FINANCIAL MANAGEMENT
Module 1: Introduction to Financial Management
Financial Management is planning, organizing, directing and controlling the financial activities such as
procurement and utilization of funds of the enterprise.
The goal of Financial Management is to maximize profit and minimize risk.
Functions of Financial Management
a) Capital Estimation
b) Deciding Capital Structure
c) Choice of Funds
d) Investments
e) Profit Allocation
f) Money Management
g) Financial controls
Legal forms of Business Organization
1. Sole Proprietorship
2. Partnership
3. Corporation
Sole Proprietorship
Legal Status: No Legal Status
Owner: One
Liabilities of owner: Unlimited Liabilities Ownership of properties: Owned by the sole proprietor
Management: Managed by Sole proprietor Termination: Occurs on the owner’s death or the
owner’s choice.
Advantages
1. Easy to form and dissolve.
2. Full ownership and control.
3. Tax Savings
4. Few government regulations
Disadvantage
1. Unlimited liabilities
2. Limitations in raising capital
3. Lack of continuity
Proprietorship may be an ideal form of business when the following exist.
1. The anticipated risk is minimum and adequately covered by insurance;
2. The owner is either unable or unwilling to maintain the necessary organizational documents and
tax returns of more complicated business entities, and
3. The business does not require extensive borrowing
Partnership
Legal Status: No Legal Status
Owner: Min 2, Max 20
Liabilities of owner: Unlimited Liabilities Ownership of properties: Jointly owned by the partners
Management: Every partner is entitled to participate
Termination: When any one of the partners dies; becomes bankrupt; withdraws; or becomes
insane.
Types of Partnership
General Partnership
All partners have unlimited liability.
Limited Partnership
Consists of one or more general partners who have unlimited liability.
One or more limited partners whose liability is limited to the amount of money they invest in the
business.
Limited Liability Company (LLC)
A hybrid business structure-operating similar to a corporation and a partnership.
Owners have limited liability, but the firm runs and is taxed like partnership
Advantage
1. Ease of formation and dissolution than corporation.
2. Additional sources of capital
3. Management base 4. Tax implications
Disadvantage
1. Unlimited liabilities
2. Lack of continuity
3. Difficulty of transferring ownership
4. Limitations in raising capital
Corporation
Legal Status: Separate legal entity
Owner: Private: min 2, max 50
Public: min 2, no max Liabilities of owner: Limited to the amount of the shares subscribed by the
shareholders.
Ownership of properties: Owned by the company
Management: Managed by the board of directors. Directors may or may not be the shareholders
of the company.
Termination: By undergoing legal winding-up. Perpetual succession unless the company is
liquidated.
Types of Corporation
Public Listed Company
Shares are openly sold to the public
Shares are traded on stock exchange
Also known as Incorporation (Inc.)
Private Limited Company (Ltd.)
Shares are sold to a selected
Group of investors.
Shares are not traded on stock exchange
Advantage
Limited liabilities
Ease in raising capital
Continuity of the business regardless of an owner’s withdrawal or death.
Ease of ownership transferability
Managed by the professionals.
Disadvantage
Complicated to form.
May need professional assistant.
High organizational cost.
More regulations to comply with and lack of secrecy.
FINANCIAL MANAGEMENT
Module 2: Financial Statement and Analysis
Financial Statements
Are written records that convey the business activities and the financial performance of a
company.
Types of Financial Statements
1. Balance sheet
2. Income statement
3. Cash flow statement
Types of Financial Statements
Balance Sheet
Provides an overview of assets, liabilities, and shareholders’ equity as a snapshot in time.
Assets = Liabilities + Shareholders
Assets – cash, inventory, property
Liabilities – rent, woges, utilities, taves, loans
Shareholders’ Equity
Components of a Balance Sheet
1. Assets: are properties (be it tangible or intangible) that a company owns or controls. A.
Current assets are assets that can be readily converted to cash in a year or less. B. Non-
current assets refer to those that cannot be readily converted to cash. (e.g. long-term
investments, machinery, building).
2. Liabilities: are what the company owes to outer parties such as creditors, or sometimes
customers
a. Current liabilities: those that should be paid within a year such as unpaid rent.
B. Non-current liabilities: those that are not due within a year such as long-
term loans payable.
3. Shareholders’ Equity: Also referred to as ‘net assets’, shareholder’s equity or equity
refers to money or properties attributable to the owners
Importance of a Balance Sheet
It determine risk. A company will be able to quickly assess whether it has borrowed too much
money, whether the assets it owns are not liquid enough, or whether it has enough cash on
hand to meet current demands.
Limitations of the Balance Sheet
On its own, it does not show you how a company operates, or how profitable a company really
is. It only shows the balance at a specific point in time
Income Statement
Primarily focuses on a company’s revenues and expenses during particular period. Once
expenses are subtracted from revenues, the a company’s profit figure statement produces called
net income.
Net Income Formula
There are two ways to calculats your net income
a) Devenue-Cost of Goods Sold-Expenses = Net Income
b) Grows Income – Expenses = Net Income
Sample Income Statement
Cash Flow Statement
Measures how well a company generates cash to pay obligations, fund its operating expenses,
and debt its fund investments
FINANCIAL MANAGEMENT
Module 3: Financial Statement Analysis
FINANCIAL STATEMENT ANALYSIS
The purpose of financial statement analysis is to determine whether an entity is stable, liquid, solvent,
or profitable enough to justify monetary investment. It is used to assess economic trends, develop
financial policies, create long-term company plans, and discover projects or firms for investment.
TECHNIQUES USED IN FINANCIAL STATEMENT ANALYSIS
1. Comparative Analysis
a) Horizontal Analysis
b) Trend Analysis
c) Vertical Analysis
2. Ratio Analysis
HORIZONTAL ANALYSIS
Comparing two periods.
A method of examining a collection of data over time to identify the increase or a decrease that
has occurred, represented as a number or a percentage.
Rules in Horizontal Analysis
1. To compute peso changes, current year less prior year.
2. To compute for the percentage changes, peso change divided by the
prior year (serve as the base figure).
3. To compute for the ratio presentation, current year divided by prior
year.
HORIZONTAL ANALYSIS
TREND ANALYSIS
A financial analysis tool that compares financial statements over multiple time periods, to see
how the company is performing.
TREND ANALYSIS
VERTICAL ANALYSIS
Is a financial statement proportional analysis in which each line item on a financial statement is listed as
a percentage of another item. It is commonly called common size statements. Certain rules observe in
Vertical analysis:
1. Balance Sheet – Total assets, total liabilities, and total capital are all considered 100%, and each
item in each section is shown as a percentage of the total
2. Income Statement – Net Sales/revenue is considered 100% and each item in the income
statement represents a certain percentage of the total.
VERTICAL ANALYSIS
RATIO ANALYSIS
Is a financial statement proportional analysis in which each line item on a financial statement is listed as
a percentage of another item.
GENERAL GROUPS OF RATIO ANALYSIS
1. LIQUIDITY RATIO- the most fundamentally important set of ratios, because they measure the
ability of a company to remain in business. It shows the relationship between cash and other
current assets to its current liabilities.
Two(2) of the most commonly used liquidity ratios are:
A. Current Ratio-measures the amount of liquidity available to pay for current liabilities. It
is calculated by dividing current assets by current liabilities.
Current Ratio = Current Assets / Current Liabilities
B. Quick or Acid Test, Ratio- the same as the current ratio but does not include inventory. It
is calculated by deducting the inventories from current assets and then dividing the
remainder by current liabilities.
GENERAL GROUPS OF RATIO ANALYSIS
2. ASSET MANAGEMENT RATIO-measures how effectively the firm is managing its asset. The most
common asset management ratios are:
A. Total Assets Turnover Ratio measures the amount in sales that are generated for each
amount that is tied up in assets. It is computed by dividing sales by total assets.
Total Assets Turnover Ratio = SALES / TOTAL SALES
B. Fixed Assets Turnover Ratio-measures how effectively the form uses its fixed assets. It is
The ratio sales to net fixed assets.
Fixed Assets Turnover Ratio = SALES / NET FIXED ASSETS
C. The Days Sales Outstanding also called the “average collection period”, it is used to
appraise accounts receivable and it is calculated by dividing accounts receivable by
average daily sales to find the number of days’ sales that are tied up in receivables.
DSO = Receivables / Average sales per day = Receivables Annual sales / 365
D. Inventory Turnover ratio- used to determine how fast inventory were converted into
cash. It is defined as a coat of good sold (COGS) divided by inventories.
Inventory Turnover ratio = COGS (COST OF GOODS SOLD) / Inventories
3. DEBT MANAGEMENT RATIOS – These ration reveal the extent to which a company is relying
upon debt to fund its operations, and its ability to pay back the debt.
1. LEVERAGE RATIO
A. Debt-to-assets ratio — the ratio of total debt to total assets.
Debt-to-asset ratio= Total debt / Assets
Total Total Assets Debt = Notes Payable + Long Term Bonds.
Debt-to-equity ratio = Total Debt / Total common equity
B. Debt-to-equity ratio Shows the extent to which management is willing to find
operations with debt, rather than equityt
Debt-to-equity ratio = Total Debt / Total common equity