CATUBURAN, HAROLD L.

ACT 234

FINANCIAL MANAGEMENT (1) 7. Moment – the resource

management and other
FINANCE
employees need to learn how to
- Originate from Latin words “finer” manage effectively and efficiently
meaning “end” or “to pay” to achieve objective as needed.
- The efficient acquisition, 8. Media – the resource that
allocation and utilization of funds. enables business to reach their
markets
FINANCE FUNCTIONS
FINANCIAL MANAGEMENT
- Allocating available funds
- Acquiring needed funds - Finance is needed to buy assets,
- Utilizing these funds to achieve end liability and pay expenses.
set goals - Managing finance for a company
is called managerial finance or
financial management

MANAGEMENT
- Concerned with utilizing the scare
resources of the organizations to
maximize the attainment of the
organization goals and objective.
COMPONENTS OF MANAGEMENT
1. Achievement goals
2. Working with and through people NATURE OF FINMA
3. Effectively and efficiently
maximizing limited resources - Mainly concerned with proper
4. Coping with a changing management of funds
environment - Financial manager sees that the
funds are produced so that risk,
8MS OF MANAGEMENT
cost, and control considerations
1. Manpower – most important of are properly balanced in a given
all the resources, referred to as situation and that there is
human resources optimum utilization of funds.
2. Money – referred as capital,
SCOPE OF FINANCIAL M.
although in accounting money is
only part of capital - Covers acquisition and efficient
3. Materials – important resource, utilization allocation of
particularly manufacturing funds/various uses
industries - Involves providing solutions for
4. Methods – way things are done major financial operations of the
which this present time has been firm :
improved with the aid of
INVESTMENT DECISION
technology
5. Machines – the resource - Related to selection of assets
produced by the technology (fixed and current assets)
which have been replacing Capital budgeting – investment
people in fixed and long-term assets
6. Market – refers to whom/ where - Volume of investment risk and
the business sell their products returns, cost of capital
- In corporate finance involves
assessing the value of long-term
capital investments like
machinery, plants, products and
research development…
 Working Capital Management – Making investment decision
investment and management of
- Determining the mix of current
assets.
and fixed assets to be held by a
Management of cash, inv., rec.
firm
profitability and liquidity.
- Determining the type of assets in
- Involves balancing a company’s
the category
short-term assets and liabilities to
ensure liquidity, prevent liquidity Making financing decision
issues and support sustainable
growth - Determining the mix of short-term
and long-term financing
FINANCING DECISION - In-depth analysis of available
financing alternatives, their cost
- Concerned with the capital
and long-term implications
structure decision of the firm
(proportion of debt and equity)
- Creating proper mix between
debt and equity – optimum capital
structure
- Tradeoff between risk and return
Capital structure – refers to the FINANCIAL GOALS
amount of debt and or equity Profit maximation
employed by a firm to fund its
operations and finance its assets. - Maximizing the rupee income of
- Debt-to-equity or debt-to-capital firm
ration - firm’s capital structure - Resources are efficiently utilized
expressed - Appropriate measure of firm perf.
Debt and equity capital – used - Serves interest of society also
to funds a business operations, Shareholders Wealth Maximization
capital exp., acquisitions, and
other investment. - Maximize the net present value
- Fundamental objective–
maximize the market value of the
firm share

- Tradeoff between risk and Maximizing EPS

return – risk return tradeoff - Ignores timing and risk of
states that the potential return expected benefit
rises with an increase in risk. - Maximizing EPS will not result in
DIVIDEND DECISION the highest price for company’s
share
- Top investment choice due to
their steady revenue and Nonfinancial Objectives
potential for capital appreciation. - General welfare of employees,
- Dividend payout ratio – consider society
the benefits of shareholder - Fulfillment of responsibilities
- Measures a company’s ability to towards customer, suppliers
continue paying or increasing div. - Leadership in R&D
- Effective utilization of funds

ROLE of FINANCIAL MANAGERS

AGENCY PROBLEMS
Performing financial analysis
- Usually refers to a conflict of
- Transforming financing data into interest between a company’s
a form that can be used for management and the company
decision making stockholders.
- Determining the needs - The manager, acting as the
agent of the shareholders
MISCONCEPTION ABT FM STATEMENT OF OWNERS EQUITY
- Financial Management is A statement of owner’s equity is
Accounting usually prepared after the income
- A Review of Mathematics statement.
- A branch of Statistics It shows the amount of equity for
a given reporting period, which is
usually a year.
FS ANALYSIS (2)
BALANCE SHEET

FINANCIAL STATEMENT It is a statement that is used to

evaluate a company’s financial
These are written reports created by a position and condition.
company’s management to summarize
the business’s financial condition over a It shows the company’s assets,
certain period (quarterly, six-monthly, or liabilities, and equity
annually). ELEMENTS:
ELEMENTS OF FS: ASSET - refers to the company’s
1. Income Statement economic resources that is
employed to produce goods and
2. Statement of Owners’ equity. services.
3. Cash Flow Statement, and LIABILITY - refers to the firm’s
4. Balance Sheet financial obligation where the
company’s resources are
financed through borrowing.
INCOME STATEMENT EQUITY - refers to the amount
It is also called the profit and owed by the owners/stockholders
loss statement, is a report that of the business.
shows the income, expenses,
and resulting profits or losses of a
company during a specific time CASHFLOW STATEMENT
period. It refers to the net amount of
ELEMENTS: cash and cash equivalents that
are transferred into and out of a
1. Revenue refers to the money business.
earned through the sales of
goods and payment for services It is a key indicator of a
generated by the company. company's financial health,
representing the money the
2. Expenses refer to the cost that business receives (inflows) from
businesses incur in running their its operations, investments, and
operations. financing, minus the money it
3. Net income or profit and loss spends (outflows).
The costs are deducted from the
revenue to calculate the total
profit. ELEMENTS OF CF:

Net Income – if the revenues are Operating Activities

higher than the Expenses This section outlines the primary
Net Loss - if the revenues are revenue-generating activities of
lower than the expenses a business, including cash flows
from selling goods or services,
paying wages, purchasing
 inventory, and other daily
business operations.
Common items in operating activities
- Cash received from customers
- Cash paid to suppliers and
employees
- Cash paid for operating expenses
(e.g., rent, utilities)
- Interest paid or received
- Income taxes paid or refunded

Investing Activities
This section details the
business's spending or cash
receipt related to its investments,
involving the purchase and sale
of long-term assets and
investments.
Common items in investing activities
- Purchase or sale of property,
plant, and equipment (PPE)
- Investments in securities or other
companies (e.g., stocks, bonds)
- Loans made to others or
repayments received

Financing Activities
Financing activities involve cash
flows between a company and its
creditors, encompassing
transactions that raise capital or
pay down debt.
Common items in financing activities
- Issuance or repurchase of stock
- Borrowing or repaying loans (bath
short and long-term debt)
- Payment of dividends to
shareholders

FINANCIAL STATEMENT
- Is an evaluation of past and
current performance of the firm
and its forecast in the future
- Financial statements analysis
involves calculations first
compute by combining accounts
coming from an income
statement to the balance sheet or
 vice versa or by simply relating LIQUIDITY - it is the sufficiency of
an account within the statement. cash and near cash to pay its
current liability as it fall due.
TOOLS & TECHNIQUES OF FS
ANALYSIS SOLVENCY - it is the ability of the
company to pay its long term
HORIZONTAL ANALYSIS liabilities.
- COMPARATIVE ANALYSIS - PROFITABILITY - it is the ability of
Evaluation of the changes or the company to pay its long term
behavior patterns of the different liabilities.
accounts in the financial
ACTIVITY RATIO - It pertains to
statements for two or more years. the ability of the company to quickly
sell its product and collect its
receivables

OBJECTIVE:
o Assess managerial performance
in terms of financial position and
operating results.
o Compare the company’s
performance with the key
VERTICAL ANALYSIS competitors and the operating
- A. COMMON SIZE ANALYSIS - it industry.
shows a significant item on a o Project future earnings and
financial statement used as the cashflows.
base value and all other items are
compared with it. o Assess the company’s financial
- it shows a significant item on a flexibility, which is the ability to
financial statement used as the grow and to meet obligations
base value and all other items are even when unexpected
compared with it. circumstances arise

FORECASTING (3)
- It refers to future financial
activities that are helpful in the
firm's operation.

USERS:
TOP MANAGEMENT
- Makes use of the forecast as a
FINANCIAL RATIO ANALYSIS tool for long-range planning,
particularly in providing a basis
It involves analyzing the mathematical for performance targets,
relationship between accounts in the implementing long-range
financial statements. strategic objectives, and making
It is calculated from statements provided capital budgeting decisions
to investors, creditors, analysts, and PRODUCTION MANAGER
other FS users with helpful information
to assess a company’s: & CATEGORY
 - Utilize the forecast to determine FORECASTING APPROACHES
the amount of raw materials
>QUALITATIVE FORECASTING
needed in the production the
budget, the schedule of - Incorporate factors based on
production activities, inventory intuition, emotion, personal
levels to maintain so as not to experiences, and value system.
disrupt the production, labor
hours, and the schedule of - EXPERT OPINIONS
shipments. Under this method, the views of
the managers or a group with a
PURCHASING MANAGER
high level of expertise, often in
- Uses the forecast to ascertain combination with statistical
the volume or bulk of materials models, are synthesized to
that should be purchased for a generate consensual forecasts
particular period. This avoids are considered
overstocking or understocking of
the inventories

MARKETING MANAGER - DELPHI METHOD

- Makes use of the forecast to Similar to the expert opinions, it is
estimate how many sales also done by a group of experts.
should be made in a particular The difference is that the
period, and to plan promotional members are asked to answer
and advertising activities for the individually through a
products questionnaire about their
forecasts of future events.
FINANCE MANAGER
- Uses the forecast to anticipate - SALES FORCE (POLLING)
the funding needed by the firm. Oftentimes, the sales force is
The Finance manager must used by the companies to arrive
establish the firm’s cash inflows at their sales forecasts
and outflows, and indicate the
exact moment when the firm will - CONSUMER (MARKET SURV.)
need additional funding. Firms, at times, conduct their own
customer or potential customer
HR MANAGER surveys to accumulate
- Utilize the forecast to supply the information regarding future
human resources needed the plans. Surveys are conducted
achieving the firm’s objectives. through telephone inquiries,
The HR manager must specify questionnaire and interviews.
when to hire additional people to >QUANTITATIVE FORECASTING
support the firm’s operations.
- Uses a variety of mathematical
COLLEGES AND UNIVERSITIES models that rely on historical data
- Makes use of the forecast to and or causal variables to
identify the possible enrollees forecast demand.
in the school year. The figures
help them to determine the TIME SERIES
revenues to be obtained from the
tuition fees, the faculty hired, the NAÏVE FORECASTING
planning of room assignments, - This is considered the benchmark
and the building of facilities model
 - This indicates that the previous TREND PROJECTION (TREND
data will be used to forecast the LINE FORECAST)
next period.
- It refers to a trend line series of
historical data point and then
projects the line into future for
medium to long term forecast.
MOVING AVERAGE
- It is the simplest among the time
series models in which a series of
averages will be computed.
MONTHS ACTUAL SALES 3 moving AVE ERROR IERRORI ERROR² %ERR0R
JANUARY 11,367.91 0.00
FEBRUARY 12,367.47 0.00
MARCH 15,433.65 0.00
APRIL 16,235.66 13,056.34 3,179.32 3,179 10,108,054 4.11
MAY 23,041.25 14,678.93 8,362.32 8,362 69,928,452 1.76
TOTAL 11,541.64 11,542 80,036,506 5.86
MAD = MEAN ABSOLUTE DEVIATION 5,770.82 40,018,253 2.93
MSE = MEAN SUARE ERROR MAD MSE MAPE
MAPE = MEAN OF ABSULUTE PERCENT

Yt = a + bt
WEIGHTED MOVING AVERAGE
- Weight can be used to place
more emphasis on recent values
when there is a trend or pattern.
This makes the techniques more
responsive to changes since a
more recent period may be more
heavily weighted.
MONTHS ACTUAL SALES 3 WEIGHTED MOVING AVE CRITERIA
JANUARY 11,367.91 0.00 WEIGHT PERIOD
FEBRUARY 12,367.47 0.00 3.00 3 MONTHS
MARCH 15,433.65 0.00 7.00 2 MONTHS
APRIL 16,235.66 13,750.63 10.00 LAST MONTH
MAY 23,041.25 15,374.73 20.00

3 34,103.73 37,102.41
7 86,572.29 108,035.55
10 154,336.50 162,356.60

13,750.63 15,374.73

APRIL MAY

EXPONENTIAL SMOOTHING
It is a continuous adjustment
process that uses alpha (α) as a
smoothing parameter to minimize
the error.
At Ft
PERIOD ACTUAL SALES FORECAST Ft = αAt + (1-α) Ft
JANUARY 11,367.91 Ft = 0.2 (At) + ( 0. 8) Ft
FEBRUARY 12.367.47 11,367.91 Ft = At
MARCH 15,433.65 11,567.82 12,367.47 (.2) + 11,367.91 (.8)
APRIL 16,235.66 12,340.98 15,433.65 (.2) + 11.567.82 (.8)
MAY 23,041.25 13,119.92 16,235.66 (.2) + 12, 340.98 (.8)
JUNE 15,104.19 23.041.25 (.2) + 13,119.92 (.8)

*Calculate exponential smoothing forecasts using α = 0.2

JANUARY FEBRUARY MARCH APRIL MAY JUNE

2,273.58 2,273.58 2,473.49 3,086.73 3,247.13 4608.25 (.2) At
9,094.33 9,094.33 9,094.33 9,254.25 9,872.79 10,495.94 (.8)Ft
11,367.91 11,367.91 11,567.82 12,340.98 13,119.92 15,104.19

PERIOD ACTUAL SALES FORECAST ERROR ERROR ²

JANUARY 11,367.91
FEBRUARY 12,367.47 11,367.91 999.56 999,120
MARCH 15,433.65 11,567.82 3,865.83 14,944,657
APRIL 16,235.66 12,340.98 3,894.68 15,168,498
MAY 23,041.25 13,119.92 9,921.33 98,432,798
MSE 32,386,268

*Calculate MSE = Mean Squred Error α = 0.2

JANUARY FEBRUARY MARCH APRIL MAY

12,367.47 15,433.65 16,235.66 23,041.25
11,367.91 11,567.82 12,340.98 13,119.92
999.56 3,865.83 3,894.68 9,921.33