BUSINESS FINANCE REVIEWER

Financial Planning Tools and Concepts

Planning is an important aspect of the firm’s operations Two phases of financial planning
because it provides road maps for guiding, coordinating, Financial planning starts with long term plans which would
and controlling the firm’s actions to achieve its objectives then translate to short term plans.
(Gitman & Zutter, 2012).
Strategic vs. Tactical Planning
- Discuss the difference between Strategic and Tactical
Management planning is about setting the goals of the
planning.
organization and identifying ways on how to achieve them
(Borja& Cayanan, 2015).

• Long-term financial plans

§ These are a set of goals that lay out the overall direction of the company.
§ A long-term financial plan is an integrated strategy that takes into account various departments such as sales,
production, marketing, and operations for the purpose of guiding these departments towards strategic goals.
§ Those long-term plans consider proposed outlays for fixed assets, research and development activities,
marketing and product development actions, capital structure, and major sources of financing.
§ Also included would be termination of existing projects, product lines, or lines of business; repayment or retirement
of outstanding debts; and any planned acquisitions(Gitman & Zutter, 2012).

• Short-term financial plans

§ Specify short-term financial actions and the anticipated impact of those actions. Part of short term financial
plans include setting the sales forecast and other forms of operating and financial data. This would then
translate into operating budgets, the cash budget, and pro forma financial statements (Gitman & Zutter, 2012).
§ For the purpose of this topic, emphasis will be made on short-term financial planning.

Long-Term Planning Short Term Planning

Persons More participation from top Top management is still involved but there is more participation
Involved management from lower level managers (production, marketing, personnel,
finance and plant facilities) because their inputs are crucial at this
stage since they are the ones who implement these plans

Time Period 2 to 10 years 1 year or less

Level of Less More

Detail

Focus Direction of the company Everyday functioning of the company

Table 1: Comparison of Short-Term and Long-Term Planning (Gitman & Zutter, 2012)
Planning Process
1) Set goals or objectives.
• For the activity done, the objective was to increase
awareness of (chosen issue).
• For corporations, long term and short term
objectives are usually identified. These can be
seen in the company’s vision and mission
statements. The vision statement states where the
company wants to be while the mission statement
states the plans on how to achieve the vision.
• Examples of a company’s Vision-Mission statements are
as follows:
Jollibee Foods Corporation (JFC)
Vision: To excel in providing great tasting
food that meets local preferences better
than anyone; To become one of the three
largest and most profitable restaurant
companies in the world by 2020.
Mission: To serve great tasting food, bringing the
joy of eating to everyone.
McDonalds Philippines
Vision: First to respond to the fast changing needs
of the Filipino family; First choice when it comes
to food and dining experience; First mention as the
ideal employer and socially responsible company;
First to respond to the changing lifestyle of the
Filipino family
Mission: To serve the Filipino community by
providing great-tasting food and the most relevant
customer delight experience.
2) Identify Resources
For the activity done, the resources the learners have are the
following:
• PHP 300,000
• Man power
Resources include production capacity, human resources
who will man the operations and financial resources (Borja
& Cayanan, 2015).
NEXT: STUDY PAGES 131-137
3) Identify goal-related tasks
• For the activity done, the goal-related task is to prepare
an event to increase awareness of (whatever issue you
want).
4) Establish responsibility centers for accountability
and timeline.
For the activity done, there were different responsibilities
formed as follows:
• Event Chairperson
• Budgeting Team
• Production Team
• Marketing Team
• Creatives Team
• Administrative Team
Also, there must be a timeline for the activities, especially
since they were allotted a specific time to do the activity.
5) Establish the evaluation system for monitoring and
controlling
• For the activity done, the learners were given an
expectation of their output and the teacher will
grade them based on a predetermined criterion.
Other evaluation for awareness events may be
number of attendees, feedback, etc.
• For corporations, the management must establish a
mechanism which will allow plans to be
monitored. This can be done through quantified
plans such as budgets and projected financial
statements. The management will then compare
the actual results to the planned budgets and
projected financial statements. Any deviations
from the budgets should be investigated.
6) Determine contingency plans
• In planning, contingencies must be considered as well.
• Budgets and projected financial statements are
anchored on assumptions. If these assumptions do not
become realities, management must have alternative
plans to minimize the adverse effects on the company
(Borja & Cayanan, 2015).
Characteristics of an Effective Plan.
• In planning, the goal of maximizing shareholders’ wealth must always be put in mind.
• The following criteria may be used for effective planning:
§ Specific – target a specific area for improvement.
§ Measurable – quantify or at least suggest an indicator of progress.
§ Assignable – specify who will do it.
§ Realistic – state what results can realistically be achieved, given available resources.
§ Time-related – specify when the result(s) can be achieved.

1. Sales Budget
• The most important account in the financial statement in making a forecast is sales since most of the expenses are correlated
with sales.
- Given the importance of the sales forecast, the financial manager must be able to support this figure with reasonable
assumptions. The following external and internal factors should be considered in forecasting sales:

External Internal

• Gross Domestic Product • production capacity

(GDP) growth rate • man power requirements
• Inflation • management style of
• Interest Rate managers
• Foreign Exchange Rate • reputation and network of
• Income Tax Rates the controlling stockholders
• Developments in the • financial resources of the
industry company
• Competition
• Economic Crisis
• Regulatory Environment
• Political Crisis
Table 1: Factors that Influence Sales

External and Internal Factors Influencing Sale

Macroeconomic Variables (external)
Macroeconomic variables such as the GDP rate, inflation
rate, and interest rates, among others play an important
role in forecasting sales because it tells us how much the
consumers are willing to spend. A low GDP rate coupled
by a high inflation rate means that consumers are spending
less on their purchases of goods and services. This means
that we should not forecast high sales of the periods of low
GDP.
Developments in the Industry (external)
Products and services which have more developments in its
industry would likely have a higher sales forecast than a
product or service in slow moving industry. Consumer
trends are always changing, thus the industry should be
competitive to be able to appeal to more customers and stay
in the market.
Competition (external)
Suppose you are selling bread and you know that each
person in your community eats an average of one loaf of
bread a day. The population of your community is 500
people. If you are the only person selling bread in your
town, then your sales forecast is 500 units of bread.
However, you also have to take account your competition.
What if there are 4 other sellers of bread? You will need to
have to divide the sales between the 5 of you. Does this
mean your new forecast should be 100 units of bread? Not
necessary. You should also know the preference of your
consumers. If more of them would prefer to buy more
bread from you, then you should increase your sales
forecast.
Production Capacity and man power (internal)
Suppose that you have already evaluated the
macroeconomic factors and identified that there is a
very strong market for your product and consumers are
very likely to buy from you. You forecasted that you
will be able to sell 1,000 units of your product.
However, you only have 20 employees who are able to
produce 20 units each. Your capacity cannot cover your
expected demand hence, you are limited by it. To be
able to increase capacity, you should be able to expand
your operations
2. Production Budget
- A production budget provides information regarding the number of units that should be produced over a given
accounting period based on expected sales and targeted level of ending inventories.
- It is computed as follows

Required production in units = Expected Sales + Target Ending Inventories - Beginning Inventories

Note: Ending inventory of current period is beginning inventory of next period.

• Provide the following example (EASY):

- [A] Company forecasts sales in units for January to May as follows:

Jan Feb Mar Apr May

Units 2,000 2,200 2,500 2,800 3,000

- Moreover, [A] Company would like to maintain 100 units in its ending inventory at the end of each month.
- Beginning inventory at the start of January amounts to 50 units.
- How many units should [A] Company produce in order to fulfill the expected sales of the company?
- Answer Key:

MONTH

Jan Feb Mar Apr May Total

Projected Sales 2,000 2,200 2,500 2,800 3,000 12,500

Target level of ending inventories 100 100 100 100 100 100

Total 2,100 2,300 2,600 2,900 3,100 12,600

Less: beginning inventories 50 100 100 100 100 50

Required production 2,050 2,200 2,500 2,800 3,000 12,500

3. Budgeting Cash
Operations budget refers to the variable and fixed costs needed to run the operations of the company but are not
directly attributable to the generation of sales.
- Examples of this are the following:
• Rent payments
• Wages and Salaries of selling and administrative personnel
• Administrative Costs
• Travel and representation expenses
• Professional fees
• Interest Payments
• Tax Payments
4. Cash Budget
§ Recall from the start of the term the exercise you did where the learners were asked how much allowance they were given
and how much expenses they would incur in a day. Recall that at the end of the activity, they were able to identify whether
they had excess cash or they had a deficit.
§ Relate that this is what the cash budget aims to do.
- For a business enterprise, having the right amount of cash is important since cash is used to make payments for purchases, for
operational expenses, to creditors, and for other transactions.
- The cash budget forecasts the timing of these cash outflows and matches them with cash inflows from sales and other
receipts. The cash budget is also a control tool to monitor the way the company handles cash.

The cash budget, or cash forecast, is a statement of the firm’s planned inflows and outflows of cash. It is used by the firm to estimate
its short-term cash requirements, with particular attention being paid to planning for surplus cash and for cash shortages

CASH BUDGET

Jan Feb … Nov Dec Total

Cash Receipts xxx xxx … xxx xxx xxx

Less: Cash Disbursements xxx xxx … xxx xxx xxx

Net Cash Flow xxx xxx … xxx xxx xxx

Add: Beginning Cash xxx xxx … xxx xxx xxx

Ending Cash xxx xxx … xxx xxx xxx

Required Ending Cash Balance xxx xxx … xxx xxx xxx

Required total financing (xxx) … (xxx)

Excess cash balance xxx … xxx xxx

• The following are the steps in formulating a cash budget:

A. Form the sales forecast, identify how much would be collected in the cash budget period. Sales may be made in cash
or for credit. Cash sales are translated to cash at the point of sale while credit sales are collected depending on the
credit period. Credit periods may range from 10 days to more than a month depending on the strategy of the company.
Recall from Lesson 2: Financial Statement Analysis the implications of the company’s credit policy.
- Continuing from previous example, assume selling price is PHP100/unit. Sales for each month are expected to be collected
as follows:
‣ Month of sales : 20%
‣ A month after sales: 50%
‣ 2 months after sales: 30%
- How much is total receipts from sales (DIFFICULT)?

Jan Feb Mar Apr May Total

Units 2,000 2,200 2,500 2,800 3,000 12,500

Sales in Pesos 200,000 220,000 250,000 280,000 300,000 1,250,000

Collection from current months sales 40,000 44,000 50,000 56,000 60,000 250,000

Collection from previous months sales 100,000 110,000 125,000 140,000 150,000

Collection from two months prior sales 60,000 66,000 75,000 84,000

Total Collections from Sales 40,000 144,000 220,000 247,000 275,000 926,000
B. Identify other receipts.
- Examples:
‣ interest received
‣ return on principal investments
‣ proceeds from sale of non-operating assets
‣ issuance of capital stock
‣ proceeds from borrowings

- Add these receipts to the collections from sales to get to total receipts.

C. From the Production Budget, identify how much of the purchases made will be paid by the company on the cash
budget period. Like sales, purchases may be made in cash or on credit depending on the supplier’s credit terms.
- Continuing from previous example:

‣ Assume that cost per unit is PHP50.

‣ All purchases this month are paid the following month. How much is total cash disbursements for purchases (AVERAGE)?

Jan Feb Mar Apr May Total

Required production 2,050 2,200 2,500 2,800 3,000 12,550

Cost in Peso 102,500 110,000 125,000 140,000 150,000 627,500

Payment from current months sales 102,500 110,000 125,000 140,000 477,500

Payment from previous months sales 150,000

Payment from two months prior sales

Total Payments for Purchases 0 102,500 110,000 125,000 140,000 477,500

D. From the operations budget, identify which expenses will be paid in cash during the cash budget period.
- The following expense items will be paid based on the following periods:

‣ Rent payments: Rent of PHP5,000 will be paid each month.

‣ Wages and salaries: Fixed salaries for the year are PHP96,000, or PHP8,000 per month. Wages are estimated as 10% of
monthly sales.
‣ Tax payments: Taxes of PHP25,000 must be paid in April.

E. Identify all other cash payments to be made.

- Examples:
‣ Fixed-asset purchases in cash
‣ Cash dividend payments
‣ Principal Payments
‣ Repurchase of common stock
‣ Purchase of stock/bond investments
- It is important to recognize that depreciation and other noncash charges are NOT included in the cash budget.
 - The following items will be paid based on the following periods:
‣ Fixed-asset outlays: New
machinery costing PHP130,000 will be
purchased and paid for in April.
‣ Interest payments: An interest payment of PHP10,000 is due in May.
‣ Cash dividend payments: Cash dividends of PHP20,000 will be paid in January.
‣ Principal payments (loans): A PHP20,000 principal payment is due in February.

Jan Feb Mar Apr May Total

Total Payments for Purchases - 102,500 110,000 125,000 140,000 477,500

Rent Payments 5,000 5,000 5,000 5,000 5,000 25,000

Wages 20,000 22,000 25,000 28,000 30,000 125,000

Salaries 8,000 8,000 8,000 8,000 8,000 40,000

Tax Payment 25,000 25,000

Fixed Asset Outlay 130,000 130,000

Interest Payment 10,000 10,000

Cash Divident 20,000 20,000

Principal Payment 20,000 20,000

Total Cash Disbursements 53,000 157,500 148,000 321,000 193,000 872,500

F. Match the receipts and disbursements on the periods they become collectible and payable, respectively.

G. Set a minimum required cash balance. This balance is maintained in case contingencies arise. Recall from the steps
in planning that we should also plan for contingencies.

H. If the net cash flow is above the minimum cash balance, the company is in excess cash and may consider
putting it in short term investments. If it is below, the company should make a short term borrowing during
that period.
- Moreover, [A] Company has a beginning cash balance of PHP80,000 and would like to maintain an ending cash
balance of PHP100,000 per month. Prepare [A] Company’s Cash Budget for January to May. Prepare a cash budget
(DIFFICULT).

Jan Feb Mar Apr May Total

Cash Receipts 40,000 144,000 220,000 247,000 275,000 926,000

Less: Cash Disbursements (53,000) (157,500) (148,000) (321,000) (193,000) (872,500)

Net Cash Flow (13,000) (13,500) 72,000 (74,000) 82,000 53,500

Add: Beginning Cash 80,000 67,000 53,500 125,500 51,500 80,000

Ending Cash Balance 67,000 53,500 125,500 51,500 133,500 133,500

Less: Minimum Cash Balance (100,000) (100,000) (100,000) (100,000) (100,000) (100,000)

Cumulative excess cash balance (33,000) (46,500) 25,500 (48,500) 33,500 33,500
(Cumulative required financing)
 - Evaluating the Cash Budget:
‣ If the ending cash balance after payment of all required disbursements is less than the required ending balance, the
company needs to borrow additional cash from short term borrowings to meet its required ending balance. Should
the ending cash balance exceed the company’s minimum cash requirement the next period, the company may be able
to repay the loan plus accrued interest.
‣ Should the Company have excess cash above its required maintaining cash balance, the company may invest this
cash on short term investments so that it will have an opportunity to earn additional profits. If the company’s cash
balance would then fall below its minimum cash requirement, the company may withdraw the investment to be
able to meet the required cash balance.

NEXT: STUDY FINANCIAL STATEMENTS ON PAGES 150-162

• Working capital is the company’s investment in current assets such as cash, accounts receivable, and
inventories.
• Net Working capital is the difference between current assets and current liabilities.

• The operating cycle is the sum of days of inventory and days of receivables.

NEXT: STUDY PAGES 173-182 (Plus take note of the Teacher Tips!)
1. Cash
• Being the most liquid asset, cash is an important account in the balance sheet that will affect the liquidity, and solvency of a
company. It is also the most vulnerable when it comes to theft.

• A good internal control must be properly implemented to safeguard this asset:

- A basic internal control system entails the assignment of custodial function and recording function to separate individuals,
unless you are the owner. Why is this so? Imagine a cashier of a company who is also the chief accountant. If tempted, this
person can steal cash from the company and can
manipulate the records so that nobody can discover that he is stealing. If you are the owner, you probably will not steal from
yourself and adjust the records?
- Cash collections should be supported by official receipts which are summarized in a daily collection report. The daily
collection report is going to useful for the next control measure for cash – depositing collections.
- A good internal control over cash is by depositing all collections intact. The daily collection reports are now compared with
the deposit slips to find out if all collections are indeed deposited.
- If all collections need to be deposited, then payments must be made through a check voucher system. There must also be
two signatories in the check to provide a check and balance. If the business is small then the entrepreneur’s signature may
suffice.
- For small payments like the fare given to a messenger, a petty cash fund is used. A petty cash fund which should be minimal
in amount, will be issued to a petty cash fund custodian, say the office administrator. The petty cash fund may be PHP10,000
or PHP20,000. Disbursements from this petty cash funds must be supported by a petty cash voucher signed by the recipient of
the petty cash. When the petty cash fund is almost depleted, the petty cash fund custodian will get reimbursements. This
reimbursement will go through the check voucher system where the custodian gets a check with the petty cash vouchers as
supporting documents.
- The check must also be cross-checked by drawing two lines on the payee section of the check. This cross-checking
requires depositing of a check. It cannot be encashed. This makes it more difficult for somebody who stole a check to get
the money.

2. Motives For Holding Cash

• The following are the reasons for holding cash:
- Primary Reasons
a. Transactional. This is the cash used for paying expenses such as salaries, utilities, rent and taxes, among others.
b. Compensating balance. This is the cash held to meet bank requirements such as the minimum cash balance you maintain
for checking accounts and if you have existing loans, banks may also require a minimum amount of deposit with them.
- Secondary Reasons
a. Precautionary. This is the cash maintained for emergencies such as the additional cash you keep during political and
economic uncertainties. For example, if your business requires a substantial amount of importation, a relatively higher amount
of cash has to be maintained when the exchange rate becomes highly volatile due to political instability such as what happened
during EDSA II.
b. Speculative. This refers to the cash held by the company to take advantage of opportunities (e.g. buying stocks during major
corrections such as what happened at the height of the global financial crisis in 2008 and 2009 where stock valuations went
down by as much as 80% for some companies).
3. Budgeting Cash
• The Cash Budget
- The cash budget provides information regarding the company’s expected cash receipts and disbursements over a given
period.
- It is useful for identifying future funding requirements or excess cash within a given period. This allows managers to find
possible sources of financing if the cash budget shows cash shortage or identify appropriate tenors for money market
placements for excess cash.
- Normally, a cash budget is prepared for a one year period broken down into smaller intervals like months. This allows
managers to see the seasonality of the business which affects the cash flows.

B. BUGAY INDUSTRIES
Cash Budget
For the months of October, November, and December 2015

OCTOBER NOVEMBER DECEMBER

Cash Receipts xxx xxx xxx

Less: Cash Disbursements (xxx) (xxx) (xxx)

Net Cash Flows xxx xxx xxx

Add: Beginning Cash Balance xxx xxx xxx

Ending Cash xxx xxx xxx

Less: Minimum cash balance (xxx) (xxx) (xxx)

Cumulative financing requirement (if negative) or xxx xxx xxx

187
Cumulative excess cash balance (if positive)

Teacher Tips
Money market placements refer to short- term financial instruments with a maximum tenor of one year.
• Basically, cash budget has the following parts:
- Cash Receipts include all of a firm’s inflows of cash in a given financial period. The most common components of
cash receipts are cash sales, collections of accounts receivable, and other cash receipts.

- Illustrative Example:
Source: Gitman, L. (1976). Principles of managerial finance. New York: Harper & Row.

B. Bugay Industries, a defense contractor, is developing a cash budget for October, November, and December. Jungaya’s
sales in August and September were PHP100,000 and PHP200,000 respectively. Sales of PHP400,000, PHP300,000, and
PHP200,000 have been forecast for October, November, and December respectively.

Historically, 20% of the firm’s sales have been for cash, 50% have generated accounts receivable collected after 1
month, and the remaining 30% have generated accounts receivable collected after 2 months. In December, the firm
will receive a PHP30,000 dividend from stock in a subsidiary.
Required: Prepare the cash receipts section of the cash budget.
Answer Key:

Forecasted sales 100,000 200,000 400,000 300,000 200,000

August September December

Cash Sales (20%) P20,000 P40,000 P80,000 P60,000 P40,000

Collection of AR

1st month (50%) P50,000 P100,000 P200,000 P150,000

2nd month (30%) P30,000 P60,000 P120,000

Other cash receipts P30,000

TOTAL CASH RECEIPTS P210,000 P320,000 P340,000

- Cash Disbursements include all outlays of cash by the firm during a given financial period. The most common cash
disbursements are:
• Cash purchases
• Purchasing fixed assets
• Payments of accounts payable
• Interest payments
• Rent (and lease) payments
• Cash dividend payments
• Wages and salaries
• Principal payments (loans)
• Tax

• It is important to recognize that depreciation and other noncash charges are not included in the cash budget,
because they merely represent a scheduled write-off of an earlier cash outflow.

• Illustrative Example:
Jungaya Industries has gathered the following data needed for the preparation of a cash disbursements schedule for
October, November, and December.
- Purchases - The firm’s purchases represent 70% of sales. Of this amount, 10% is paid in cash, 70% is paid in the
month immediately following the month of purchase, and the remaining 20% is paid 2 months following the
month of purchase.
- Rent Payments - Rent of PHP5,000 will be paid each month.
- Wages and Salaries - Fixed salary cost for the year is PHP96,000, or PHP8,000 per month. In addition, wages are
estimated as 10% of monthly sales.
- Tax Payments - Taxes of PHP25,000 must be paid in December.
- Fixed Assets - New machinery costing PHP130,000 will be purchased and paid for in November.
Interest Payments - An interest payment of PHP10,000 is due in December.
 - Answer Key:

Forecasted purchases (70%) 70,00 140,000 280,000 210,000 140,000

0
August September OCTOBER NOVEMBE DECEMBER
R
Cash Purchases (10%) P7,000 P14,000 P28,000 P21,000 P14,000

Payment of AP

1st month (70%) 49,000 98,000 196,000 147,000

2nd month (20%) 14,000 28,000 56,000

Total Cash Purchases P7,000 P63,000 140,000 245,000 217,000

Rent 5,000 5,000 5,000

Wages and Salaries 48,000 38,000 28,000

Tax 25,000

Machinery purchase 130,000

Interest 10,000

TOTAL CASH DISBURSEMENTS 193,000 P418,000 P285,000

4. Net Cash Flow, Ending Cash, Financing, and Excess Cash

• The firm’s net cash flow is found by subtracting the cash disbursements from cash receipts in each period. Then we add
beginning cash to the net cash flow to determine the ending cash for each period. Finally, we subtract the desired
minimum cash balance from ending cash to find the required total financing or the excess cash balance. If the computed
amount is negative, the company needs financing. Otherwise, the company has excess cash.

• The cash budget is part of planning. It helps managers anticipate future funding requirements in order to obtain proper
financing even before the need arises. This will help them avoid usurious rates. On the other hand, if the company has
excess cash, managers are able identify the investment instruments that will maximize the returns on the excess cash.

• Illustrative Example: Given the two illustrative examples, generate a cash budget showing the net cash flow, ending cash
flow, financing, and excess cash. At the end of September, Jungaya’s cash balance was PHP50,000,and its notes payable
and marketable securities equaled PHP0. The company wishes to maintain as a reserve for unexpected needs, a minimum
cash balance of PHP25,000.
 • Answer Key:

B. BUGAY INDUSTRIES
Cash Budget
For the months of October, November, and December 2015

OCTOBER NOVEMBER DECEMBER

Cash Receipts 210,000 320,000 340,000

Less: Cash Disbursements (193,000) (418,000) (285,000)

Net Cash Flows 17,000 (98,000) 55,000

Add: Beginning Cash Balance 50,000 67,000 (31,000)

Ending Cash 67,000 (31,000) 24,000

Less: Minimum cash balance (25,000) (25,000) (25,000)

Cumulative excess cash balance (Cumulative required 42,000 (56,000) (1,000)

financing)

• Comprehensive Illustrative Example:

It was December 2014 and the president of DCD Corporation wants to find out if the company has enough cash to
pay the principal balance of the company’s loan worth PHP3 million by the end of 2015. He asked the chief accountant
to prepare the cash budget for 2015.

EXAMPLE: PAGES 191-193

5. Accounts Receivable
• Accounts receivables spring out of the need to sell merchandise.

• An excellent business proposition is to generate sales without offering a credit facility to customers. However, this
concept is theoretically sound, but not sustainable.
- Consider a real estate company which sells condominium units at PHP5 million per unit. How many units can the
property developer sell if he sells the units only on cash basis? Do you think he can sell a lot? Probably not as many as
compared to providing instalment payments.

• Credit management strategically defines the quality of account receivables collection.

• The collectability of accounts receivables depends largely on the quality of customers. The quality of customers
depends on the standards or credit policies set up and used by an organization. Credit policies are an integral part of the
credit evaluation and there are 5C’s used in credit evaluation. These are:
- Character –the willingness of the borrower to repay the loan
- Capacity – a customer’s ability to generate cash flows
- Collateral – security pledged for payment of the loan
- Capital – a customer’s financial resources
- Condition – current economic or business conditions
• Proper management of accounts receivable entails having a good billing and collection system.
- A good system should lead to the sending of statements of account to customers on time.
- Follow-ups through phone calls or any form of gentle reminders should be made if customers fail to pay on time. These
follow-ups can also serve as the management’s way of validating if the contact details given by customers are still valid
and if the customers still occupy the same office.
 • Aging of receivables is also a control measure to determine the amount of receivables that are still outstanding and past due.

Current P 60 million

1 - 30 day past due 20 million

31 - 60 day past due 10 million

61 - 90 day past due 3 million

Over 90 days past due 7 million

Total Php 100 million

• Accounts which have been past due for more than 90 days have higher probability to default. The aging of
receivables is useful in determining the allowance for doubtful accounts.

6. INVENTORY MANAGEMENT
• Inventory management involves the formulation and administration of plans and policies to efficiently and
satisfactorily meet production and merchandising requirements and minimize costs relative to inventories.
- Effective inventory management becomes critical when the nature of the products are either perishable (e.g. fruits,
vegetables), fragile (e.g. glasses), or toxic (e.g. bleaching agent).

• Proper inventory management involves the determination of reasonable levels of inventories considering the size and nature
of business.
- Maintaining too much inventories has costs such as carrying or holding costs, possible obsolescence or spoilage.
- On the other hand, too low inventory can result to stockout, and eventually lost sales.

7. Inventory In A Manufacturing Company

• In a manufacturing company, there are three types of inventory:
- Raw materials – these are purchased materials not yet put into production.
- Work in process – these are goods and labor put into production but not yet finished.
- Finished goods – these are goods put into production and finished. These are ready to be sold.

8. The ABC Analysis

One way to control inventory is to classify inventory into a classification system called ABC Analysis.
Inventories classified as “A” are high valued items which should be safeguarded the most.
B items, on the other hand, are average-cost items that should be safeguarded more than C items but not as much as A items.
While C items have low cost and is the least safeguarded.

To summarize:

INVENTORY CLASS

A B C

Money value High Medium Low

Quality of control Very strict Strict Not too Strict

Inventory movement (flows) Slow Relatively fast Fast

Three ways for Maria to better manage her cash balance

Maria Luna, a 25-year-old nurse, works at a hospital that pays her every 2 weeks by direct deposit into her checking account
which pays no interest and has no minimum balance requirement. She takes home about PHP9,000 every 2 weeks or about
PHP18,000 per month.

She maintains a checking account in the bank that does not earn any interest income with a balance of around PHP7,500. Whenever it
exceeds that amount she transfers the excess into her savings account, which currently pays 1.5% annual interest.

She currently has a savings account balance of PHP85,000 and estimates that she transfers about PHP3,000 per month
from her checking account into her savings account.

Maria pays her bills immediately when she receives them. Her monthly bills average about PHP9,500, and her monthly cash
outlays for food and transportation cost total about PHP4,500.

An analysis of Maria’s bill payments indicates that on average she pays her bills 10 days early. Bank Time Deposit are
currently yielding about 4.2% annual interest. Maria is interested in learning how she might better manage her cash balances.

Answer Key:

The three ways for Maria to better manage her cash balance:

1. Invest current balances. Maria can transfer her current savings account balances into a Time Deposit, thereby increasing
the rate of interest earned from 1.5% to about 4.2%. On her current P17,000 balance, she will immediately increase her
annual interest earnings by about PHP2,295. (0.042 - 0.015) X P85,000
2. Invest monthly surpluses. Maria can transfer monthly the PHP3,000 from her checking account to the Time Deposit,
thereby increasing the annual earnings on each monthly transfer by about PHP81(0.042 - 0.015) X PHP3,000 which, for
the 12 transfers, would generate additional annual earnings of about PHP972 (12 months X PHP81).
3. Slow down payments. Rather than paying her bills immediately on receipt, Maria can pay her bills nearer their due date.
By doing this she can gain 10 days of disbursement float each month, or 120 days per year (10 days per month over12
months), on an average of PHP9,500 of bills. Assuming she can earn 4.2% annual interest on the PHP9,500, slowing down
her payments would save about P133 annually (120/360) X 0.042 X P9,500.

Based on these three recommendations, Maria would increase her annual earnings by a total of about PHP3,400
(PHP2,295 + PHP972 + PHP133) . Clearly, Maria can grow her earnings by better managing her cash balances.

EVALUATION: PAGE 198-200