‭Business Finance‬ ‭3rd Quarter Reviewer‬

‭ eek 1 - 8 (Powerpoint and Pointers Based)‬

W ‭Reina & Mark‬
‭__________________________________________________________________________‬
‭WEEK‬ ‭1‬ ‭&‬ ‭2:‬ ‭INTRODUCTION‬ ‭TO‬ ‭FINANCIAL‬ ‭a.‬ ‭Formulating‬ ‭marketing‬ ‭strategies‬‭and‬‭plans‬‭.‬‭Directing‬
‭ ANAGEMENT‬
M ‭ nd coordinating company sales.‬
a
‭ .‬
b ‭Performing market and competitor analysis.‬
‭Finance‬ ‭c.‬ ‭Analyzing‬‭and‬‭evaluating‬‭the‬‭effectiveness‬‭and‬‭cost‬‭of‬
‭marketing‬‭methods applied.‬
‭The‬‭science‬‭and‬‭art of managing money‬‭. (Gitman & Zutter,‬‭2012)‬ ‭d.‬ ‭Conducting‬ ‭or‬ ‭directing‬ ‭research‬ ‭that‬ ‭will‬ ‭allow‬ ‭the‬
‭company‬ ‭identify‬ ‭new‬ ‭marketing‬ ‭opportunities,‬ ‭e.g.‬
‭Risk‬ ‭is‬ ‭nothing‬ ‭but‬ ‭an‬ ‭uncertain‬ ‭event‬ ‭that‬ ‭might‬ ‭damage‬ ‭your‬ ‭variants‬‭of‬‭the‬‭existing‬‭products/services‬‭already‬‭offered‬
‭ ssets and when it is a financial risk, it creates loss of Finance.‬
a ‭in the market.‬
‭e.‬ ‭Promoting‬ ‭good‬ ‭relationships‬ ‭with‬ ‭customers‬ ‭and‬
‭Financial Management‬
‭distributors.‬

‭ eals‬‭with‬‭decisions‬‭that‬‭are‬‭supposed‬‭to‬‭maximize‬‭the‬‭value‬‭of‬
D
‭5.‬ ‭VP‬ ‭for‬ ‭Production‬ ‭-‬ ‭The‬ ‭following‬ ‭are‬ ‭among‬ ‭the‬
‭shareholders‬ ‭wealth‬ ‭(Cayanan).‬ ‭These‬ ‭decisions‬ ‭will‬ ‭ultimately‬
r‭ esponsibilities of the vp for production:‬
‭affect‬ ‭the‬ ‭market's‬ ‭perception‬ ‭of‬ ‭the‬ ‭company‬ ‭and‬ ‭influence‬
‭a.‬ ‭Ensuring‬‭production meets customer demands‬‭.‬
‭the share price.‬
‭b.‬ ‭Identifying‬ ‭production‬ ‭technology‬‭/process‬ ‭that‬
‭minimizes‬‭production‬‭cost‬‭and‬‭makes‬‭the‬‭company‬‭cost‬
‭ o‬ ‭maximize‬ ‭the‬ ‭value‬ ‭of‬ ‭shares‬ ‭of‬ ‭stocks‬‭.‬ ‭Managers‬ ‭of‬ ‭a‬
T
‭competitive.‬
‭corporation‬ ‭are‬ ‭responsible‬ ‭for‬ ‭making‬ ‭the‬ ‭decisions‬ ‭for‬ ‭the‬
‭c.‬ ‭Coming‬ ‭up‬‭with‬‭a‬‭production‬‭plan‬‭that‬‭maximizes‬ ‭the‬
‭company‬ ‭that‬ ‭would‬ ‭lead‬ ‭towards‬ ‭shareholders‬ ‭wealth‬
‭utilization of the company's production‬‭facilities‬‭.‬
‭maximization.‬
‭d.‬ ‭Identifying‬‭adequate and cheap raw material‬‭suppliers.‬

‭Role of Each Position:‬

‭6.‬ ‭ P‬ ‭for‬ ‭Finance‬ ‭-‬ ‭The‬ ‭role‬ ‭of‬ ‭the‬ ‭VP‬ ‭for‬ ‭Finance/Financial‬
V
‭1.‬ ‭ hareholders‬ ‭-‬‭The‬‭shareholders‬‭elect‬‭the‬‭Board‬‭of‬‭Directors‬
S ‭Manager‬ ‭is‬‭to‬‭determine‬‭the‬‭appropriate‬‭capital‬‭structure‬
‭(BOD).‬ ‭Each‬ ‭share‬ ‭held‬ ‭is‬ ‭equal‬ ‭to‬ ‭one‬ ‭voting‬‭right‬‭.‬‭Since‬ ‭of‬ ‭the‬ ‭company.‬ ‭Capital‬ ‭structure‬ ‭refers‬ ‭to‬ ‭how‬ ‭much‬ ‭of‬
‭the‬‭shareholders‬‭elect‬‭the‬‭BOD,‬‭their‬‭responsibility‬‭is‬‭to‬‭carry‬ ‭your‬ ‭total‬ ‭assets‬ ‭financed‬ ‭by‬ ‭debt‬ ‭and‬ ‭how‬ ‭much‬ ‭is‬
‭out‬ ‭the‬ ‭objectives‬ ‭of‬ ‭the‬ ‭shareholders.‬ ‭Otherwise,‬ ‭they‬ ‭financed by equity.‬
‭would not be elected in that position.‬
‭Functions of Financial Managers‬

‭2.‬ ‭ oard‬ ‭Of‬ ‭Directors‬ ‭-‬ ‭Highest‬ ‭policy‬ ‭making‬ ‭body‬ ‭in‬ ‭a‬
B
‭1.‬ ‭ inancing‬‭Decisions‬ ‭-‬‭Include‬‭making‬‭decisions‬‭as‬‭to‬‭how‬‭to‬
F
‭corporation.‬ ‭The‬ ‭board’s‬ ‭primary‬ ‭responsibility‬ ‭is‬ ‭to‬ ‭ensure‬
‭finance‬ ‭long-term‬ ‭investments‬ ‭and‬ ‭working‬ ‭capital-which‬
‭that‬ ‭the‬ ‭corporation‬ ‭is‬‭operating‬‭to‬‭serve‬‭the‬‭best‬‭interest‬
‭deals with the‬‭day-to-day operations.‬
‭of‬ ‭the‬ ‭stockholders‬‭.‬ ‭The‬ ‭following‬ ‭are‬ ‭among‬ ‭the‬
‭responsibilities of the board of directors:‬
‭2.‬ I‭ nvesting‬‭Decisions‬ ‭-‬‭To‬‭minimize‬‭the‬‭probability‬‭of‬‭failure‬‭,‬
‭a.‬ ‭Setting‬ ‭policies‬ ‭on‬ ‭investments,‬ ‭capital‬ ‭structure‬ ‭and‬
‭long-term‬ ‭investments‬ ‭have‬ ‭been‬ ‭supported‬ ‭by‬ ‭capital‬
‭dividend policies.‬
‭budgeting analysis.‬
‭b.‬ ‭Approving company’s strategies, goals and budgets.‬
‭c.‬ ‭Appointing‬ ‭and‬ ‭removing‬ ‭members‬ ‭of‬ ‭the‬ ‭top‬
‭3.‬ ‭ perating‬‭Decisions‬ ‭-‬‭Deal‬‭with‬‭the‬‭daily‬‭operations‬‭of‬‭the‬
O
‭management including the president.‬
‭company‬ ‭especially‬ ‭on‬ ‭how‬ ‭to‬ ‭finance‬ ‭working‬ ‭capital‬
‭d.‬ ‭Determining top management's compensation.‬
‭accounts such as accounts receivable and inventories.‬
‭e.‬ ‭Approving‬ ‭the‬ ‭information‬ ‭and‬ ‭other‬ ‭disclosures‬
‭reported in the financial statements.‬
‭4.‬ ‭ ividend‬ ‭Policies‬ ‭-‬ ‭Dividend‬ ‭is‬ ‭a‬ ‭part‬ ‭of‬ ‭profits‬ ‭that‬ ‭are‬
D
‭available‬ ‭for‬ ‭distribution‬‭,‬ ‭to‬ ‭equity‬ ‭shareholders.‬ ‭The‬
‭3.‬ ‭President‬ ‭(CEO)‬ ‭-‬ ‭The‬ ‭following‬ ‭are‬ ‭among‬ ‭the‬
‭Finance‬ ‭manager‬ ‭must‬ ‭decide‬ ‭whether‬ ‭the‬ ‭firm‬ ‭should‬
r‭ esponsibilities of the president:‬
‭distribute‬ ‭all‬ ‭the‬ ‭profits‬ ‭or‬ ‭retain‬ ‭them‬ ‭or‬ ‭distribute‬ ‭a‬
‭portion‬‭and‬‭retain the balance‬‭.‬
‭a.‬ ‭ pproving‬ ‭the‬ ‭information‬ ‭and‬ ‭other‬ ‭disclosures‬
A
‭reported‬ ‭in‬ ‭the‬ ‭financial‬ ‭statements.‬ ‭Overseeing‬ ‭the‬ ‭Overview of the Financial System‬
‭operations‬ ‭of‬ ‭a‬ ‭company‬ ‭and‬ ‭ensuring‬ ‭that‬ ‭the‬
‭strategies‬‭as‬‭approved‬‭by‬‭the‬‭board‬‭are‬‭implemented‬‭as‬
‭planned.‬
‭b.‬ ‭Performing‬ ‭all‬ ‭areas‬ ‭of‬ ‭management‬‭:‬ ‭planning,‬
‭organizing, staffing, directing and controlling.‬
‭c.‬ ‭Representing‬‭the company‬

‭4.‬ ‭VP‬ ‭for‬ ‭Marketing‬ ‭-‬ ‭The‬ ‭following‬ ‭are‬ ‭among‬ ‭the‬
r‭ esponsibilities of the vp for marketing:‬ ‭Financial Institution‬
 ‭ inancial‬ ‭institutions‬ ‭are‬ ‭companies‬ ‭in‬ ‭the‬ ‭financial‬ ‭sector‬ ‭that‬
F ‭●‬ ‭ he‬‭role‬‭of‬‭Financial‬‭Managers:‬‭make‬‭financing‬‭decisions‬
T
‭provide‬ ‭a‬ ‭broad‬ ‭range‬ ‭of‬ ‭business‬ ‭and‬ ‭services‬ ‭including‬ ‭that‬ ‭require‬ ‭funding‬ ‭from‬ ‭investors‬ ‭in‬ ‭the‬ ‭financial‬
‭banking, insurance, and investment management.‬ ‭markets.‬

‭ .‬
a ‭ ommercial Banks‬
C ‭WEEK‬ ‭3:‬ ‭FINANCIAL‬ ‭PLANNING‬ ‭TOOLS‬ ‭AND‬
‭b.‬ ‭Insurance Companies‬ ‭ ONCEPTS‬
C
‭c.‬ ‭Mutual Funds‬
‭Cash Management‬
‭d.‬ ‭Pension Funds‬
‭e.‬ ‭Other‬ ‭financial‬ ‭institutions‬ ‭include‬ ‭pension‬ ‭funds‬ ‭like‬
‭Government‬ ‭Service‬ ‭InsuranceSystem‬ ‭(GSIS)‬ ‭and‬ ‭ he‬ ‭cash‬ ‭management‬ ‭involves‬ ‭the‬ ‭maintenance‬ ‭of‬ ‭a‬‭cash‬ ‭and‬
T
‭SocialSecurity‬ ‭System‬ ‭(SSS),‬ ‭unit‬ ‭investment‬ ‭trust‬‭fund‬ ‭marketable‬ ‭securities‬ ‭investment‬ ‭level,‬ ‭which‬ ‭will‬ ‭enable‬ ‭the‬
‭(UITF),‬ ‭investment‬ ‭banks,‬ ‭and‬ ‭credit‬ ‭unions,‬ ‭among‬ ‭company‬ ‭to‬ ‭meet‬ ‭its‬ ‭cash‬ ‭requirements‬ ‭and‬ ‭at‬‭the‬‭same‬‭time‬
‭others.‬ ‭optimize‬ ‭the‬ ‭income‬ ‭on‬ ‭idle‬ ‭funds.‬ ‭A‬ ‭financial‬ ‭officer‬ ‭has‬ ‭the‬
‭following specific objectives in monitoring cash balances:‬
‭Financial Instrument‬
‭●‬ ‭To‬ ‭meet‬ ‭the‬ ‭ash‬ ‭disbursement‬ ‭needs‬ ‭(payments‬
‭ chedule).‬
s
‭ eal‬ ‭or‬ ‭a‬ ‭virtual‬ ‭document‬ ‭representing‬ ‭a‬ ‭legal‬ ‭agreement‬
R
‭●‬ ‭To‬ ‭minimize‬ ‭the‬ ‭funds‬ ‭committed‬ ‭to‬ ‭transactions‬ ‭and‬
‭involving‬ ‭some‬ ‭sort‬ ‭of‬ ‭monetary‬ ‭value.‬ ‭These‬ ‭can‬ ‭be‬ ‭debt‬
‭precautionary cash balances; and‬
‭securities‬‭like‬‭corporate‬‭bonds‬‭or‬‭equity‬‭like‬‭shares‬‭of‬‭stock.‬‭When‬
‭●‬ ‭To‬ ‭avoid‬ ‭misappropriation‬ ‭and‬ ‭handling‬ ‭losses‬ ‭in‬ ‭the‬
‭a‬‭financial‬‭instrument‬‭is‬‭issued,‬‭it‬‭gives‬‭rise‬‭to‬‭a‬‭financial‬‭asset‬‭on‬
‭normal course of business.‬
‭one hand and a financial liability or equity instrument on the other.‬

‭1.‬ ‭ inancial‬ ‭Assets‬ ‭-‬ ‭(‬‭cash‬‭)‬ ‭An‬ ‭equity‬ ‭instrument‬ ‭of‬ ‭another‬
F ‭Reason for Holding Cash‬
‭entity.‬‭A‬‭contractual‬‭right‬‭to‬‭receive‬‭cash‬‭or‬‭another‬‭financial‬
‭asset‬ ‭from‬ ‭another‬ ‭entity.‬ ‭A‬ ‭contractual‬ ‭right‬ ‭to‬ ‭exchange‬ ‭Transaction Motive‬ ‭ ash‬‭needed‬‭to‬‭facilitate‬‭the‬‭normal‬
C
‭instruments‬ ‭with‬ ‭another‬ ‭entity‬ ‭under‬ ‭conditions‬ ‭that‬ ‭are‬ ‭transactions‬‭of‬‭the‬‭business‬‭,‬‭that‬‭is,‬
‭potentially favorable.‬ ‭to‬ ‭carry‬ ‭out‬ ‭its‬ ‭purchases‬ ‭and‬ ‭sales‬
‭Example:‬ ‭Notes‬‭Receivables,‬‭Loans‬‭Receivable,‬‭Investment‬‭in‬ ‭activities.‬
‭Stocks, Investment in Bonds‬
‭Precautionary Motive‬ ‭ ash‬‭may‬‭be‬‭held‬‭beyond‬‭its‬‭normal‬
C
‭2.‬ ‭ inancial‬ ‭Liability‬ ‭-‬ ‭Any‬ ‭liability‬ ‭that‬ ‭is‬ ‭a‬ ‭contractual‬
F ‭operating‬ ‭requirement‬ ‭level‬‭in‬‭order‬
‭obligation‬‭:‬‭(1)‬‭To‬‭deliver‬‭cash‬‭or‬‭other‬‭financial‬‭instruments‬‭to‬ ‭to‬ ‭provide‬ ‭for‬ ‭a‬ ‭buffer‬ ‭against‬
‭another‬ ‭entity.‬ ‭(2)‬ ‭To‬ ‭exchange‬ ‭financial‬ ‭instruments‬ ‭with‬ ‭contingencies‬ ‭such‬ ‭as‬ ‭unexpected‬
‭another‬ ‭entity‬ ‭under‬ ‭conditions‬ ‭that‬ ‭are‬ ‭potentially‬ ‭slow-down‬ ‭in‬ ‭accounts‬ ‭receivable‬
‭unfavorable.‬ ‭collection,‬ ‭strike‬ ‭or‬ ‭increase‬ ‭in‬ ‭cash‬
‭Examples:‬‭Notes Payable, Loans Payable, Bonds Payable‬ ‭needs‬ ‭beyond‬ ‭management’s‬ ‭original‬
‭projections.‬
‭3.‬ ‭ quity‬‭Instrument‬ ‭-‬‭Any‬‭contract‬‭that‬‭evidences‬‭a‬‭residual‬
E
‭interest‬ ‭in‬ ‭the‬ ‭assets‬ ‭of‬ ‭an‬ ‭entity‬ ‭after‬ ‭deducting‬ ‭all‬ ‭Speculative Motive‬ ‭ ash‬‭held‬‭ready‬‭for‬‭profit‬‭making‬‭or‬
C
‭liabilities.‬ ‭investment‬ ‭opportunities‬ ‭that‬ ‭may‬
‭Examples:‬‭Ordinary Share Capital, Preference Share‬‭Capital‬ ‭come‬ ‭up‬ ‭such‬ ‭as‬ ‭a‬ ‭block‬ ‭of‬ ‭raw‬
‭materials‬ ‭inventory‬ ‭offered‬ ‭at‬
‭4.‬ ‭Debt‬ ‭Instrument‬ ‭-‬ ‭Debt‬ ‭Instruments‬ ‭generally‬ ‭have‬ ‭fixed‬ ‭discounted‬ ‭prices‬ ‭or‬ ‭a‬ ‭merger‬
r‭ eturns‬‭due to fixed interest rates.‬ ‭proposal.‬
‭Examples:‬ ‭Treasury‬ ‭Bonds‬ ‭and‬ ‭Treasury‬ ‭Bills,‬ ‭Corporate‬
‭Bonds‬
‭Contractual Motive‬ ‭ ‬ ‭company‬ ‭may‬ ‭be‬ ‭required‬ ‭by‬ ‭a‬
A
‭bank‬ ‭to‬ ‭maintain‬ ‭a‬ ‭certain‬
‭5.‬ ‭ quity‬‭Instrument‬ ‭-‬‭Equity‬‭Instruments‬‭generally‬‭have‬‭varied‬
E
‭compensating‬‭balance‬‭in‬‭its‬‭demand‬
‭returns‬‭based‬‭on‬‭the‬‭performance‬‭of‬‭the‬‭issuing‬‭company‬‭.‬
‭deposit‬ ‭account‬ ‭as‬ ‭a‬ ‭condition‬ ‭of‬ ‭a‬
‭Returns‬ ‭from‬‭equity‬‭instruments‬‭come‬‭from‬‭either‬‭dividends‬
‭loan extended to it.‬
‭or stock price appreciation.‬
‭Examples:‬‭Preferred Stock, Common Stock‬
‭Cash Conversion Cycle‬
‭Financial Market‬
‭ ‬ ‭firm‬ ‭operating‬ ‭cycle‬ ‭begins‬ ‭from‬ ‭the‬ ‭time‬ ‭goods‬ ‭for‬ ‭sale‬ ‭are‬
A
‭ ‬ ‭marketplace‬‭,‬ ‭where‬ ‭creation‬ ‭and‬‭trading‬‭of‬‭financial‬‭assets‬‭,‬
A ‭manufactured‬ ‭to‬ ‭the‬ ‭eventual‬ ‭collection‬‭of‬‭cash‬‭from‬‭the‬‭sale‬‭of‬
‭such‬‭as‬‭shares,‬‭debentures,‬‭bonds,‬‭derivatives,‬‭currencies,‬‭etc.take‬ ‭these‬‭goods.‬‭The‬‭operating‬‭cycle‬‭of‬‭a‬‭firm‬‭is‬‭mainly‬‭composed‬‭of‬
‭place.‬ ‭Classify‬ ‭Financial‬ ‭Markets‬ ‭into‬ ‭comparative‬ ‭groups:‬ ‭(1)‬ ‭two‬ ‭current‬ ‭asset‬ ‭categories:‬ ‭inventories‬ ‭and‬ ‭accounts‬
‭Primary‬‭and‬‭secondary‬‭market,‬‭(2)‬‭Initial‬‭Public‬‭offering,‬‭(3)‬‭Private‬ ‭receivable‬‭.‬ ‭It‬ ‭measures‬ ‭as‬ ‭the‬ ‭sum‬ ‭of‬ ‭the‬ ‭Average‬ ‭Age‬ ‭of‬
‭Placement‬ ‭Inventory‬‭and‬‭Average Collection Period‬‭.‬

‭1.‬ ‭ oney‬ ‭Market‬ ‭and‬ ‭Capital‬ ‭Market‬ ‭-‬ ‭A‬ ‭venue‬ ‭wherein‬
M ‭Average‬ ‭Age‬‭of‬‭Inventory‬ ‭-‬‭time‬‭that‬‭lapsed‬‭when‬‭a‬‭good‬‭was‬
‭s‭e ‬ curities‬ ‭with‬ ‭short-term‬ ‭maturities‬ ‭(1‬ ‭year‬ ‭or‬ ‭less)‬ ‭are‬ ‭ anufactured and eventually sold‬‭.‬
m
‭sold‬‭.‬ ‭They‬ ‭have‬ ‭been‬ ‭created‬ ‭because‬ ‭some‬ ‭individuals,‬
‭businesses,‬ ‭governments,‬ ‭and‬ ‭financial‬ ‭institutions‬ ‭have‬ ‭Average‬ ‭Collection‬ ‭Period‬ ‭-‬ ‭time‬‭when‬‭the‬‭sale‬‭was‬‭made‬‭and‬
‭temporarily‬‭idle‬‭funds‬‭that‬‭they‬‭wish‬‭to‬‭invest‬‭in‬‭a‬‭relatively‬ ‭ ollected‬‭(both measured in‬‭days‬‭).‬
c
‭safe,‬ ‭interest‬ ‭bearing‬ ‭asset.‬ ‭At‬ ‭the‬ ‭same‬ ‭time,‬ ‭other‬
‭individuals.‬
‭Operating Cycle‬‭=‬‭Average Age of Inventory‬‭+‬‭Average‬
‭●‬ ‭ n‬ ‭the‬ ‭other‬ ‭hand,‬ ‭securities‬ ‭with‬ ‭longer-term‬
O ‭Collection Period‬
‭maturities‬ ‭sold‬ ‭in‬ ‭Capital‬ ‭Markets‬‭.‬ ‭The‬ ‭key‬ ‭capital‬
‭market‬ ‭securities‬ ‭are‬ ‭bonds‬ ‭(long-term‬‭debt)‬‭and‬‭both‬ ‭ irms‬‭would‬‭generally‬‭want‬‭to‬‭speed‬‭up‬‭their‬‭operating‬‭cycle.‬‭The‬
F
‭common‬ ‭stock‬ ‭and‬ ‭preferred‬ ‭stock‬ ‭(equity,‬ ‭or‬ ‭faster‬ ‭their‬ ‭operating‬ ‭cycle‬ ‭is,‬ ‭the‬ ‭faster‬ ‭they‬ ‭can‬ ‭convert‬‭other‬
‭ownership).‬ ‭current assets to cash, which is used to pay current obligations.‬
 ‭practices‬ ‭would‬ ‭form‬ ‭three‬ ‭parts:‬ ‭credit‬ ‭selection,‬ ‭credit‬ ‭terms‬
‭Cash Conversion Cycle‬‭=‬‭Operating Cycle‬‭-‬‭Average‬
‭ nd credit monitoring.‬
a
‭Payment Period‬

‭One popular credit selection technique is the use of the‬

‭ owever,‬ ‭in‬ ‭the‬ ‭process‬ ‭of‬ ‭producing‬ ‭and‬ ‭selling‬ ‭goods,‬ ‭firms‬
H
‭5 C’s of credit:‬
‭would‬ ‭incur‬ ‭obligations‬‭for‬‭purchases‬‭of‬‭raw‬‭materials‬‭or‬‭finished‬
‭goods‬ ‭on‬ ‭account‬‭which‬‭results‬‭in‬‭accounts‬‭payable.‬‭An‬‭account‬
‭Character‬ ‭ he‬ ‭applicant’s‬ ‭record‬ ‭of‬ ‭meeting‬ ‭its‬
T
‭payable‬‭reduces‬‭the‬‭number‬‭of‬‭days‬‭a‬‭firm’s‬‭resource‬‭has‬‭tied‬‭up‬
‭past‬ ‭obligations‬ ‭have‬ ‭been‬ ‭judged.‬
‭to‬ ‭its‬ ‭operating‬ ‭cycle.‬ ‭Thus,‬ ‭including‬ ‭accounts‬ ‭payable‬ ‭in‬ ‭our‬
‭However,‬‭if‬‭the‬‭applicant‬‭does‬‭not‬‭have‬‭any‬
‭earlier equation, gives us the firm’s cash conversion cycle.‬
‭credit‬‭history,‬‭he‬‭or‬‭she‬‭may‬‭be‬‭required‬‭to‬
‭have‬ ‭a‬ ‭co-maker.‬ ‭A‬ ‭co-maker‬‭is‬‭another‬
‭Cash Conversion Cycle‬‭=‬‭Average Age of Inventory‬‭+‬‭Average‬ ‭person‬ ‭who‬ ‭signs‬‭the‬‭loan‬‭and‬‭assumes‬
‭Collection Period‬‭-‬‭Average Payment Period‬ ‭equal responsibility for repayment.‬

‭Capacity‬ ‭ his‬‭emphasizes‬‭the‬‭customer’s‬‭ability‬‭to‬
T
‭ he‬‭average‬‭payment‬‭period‬‭is‬‭the‬‭time‬‭it‬‭takes‬‭for‬‭the‬‭firm‬‭to‬‭pay‬
T ‭repay‬ ‭its‬ ‭obligations‬ ‭in‬ ‭reference‬ ‭to‬ ‭its‬
‭its‬ ‭accounts‬ ‭payable‬ ‭expressed‬ ‭in‬ ‭the‬ ‭number‬ ‭of‬ ‭days.‬ ‭The‬ ‭current‬ ‭financial‬ ‭position‬ ‭or‬ ‭standing.‬ ‭It‬
‭operating‬‭cycle‬‭less‬‭than‬‭the‬‭average‬‭payment‬‭period‬‭provides‬‭us‬ ‭determines‬ ‭whether‬ ‭the‬ ‭customer‬ ‭has‬
‭the‬‭firm’s‬‭cash‬‭conversion‬‭cycle.‬‭Carefully‬‭analyzing‬‭the‬‭equations‬ ‭sufficient‬ ‭resources‬ ‭or‬ ‭sources‬ ‭of‬ ‭funds‬
‭provided‬ ‭above,‬ ‭a‬ ‭firm’s‬ ‭cash‬ ‭conversion‬ ‭cycle‬ ‭is‬ ‭expressed‬ ‭as‬ ‭that it can use to settle obligation‬
‭follows.‬
‭Capital‬ ‭ he‬ ‭applicant’s‬ ‭net‬ ‭worth‬ ‭which‬ ‭can‬ ‭be‬
T
I‭ llustration‬‭:‬‭Bloom‬‭Manufacturing‬‭had‬‭an‬‭average‬‭age‬‭of‬‭inventory‬ ‭arrived‬ ‭at‬ ‭by‬ ‭deducting‬ ‭total‬ ‭liabilities‬
‭of‬ ‭18.5‬ ‭days,‬ ‭an‬ ‭average‬ ‭collection‬ ‭period‬ ‭of‬ ‭48.5‬ ‭days‬ ‭and‬ ‭an‬ ‭from total assets.‬
‭average‬‭payment‬‭period‬‭of‬‭53.5‬‭days.‬‭Bloom‬‭is‬‭operating‬‭and‬‭cash‬
‭conversion cycle obtained as follows:‬ ‭Collateral‬ ‭ he‬ ‭amount‬ ‭of‬ ‭assets‬ ‭the‬ ‭customer‬ ‭has‬
T
‭that‬ ‭could‬ ‭serve‬ ‭as‬ ‭a‬ ‭security‬ ‭in‬ ‭the‬
‭Operating‬‭Cycle‬ ‭=‬‭Average‬‭Age‬‭of‬‭Inventory‬‭+‬‭Average‬‭Collection‬ ‭event that the obligation is not paid.‬
‭ eriod‬
P
‭●‬ ‭18.5 days + 48.5 days =‬‭67 days‬
‭Condition‬ ‭ his‬ ‭includes‬ ‭current‬ ‭economic‬ ‭and‬
T
‭industry‬ ‭conditions‬ ‭that‬ ‭might‬ ‭affect‬ ‭the‬
‭Cash‬ ‭Conversion‬ ‭Cycle‬ ‭=‬ ‭Operating‬ ‭Cycle‬ ‭–‬ ‭Average‬ ‭Payment‬
‭customer’s ability to repay its obligations.‬
‭ eriod‬
p
‭●‬ ‭67 days - 53.5 days =‬‭13.5 days‬
‭Credit Score‬
‭Inventory Management‬
‭ nother‬ ‭use‬ ‭in‬ ‭granting‬ ‭credit‬ ‭to‬ ‭customers‬ ‭is‬ ‭through‬ ‭credit‬
A
‭ he‬ ‭objective‬ ‭in‬ ‭managing‬‭inventory‬‭is‬‭to‬‭convert‬‭it‬‭as‬‭quickly‬
T ‭scoring.‬ ‭Credit‬ ‭scoring‬ ‭applies‬ ‭statistically‬ ‭derived‬ ‭weights‬ ‭to‬ ‭a‬
‭as‬ ‭possible‬ ‭to‬ ‭cash‬ ‭without‬ ‭losing‬ ‭sales‬ ‭due‬ ‭to‬ ‭stock‬ ‭outs‬‭.‬ ‭credit‬ ‭applicant’s‬ ‭scores‬ ‭on‬ ‭key‬ ‭financial‬ ‭and‬ ‭credit‬
‭Therefore,‬ ‭the‬ ‭financial‬‭manager‬‭plays‬‭a‬‭crucial‬‭role‬‭in‬‭overseeing‬ ‭characteristics‬ ‭to‬ ‭predict‬ ‭whether‬ ‭he‬ ‭or‬ ‭she‬ ‭will‬ ‭pay‬ ‭the‬
‭that‬ ‭the‬‭firm‬‭maintains‬‭an‬‭appropriate‬‭quantity‬‭of‬‭inventory‬‭–‬ ‭requested‬ ‭credit‬ ‭on‬ ‭time.‬ ‭In‬ ‭this‬ ‭procedure,‬ ‭a‬ ‭credit‬ ‭score‬ ‭is‬
‭not‬ ‭too‬‭much‬‭and‬‭not‬‭too‬‭little.‬ ‭Maintaining‬‭too‬‭much‬‭inventory‬ ‭obtained‬ ‭that‬ ‭reflects‬ ‭the‬ ‭customer’s‬‭creditworthiness,‬‭reflecting‬
‭implies‬ ‭that‬ ‭the‬ ‭firm‬ ‭incurs‬ ‭more‬ ‭costs‬ ‭associated‬ ‭with‬‭carrying‬ ‭its‬ ‭overall‬ ‭credit‬ ‭strength.‬ ‭The‬ ‭score‬ ‭obtained‬ ‭is‬ ‭compared‬ ‭to‬ ‭a‬
‭these‬ ‭inventories.‬ ‭However,‬‭carrying‬‭too‬‭little‬‭inventory‬‭quantities‬ ‭predetermined‬ ‭standard‬ ‭in‬ ‭order‬ ‭to‬ ‭arrive‬ ‭at‬ ‭a‬ ‭decision‬ ‭of‬
‭might‬ ‭lead‬ ‭to‬ ‭possible‬ ‭stock‬ ‭outs‬ ‭that‬ ‭could‬ ‭further‬‭lead‬‭to‬‭lost‬ ‭accepting‬ ‭or‬ ‭rejecting‬ ‭the‬ ‭customer’s‬ ‭credit.‬ ‭This‬ ‭method‬ ‭is‬ ‭an‬
‭sales, and worst, lost customers.‬ ‭inexpensive way to obtain credit ratings for customers.‬

‭REMEMBER !!!‬
‭Types of Inventory (Manufacturing Company)‬
‭ he‬‭use‬‭of‬‭the‬‭5‬‭C’s‬‭of‬‭credit‬‭will‬‭allow‬‭the‬‭firm‬‭to‬‭carefully‬‭assess‬
T
‭Raw Materials‬ ‭ hese‬‭are‬‭purchased‬‭materials‬‭not‬‭yet‬‭put‬
T ‭the‬ ‭customer’s‬ ‭ability‬‭to‬‭repay‬‭its‬‭obligations‬‭along‬‭with‬‭the‬‭level‬
‭into production‬‭.‬ ‭of‬ ‭risk‬ ‭that‬ ‭the‬‭firm‬‭will‬‭be‬‭subjected‬‭to‬‭once‬‭it‬‭decides‬‭to‬‭grant‬
‭credit‬ ‭to‬ ‭the‬ ‭customer.‬ ‭It‬‭requires‬‭experience‬‭to‬‭fully‬‭assess‬‭and‬
‭Work in Process‬ ‭ hese‬ ‭are‬ ‭goods‬ ‭and‬ ‭labor‬ ‭put‬ ‭into‬
T ‭review‬ ‭the‬ ‭credit‬ ‭worthiness‬ ‭of‬ ‭customers‬ ‭and‬ ‭subsequently‬
‭production but not finished‬‭.‬ ‭decide.‬

‭Finished Goods‬ ‭ hese‬ ‭are‬ ‭goods‬ ‭put‬ ‭into‬ ‭production‬ ‭and‬

T ‭ EEK‬‭4:‬‭THE‬‭SOURCES‬‭AND‬‭USES‬‭OF‬‭SHORT-TERM‬‭&‬
W
‭finished. These are‬‭ready to be sold‬‭.‬ ‭LONG-TERM FUNDS‬

‭ ne‬ ‭of‬‭the‬‭common‬‭techniques‬‭in‬‭inventory‬‭is‬‭the‬‭ABC‬‭Inventory‬
O
‭Sources and Uses of short-term funds‬
‭system/ABC‬‭Analysis.‬‭Inventories‬‭classified‬‭as‬‭“A”‬‭are‬‭high‬‭valued‬
‭items,‬ ‭which‬ ‭should‬ ‭be‬‭safeguarded‬‭the‬‭most.‬‭“B”‬‭items,‬‭on‬‭the‬
‭Bank‬ ‭Banks‬ ‭provide‬ ‭several‬ ‭loan‬ ‭products‬
‭other‬‭hand,‬‭are‬‭average-cost‬‭items‬‭that‬‭should‬‭be‬‭safeguarded‬
‭ atering to different types of needs.‬
c
‭more‬‭than‬‭C‬‭items‬‭but‬‭not‬‭as‬‭much‬‭as‬‭A‬‭items.‬‭While‬‭“C”‬‭items‬
‭have low cost and are the least safeguarded.‬
‭ redit‬
C ‭ redit‬ ‭provided‬ ‭lending‬ ‭services‬ ‭to‬ ‭its‬
C
‭Accounts Receivable Management‬ ‭Cooperatives‬ ‭members.‬ ‭Members‬ ‭usually‬ ‭pay‬
‭contributions to the cooperative.‬
‭ epresents‬ ‭assets‬ ‭of‬ ‭the‬ ‭entity‬ ‭that‬ ‭are‬ ‭expected‬ ‭to‬ ‭be‬
R
‭Credit Card‬ ‭Credit‬ ‭Cards‬ ‭just‬ ‭take‬ ‭note‬ ‭of‬ ‭the‬ ‭high‬
‭collected‬ ‭and‬ ‭thus‬ ‭converted‬ ‭to‬ ‭cash.‬ ‭A‬ ‭firm‬ ‭would‬ ‭generally‬
i‭ nterest rates on this source of funds.‬
‭want‬ ‭to‬ ‭collect‬ ‭its‬ ‭receivables‬ ‭as‬ ‭quickly‬ ‭as‬‭possible‬‭without‬
‭losing‬ ‭customers‬ ‭due‬ ‭to‬ ‭imposing‬ ‭very‬ ‭tight‬ ‭collection‬
‭procedures.‬ ‭Thus,‬ ‭sound‬ ‭accounts‬ ‭receivable‬ ‭management‬ ‭Lending‬ ‭Lending‬ ‭Companies‬ ‭companies‬ ‭that‬ ‭are‬
 ‭Companies‬ ‭ edicated‬‭to‬‭lending‬‭.‬‭They‬‭usually‬‭charge‬
d ‭Future and Present Value‬
‭higher‬ ‭interest‬ ‭than‬‭banks‬‭but‬‭their‬‭credit‬
‭requirements are more lenient‬ ‭1.‬ ‭ uture‬‭Value‬‭-‬‭The‬‭amount‬‭to‬‭which‬‭an‬‭investment‬‭will‬‭grow‬
F
‭compared to banks.‬ ‭after‬ ‭earning‬ ‭interest.‬ ‭In‬ ‭our‬ ‭previous‬ ‭examples,‬ ‭it‬ ‭is‬ ‭the‬
‭principal plus total interest earned over a stated period.‬
‭Pawnshop‬ ‭ awnshop‬‭provides‬‭funds‬‭in‬‭exchange‬‭for‬
P
‭collateral,‬‭usually‬‭jewelry,‬‭or‬‭other‬‭items‬ ‭2.‬ ‭Present‬‭Value‬ ‭-‬‭The‬‭amount‬‭you‬‭have‬‭to‬‭invest‬‭today‬‭if‬‭you‬
‭of value.‬ ‭ ant to have a certain amount of cash flow in the future.‬
w

‭Pattern of Cash Flow‬

‭Sources and Uses of long-term funds‬
‭1.‬ ‭Single‬‭Amount‬‭(Lump‬‭Sum)‬ ‭-‬‭A‬‭single‬‭cash‬‭outflow‬‭is‬‭made‬
‭ nd the total receipts will be at a single future date.‬
a
‭Equity Investor‬ ‭ hese‬ ‭are‬ ‭the‬ ‭individuals/corporations‬
T
‭which‬ ‭are‬ ‭issued‬ ‭common‬ ‭stock.‬ ‭They‬
‭2.‬ ‭Annuity‬ ‭-‬‭Periodic‬‭stream‬‭of‬‭equal‬‭cash‬‭flow‬‭at‬‭equal‬‭time‬
‭share‬ ‭in‬ ‭the‬ ‭ownership‬ ‭of‬ ‭the‬ ‭company.‬ i‭ ntervals‬‭(annually, monthly, etc.)‬
‭There‬‭are‬‭also‬‭equity‬‭investors‬‭who‬‭do‬‭not‬
‭have‬‭voting‬‭rights‬‭in‬‭the‬‭company‬‭but‬‭have‬ ‭3.‬ ‭Mixed‬‭Stream‬ ‭-‬‭Unequal‬‭periodic‬‭cash‬‭flows‬‭that‬‭reflect‬‭no‬
‭a‬ ‭share‬ ‭in‬ ‭dividends,‬ ‭usually‬ ‭a‬ ‭fixed‬ ‭ articular pattern.‬
p
‭percentage.‬ ‭These‬ ‭investors‬ ‭are‬ ‭issued‬
‭preferred‬ ‭stock.‬ ‭Holders‬ ‭of‬ ‭preferred‬ ‭Present Value of a Single Amount‬
‭shares‬ ‭are‬ ‭first‬ ‭to‬ ‭receive‬ ‭dividends‬ ‭than‬
‭common stockholders.‬ ‭ nswers‬ ‭the‬ ‭question:‬ ‭How‬ ‭much‬ ‭must‬ ‭be‬ ‭invested‬ ‭today‬ ‭to‬
A
‭produce‬ ‭a‬ ‭certain‬ ‭amount‬ ‭in‬ ‭the‬ ‭future‬‭?‬ ‭Since‬ ‭future‬ ‭value‬ ‭is‬
I‭ nternal‬ ‭ ot‬ ‭all‬ ‭profits‬ ‭are‬ ‭distributed‬ ‭to‬
N ‭calculated‬ ‭by‬ ‭multiplying‬ ‭the‬ ‭present‬ ‭investment‬ ‭by‬ ‭1‬ ‭+‬ ‭interest‬
‭Generated‬ ‭stockholders.‬ ‭Most‬ ‭of‬ ‭the‬ ‭profits‬ ‭are‬ ‭rate‬‭compounded‬‭by‬‭the‬‭number‬‭of‬‭periods,‬‭we‬‭shall‬‭just‬‭reverse‬
‭Funds‬ ‭reinvested‬ ‭and‬ ‭used‬ ‭by‬ ‭companies‬ ‭to‬ ‭the process. This method is called‬‭discounting‬‭.‬
‭finance their needs.‬
‭𝑡‬
‭𝐹𝑉‬‭‬ = ‭‬‭𝑃𝑉‬‭‬‭𝑥‭‬‬(‭1‬‭‬ + ‭‬‭𝑟‬) ‭‬
‭Banks‬ ‭ hey‬
T ‭provide‬ ‭long-term‬ ‭loans,‬
‭depending‬‭on‬‭the‬‭nature‬‭of‬‭the‬‭need.‬‭For‬ ‭𝐹𝑉‬
‭example,‬ ‭a‬ ‭5-year‬ ‭to‬‭10-year‬‭loan‬‭may‬‭be‬ ‭𝑃𝑉‬‭‬ = ‭‬ ‭𝑡‬
‭granted‬ ‭if‬ ‭the‬ ‭purpose‬ ‭of‬ ‭the‬ ‭loan‬ ‭is‬
(‭1‬‭‬+‭‬‭𝑟)‬
‭construction of an office building‬
‭WEEK 6: BASIC LONG-TERM FINANCIAL CONCEPTS‬
‭Bonds‬ ‭ hese‬ ‭are‬ ‭debt‬ ‭investments‬ ‭where‬ ‭an‬
T
‭investor‬ ‭loans‬‭money‬‭to‬‭an‬‭entity‬‭which‬ ‭Annuities‬ ‭Ordinary Annuity‬ ‭Annuity Due‬
‭borrows the funds.‬
‭ n installment that‬
A I‭f payment is made‬ I‭f the cash flow‬
‭WEEK 5: COMPOUND AND SIMPLE INTEREST‬ ‭requires‬‭a buyer to‬ ‭and interest is‬ ‭happens‬‭at the‬
‭pay equal‬ ‭computed‬‭at the‬ ‭beginning of each‬
‭Simple Interest‬ ‭payments at a‬ ‭end of each‬ ‭period,‬‭then it is‬
‭certain period‬ ‭payment interval,‬ ‭called an annuity‬
‭illustrates an‬ ‭then it is called‬ ‭due.‬
‭The‬‭charging‬‭interest‬‭(r)‬‭based‬‭on‬‭a‬‭principal‬‭(P)‬‭over‬‭the‬‭number‬
‭annuity – a series‬ ‭ordinary annuity.‬
‭ f years (T).‬‭Basis is Principal Amount‬‭.‬
o
‭of equal cash flow‬
‭𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡‬‭‬ = ‭𝑃‬‭‬‭𝑥‬‭‬‭𝑟‬‭‬‭𝑥‬‭‬‭𝑇‬‭‬ ‭– payments in this‬
‭case for a specific‬
‭Compound Interest‬
‭number of periods.‬

‭ he‬ ‭interest‬ ‭in‬ ‭the‬ ‭first‬ ‭compounding‬ ‭period‬ ‭is‬ ‭added‬ ‭on‬ ‭the‬
T
‭principal,‬ ‭which‬ ‭will‬ ‭then‬ ‭be‬ ‭the‬ ‭basis‬ ‭for‬ ‭the‬ ‭interest‬ ‭to‬ ‭be‬
‭Present and Future value of Ordinary Annuity Formulas:‬
‭computed to the next period.‬‭Basis is Maturity Value‬‭(P + I).‬
‭ ‬‭- Periodic Payment‬
P
‭𝑟‬ ‭𝑚𝑡‬ ‭1‭‬−
‬ ‭(‬ ‭‭1 ‬ ‭‭𝑖‬ ‬‭)‬ −‭𝑛‬
‬ ‭‬+
‭𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡‬‭‬ = (‭𝑃‬‭‬‭𝑥‬‭‬(‭1‬‭‬ + ‭‬ ‭𝑚‬ ) ‭‬ − ‭‬‭𝑃‬)‭‬ ‭𝑃𝑉‬ = ‭𝑃‬‭‬ ‭‬ ‭i‬‭- interest rate per‬
‭𝑖‬
‭compounding period‬
‭n‬‭- number of‬
‭Compounding Frequency‬ ‭𝑛‬ ‭conversion period‬
(‭‭1
‬ ‭‬‬+‭‭𝑖‬ ‬‭)‬ −‭1‬
‭𝐹𝑉‬ = ‭𝑃‬‭‬ ‭‬ ‭FV‬‭- future value‬
‭𝑖‬
‭ he‬‭number‬‭of‬‭times‬‭interest‬‭is‬‭computed‬‭on‬‭a‬‭certain‬‭principal‬
T ‭PV‬‭- present value‬
‭in one year.‬

1‭ .‬ ‭ nnually‬‭(m =‬‭1‬‭)‬
A ‭Present and Future value of Annuity Due Formulas:‬
‭2.‬ ‭Semi-annually‬‭(m =‬‭2‬‭)‬
‭3.‬ ‭Quarterly‬‭(m =‬‭4‭)‬ ‬ −‭𝑛‬
‭ ‬‭- Periodic Payment‬
P
‭4.‬ ‭Monthly‬‭(m =‬‭12‬‭)‬ ‭1‭‬−
‬ ‭(‬ ‭‭1
‬ ‭‬+
‬ ‭‭𝑖‬ ‬‭)‬ ‭i‬ ‭- interest rate per‬
‭𝑃𝑉‬ = ‭𝑃‬‭‬ (‭1‬ − ‭𝑖‬)
‭𝑖‬ ‭compounding period‬
‭Effective Annual Rate (EAR)‬ ‭n‬‭- number of‬
‭𝑛‬
‭conversion period‬
‭𝐹𝑉‬ = ‭𝑃‬‭‬
(‭‭1
‬ ‭‬‬+‭‭𝑖‬ ‬‭)‬ −‭1‬
(‭1‬ − ‭𝑖‬) ‭FV‬‭- future value‬
‭ nown‬‭as‬‭the‬‭effective‬‭annual‬‭interest‬‭rate‬‭is‬‭the‬‭actual‬‭percent‬
K ‭𝑖‬ ‭PV‬‭- present value‬
‭interest‬ ‭that‬ ‭a‬ ‭borrower‬ ‭pays‬ ‭on‬ ‭their‬ ‭loan‬ ‭or‬‭that‬‭an‬‭investor‬
‭earns on their investment‬

‭𝑟‬ ‭𝑚‬
‭𝐸𝐴𝑅‬‭‬ = ‭‬(‭1‬‭‬ + ‭‬ ‭𝑚‬ ) − ‭‬‭1‬)‭‬