BUSINESS FINANCE

CHAPTER 1  ACCOUNTING STANDARD: must

 FINANCE was derived from the word: observe accepted accounting principle.
LATIN FRENCH ENGLISH 2 TYPES OF INVESTORS
FINANCIUS FINAUNCE FINANCE ANGEL INVESTOR – individual/person that FINANCIAL INTITUTIONS AND
FINIS FINER FINE invest to a company, 1 million is the max. FINANCIAL MARKETS
End to pay a to pay a amount, not demanding to have a position FINANCIAL INSTITUTION – conducts
ransom penalty in board members. financial transaction such as investment,
VENTURE CAPITALIST – group of loan and deposits.
 In the 15th century it is called ransom company that will invest to a company, 1  COMMERCIAL BANKS – accept
and later on, taxation. million is the minimum investment, demands deposits, make business loans and
 In 1770 it is called “sense of to be in the board members. other related services.
managing money”  PERSONAL – managing personal - Run to make a profit and owned by a
1. The management of large amount of finances group of individuals.
money FORMS OF ORGANIZATION - Concerned with receiving deposits
2. The giving of monetary support for an - Sole Proprietorship and lending to other businesses.
enterprise - Partnership  INVESTMENT BANKS – financial
3. Monetary resources and affairs of a - Corporation intermediary that performs a variety of
government, org. or a person FORMS OF ORGANIZATION services for business and some
DIFFERENT TYPES OF FINANCE - Manufacturing government.
 PUBLIC – government concerns - Merchandising - Generally speaking, it is subject to
Raise funds by: taxes, insurance, selling - Service less regulation than commercial
securities - Hybrid banks.
PRC (Professional Regulatory 2 TYPES OF PRODUCTS - Operates under supervision of
Commission) - Tangible regulatory bodies like SEC and BSP.
 CORPORATE – managing assets and - Intangible  INSURANCE COMPANIES – collecting
debts for a business 2 TYPES OF SKILL premiums from a large group of people
- Managing the company’s equity - Technical skill who want to protect themselves or their
FINANCIAL MANAGERS – took good care - Professional skill loved ones.
of company’s money. GUIDING PRINCIPLES FOR FINANCIAL  BROKERAGES – intermediary between
 LOGIC AND MATHEMATICAL MANAGEMENT SYSTEM buyers and sellers to facilitate securities
INTELLEGENCE  CONSISTENCY: showing steady transactions.
 ANALYZE AND UNDERSTAND conformity to character.  INVESTMENT COMPANIES – a trust
CAPITAL MARKET  ACCOUNTABILITY: being liable and through individuals invest in diversified,
 RAISING FUNDS – maintaining a responsible to give a satisfactory professionally managed portfolios.
good balance between equity and reason. NONBANK FINANCIAL INSTITUTIONS –
debt.  TRANSPARENCY: honesty and not technically banks but provide some of
 ALLOCATING FUNDS – process of openness. same services as banks.
distributing.  INTEGRITY:  SAVINGS AND LOANS – typically
 PROFIT PLANNING – proper usage  FINANCIAL STEWARDSHIP: offered lower borrowing rates than
of the profit generated by the firm. supervising or taking care of something. commercial banks and higher interest
rates on deposits.
BUSINESS FINANCE
 CREDIT UNIONS – are almost always
organized as non-profit cooperatives,
they typically offer higher rates on
deposits and charge lower rates on
loans in comparison to a commercial
banks.
FINANCIAL MARKETS – any marketplace
where buyers and sellers participate in the
trade of assets.
 MONEY MARKET – lending in the short
term, from several days to just under a
year.
SECURITY: t-bills, commercial paper
 CAPITAL MARKET – long term maturity
period (more than a year)
INSTRUMENT: shares
2 KINDS OF CAPITAL MARKET
 PRIMARY – direct contact to a certain
business. (no regulation)
 SECONDARY – has regulation.
 OTC OR OVER THE COUNTER
MARKET – secondary market, referred
as a dealer market.
- All of the stocks that are not trading
on stock exchange such a PSE.
- Small businesses
 STOCK MARKET – investors buy and
sell shares in publicly traded companies.
PSE (Philippine Stock Exchange)
MSE (Makati Stock Exchange)
 FOREIGN EXCHANGE (FOREX) AND
INTERBANK MARKET
FOREX – exchanging of currency from
one country to another.
INTERBANK – hand and hand with
FOREX , bank and bank exchanging.
 BOND MARKET – loan investment,
involvement of 2 companies also
referred as DCFI market or Debt, Credit
or Fixed-Income market.
CHAPTER 2
FINANCIAL STATEMENT – a formal record
of financial activities of an entity (written
report)
4 TYPES OF FINANCIAL STATEMENT
1. STATEMENT OF FINANCIAL
POSITION (SFP) – also known as
balance sheet
3 elements: asset, liabilities, equity
2. INCOME STATEMENT – also known as
the Profit and Loss Statement
2 elements: Income and Expense
 Net Profit/Loss is arrived by deducting
expense from income statement.
3. CASH FLOW STATEMENT –
movement in cash and bank balances
over a period.
SEGMENTS:
 OPERATING ACTIVITIES – from
primary activities of a
Business.
 INVESTING ACTIVITIES – from
purchase and sale
 FINANCIAL ACTIVITIES – generated or
spent on raising and repaying share
capital.
4. STATEMENT OF CHANGES IN
EQUITY – also known as the statement
of retained earnings.
COMPONENTS:
 NET PROFIT/LOSS during the period
as reported in the I.S.
 SHARE CAPITAL issued or repaid
during the period.
 DIVIDEND payments
 GAIN/LOSS recognized directly in
equity.
 EFFECTS of change in accounting
policy.
PURPOSE OF FINANCIAL STATEMENT –
provide information about financial position,
performance and changes.
USERS OF FINANCIAL STATEMENT
1. MANAGER – F to manage affairs of
company
2. SHAREHOLDERS – asses the risk and
return
3. PROSPECTIVE INVESTORS – asses
the viability of investing in a company.
4. FINANCIAL INSTITUTIONS – to decide
whether to grant a loan or credit to a
business.
5. SUPPLIERS – asses the credit
worthiness of a business and ascertain
whether to supply goods in the future.
6. CUSTOMERS – asses if a supplier has
the resources to ensure steady supply
of goods in future.
7. EMPLOYEES – assessing the
company’s profitability and
consequences on their future
remuneration and job security.
8. COMPETITORS – compare their
performance with rival companies.
9. GOVERNMENTS – determine
correctness of tax declared in tax
returns.
ACCOUNTING CYCLE – financial process
starting with recording business
transactions and leading up to the
preparation of financial statements.
- Set of steps that are repeated in the
same order every period.
FINANCIAL ACCOUNTING – create useful
financial information in the form of general-
purpose FS
BUSINESS FINANCE
ACCOUNTING WORKSHEET – tool used  COMPARATIVE STUDY REQUIRED
to help bookkeeper and accountants  RATIOS ALONE ARE NOT ADEQUATE
complete the accounting cycle and prepare  PROBLEM OF PRICE LEVEL
year-end reports. CHANGES
FINANCIAL ANALYSIS – identifying  LACK OF ADEQUATE STANDARD
financial strength and weaken of BS and IS  LIMITED USE OF SINGLE RATIO
FINANCIAL STATEMENT – process of  PERSONAL BIAS
understanding the risk and profitability of a  INCOMPARABLE
company by analyzing reported financial CLASSIFICATION OF ACCOUNTING
information. RATIO
HORIZONTAL ANALYSIS – showing
changes between years in both (A)TRADITIONAL (B) FUNCTIONAL (C)SIGNIFICANCE
peso and percentage form. CLASSIFICATION CLASIFICATION RATIO OR
VERTICAL ANALYSIS – procedure OR STATEMENT OR RATIOS
of preparing and presenting RATIO CLASSIFICATION ACCORDING TO
common size statements. ACCORDING TO IMPORTANCE
COMMON SIZE STATEMENT – TEST
shows the items appearing on it in Profit/loss account Profitability ratio Primary ratios
percentage form as well as in ratio or
dollar revenue/income
RATIOS: most powerful tool of FS statement ratio
analysis / relationship between Balance sheet Liquidity ratio Secondary ratio
two. ratios or position
ACCOUNTING RATIO – significant statement ratio
relationship between figures shown Composite/mixed Activity ratio
on balance sheet or in any other ratios or inter
part of accounting. statement ratio
RATIO ANALYSIS – important and Leverage ratio or
age-old techniques of Financial long term
analysis. Solvency ratio
BENEFITS OF RATIO ANALYSIS:
 SIMPLIFIES F.S.
 FACILITATES INTER-FIRM
COMPARISON
 HELPS IN PLANNING
 MAKES INTER-FIRM COMPARISON
POSSIBLE
 HELPS IN INVESTMENT DECISION
 LIMITATION OF RATIO ANALYSIS
 LIMITATION OF F.S.
BUSINESS FINANCE
CHAPTER 3: FINANCIAL PLANNING
TOOLS AND CONCEPTS
FINANCIAL PLAN – helps you to see the
big picture and set long and short term
business plan.
- Can help managers determine if
they can achieve the organization’s
goals.
ILLUSTRATIVE FINANCIAL PROCESS
1) CALCULATE SET UP COSTS –
comparing your set up cost to you start-
up equity investment.
- Accounting fees
- Registrations and licences/ renewal
- Equipment and fit out
- Initial working capital
2) PROFIT AND LOSS FORECAST –
forecast of sales and expense, usually
for the next 12 months of operation.
- Compare potential sales revenue to
cost of goods sold and fixed costs of
doing business.
- Calculate likely margins and put your
pricing model to the test
3) CASH FLOW FORECAST – vital
component of any financial plan
- New businesses often need cash to
build the capacity necessary to
service customers
- Customers may be slow to pay
- Resulting cash flow gap could leave
you vulnerable if you’re not prepared
4) BALANCE SHEET FORECAST –
snapshot of business after 12 months of
operation.
- Purchases you anticipated in your
set-up costs.
- Results of your profit and loss
forecast
5) BREAK EVEN ANALYSIS – let you
determine what you need to sell to cover
your costs of doing business.
BUDGET AND BUDGET PREPARATION
BUDGETING – process of creating plan to
spend your money.
BUDGET – allotting the money
WHY BUDGETING IS IMPORTANT?
 Ensures that you will have enough
money for the things you need and that
are important to you.
TYPES OF BUDGETS FOR BUSINESSES
 MASTER BUDGET – aggregate of a
company’s individual budgets designed
to present a complete picture of its
financial act. & health.
 OPERATING BUDGET – forecast and
analysis of projected income and
expenses over the course of specified
time period.
 CASH FLOW BUDGET – projecting how
& when cash comes in and flows out of
a business within a specified time
period.
- Useful in helping company
determine whether it’s managing its
cash wisely.
 SCHEDULE OF EXPECTED CASH
COLLECTION – from customers shows
the budgeted cash collections on sales
during period.
- Used to determine how much sales
are expected to be collected during
a period.
 SALES BUDGET – first and basic
component of master budget and shows
expected number of sales units of a
period and expected price per unit.
 PRODUCTION BUDGET – schedule
showing planned production in units
which must be made by a manufacturer
during a specific period to meet the
expected demand for sales and the
planned finished goods inventory.
PLANNED PRODUCTION
UNITS=EXPECTED SALES IN UNITS +
PLANNED ENDING INV. IN UNITS –
BEGINNING INVENTORY IN UNITS
 BUDGETED INCOME STATEMENT
DEFINITION – contains all of the line
items found in a normal income
statement.
 PROJECTED BALANCE SHEET -
provide the most relevant financial
information needed in the business
planning process. (also referred as PRO
FORMA BALANCE SHEET)
WORKING CAPITAL – measure of both
company’s efficiency and its short-term
financial health.
 Calculated as:
WORKING CAPITAL= CURRENT
ASSETS-CURRENT LIABILITIES
WORKING CAPITAL MANAGEMENT –
refers to company’s managerial strategy
designed to monitor and utilize the two
components of working capital
BUSINESS FINANCE
CHAPTER 4: SOURCES & USES OF  PROMISSORY NOTES – negotiable TYPE OF FINANCIAL INSTITUTIONS
FUNDS instrument wherein one party makes an AND THEIR ROLES
unconditional promise in writing to pay a  COMMERCIAL BANKS – accept
SOURCE OF USES OF FUNDS determinate sum of money to the other. deposits and provide security and
FUNDS  ASSET-BASED LOANS – secured by a convenience to their customers.
STAKE HOLDERS FINANCE TO company’s assets.  INVESTMENT BANKS – financial
START UP OR  REPURCHASE AGREEMENTS – intermediary that performs a variety of
EXPAND selling securities to an investor with an services for business and some
BUSINESS agreement to repurchase them at a governments.
BANK LOAN TO FINANCE fixed price on a fixed date.  INSURANCE COMPANIES – pool risk
CAPITAL  LETTER OF CREDIT – document that by collecting premiums from a large
PROJECTS the issuer will pay the seller for group of people who want to protect
OVERDRAFT TO goods/services the seller delivers to a themselves or their loved ones against a
MANAGE CASH third-party buyer. particular loss.
FLOW DEBT AND DEBT EQUITY FINANCING  BROKERAGES – middle man, they are
CREDITORS SHORT TERM  EQUITY FINANCING – means issuing the one who will buy shares for you.
CREDIT UNTIL additional shares of common stock to an (tagapamagitan)
GOODS HAVE investor  INVESTMENT COMPANIES –
BEEN SOLD  DEBT FINANCING – borrowing money corporation or a trust through which
and not giving up ownership. individuals invest in professionally
MAJOR METHODS OF LONG-TERM BANKING SERVICES/FINANCIAL managed portfolios of security
FINANCING: INSTITUTIONS TYPES OF INVESTMENT COMPANIES
 EQUITY FINANCING – this includes 1. LOANS provide business with - Unit Investment Trusts (UITs) - Is a
preferred stocks and common stocks expansion capital. company established under an
and less risky with respect to cash 2. BUSINESS ACCOUNT SERVICES identure or similar agreement.
flow commitments. enable a business to its day to day - Face Amount Certificate – company
 CORPORATE BONDS – issued by a affairs issues debt certificates at
corporation to raise money 3. OVERDRAFT FACILITIES enable a predetermined rate of interest.
effectively so as to expand its business to have a short period of - Management Investment Company
business. credit to smooth out cash flow – most common investment
 CAPITAL NOTES – form of difficulties. company it actively manages a
convertible security exercisable into 4. CHEQUES, CREDIT CARDS & portfolio of securities to achieve its
share. BANK DRAFTS enable business to investment objectives.
SHORT-TERM FINANCING USED THE smooth manage its day to day  Close-End Investment
FOLLOWING FINANCIAL INSTRUMENT payments & transactions. Companies – issues shares in a
 COMMERCIAL PAPER – unsecured 5. BANK provides systematic and on one-time public offering.
promissory note with fixed maturity of 1 going advice, particularly to mall  Open-End Investment
to 364 days in global money market. businesses and start ups. Companies – also known as
(ABCP) – Asset-Backed Commercial Paper 6. MERCANT BANKS also support mutual funds, continuously issue
companies in the management of new shares.
share issues.
BUSINESS FINANCE
NONBANK FINANCIAL INSTITUTIONS
 SAVING AND LOANS –
 CREDIT UNIONS – another alternative
to regular commercial banks.
 SHADOW BANKS – replicate some of
the activities of regulated banks.
REQUIREMENTS FOR A BUSINESS
LOAN (to ensure that debtors will pay)
 GOOD PERSONAL CREDIT – as a
primary face of business on the general
market, your record & character will
reflect on the business itself.
 GOOD BUSINESS CREDIT – business
needs good credit to be considered for a
business loan
 LARGE ASSET BASE – most business
loan are secured against an asset.
 SOLID BUSINESS PLAN – reflects the
estimated profitability of a business in
years to come.
 INDUSTRY EXPERIENCE – most
lenders want to see members of the
board of the company have the
knowledge and experience building a
profitable business.
DOCUMENTATION LOAN
REQUIREMENTS – any loan that requires
full information substantiating a borrower’s
claims of income and asset in order to gain
financing.
 INCOME VERIFICATION – in order to
prove you can afford a loan.
 ASSET VERIFICATION – lenders will
consider your assets when reviewing
your financial strength
 LIENS AND LIABILITIES – your credit
report will reflect all of your debts and
lien against your property.
LOW OR NO DOCUMENTATION LOAN –  FINANCIAL ADVISERS – can offer
requires very little verification of the claim specialist advice on your behalf.
made on an application.  CREDIT UNION – informal types of
STEPS TO GETTING A BUSINESS LOAN banks which provide facilities for lending
 Start before the loan is needed. and depositing within a particular
 Decide what the money is needed community.
for.  MUTUAL FUNDS/INVESTMENT
 Decide how much money the FUNDS – enable small investors to
company needs. benefit from smaller commission rates
 Know the score. available to big purchases.
TYPICAL PROCESS OF APPLYING FOR
BUSINESS LOANS
1. Begin your business loans application
by filling out loan application loan
2. Submit it to lender’s main office
3. Wait for approval, 7 days
4. Wait for advice to meet with lender to
claim your loan
CREDITORS – come to existence due to
the range of financial transactions a
company has entered.
VOLUNTARY ADMINISTRATION – aims to
improve the way business run in order to
continue business activity for the long term.
RECEIVERSHIP – receiver’s prime
obligations are owed to the secured
creditor. This also means that the receiver
Is not obliged to report to unsecured
creditors either in writing or in a formal
meeting.
LIQUIDATION – refers to the winding up of
a company
FINANCIAL INTERMEDIARIES – offers a
service to help an individual/firm to save or
borrow money.
EXAMPLES OF FINANCIAL
INTERMEDIARIES
 INSURANCE COMPANIES – who can
offer insurance and help spread the risk
of default.