like government securities
and corporate bonds.

INSURANCE COMPANIES
• Insurance products can be broadly categorized into life or non-life
insurance products. Life insurance – protect the insured when there’s a loss
of life. Non-Life – protect the insured from the loss or damage of properties
both are acquired by filing insurance claims.
• In exchange for these protection, the insured pays premium to the
insurance companies.

Categorized into Life insurance and Non-life insurance products

Life insurance products protect the insured from loss of life while non-life
insurance products protect the insured from the loss or damage to
properties. In exchange for the protection, the insured pays premiums to
the insurance companies.

Premiums - used to fund claims, cash collected from premiums may cover
more than claims for most periods.

The remaining cash/excess cash from premiums can be invested by

insurance companies.

STOCK EXCHANGE
• The Philippine Stock Exchange (PSE) provides a system for the trading of
equity securities of publicly listed companies.
• The equity securities are common stocks and preferred stocks.

An individual cannot go directly to PSE to buy and sell stocks. He has to

open an account with an accredited stock brokerage firm where he can
channel his buy and sell orders of equity securities.

STOCK BROKERAGE FIRMS

• Investing in the stock market has to be coursed through stock brokerage
firms. At present, there are online (trade thru the internet) and live broker
(over the phone to place orders).
• COL Financial and BPI Trade are two of the online broker in the
Philippines.
 To trade online, one must have an account and deposit with the online
broker.

MUTUAL FUNDS
• Provides opportunities for big and small investors to invest in financial
instruments which they would not have considered on their own, or they
may have considered but do not have the time or the expertise to do it.
• These include investments in the stock market, bonds, treasury notes, and
other money market instruments like treasury bills.
• There are mutual funds that are limited only to stocks while others are
restricted to fixed income instruments like bonds and treasury notes.

With mutual funds, investments are pooled and the funds are invested,
cater to different investment objectives. There are mutual funds which are
limited only to stocks while others are restricted to fixed income
instruments like bonds and treasury notes. Others a combination of stocks
and fixed income instruments.

When one invests in a mutual fund, he becomes a part owner of that

fund. To invest in it, one has to buy shares of mutual fund and the buying
price depends on the net asset value.

(NAV) of that fund when the purchase is made. NAV changes everyday
for the value of financial instruments where the funds are invested also
changes.

An investor in mutual fund can also lose as the NAV can fall below the
NAV when the investment was made. However, because the fund is managed
by professionals, positive returns are expected over time.

The gains from investing in mutual funds may also depend on the
investment horizon of the investor.

One person/company to person who is expert in stock bonds

OTHER FINANCIAL INSTITUTIONS

Other financial institutions include pension fund like Government Service
Insurance System (GSIS) and Social Security System (SSS), investment banks,
and credit union, among others.
 FINANCIAL INSTRUMENTS
Financial instruments are generally classified into two major categories:
equity securities and debt securities. Equity securities include common
stocks and preferred stocks.

COMMON STOCKS AND PREFERRED STOCKS

Most companies have only common stocks in their stockholders’ equity but
some companies have both common and preferred stocks. PLDT and GLOBE
have both in their stockholders’ equity.

Common Stocks
• Common stockholders are the real owner of the company. Being residual
owners, the growth potential of their investments is unlimited.
• The dividend share for common stocks is not fixed. A common stock
investor can receive more cash dividends during a period of unusual
profitability.
• Have voting rights, a privilege generally not available to preferred
stockholders.

The dividend yield is higher than the return of most fixed income
instruments like time deposit.

Preferred stocks
• Has a priority over common stocks in terms of claims over the assets of
the company.
• Have the priority over common stockholders’ in cash dividend declaration.
• Has no voting right.

FINANCING
FINANCING DECISIONS
• include making decisions as to how to finance long-term investment and
working capital of the company
• responsible for determining the appropriate capital structure, that is how
much of the total assets should be finance by debt and equity. (This
responsibility is crucial because if the company becomes vulnerable to
adverse economic conditions which may result in higher volatility in
earnings. The company can get bankrupt because of too much debt).

REVIEW OF FINANCIAL STATEMENT PREPARATION, ANALYSIS AND

INTERPRETATION

Financial Statement preparation, analysis and interpretation determine if a

company is healthy or unhealthy, monitor performance and to identify
strategies to further improve company’s operations. In determining a
company’s financial health, the different financial statements have to be
analyzed.
Statement of Financial Position or Balance Sheet
Statement of fianncial Position is the new name that the International
Accounting Standards Board (IASB) suggested for the balance sheet since
2009 to better reflect the kinds of information found in the financial report.

The financial report provides information regarding the liquidity position

and capital structure of a company as of a given date.

Liquidity - ability of a company to pay maturing obligations. The current

assets of a company are compared with its current liabilities to determine
its paying capacity.

Capital Structure - provides information regarding the amount of assets

financed by debt or liabilities and equity. While debt or liabilities are not
bad in business, too much of it is not good also as it exposes the company to
higher probabilty of bankruptcy.

Statement of Profit or Loss or Income Statement

 Provides information regarding the revenues or sales, expenses, and net
income of a company over a given accounting period. It may be for a
month, a quarter, or a year. The income reported by a company is not
that useful if the accounting period is not stated.

 In analyzing earnings performance, a comparison with the previous

periods with other companies, especially those coming from the same
industry, is a must.

 It is important to identify how much of the Income comes from the core
business (refers to the main business of a company) and how much
comes from the non-core business.

 If an actual statement of profit or loss of a company is examined, one

will realize that this financial statement is not easily found. This is
because IASB which serves as ourgenerally accepted accounting
principles gives the preparers of financial statement 2 options on how to
present their statements of profit or loss.

 The first option is to present it as a separate financial statement. The

second option is to present it together with other comprehensive income
(represents transactions that are not reported in the profit or loss
statement but affects the stockholder’s equity).

Notes to Financial Statement

 The integral part of the financial statements. Among the additional
information that the notes to financial statements provide are the
following:
1. Brief description of the company. Info may include the nature of business
of the company and the owners behind the company.

2. Summary of significant accounting policies . It is important to find out

what specific accounting policies are used by the company.

3. Breakdown of amounts found in the financial statements . An alternative

presentation is to provide a single amount on the face of the balance sheet,
breakdown can be presented in the notes to financial statements. May be
provided for other financial statement accounts such as accounts
receivable, inventories, loans, operating expenses etc.

Steps in Preparing Financial Statements

1. Analyzing business transactions

2. Recording in the Journals. Once the transaction is identified and

analyzed, the next step is the prep of the jornal entry.

3. Posting to ledger accounts. Ledgers provide chronological details as to

how transactions affect individual accounts. Two types: General (summary
of the different subsidiary ledgers and can serve as a control account) and
Subsidiary ledger. Posting in the subsidiary ledger can be done anytime and
the balances are summarized at the end of an accounting period. Posting in
general ledger is done at the end of the accounting period.

4. Preparing the unadjusted trial balance. At the end of each accounting

period, unadjusted trial balance is prepared from the financial statement
account balances found in the general ledgers.

5. Making the adjusting entries.

a) Accruals. Include unpaid salaries, unpaid interest expense, or unpaid
utility epenses
b) Prepayments. If the company has prepaid expenses such as prepaid rent
or prepaid insurance, then the correct balances for these accounts have
to be establishes at the end of each accounting period to reflect their
correct balances
c) Depreciation and amortization. If there are intangible assets such
asfranchise, the allocation of their costs, which is called amortization
expense, is also recognized at the end of each accounting period
through adjusting entries.
d) Allownace for uncollectible accounts. Bad debt expense from accounts
receivable are also recognized.

6. Preparing the adjusted trial balance. Prepared after taking into

consideration the effects of the adjusting entries. To ensure that the total
debit balances equal the credit balances.

7. Preparing the financial statements. These are financial position,

statement of profit or loss, and the statement of cash flows.
8. Making the closing entries. Income statement such as revenues and
expenses are closed to prepare the system for the nect accounting period.

9. Post-closing trial balance. To test if the debit balances equal the credit
balances after closing entries are considered. To ensure that the accounting
system is working.

Vertical Analysis
Comparing a company’s financial condition and performance to a base
amount.
 Purpose is to answer the general question, What percentage of one line
item is another line item?
 Is used for analyzing the balance sheet
 Called common size because it converts every line iten to a percentage,
thus allowing comparisons between the financial accounts of the
organizations of different sizes.

Horizontal Analysis
Comparing a company’s financial condition and performance across time
 Looks at the percentage in a line from one year to the next year
 Goal - What is the percentage change in a line item from one year to the
next year?
 An issue with horizontal analysis is that small percentage changes can
hide major dollar effects
 Another issue is that large percentage changes from year to year may be
relatively inconsequential in terms of dollar amounts.

Trend Analysis
 Compares changes over a longer period of time by comparing each year
with a base year.
 Is used to reveal patterns in data covering successive periods
 A type of analysis that looks at changes in the line items compared with
a base year.

 We can use the trend percentages to construct graph so we can see the
trend over time.
FORMULAS
LIQUIDITY RATIOS
Current Ratio

Working Capital
Current Assets
Working Capital Ratio 
Current Liabilitie s

Quick Ratio

Acid-Test Ratio

Book:
Acid-Test Ratio and Quick Asset Ratio
Stricter Measure:
Cash  Current Accounts Receivable  Short - term Marketable Securities )
Acid  Test Ratio and Quick Asset Ratio 
Current Liabilitie s
Current Assets - Inventorie s
Quick Asset Ratio 
Current Liabilitie s

Days in Accounts Receivable Ratio

Days Cash on Hand

Average Payment Period

LEVERAGE RATIOS/CAPITAL STRUCTURE

Debt Ratio
Total Liabilitie s
Debt Ratio 
Total Assets

Debt to Equity Ratio

 Total Liabilitie s
Debt to Equity Ratio 
Total Stockholde r' s Equity

Long-term debt to net assets ratio

Net assets to Total Assets

Times Interest Earned Ratio

Debt Service Coverage Ratio

Interest Coverage Ratio

Earnings before interest and taxes
Interest Coverage Ratio 
Interest Expense

PROFITABILITY RATIOS
Return on Equity
Net Income
ROE   100%
Shareholder' s Equity

Return on Assets
Operating Income
ROA   100%
Total Assets

Gross Profit Margin

Gross Profit
Gross Profit Margin  100%
Sales

Operating Profit Margin

Operating Income
Operating Profit Margin   100%
Sales

Net Profit Margin

Net income
Net Profit Margin   100%
sales
ACTIVITY RATIOS/EFFICIENCY RATIOS
IN GENERAL:
Revenues
Activity Ratios 
Assets

Asset Turnover Ratio

Re venue( sales )
Asset Turnover 
Net assets

Total Asset Turnover Ratio

Fixed Asset Turnover Ratio

Accounts Receivable Turnover Ratio

Sales
Accounts Receivable Turnover Ratio 
Average Accounts Receivables

Inventory Turnover Ratio

Cost of Sales
Inventory Turnover Ratio 
Average Inventory

360
Days Inventorie s 
Inventory Turnover Ratio

SOURCES OF FUNDS
Three Types of Capital
Capital is any form of wealth employed to produce more wealth for a firm.
◼ Fixed - used to purchase the permanent or fixed assets of the business
(e.g., buildings, land, equipment, etc.)
◼ Working - used to support the small company’s normal shortterm
operations (e.g., buy inventory, pay bills, wages, salaries, etc.)
◼ Growth - used to help the small business expand or change its primary
direction.

Capital Structure
- Shown in leverage ratios
- combination of debt and equity, for a company
- Debt comes in the form of bond issues or loans. Equity comes in the form
of common stock, preferred stock, or retained earnings.
- shows how much of the total assets should be financed by debt and equity.
- vary from one company to another.
- affected by the stability of cash flows, extent of fixed operating expenses
and variable expenses.

Companies which are capital intensive and are characterized by high-

fixed operating expenses such as utility and mining companies are
supposedly more conservatively financed( they have to be financed more by
equity). These companies need to generate more revenue before they can
cover their expenses. If these companies are heavily financed by debt then
interest expense adds up to the already high-fixed operating expenses. This
would mean higher revenues for profits to be made.

Influenced by the following factors:

1. Nature of Business
If a company is in a risky business and operating cash flows are
uncertain like mining operations, It has to be more conservatively financed
(means there should be more stockholder’s equity). Unlike SM malls where
cash flows from rent are almost certain, the a more aggressive capital
structure can be considered. Stable operating cash flows allow the company
to pay periodic debt amortizations.

2. Stage of business development

A company whch is just starting its operations may encounter difficulties
borrowing from bank for banks generally look for the historical performance
of a company in making decisions regarding loan application. From the
stockholder’s POV, it is also not good to start an operation with borrowed
funds.

3. Macroeconomic conditions
If macroeconomic conditions are good as measured by GDP and this
trend is expected to continue in the foreseeable future, then management
can take a more agrgressive stance in financing the company’s operations.

4. Prospects of the industry and expected growth rates

If the industry where the company operates has good prospects and
growth rates are expected to be high. Management can consider borrowing
more to expand operations.

5. Bond and stock market conditions

6. Financial stability
Refers to the ability of a company to raise funds.

7. Regulatory environment
There are operations that are regularly regulated such as banks which
monitored by BSP.

8. Taxes

9. Management style
Some manager are aggressive and some are conservative.
Sources of Long- term Funds

Equity Capital
◼Represents the personal investment of the owner(s) in the business.
◼ Is called risk capital because investors assume the risk of losing their
money if the business fails.
◼ Does not have to be repaid with interest like a loan does.
◼ Means that an entrepreneur must give up some ownership in the company
to outside investors.

Sources of Equity
◼ Personal savings
- The first place an entrepreneur should look for money.
- The most common source of equity capital for starting a business.
- Outside investors and lenders expect the entrepreneur to put some of her
own capital into the business before investing theirs.

◼ Friends and family members

- After emptying her own pockets, an entrepreneur should turn to those
most likely to invest in the business – friends and family members.
- Survey: 10% of business owners turn to family and friends for capital.
- Inherent dangers lurk in family/friendly business deals, especially those
that flop.

◼ Angels
- private investors who back emerging entrepreneurial companies with their
own money.
- Fastest growing segment of the small business capital market.
- An excellent source of “patient money” for investors needing relatively
small amounts of capital – often less than P500,000.
- Angels almost always invest their money locally and can be found through
“networks.”
- The typical angel accepts 30% of the proposals presented to him and has
invested an average of P131,000 in 3.5 businesses.

◼Corporate Venture Capital

- 30% of all venture capital investments come from corporations.
- About 900 large corporations across the globe invest in start-up companies.
- Capital infusions are just one benefit; corporate partners may share
marketing and technical expertise.

◼ Partners

◼ Corporations

◼ Venture capital companies

Venture Capitalist Companies
- More than 3,000 venture capital firms operate across the United States. -
Most venture capitalists seek investments in the $3,000,000 - $10,000,000
range in companies with highgrowth and high- profit potential. - Business
plans are subjected to an extremely rigorous review – less than 1% accepted.
- Most venture capitalists take an active role in managing the companies in
which they invest.
- Many venture capitalists focus their investments in specific industries with
which they are familiar.
- Most often, venture capitalists invest in a company across several stages.

◼ Public stock sale/Going Public

- Initial public offering (IPO) - when a company raises capital by selling
shares of its stock to the public for the first time.
- Typical year: about 550 companies make IPOs.
- Few companies with sales below $10 million in annual sales make IPOs.

Advantages & Disadvantages of Public Stocks

Advantages:
- Initial public offering (IPO) - when a company raises capital by selling
shares of its stock to the public for the first time.
- Typical year: about 550 companies make IPOs.
- Few companies with sales below $10 million in annual sales make IPOs.

Disadvantages:
- Dilution of founder’s ownership
- Loss of control
- Loss of privacy
- Reporting to the SEC
- Filing expenses
- Accountability to shareholders
- Pressure for short-term performance
- Timing
What Do Venture Capital Companies Look For?/Considerations beofre
investing
◼ Competent management
◼ Competitive edge
◼ Growth industry
◼ Viable exit strategy
◼“Intangibles

Debt Financing
- Must be repaid with interest.
- Is carried as a liability on the company’s balance sheet.
- Can be just as difficult to secure as equity financing, even though
sources of debt financing are more numerous.
- Can be expensive, especially for small companies, because of the
risk/return tradeoff.

Sources of Debt Capital

◼ Commercial banks (The heart of the financial market for small businesses)
- Short-term loans
◆Commercial loans
◆Lines of credit
◆Floor planning
- Intermediate and long-term loans
◆Installment loans and contracts
◼ Asset-based lenders/Asset-Based Borrowing
- Discounting accounts receivable
- Inventory financing
◼ Trade credit
◼ Equipment suppliers
◼ Commercial finance companies
◼ Saving and loan associations
◼ Stock brokerage houses
◼ Insurance companies
◼ Credit unions
◼ Bonds
◼ Private placements
◼ Small Business Investment Companies (SBICs)
◼ Small Business Lending Companies (SBLCs)
(Federally Sponsored Programs)
◼ Economic Development Administration (EDA)
◼ Department of Housing and Urban Development (HUD)
◼ U.S. Department of Agriculture’s Rural BusinessCooperative Service
◼ Local Development Companies (LDCs)
◼ Small Business Innovation Research (SBIR)
◼ Small Business Technology Transfer programs
◼ Small Business Administration (SBA)
file:///C:/Users/user/Downloads/BusFin%20C1-2.pdf - Business Finance
Intro to review of financial statement preparation, analysis and
interpretation

*Introduction 1 - 15
*Balance sheet and Income statement 18 - 19
*Notes to financial statements 20
*Steps in preparing the financial statements 21 - 22
*Profitability ratios 25 - 28
*Liquidity Ratios 28 - 29
*Leverage Ratios 29 - 31
*Efficienct Ratios/Activity 32 - 25
*Vertical Analysis 36
*Horizontal Analysis 37