INTRODUCTION OF BUSINESS 1.

What long-term investments should the DIFFERENT INDIVIDUALS

FINANCE firm undertake? INVOLVED IN FINANCE
(Capital Budgeting decisions) ➢ Chief Financial Office (CFO) - top
Finance is concerned with decisions about: 2. How should the firm fund these financial manager within a firm
➢ How much of their earnings you spend investments? ➢ Treasurer - oversees cash management,
➢ How much you save or how much you (Capital Structure decisions) credit management, capital expenditures,
need 3. How can the firm best manage its cash and financial planning
➢ How you invest your savings flows as they arise in its day-to-day ➢ Controller - oversees taxes, cost
➢ How you raise additional funds you operation? accounting, financial accounting, and date
need (Working capital management) processing

FINANCE FINANCIAL MANAGEMENT FUNCTIONS OF FINANCIAL

➢ defined as the management of money ➢ means planning, organizing, directing, MANAGERS
and includes activities such as investing, and controlling the financial activities such 1. Financing - decision regarding capital
borrowing, lending, budgeting, saving, and procurement and utilization of funds of the structure
forecasting. enterprise. ➢ Capital structure is a combination of
debt (loan) and equity(own funds used by a
BASIC AREA OF FINANCE CORPORATION company to finance its overall operations
➢ Corporate Finance ( Business Finance) ➢ An entity created by law owned by and growth
➢ Investments – e.g stocks and bonds shareholders. 2. Investing – investment decision where
➢ Financial Institutions – e.g banks and to put your excess cash to make it more
insurance company profitable.
➢ International Finance – e.g exchange ➢ Investments may either be short term or
rate long term.
3. Operating – estimating the
BUSINESS FINANCE requirements of funds
( CORPORATE FINANCE) ➢ careful estimate of funds like working
➢ deals with the capital structure of the capital ( day to day operations) is required
corporation, including its funding and the to be made.
actions that management takes to increase ➢ forecasting the requirements of funds
the value of the company. using techniques of Budgetary Control
(managing income and expenditure) and
long-range planning. insurance premiums. The insurance 1. Securities – These can be in form of
➢ supply funds to all parts of the companies pool these payments and invest treasury bills, notes and bonds. These are
organization the proceeds in various securities until the the government issued and are sold by the
4. Dividend Policies – estimating the funds needed to pay off claims by government to raise funds. Through the
requirements of funds policyholders. purchase of securities, you earn after your
➢ the finance manager is concerned to pay c. Mutual Funds - Mutual funds owned by security matures and you receive the
or declared dividend ( a share of profits investment companies that enable small money with interest. Interest is the
and retained earnings) investors to enjoy the benefits of investing difference between the purchase price and
➢ Assist the top management in deciding in a diversified portfolio of the actual price.
as to what amount of dividend should be securities purchased on their behalf by
paid to shareholders and what amount be professional investment managers.
retained by the company d. Pension Funds - Financial institutions
that receive payments from employees and
FINANCIAL INSTITUTIONS, invest the proceeds on
INSTRUMENTS, AND MARKET their behalf. Other financial institutions
include pension funds like Government
FINANCIAL INSTITUTIONS Service Insurance System (GSIS) and
➢ These are companies in the financial Social Security System (SSS), unit
sector that provide a broad range of investment trust fund (UITF), investment
business and services including banking, banks, and credit unions, among others.
insurance, and investment management.
Examples of financial FINANCIAL INSTRUMENTS
institutions/Intermediaries: ➢ is a real or a virtual document
a. Commercial Banks - Individuals deposit representing a legal agreement involving
funds at commercial banks, which use the some sort of monetary value.
deposited funds to provide commercial These can be debt securities like corporate
loans to firms and personal loans to bonds or equity like shares of stock. When
individuals, and purchase debt securities a financial instrument issued, it gives rise
issued by firms or government agencies. to a financial asset on one hand and a
b. Insurance Companies - Individuals financial liability or equity instrument on
purchase insurance (life, property and the other.
casualty, and health) protection with
 FINANCIAL MARKETS ➢ It helps external users evaluate the
It is referring to a marketplace, where financial health of a business.
creation and trading of financial assets, ➢ It evaluate a company performance and
such as shares, debentures, bonds, condition using financial ratios.
derivatives, currencies, etc. take place. ➢ Techniques can use to come up with
➢ Money Market meaningful analysis. First, compare
It is the sector of financial market where financial ratios within one period, then
financial instruments that have a short-term with past performance, and then within
2. Stocks – these are another form of maturity or be redeemed in 1 year or less industry average or what we call
investment that can be purchased through from the date of issuance. benchmarking.
the Philippine Stock Exchange. Stocks are E.g. Treasury Bills, Commercial papers,
“ownership” in a company. These are paid certificate of deposits, credit card debts. FINANCIAL ANALYSIS
out through dividends when a company is ➢ Capital Market ➢ Horizontal and Vertical Analysis
profitable. You can also earn by buying and It is the sector of financial market where ➢ Ratio Analysis ( Liquidity Ratios,
selling stocks. financial instruments that have a long-term Solvency Ratios, Profitability Ratios, and
maturity or will mature 1 year from the Leverage Ratio)
date of issuance are traded.
E.g. Treasury notes and bonds, municipal Horizontal Analysis
bonds and corporate bonds. ➢ Peso Change
➢ Percentage Change
FINANCIAL ANALYSIS ➢ See financial changes from Prior Year
to Current Year
FINANCIAL STATEMENT ANALYSIS ➢ Peso change = Balance of Current
➢ It involves the assessment of a Year-Balance of Prior Year
company’s past performance and future ➢ Percentage change = Peso
potentials. Change/Balance of Prior Year
➢ It is one way of determining a
company’s strengths and weaknesses. Vertical Analysis
➢ It serves as a communication tool for ➢ Common Size
the internal users to address weaknesses ➢ See the biggest component in the
and at least maintain strengths. Capital Structure of the company
➢ Common Size = (Balance of Account / ➢ Debt Ratio= Total Liabilities/Total ➢ ROE is a great way to calculate a
Base Amount) 100 Assets company’s profitability—put simply, how
➢ This ratio measures the proportion of good it is at making money.
RATIO ANALYSIS total assets finance by total liabilities or ➢ If you’re considering investing in a
Liquidity Ratio money provided by creditors (not by the company, you can look at their ROE over
➢ Checking if the entity can pay its business owners). the years to see if its growing or
obligations using its current assets diminishing, which can point to whether
➢ Current Ratio = Current Assets/Current ➢ Debt to Equity Ratio= Total leadership is making wise decisions that
Liabilities Liabilities/Equity benefit shareholders.
➢ Quick Ratio = Quick Assets/Current ➢ A variation of debt ratio, shows the ➢ ROE (return on equity) = Net income ÷
Liabilities proportion of debt to equity. Stockholders’ equity
➢ Cash Ratio= Total Cash/Current
Liabilities ➢ Interest Coverage Profitability Ratio – Return on asset
ratio=Operating/Interest/Expense ➢ Return on assets measures the ability of
Solvency Ratio/Leverage Ratio ➢ This ratio shows the company’s ability a company to generate income out of its
➢ Financial leverage refers to the to pay its fixed interest charges in relation resources/assets.
company’s use of debt. It defines the to its operating income or earnings before ➢ Determining how effective a company
company’s capital structure which interest and taxes. is at utilizing their assets to create more
indicates how much of the total assets are value.
financed by debt and equity. Profitability Ratio ➢ Higher percentages mean the company
➢ Debt Ratio= Total Liabilities/Total ➢ Profitability refers to the company’s is better at its assets to make more money;
Assets ability to generate earnings. It is one of the lower percentages mean that its worse at it.
➢ Debt to Equity Ratio= Total most important goals of businesses. ➢ ROA (return on asset) = Operating
Liabilities/Equity ➢ These are the return on equity, return on income ÷ Total assets
➢ Interest Coverage assets, gross profit margin, operating profit
ratio=Operating/Interest/Expense margin, net profit margin. Profitability Ratio – Gross Profit
Margin
Profitability Ratio - Return on equity ➢ Gross profit margin shows how many
➢ Return on equity measures the amount pesos of gross profit is earned for every
of net income earned in relation to peso of sale. It provides information
stockholders’ equity. regarding the ability of a company to cover
its manufacturing cost from its sales.
➢ Measures the average markup on every
peso sale or for each product sold
➢ Gross profit margin = Gross profit ÷
Net Sales

Profitability Ratio – Operating Income

Margin
➢ Operating profit margin shows how
many pesos of operating profit is earned
for every peso of sale. It measures the
amount of income generated from the core
business of a company.
➢ Measures the percentage of profit
provided by the operations, and therefore
measures how well the managers take care
of the operating cost and expenses to
generate income from sales.
➢ Operating profit margin =Operating
income ÷ Net Sales

Profitability Ratio – Net Income Margin

➢ Net profit margin measures how much
net profit a company generates for every
peso of sales or revenues that it generates.
➢ Measures the overall profitability of a
company.
➢ Net profit margin = Net income ÷ Net
Sales