MANAGING the

Finances
ENTERPRISES
of the
INTRODUCTION
• Financial Management is exponential in building up
any forms of enterprises.

• Failure to plan and carefully manage the resources

prior establishment might lead to a costly mistake.

• Some entrepreneurs think that financial management

is simply maintaining sufficient cash for their
operations.

• Thus, it is imperative that businessmen know how to

measure whether their resources have been
effectively and efficiently used.
A. Financial Controls
Managing your finances is a difficult task. Nevertheless, there
are available tools that will help ensure the efficient use of
financial resources. Business budget guides the enterprise as to
how much money has to be allotted for certain activities, items,
and expenses.

SIMPLE TIPS IN BUDGETING FOR AN ENTERPRISE

1. Prepare realistic and flexible budgets.

2. Use actual prices as your basis for cost estimates.
3. Consider other important factors like inflation, fuel price hikes
and other adverse economic situations like foreign exchange
fluctuations, when setting a budget.
4. Variances point out to specific actions that need
improvement to enhance the performance of the firm.
B. Analysis of Financial Ratios
• Financial statements, that is Income Statement and the cash flow
statement for a given period, presents the results of the
operations and the final condition of an enterprise to the
entrepreneur and other interested parties.

• A number of these financial relationships or indicators can be

expressed in ratios or comparisons between figures in the same
statement.

TWO TYPES OF COMPARISONS IN ANALYSIS OF FINANCIAL RATIOS

1. INTERNAL COMPARISON – Ratios can be analyzed from a

historical perspective.
2. EXTERNAL COMPARISON –This involves comparing the ratios of
the firm with the ratios of various firms
in the same industry or with industry
averages during a period.
CLASSIFICATIONS OF FINANCIAL RATIOS
PROFITABILITY RATIOS. Several ratios have been devised to help one assess one’s
firm’s performance in terms of its capacity to generate profits.
RATIO FORMULA COMPUTATION REMARKS
Profitability Ratios
Gross Profit Gross Profit 822, 800 • Measures the total margin to cover
Margin ___________ ___________ = 38.6% operating expenses and yield a profit.
Sales 2,131, 200 • Indicates a firm’s average mark-up
obtained on products sold and
measures the firm’s ability to pass
along its increased costs to its
customers.

Net Profit Margin Net Income After Taxes 312, 095 • Indicates the net income on products
___________ ___________ = 14.6% sold.
Sales 2,,131,200 • Measures the firm’s overall
profitability.

Return on Assets Net Income After Taxes 312, 095 • Reflects how the firm has earned from
___________ ___________ = 18.9% the investment of all its financial
Total Assets 1.651,520 resources.
• Measures management performance
in using assets to generate profits.

Return on Net Income After Taxes 312, 095 • Measures how much the firm has
Investments ____________ ___________ = 36.1 % earned on the funds provided by the
Long term liabilities + 144,000 + 720,000 owners and long term creditors.
Owner’s Equity

Return on Equity Net Profit 312, 095 • Shows the return on the owner’s
___________ ___________ = 43.3 % investment in the business.
Owner’s Equity 720,000 • Measures firm’s overall performance.
CLASSIFICATIONS OF FINANCIAL RATIOS
LIQUIDITY RATIOS. These ratios determine the firm’s ability to meet its maturing
short-term obligations in relation to its current assets.

NOTE: Generally, the higher the liquidity ratio of the firm, the stronger its financial
position.

RATIO FORMULA COMPUTATION REMARKS

Liquidity Ratios
Current Ratio Current Assets 1,181,520 • Measures ability of the firm to
___________ ___________ = 3.56:1 meet its current liabilities
Current Liabilities 331,425 through assets that are readily
converted into cash.
• Typically, a current ratio of 2:1 is
suggested to meet the firm’s
obligations.
Acid Test Ratio Current Assets Less: 958,320 • Indicates the firm’s ability to pay
Inventory Less: ___________ = 2.89:1 off short-term obligations with
331, 425 cash and assets convertible to
Prepayments cash without relying on the sale
___________ of inventories.
Current Liabilities • An acid-test ratio of 1:1 is the
rule of thumb for the firm in
meeting its current obligations.
CLASSIFICATIONS OF FINANCIAL RATIOS
LEVERAGE OR SOLVENCY RATIOS. These ratios measure the extent of the
firm’s total debt burden and it ability to meet obligations. They are
important to creditors since these ratios reflect the capacity of the firm’s
revenues to pay interest (on loans taken out) and other fixed charges.

RATIO FORMULA COMPUTATION REMARKS

Leverage or Solvency Ratios
Debt Equity Total Liabilities 475, 425 • Expresses the relationship
___________ _________ = 0.40:1 between capital
Total Capital 1,176,095 contributed by long-term
creditors and owner’s
capital.

• The lower the ratio, the

les the debt pressure and
the greater the
protection from creditors.
CLASSIFICATIONS OF FINANCIAL RATIOS

ACTIVITY RATIOS. Analysis of activity ratios can help n evaluating a small

firm’s performance by showing how effectively the business employs its
resources. This will assist management in running the business effectively.

RATIO FORMULA COMPUTATION REMARKS

Activity Ratios
Fixed Asset Sales 2,131,200 • Measures the
Turn-over ___________ ______= 4.53 times contribution of fixed
Total Fixed Assets 470,000 assets to sales and how
fixed assets are utilized.

Total Asset Sales 2,131,200 • Indicates the contribution

Turn-over __________ ______= 1.29 times of total assets to sales
Total Assets 1,651,520 and how total assets are
being utilized.
C. Common Size Income Statement Analysis
This analytical toll reduces or convert the different items in the Income
Statement into percentages of sales.
Table 9.12. Comparative Income Statement (In Pesos)
2003 2004 Increase
(Decrease)
Sales 800,000 1,000,000 200,000
Less: Cost of Sales 400,000 480,000 80,000

Gross Profit Margin 400,000 520,000 120,000

Less: Operating
Expenses
Salaries and Wages 120,000 140,000 20,000
Commissions 80,000 100,000 20,000
Sales Tax 80,000 100,000 20,000
60,000 60,000 0
Promotions
6,000 10,000 4,000
Transportation expense
2,000 2,000 0
Insurance 12,000 14,400 2,400
Professional Fees 2,400 2,800 400
Light and water 12,000 14,400 2,400
Telephone and telegraph
Miscellaneous expense 24,000 28,000 4,000
Total Operating Expense 398,400 471,600 73,400

Net Operating Profit 1,600 48,400 46,800

C. Common Size Income Statement Analysis
Table 9.13. Comparative Income Statement (In Percentage)

2003 2004
Sales 100.00 100.00
Less: Cost of Sales 50.00 48.00

Gross Profit Margin 50.00 52.00

Less: Operating
Expenses
Salaries and Wages 15.00 14.00
10.00 10.00
Commissions 10.00 10.00
Sales Tax 7.50 6.00
Promotions 0.75 1.00
Transportation expense 0.25 0.20
Insurance 1.50 1.44
Professional Fees 0.30 0.28
Light and water 1.50 1.44
Telephone and telegraph 3.00 2.80
Miscellaneous expense
Total Operating Expense 49.80 47.16

Net Operating Profit 0.20 4.84

D. Benchmarking
The comparative analysis of your sales, costs, and profit on a monthly or yearly
basis will give you a good picture of the changes in your sales. This can help you to
plan ways of increasing sales. High sales, however do not necessarily guarantee
high profits. It can also mean an increase in your operating costs, which can
adversely affect profitability. In which case, you have to think of ways to minimize
these costs.

Table 9.14. Performance of Yantok Furniture

2004 2003 2002

Sales 2,174,700 2,065,965 1,957,230

Gross Profit 777,132 738,275 6,999,419

Margin
Operating 274,680 260,946 247,212
Expense
E. Break-Even Analysis
Break-even analysis is one of the tools being used to analyze and
measure the profitability of an enterprise. Management can use this tool
to determine the effects of certain decisions or situations on the firm’s
operations. Such decisions may include the following:

• A lower sales performance than the expected volume of sales

•An increase (or decrease) in selling prices
• Hiring of additional sales people
•Increase in the wages of direct labor
•Rise in the cost of raw materials
•Related factors affecting costs, volume of sales, and production and s
selling prices.