Chapter 6: Finance Department Strategies and Analysis

Finance Department – Role & Purpose

Managing the assets of an organization secures the future of business.

 Profit – reward and motivation of a business.

 Assets – ownership that the organization manages.
 Finance ensures planning, recording, reporting, and controlling of funds.

 Liquidity – availability of cash to meet obligations.

 Solvency – ability to meet long-term debts.

Finance Department Functions

Planning  Ensures liquidity (availability of cash for

 Prepares and recommends financial obligations).
action plans.
 Analyzes financial standing (assets, Cost Accounts
liabilities, budget proposals).  Analyzes production and operational
 Forecasts future needs and allocates costs.
resources accordingly.  Computes cost of products and services.
 Helps in pricing, cost control, and
Accounting decision-making on production timing.
 Records daily transactions.
 Maintains ledgers and prepares annual Credit and Collection
financial statements.  Sets policies for extending credit to
 Ensures accuracy and reliability of customers.
financial data.  Evaluates creditworthiness and capacity
to pay.
Audit / Internal Audit  Collects receivables and ensures cash
 Ensures compliance with laws (e.g., inflow is maintained.
Bureau of Internal Revenue tax filings).
 Evaluates risks, governance, and Financial Planning and Budgeting
internal controls.  Prepares budget plans for departments
 Detects errors, fraud, or inefficiencies in and projects.
operations.  Coordinates with other divisions for
resource allocation.
Cash Management  Ensures that financial plans align with
 Overseen by the Treasurer. organizational strategies.
 Handles all cash transactions and
maintains different cash accounts.
Horizontal Analysis
Formula:

Difference ÷ Last Year × 100%

Measures growth or decline over time.

Example: Sales ↑ 60%, Other Income ↑ 100%, Expenses ↑ 200%.

Vertical Analysis
Each item expressed as % of Net Sales.

Example (2021):
Net Sales = 1,000,000 (100%)
COGS = 300,000 (30%)
Gross Profit = 700,000 (70%)
Operating Expenses = 100,000 (10%)
Net Profit = 600,000 (60%)
Non-Operating Exp. = 100,000 (10%)

Ratio Analysis
Evaluates financial standing of an entity.

Types:

 Liquidity Ratios – ability to pay short-term  Efficiency Ratios – asset utilization.

debts. Measure the company’s ability to Measure how well the company uses
meet short-term obligations. resources.

 Profitability Ratios – measure of returns.  Earnings Ratios– the company’s ability to

Show the company’s ability to generate generate earnings/profit from sales, assets,
profits from sales and assets. and equity.

 Solvency Ratios – long-term stability.  Coverage Ratios – ability to service debt.

Measure long-term financial stability and Assess the ability to cover interest and fixed
debt capacity. charges.

Purpose: guides decisions in investment, cost-cutting, pricing, and forecasting.

 Investment Decisions – Investors check profitability and solvency before investing.

 Cost Cutting – Identifies areas of inefficiency (e.g., high expenses vs. sales).
 Forecasting – Helps predict future trends in profitability or debt.
 Benchmarking – Compare against industry averages or competitors (cross-sectional analysis).
 Strategic Planning – Used in board meetings to rationalize budgeting, pricing, and resource
allocation.
Types of Horizontal Financial Analysis

 Time-Series Analysis – evaluates growth across years.

 Cross-Sectional Analysis – compares company with competitors or industry average.

 Combined Analysis – uses both approaches.

Budget management is the process of planning, allocating, and controlling financial resources to ensure
that company operations and strategic goals are supported.
It ensures the company doesn’t just spend, but spends wisely in line with its mission and vision.

Historical Financial Performance

 Refers to the company’s past financial results (sales, revenues, expenses, profits, cash flow).
 Past trends are used as a benchmark or reference for planning the next budget.
o Identifies patterns such as seasonal sales fluctuations (e.g., holidays, back-to-school
season).
o Shows what worked and what didn’t in previous years.
o Prevents under- or overestimating future budgets.

Past Budget Reports

Refers to the actual usage of previous budgets — were the funds used as expected, underutilized, or
exceeded
o Evaluates budget accuracy — did managers overestimate or underestimate?
o Allows reallocation — avoids giving excessive funds to areas that don’t use them.
o Builds accountability — departments are held responsible for how they spend.

Current Financial Results

 Refers to the company’s present financial condition — revenues, profits, cash flow, and debts.
 The budget must reflect the company’s current financial strength or weakness.
o Prevents overspending when cash flow is weak.
o Allows flexibility — management can adjust budgets mid-year depending on current
performance.
o Ensures budgets are realistic based on the company’s capacity.

Forecasted Needs (Future Expectations)

 Refers to the projected financial requirements based on growth plans, market opportunities, or
external factors.
 This is forward-looking — focuses on what the company plans to achieve.
o Ensures resources are available for strategic initiatives like expansion, innovation, or
new product launches.
o Helps companies prepare for opportunities (e.g., entering new markets) or risks (e.g.,
inflation, competition).
o Links budgeting to long-term growth instead of just short-term operations.
Time Value of Money (TVM)

Money today ≠ money tomorrow due to inflation & opportunity cost.

The time value of money is the foundation of all finance. It recognizes that money’s value changes over
time due to inflation, opportunity cost, and risk. Using formulas for Future Value, Present Value, Simple
Interest, and Compound Interest, businesses can make smarter financial decisions about investments,
loans, and long-term strategies.

Formulas:
 Future Value (FV)- How much an investment today will be worth in the future.
 Present Value (PV)- The value today of a future amount of money.
 Simple Interest (SI)- Interest calculated only on the original principal.
Questions:

In what ways can financial strategies and analysis protect a company’s assets and ensure long-term
profitability?

1. Financial strategies and analysis protect a company’s assets by ensuring resources are managed
efficiently and risks are minimized. Through budgeting, forecasting, and ratio analysis,
companies can identify potential problems early and make informed decisions. These practices
also support cost control, proper investment choices, and effective debt management. In the
long run, they help maintain stability, safeguard assets, and ensure consistent profitability.

2. Financial strategies and analysis help protect a company’s assets by monitoring cash flow,
controlling expenses, and preventing misuse of resources. They guide decision-makers in
evaluating investments, managing debts, and aligning budgets with business goals. By analyzing
performance and market trends, companies can adjust strategies to remain competitive. This
ensures long-term profitability and sustainable growth.

3. Financial strategies and analysis safeguard a company’s assets by providing a clear picture of its
financial health and guiding sound decision-making. They help identify risks, reduce unnecessary
costs, and allocate resources effectively. By continuously reviewing performance through tools
like ratio and budgeting analysis, companies can adapt to changes and maintain efficiency. This
disciplined approach supports long-term profitability and business stability.

4. Financial strategies and analysis protect a company’s assets through careful planning, proper
monitoring, and responsible use of resources. They help identify risks like overspending,
declining sales, or excessive debt that may harm the business. By guiding investment decisions
and cost management, these strategies strengthen financial stability and provide a solid
foundation for long-term profitability and growth.

How can these strategies and analysis help businesses survive in today’s competitive Philippine
market?

1. These strategies and analysis help businesses in the Philippine market by allowing them to
manage resources wisely and avoid financial risks. Through budgeting, and ratio analysis,
companies can spot weaknesses early and make better decisions. They also guide competitive
pricing, cost control, and investment planning, which are crucial in a fast-changing market.
Overall, they give businesses the stability and flexibility needed to survive and grow despite
competition.

2. Financial strategies and analysis help businesses in the Philippine market by ensuring they stay
financially healthy and adaptable. They provide insights on managing cash flow, controlling
expenses, and maximizing profits, which are vital in a competitive environment. By
understanding trends and customer demands, companies can adjust strategies to stay ahead.
This allows them to remain sustainable and resilient despite market challenges.
 3. Financial strategies and analysis enable businesses in the Philippine market to make informed
choices and stay competitive. They help identify growth opportunities, manage risks, and ensure
efficient use of assets. With proper financial planning and monitoring, companies can respond
quickly to market changes and economic challenges. This strengthens their ability to survive and
achieve long-term success.

4. Financial strategies and analysis support businesses in the Philippine market by guiding smart
decision-making and resource allocation. They help companies maintain liquidity, control debts,
and avoid financial mismanagement. By regularly reviewing performance, businesses can adapt
to competition and economic shifts. This ensures stability, profitability, and long-term survival in
a demanding market.

What risks might a company face if it fails to conduct proper financial strategies and analysis?

1. If a company fails to conduct proper financial strategies and analysis, it risks making poor
investment decisions, overspending, or misusing resources. This can lead to liquidity problems,
unmanageable debt, and missed opportunities for growth. Without proper analysis,
inefficiencies may go unnoticed, reducing competitiveness in the market. In the worst case,
these issues can result in financial losses and even business failure.

2. Without proper financial strategies and analysis, a company may face cash flow shortages, rising
debts, and poor budgeting decisions. It could also fail to detect financial risks early, leading to
losses and unstable operations. Over time, this weakens profitability and threatens the
company’s survival.

3. A company that neglects financial strategies and analysis may struggle with inefficient resource
use, inaccurate forecasting, and uncontrolled expenses. These issues can cause declining
profitability and limit its ability to compete. In the long run, the business may face serious
financial instability.

4. Failing to conduct financial strategies and analysis exposes a company to poor decision-making,
mismanagement of funds, and hidden inefficiencies. This increases the risk of excessive
borrowing, unstable cash flow, and reduced market competitiveness. Such risks can eventually
lead to bankruptcy or business closure.

How do financial strategies and analysis help in decision-making?

1. Financial strategies and analysis help in decision-making by providing accurate data on a

company’s performance, resources, and risks. They guide managers in budgeting, investments,
and cost control, ensuring that choices are realistic and sustainable. By analyzing trends and
ratios, businesses can make informed decisions that support growth and stability.

2. Financial strategies and analysis support decision-making by giving a clear picture of the
company’s financial health. They help identify strengths, weaknesses, and potential risks,
allowing managers to choose the best course of action. With this information, businesses can
plan effectively, use resources wisely, and make decisions that improve profitability and long-
term success.
 3. Financial strategies and analysis aid decision-making by turning financial data into useful
insights. They help evaluate whether plans are affordable, investments are worthwhile, and
costs are under control. This ensures that every decision is based on facts and contributes to the
company’s overall goals and stability.

4. Financial strategies and analysis help in decision-making by providing a clear view of a

company’s financial health and performance. They guide managers in evaluating options,
weighing risks, and allocating resources effectively. By analyzing cash flow, profitability, and
expenses, businesses can make informed choices that are cost-efficient, practical, and aligned
with long-term goals.

how will you use these financial strategies and analysis in the company?

1. I will use financial strategies and analysis in the company by carefully planning budgets,
monitoring cash flow, and ensuring resources are used wisely. They will guide decisions on
investments, cost control, and debt management to avoid risks and improve profitability.
Regular analysis of financial ratios and performance will help identify problems early and adjust
strategies to stay competitive. In this way, the company can protect its assets, achieve stability,
and secure long-term growth.

2. will apply financial strategies and analysis in the company by setting clear financial goals,
tracking performance, and using data to support decision-making. This will help control
expenses, improve efficiency, and make sure funds are allocated to the right areas.

3. In the company, I will use financial strategies and analysis to evaluate risks, manage resources,
and plan for sustainable growth. They will serve as a guide in choosing profitable opportunities
while avoiding financial problems.

4. I will use financial strategies and analysis by reviewing budgets, analyzing trends, and checking
the company’s overall financial health. This ensures that decisions are practical, investments
are ,.sound, and the company remains competitive in the long run.