Financial Management- managerial/corporate finance Financial Planning tools

and is the strategic planning, organizing etc. for Sales Budget (Page 1)
shareholder maximization - A financial document that allows a business owner to
Finance- science and art of managing money estimate the revenue they expect their company to make
Money- anything generally accepted for payment in a specified period.
Controllable factors: - The most important account in the financial statement
Profitability- measure of financial performance since most of the expenses are correlated with sales
Good liquidity- type and amount of assets and Factors to Consider in Forecasting Sales:
liabilities External Factors:
Dividends- holders receive dividends from a - Political & Legal Factors
corporation as returns - Macroeconomic Variables (GDP, Inflation, Interest
Competent management- visionary, decisive, people- Rates, Foreign Exchange Rates, Income Tax Rates)
oriented, inspiring, innovative, respected, experienced - Competition and Consumers' social factors
Corporate plans for improvement- allow investors to - Technological Developments in the Industry
hope for better revenues Uncontrollable factors: Internal Factors:
macroeconomic conditions, political stability, - Previous sales patterns
prospects of the company’s industry, general market - Production capacity & manpower requirements
sentiment, flow of foreign funds - Management style of managers & reputation and
Balance sheet- shows what a firm owns, owes, and network of the controlling stockholders
net worth - Financial resources of the company (Page 1)
Sources of finance- debt, equity Points to Take in Creating a Sales Budget (Page 2)
Sources of return- income, price appreciation - Examine previous sales data on the same month or
Risk- uncertainty of return quarter and compare it with industry benchmarks
Financial leverage- use of borrowed funds - Know more about consumers' spending patterns for
Valuation- determination of what an asset is worth products in your industry
Goal of mgmt- maximization of shareholder value - Consider sales team's capacity
Roles of finc mgmt.- financial decisions and controls, - Examine data on the conversion of prospective
financial planning, capital management, allocation customers to actual customers
and utilization of financial resources, cash flow mgmt, Production Budget (Page 2)
disposal of surplus, financial reporting, risk mgmt - A production budget provides information regarding the
Owners- shareholders, board of directors, CEO number of units that should be produced over a given
Managers- VP for mark., finc., production, adminis. accounting period based on expected sales and targeted
CFO functions- financing (determine capital level of ending inventories.
structure), investing, operating, dividend policies Direct Materials Budget (Page 2)
Goals of finc mag.- acquisition of funds, effective cash - Used to determine the number of direct materials that
management, effective working capital management, are needed to fulfill the requirements of the production
effective inventory management, effective investment budget. Direct materials are the raw materials needed to
decision, proper asset collection, proper risk mgmt. manufacture a product.
Financial market- organized forums Direct Labor Budget (Page 3)
Financial Institutions - Used to determine how many hours of labor are required
Financial Instruments- real or virtual document to produce each type of product listed in the production
representing a legal agreement budget.
Debt instruments- treasury bonds and bills (low Overhead Budget (Page 3)
interest rates and low risk of default), corporate bonds - Contains all other manufacturing costs such as
(high interest rates and not risk free), commercial supervisor salaries, payroll taxes, logistics, rent, and
paper (short-term), certificate of deposits (earns utilities. These costs are typically split into fixed and
interest on a lump sum of money) variable costs.
Equity Instrument- preferred stock (priority over Selling & Administrative Budget (Page 3)
common stock, no asset will be distributed if - An estimate of all operating costs other than production.
liquidated), common stock (real owners of the Includes items such as management salaries, business
company) licenses, accounting, legal, and human resources
Financial markets: expenses, rent, advertising, marketing, and more.
Primary market- where securities are initially issues Cash Budget (Page 4)
Public offering- sale of bonds or stocks to public, - Set a minimum required cash balance to be maintained.
initial public offering (first offering) If net cash flow is above the minimum, excess cash can
Private placements- sale of a new security directly to be invested. If below, short term borrowing may be
an investor needed.
Secondary markets- where the sale of previously Long-term Financial Plan (Page 4)
owned securities take place - Lays out the overall direction of the company as an
Money markets- where securities with short-term integrated strategy considering various departments for
maturities are sold strategic goals. Considers proposed outlays, activities,
Capital markets- where longer-term maturities are actions, capital structure, and major financing sources.
sold
Financial institutions- thrift banks, commercial banks,
insurance companies, mutual funds, pension funds,
others

Financial Statement Projected Financial Statements (Page 4-5)

Accounting system- procedures and methods used - The tool used to set an overall goal for the company's
Debit- left side performance and position for the end of the year. It sets
Credit- right side targets to control and monitor activities. Statements that
Transactions- exchange of goods and services can be forecasted include projected income statement,
Doubt-entry accounting- recording transactions in a statement of financial position, and statement of cash
way that maintains equality flows.
Journal entry- recording of a transaction in which Working Capital (Page 5)
debit equals credit - A company's investment in current assets such as cash,
Journals- record when transactions are first entered accounts receivable, and inventories. Net working capital
Accounting process (cycle)- procedures is the difference between current assets and current
Special journals- used to list recurring transactions liabilities.
General Journal- record all business activities Operating Cycle (Page 5)
Account- used to classify and summarize effects of - The sum of days of inventory and days of receivables.
transactions Days of Inventory (Page 5-6)
Ledger- collection of accounts - The average number of days to sell inventory, calculated
Posting- process of summarizing transactions by based on average inventory and cost of goods sold.
transferring amounts Days of Sales Outstanding (Page 6)
General Ledger- collection of all accounts - The average time for a company to collect receivables,
Subsidiary Ledgers- grouping of supporting accounts calculated based on average receivables and net credit
Nominal- expense, revenue sales.
Financial Ratios: Cash Conversion Cycle (Page 6)
Liquidity (current and quick)- capacity of the firm to - The length of time between initial cash outflows and
meet its current obligations as they come due cash inflows from sales, calculated as Operating Cycle -
Current ratio- is the ratio of current assets to current Days of Payables.
liabilities. It measures a company’s ability to pay off Days of Payables Outstanding (Page 6-7)
short-term liabilities with current assets. - The average number of days a company waits before
Quick ratio- also referred as “acid-test ratio” paying creditors, calculated based on average payables
measures a company’s ability to pay off short-term and net credit purchases.
liabilities with quick assets Turnovers for Cash Conversion Cycle (Page 7)
Solvency- indicates whether a company's cash flow is - Inventory Turnover, Receivables Turnover, Payables
sufficient to meet its long-term liabilities Turnover are needed to calculate the cash conversion
Leverage- firm’s use of debt financing cycle. Numerators are income statement accounts and
Debt to capital ratio- is a measurement of a denominators are average balance sheet accounts.
company's financial leverage • is calculated by taking Managing the Cash Conversion Cycle (Page 7-8)
the company's interest-bearing debt, both short- and - Reduce operating cycle days to ensure it is shorter than
long-term liabilities and dividing it by the total capital. payable days through strategies like turning over inventory
Efficiency (Activity Ratio)- measure how well the quickly, managing receivables through credit terms and
company is utilizing its assets and resources collection, and paying payables slowly without damaging
Inventory turnover- speed with which inventory is credit.
sold • may be defined as annual sales divided by Working Capital Financing Policies (Page 8-9)
average inventory - Maturity Matching: Finance permanent working capital
Receivables turnover- •is defined as annual credit with long term sources and temporary with short term.
sales divided by receivables since only sales on credit - Aggressive: Finance some permanent working capital
(not cash sales) result in accounts receivable. • speed with short term sources for lower costs but increases
with which accounts receivable are collected liquidity risk.
Day sales outstanding- Number of days required on - Conservative: Finance all permanent working capital with
the average to collect an account receivable long term sources despite higher costs to minimize
Turnover ratios- Turnover ratios employing current liquidity risk.
assets need to be interpreted cautiously. These ratios Working Capital Management (Page 9-10)
are dealing with dynamic measurements, since they Reasons for Holding Cash:
are concerned with how long it takes for an event to - Transactional
occur. Turnover ratios may be biased if the firm has - Compensating Balance
Fixed asset and total asset turnover- Fixed asset - Precautionary
turnover is ratio of sales to fixed assets; measure of - Speculative
fixed assets necessary to generate sales Internal Controls for Cash:
Profitability- measures of performance that indicate - Separate custodial and recording functions
what the firm is earning on its sales, its assets, or its - Support cash collections with receipts
equity - Deposit all collections intact
Gross profit margin- It provides information regarding - Use check voucher system and dual signatories for
the ability of a company to cover its manufacturing payments
cost from its sales Managing Accounts Receivable:
Operating Profit margin- also known as return on - Set credit policies using 5 C's of credit evaluation
sales ratio compares the operating income of a - Have a good billing and collection system
company to its net sales to determine its operating - Follow up on past due accounts
efficiency - Analyze aging of receivables
Net Profit margin- the ratio of earnings after interest Managing Inventory: ABC Analysis (Page 10-11)
and taxes to sales • measures how much net profit a - Classify inventory into A, B, C categories based on
company generates for every peso of sales or value, quality of control, inventory movement
revenues that it generates Managing Inventory: XYZ Analysis (Page 11)
Operating cash flow margin- measures your - Classify products based on demand variability and stock-
business’s cash from operating activities as a out tendency into X, Y, Z categories
percentage of your sale’s revenue over a given Financial Planning Process (Page 11-12)
period. Put simply, it’s a demonstration of how well - 6 step process including understanding financial status,
your business can convert sales to cash. identifying goals, prioritizing actions, creating
Return on assets- measures how efficiently a budgets/strategies, establishing evaluation, making
company is using its assets to generate profit • ratio adjustments
of earning to total assets ; percentage earn on assets Managing Cash Flow Analysis, Debt-To-Income Ratio,
Return on equity- ratio of earnings to owners’ equity ; and Risk Tolerance Assessment can be conducted in the
percentage earned on equity • measures the return understanding financial status step.
the firm is earning on its stockholders’ investment Financial Planning Tools and Concepts
Basic earning power- the return generated by Sales Budget (Page 1)
operating income (EBIT), referred as basic earning - A financial document that allows a business owner to
power estimate the revenue they expect their company to make
Return on invested capital- • is a profitability ratio that in a specified period.
aims to measure the percentage return that a - The most important account in the financial statement
company earns on invested capital. • The ratio shows since most of the expenses are correlated with sales
how efficiently a company is using the investors’ Factors to Consider in Forecasting Sales:
funds to generate income. External Factors:
Market Value- used to evaluate the share price of a - Political & Legal Factors
company’s stock - Macroeconomic Variables (GDP, Inflation, Interest
Earnings per share- Earnings per share (EPS) is Rates, Foreign Exchange Rates, Income Tax Rates)
calculated by determining a company's net income - Competition and Consumers' social factors
and allocating that to each outstanding share of - Technological Developments in the Industry
common stock Internal Factors:
Price to earnings ratio- • The price-to-earnings ratio is - Previous sales patterns
the ratio for valuing a company that measures its - Production capacity & manpower requirements
current share price relative to its earnings per share - Management style of managers & reputation and
(EPS). • A high P/E ratio could mean that a network of the controlling stockholders
company's stock is overvalued, or that investors are - Financial resources of the company (Page 1)
expecting high growth rates in the future. Points to Take in Creating a Sales Budget (Page 2)
Market to book ratio- o compares a company’s market - Examine previous sales data on the same month or
capitalization, or “equity value,” to its book value of quarter and compare it with industry benchmarks
equity (BVE). It is also known as Price to Book Ratio. - Know more about consumers' spending patterns for
Factors Influence Capital Structure products in your industry
Nature of Business - If the business is risk, then it - Consider sales team's capacity
must be financed conservatively hence, lower debt - Examine data on the conversion of prospective
ratio customers to actual customers
Stage of Business Development - A newly formed Production Budget (Page 2)
business may have difficulty borrowing from banks - A production budget provides information regarding the
Macroeconomic Conditions - If the overall economy is number of units that should be produced over a given
good then management can be more aggressive on accounting period based on expected sales and targeted
taking in risk through increased debt financing level of ending inventories.
Prospects of the Industry - A growing industry makes Direct Materials Budget (Page 2)
business more confident to take on more financial risk - Used to determine the number of direct materials that
Taxes - Interest expenses are tax deductible while are needed to fulfill the requirements of the production
cash dividends are not. Management Style - budget. Direct materials are the raw materials needed to
Management and the board of directors can be manufacture a product.
aggressive or conservative in terms of taking on risk Direct Labor Budget (Page 3)
Vertical Analysis- also known as common size - Used to determine how many hours of labor are required
analysis • This is a technique for evaluating the data to produce each type of product listed in the production
of financial statements that express each item within a budget.
financial statement in terms of a percent of a base Overhead Budget (Page 3)
amount. • For the Statement of Financial Position or - Contains all other manufacturing costs such as
Balance Sheet, all accounts are presented as a supervisor salaries, payroll taxes, logistics, rent, and
percentage of total assets. •For the statement of Profit utilities. These costs are typically split into fixed and
or Loss or Income Statement, all accounts are variable costs.
presented as a percentage of net sales Selling & Administrative Budget (Page 3)
Horizontal analysis- •also known as trend analysis • - An estimate of all operating costs other than production.
To establish the trend, percentage changes of Includes items such as management salaries, business
accounts from one period to another must be made. licenses, accounting, legal, and human resources
expenses, rent, advertising, marketing, and more.
Cash Budget (Page 4)
- Set a minimum required cash balance to be maintained.
If net cash flow is above the minimum, excess cash can
be invested. If below, short term borrowing may be
needed.
Long-term Financial Plan (Page 4)
- Lays out the overall direction of the company as an
integrated strategy considering various departments for
strategic goals. Considers proposed outlays, activities,
actions, capital structure, and major financing sources.
Projected Financial Statements (Page 4-5)
- The tool used to set an overall goal for the company's
performance and position for the end of the year. It sets
targets to control and monitor activities. Statements that
can be forecasted include projected income statement,
statement of financial position, and statement of cash
flows.
Working Capital (Page 5)