Chapter 3: Planning and Working Capital
information regarding the number of units that
Management Planning: is about setting goals of the
organization and identifying the ways how to achieve
them.
These plans are divided into 2:
 Short-term plans:
 Long-term plans:
o These are reflected in a company’s
business strategy
o In the process of this planning, resources
(man power, production capacity and
financial resources) has to be identified
o Once a plan is set it has to be quantified.
o To quantify a plan means to be able to
gauge that plan in a way that it can be
monitored and has a basis for
performance
Steps in Planning:
1. Set goals or objectives
2. Identify resources
3. Identify goal-related tasks
4. Establish responsibility centers for accountability
and timeline
5. Establish an evaluation system for onitoring and
controlling
6. Determine contingency plans
Sales Budget:
 This is the most important statement account in
forecasting because almost all other financial
statements are affected by sales
 The decision of the management whether to
expand production capacity is based on
projected sales
 In preparing the sales budget you must consider
internal and external factors.
 External factors include: GDP, growth rate,
interest rate, foreign exchange rate, income tax
rates, inflation, economic crisis, regulatory
environment and political nature of the
environment.
 Internal Factors include: pricing, promotion,
activities distribution, area/outlet coverage,
production capacity, human resources ,
management styles, reputation, controlling of
the stakeholders and financial resources.
Production Budget: is a schedule of which provides
should be produced over a given accounting period
based on expected sales and targeted level of ending
inventories.
Projected Financial Statements:
1. Forecast sales
2. Forecast cost of sales and operating
expenses
3. Forecast net income and retained earnings
4. Determine balance sheet items
5. Determine payment schedules for loans
6. Determine external funds needed (EFN)
7. Determine how EFN will be financed
Working Capital Management: refers to the current
assets used in the operations of the business. This
includes: cash, a/r, inventories and prepaid expenses.
These assets can be reduced when current liabilities
increase.
Working Capital Financing Policies:
3 types of working capital financing:
1. Maturity-Matching working capital financing
policy:
Permanent working capital
requirements should be financed by long
term sources while temporary working
capital requirements is financed by
short-term sources
2. Aggressive working capital financing policy:
Some of the permanent working capital
requirements are financed by short-
terms
3. Conservative working capital financing policy:
Some of the temporary working capital
requirements are financed by long-term
sources.
Management of Working Capital Accounts:
 Cash: is the most liquid of assets . The following
are ways to control cash:
o Separating Cashiering functions from
Accounting function
o Issuing official receipts for collections
and summarizing collections
 o Depositing Collections  Comply with the provisions of the loan covenant
o Adopting the Check voucher system for  Notify the creditor if the company is acquiring
payments another company
 Cash Budgets: contains the following parts:  Do not default on the loans as much as possible
o Cash Receipts
o Cash Disbursements
o Net Cash flow for the period Chapter 5: Basic Long-Term Financial Concepts
o Target Cash Balance
o Cumulative excess cash or Funding Interst:
requirements I=PxRxT
 Accounts Receivables: Credit Evaluation
o Character 2 types of interest
o Capacity 1. Simple
o Capital 2. Comppound
o Collateral
o Condition Future Value of Money
 Inventories: how to safe guard the inbentories
Future Value = Initial Value x (1 + R)^T
o Separating custodial functions
o Aging of inventories R = interest Rate
o ABC analysis (A= high B= mid C= low)
T = time period
 Trade Accounts Payable
Present Value of Money

Present Value = Future Value

Chapter 4: Sources / Uses of Short and Long term Funds
(1 + R)^T
2 sources of funds
R = interest Rate
1. Debt Financing: inuutang
2. Equity Finacing: investing T = time period
Sources and Uses of short-term funds Present Value of Annuities

 Supplier’s Credit Present Value of Annuity = C x (1/r – 1/r(1+R)^t)

 Advances from Stockholders
R = interest Rate
 Credit Cooperatives
 Bank Loans T = time period
 Lending Companies
C = Equal Cash Flow Stream
 Informal Lending Sources

Sources and Uses of short-term funds

 Equity Investors
 Internally Generated Funds
 Banks
 Bond Market
 Lending Companies

Duties of the borrowers to creditors

 Pay the creditors based on payment schedule

 Provide the collaterals as agreed upon in the
loan negotiation with supporting documents
Chapter 6: Introduction to Investments i) How to manage risk (camels)
(1) Capital Adequacy
Six Sectors of Inices
(2) Asset Quality
1. Financials (3) Management Indicators
2. Industrials (4) Earnings Quality
3. Holding Firms (5) Liquidity
4. Property (6) Sensitivity to Risk Factors
5. Services
6. Mining and Oil 2) Government securities
a) T-bonds
Risk Aversion b) T-bills
Risk is inevitable but manageable
3) Corporate Debt Securities
Investment a) Commercial Papers: short-term
The current commitment of dollars for a period of time b) Corporate Bonds: Long Term
in order to derive future payments that will compensate 4) Equity Securities
the investor for the time the funds are committed; the a) Stocks
expected rate of inflation; the uncertainty of future i) Common Stocks
payments. (1) How to manage risks?
(a) Is the return of investment fixed?
Sources of Risk (b) Who is the issuer of the investment
(c) Can it be liquidated at a
1. Business Risk: related to the company itself, the
determinable price?
strategies and it’s capability to operate
(d) How long would it mature?
b) Preferred Stocks: earns you voting rights

2. Financial Risk: risk from the choice of capital

5) Pooled funds: mutual funds
structure. Where the company gets its money
6) Alternative Investments
a) Real estate
b) Cars
3. Liquidity Risk: The risk whether or not an c) Antiques
investment will pay off into cash d) Artworks
e) Anything tangible

4. Exchange Rate Risk: the value of money today

may differ from the value of money tomorrow

5. Country Risk: uncertainty of the business

environment. Uncontrolled

Types of Investment

1) Deposits
a) Savings Account
b) Checking Account
c) Time deposit Account
Chapter 7: Managing Personal Finances  Waste not, Want not
 Know your priorities
Financial Planning and The Individuals Life Cycle

1) Accumulation Phase: New Career, Gaining Money,

Capable of putting money on “high risk but high  Protect yourself against major calamities
reward” investments  Protect properties from natural calamities

2) Consolidation Phase: At this phase an individual has  Risk and Return go hand in hand
a career but has other matters to attend to (such as  Understand that risks are inevitable but always
family) that take account for most of his financing manageable

 Mind Games and Your Money

3) Spending Phase: At this phase an individual is already  Financial Management is not all computations
retired, and no longer needs to finance other people, but also a study of behavior and way of thinking
at this stage an individual spends his financial
resources (pensions and retirement fees) on luxury
 Just Do it
 Apply the concepts in real life
4) Gifting Phase: at this phase an individual decides to
share his financial resources to support far relatives
and other charitable institutions

Basic Principles of Personal Finance

 The Best Protection is Knowledge

 Financial literacy is needed to understand and
apply the principles of finance

 Nothing Happens without a Plan

 You must plan how you manage your finances

 The time Value of Money

 Utilize the concepts of investment

 Taxes affect personal decisions

 Keep an eye that everything is taxable and
anticipate tax deductions

 Importance of Liquidity
 Make sure that there is a way to turn certain
asset into cash.