BUSINESS FINANCE
the steps to achieve that goal.
Identify the steps in the financial planning process
Planning is an important aspect of the firm’s operations
because it provides road maps for guiding, coordinating,
and controlling the firm’s actions to achieve its
objectives
Management planning is about setting the goals of the
organization and identifying ways on how to achieve
them
Importance of Planning - to achieve long-term and
short-term goals
Steps in the financial planning process
1. Set goals or objectives.
2. Identify Resources
3. Identify goal-related tasks
4. Establish responsibility centers for
accountability and timeline.
5. Establish the evaluation system for monitoring
and controlling
6. Determine contingency plans
• There are three phases of financial planning.
Financial planning starts with long term plans
( set of goals that lay out the overall direction of
the company)which would then translate to
short term plans. ( specific steps or actions that
will ultimately reach the company’s long term
goals.)Medium Trrm Plans
Contingency plan-A contingency plan is a course of
action designed to help an organization respond
effectively to a significant future event or situation that
may or may not happen. A contingency plan is
sometimes referred to as "Plan B," because it can be
also used as an alternative for action if expected results
fail to materialize.
• Mission vs. Vission
A Mission Statement defines the company's business,
its objectives and its approach to reach those
objectives. A Vision Statement describes the desired
future position of the company.
• Goal vs. Objective
Goals are general guidelines that explain what you want
to achieve in your community. ... Objectivesdefine
strategies or implementation steps to attain the
identified goals. Unlike goals, objectives are specific,
measurable, and have a defined completion date.
• Strategic vs. Tactical Planning
Strategic planning plays out the long-term, broad goals
that a business or individual wants to achieve. ...
Your strategic plan provides the general idea of how to
reach a goal, and the tactical plan is where you lay out
Characteristics of an Effective Plan
Specific – target a specific area for improvement. -
Measurable – quantify or at least suggest an indicator
of progress. -
Assignable/Attainable – 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
Illustrate the formula & format in budget preparation
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.
2. 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.
Required production in units = Expected Sales + Target
Ending Inventories - Beginning Inventories
3. Operating 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.
4. Cash Budget-an estimation of the cash inflows
and outflows for a business over a specific period of
time. This budget is used to assess whether the entity
has sufficient cash to operate
Working Capital Management is the administration and
control of the company’s working capital. The primary
objective is to achieve balance bet. profitability and
risk.
Three types of working capital
a. Maturity-matching working capital financing policy -
b. Aggressive working capital financing policy
c. Conservative working capital financing policy
• Managing working capital is important because
failure to do so may result in the closure of business
Permanent Working Capital is the minimum level of
current assets required by a firm to carry-on its business
operations given its production capacity or relevant
sales range.
Temporary working capital is the excess of working
capital over the permanent working capital given its
production capacity or r
Explain tools in managing cash
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. There should be a
good internal control
2. Motives For Holding Cash
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
c. Precautionary. This is the cash maintained for
emergencies such as the additional cash you
d. Speculative. This refers to the cash held by the
company to take advantage of opportunities
3. Budgeting Cash -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
4. Net Cash Flow, Ending Cash, Financing, and Excess
Cash
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.
5. • 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.
6. Proper management of accounts receivable entails
having a good billing and collection system
5C’s used in credit evaluation. These are: -
Character –willingness of the borrower to repay 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
7. Proper management of accounts receivable entails
having a good billing and collection system.
8. INVENTORY MANAGEMENT
Cite bank and nonbank institutions
financing - It means to provide funding for a particular
need.
•Debt Financing - borrowing money from lenders and
not giving up ownership.
•Equity Financing - the method of raising capital by
selling company stock to investors (stockholders) in
exchange of ownership interests in the company.
Compare and contrast the loan requirements
Draw a flow chart on the steps in loan application
List down obligations of entrepreneurs to creditors
- present a feasibility study to a potential creditor if he
is just about to put up a business.
-present financial statements that would show the
income and loss that the company
- guarantee of an individual or an entrepreneur's
character to assure
-Entrepreneurs are responsible for setting up a viable
and regular payment scheme that creditors will agree
to. -Entrepreneurs must keep a regular stream of
financial reports to the creditors.
-entrepreneurs are legally obligated to pay the sum of
money they owe their creditors whether they are at a
profit or at a loss.
Sources of Funds
• Suppliers Credit – refers to the extension of payment
due date by suppliers.
• Advances from stockholders or other owners –
personal funds advanced by a stockholder to a company
that usually requires interest.
• Credit cooperatives – provided lending services to its
members.
• Banks – provides several loan products catering to
different types of needs.
• Credit Cards – just take note of the high interest rates
on this source of funds.
• Lending Companies – companies that are dedicated
to lending. They usually charge higher interest than
banks but their credit requirements are more lenient
compared to banks
. • Pawnshops – provides funds in exchange for
collateral, usually jewellery, or other items of value
• Informal lending sources (5/6)
Interest is usually paid per month, and monthly interest
is (6-5)/5 or 20%.
sources and uses of long-term funds.
• Equity investors – these are the
individuals/corporations w/c are issued common stock.
. • Internally generated funds – not all profits are
distributed to stockholders. Most of the profits are re-
invested and used by companies to finance their needs
. • Banks – they provide long-term loans, depending on
the nature of the need. For example, a 5-year to 10-year
loan may be granted if the purpose of the loan is
construction of an office building.
• Bonds – these are debt investments where an investor
loans money to an entity which borrows the funds.
• Lending companies – they can also provide long-term
loans.