VALUATION CONCEPTS AND

METHODS
FINANCIAL PERFORMANCE TOOLS

Submitted by:
Acierto, John Reymark
Alabata, Jharzel
Beltran, Millet
Dalagan, Alaina Chriselle
Gabion, Marafe
Licudine, Paul Jhon
Macabata, Jess-Cyr
Mariano, Abegail
Mariano, Jhiezel
Noblejas, Erika
BSA 1-13

Submitted to:
Ms. Eva Topacio
 FINANCIAL PERFORMANCE TOOLS

Financial Performance
The financial performance is a subjective measure of how well a company or firm
manage its assets, liabilities, and the financial interests of its stakeholders from its primary mode
of business and generate revenues.
Financial Performance Tools
Business's Key Performance Indicators (KPIs) are the tools for measuring and tracking
progress in essential areas of company performance. The KPIs provides a general picture of the
overall health of the business/ firm. Acquiring insights afforded by KPIs allows one to be
proactive in making necessary changes in under-performing areas, preventing potentially serious
losses. The KPI quantification then allows you to measure the effectiveness of your efforts. This
process ensures the long-term sustainability of the company's operating model and helps increase
business's value as an investment.

A. FINANCIAL PLANNING
Definition:
Financial Planning is the process of estimating the capital required and determining its
competition. It is the process of framing financial policies in relation to procurement, investment
and administration of funds of an enterprise. In short, financial planning is a task to determine how
a business will afford to achieve its strategic goals and objectives.
Significance:
Financial planning helps determine short and long-term financial goals and create a
balanced plan to meet those goal. It provides the criteria for making better and reliable decisions
on acquisition of resources and their commitment.
It aids the management to utilize the resources to the optimal level and avoid wastage. The
more prudent a financial plan is, the less would be the problems of redundancy or shortage of
capital in the business.
Function:
The following are the functions of financial planning:

• To ensure the availability of funds: Financial planning majorly excels in the area of
generating funds as well as making them available whenever they are required. This also
 includes estimation of the funds required for different purposes, which are, long-term
assets and working capital requirements.
• To estimate the time and source of funds: Time is a game-changing factor in any business
venture. Delivering the funds at the right time at the right place is crucial. It is as vital as
the generation of the amount itself. While time is an important factor, the sources of these
funds are necessary as well.
• To generate capital structure: The capital structure is the composition of the capital of a
company, that is, the kind and proportion of capital required in the business. This includes
planning of debt-equity ratio both short-term and long-term.
• To avoid unnecessary funds: It is an important objective of the company to make sure that
the firm does not raise unnecessary resources. Shortage of funds and the firm cannot meet
its payment obligations. Whereas with a surplus of funds, the firm does not earn returns
but adds to costs.

B. BUDGETING
Definition:
Budgeting is the process of creating a plan to spend your money. This involves quantifying
the plans in terms of monetary value. It also balancing your expenses to your income.
Significance:
The essence of budgeting is that it predicts cash flows. A budget is especially useful for
giving a company guidance regarding the direction in which it is supposed to be going. A budget
is extremely useful in companies that are growing rapidly, that have seasonal sales, or which have
irregular sales patterns. Allocate resources. Some companies use the budgeting process as a tool
for deciding where to allocate funds to various activities, such as fixed asset purchases. Model
scenarios. If a company is faced with a number of possible paths down which it can travel, you
can create a set of budgets, each based on different scenarios, to estimate the financial results of
each strategic direction. Measure performance. A common objective in creating a budget is to use
it as the basis for judging employee performance, through the use of variances from the budget.
Functions:

• Planning- the development of operational and project plans, proposed activities should
involve profit generation.
• Coordination- the budget serves as a guide to synchronize the firm's operations as to what
the company should achieve.
• Control- budgeting provides the barometer or the yardstick against which the firm can
measure and compare their actual result of operations.
 C. BUDGETARY CONTROL
Definition:
Budgetary Control is a process of determining various results with budgeted figures of the
enterprise for the future period and standards set then comparing the budgeted figures with the
actual performance for calculating various.
Significance:
A budgetary control is an essential mechanism that helps senior managers ensure that
spending and budgets for planning and controlling all aspects of producing and or selling products
or services. In simpler terms budgetary control is important because spending excesses have an
unfavorable impact on corporate profits.
Functions:

• Setting up of budgets
• Policymaking
• Comparing the actual and budgeted
• Taking corrective steps and remedial measures, (if possible) or Revising the budgets (if
required).
• Placing responsibility when there is a failure to attain the target.
Budgetary control's purpose is to ensure adherence to the plan and to compare the actual
performance with the budgets and taking immediate remedial steps.

D. FINANCIAL LEVERAGE
Definition:
Financial Leverage also known as leverage or trading on equity, refers to the use of debt to
acquire additional assets and has an ability of the firm to increase better returns and to reduce the
cost of the firm by paying lesser taxes.
Significance:
Most of the companies use leverage to finance their assets: instead of issuing stock to raise
capital, companies can use debt to invest in business operations in an attempt to increase
shareholder value. Leverage (means more debt and a greater chance of large profits, but also big
losses) is a technique in investing as it helps companies set a threshold for the expansion of
business operations. And to increase the profitability of an asset to borrow money, because they
believe that with the extra money (which can buy more assets) will make a bigger profit.
Functions:

• Financial Leverage is the ratio of equity and financial debt of a company.

• To control a greater amount of assets (by borrowing money) will cause the returns on the
owner's cash investment to be amplified.
• It is employed to increase the return on equity. However, an excessive amount of Financial
Leverage increases the risk of failure, since it becomes more difficult to repay debt.

E. Operating leverage
Definition:
Operating leverage is a cost-accounting formula that measures the degree to which a firm
or project can increase operating income by increasing revenue. Operating leverage is a measure
of the combination of fixed costs and variable costs in a company's cost structure. A company with
high fixed costs and low variable costs has high operating leverage; whereas a company with low
fixed costs and high variable costs has low operating leverage.
Significance:
Operating leverage, essentially, measures the proportion of fixed costs to your overall
costs. Higher Operating Leverage means that you have more fixed costs in your cost structure.
Lower operating leverage means that you have less fixed costs in your cost structure.
Function:
Operating leverage measures a company’s fixed costs as a percentage of its total costs. It
is used to evaluate the breakeven point of a business, as well as the likely profit levels on individual
sales.

F. Contribution margin
Definition:
Contribution margin (CM), or dollar contribution per unit, is the selling price per unit
minus the variable cost per unit. "Contribution" represents the portion of sales revenue that is not
consumed by variable costs and so contributes to the coverage of fixed costs. This concept is one
of the key building blocks of break-even analysis.
Significance:
The importance of contribution margin is that it shows how much money is available to
pay the fixed costs such as rent and utilities, that must be paid even when production or output is
zero. In example companies calculate contribution margins for a single product, multiple groups
of products or for their entire product line.
Function:
The Contribution Margin is the difference between Sales Revenue and Variable Cost
wherein it helps to separate out fixed cost and profit. It is also indicate whether the business is
generating profit, if the Contribution Margin exceed the fixed cost, or occurring loss, if
Contribution Margin cannot cover the fixed cost.

G. Time Value of Money

Definition:
The time value of money (TVM) is a useful tool in helping you understand the worth of
money in relation to time. The time value of money (TVM) is the concept that money you have
now is worth more than the identical sum in the future due to its potential earning capacity. This
core principle of finance holds that provided money can earn interest, any amount of money is
worth more the sooner it is received. TVM is also sometimes referred to as present discounted
value.
Significance:
The importance of the time value of money is that it can help make informed decision about
what to do with the money on hand. Because the TVM can help understand which option may be
best based on interest, inflation, risk and return.
It can also be used to help understand how much money to save in an account to obtain a
specific amount of money in the future.
Function:
The time value of money (TVM) is a useful tool in helping you understand the worth of
money in relation to time. It is a formula often used by investors to better understand the value of
money as it compares to its value in the future.
 DIVISION OF TASKS

Group Member Assigned Task

Acierto, John Reymark • Definition of Financial Planning
• Significance of Financial Planning
Alabata, Jharzel • Function of Financial Planning
• Definition of Budgeting
Beltran, Millet • Significance of Budgeting
• Function of Budgeting
Dalagan, Alaina Chriselle • Definition of Budgetary Control
• Significance of Budgetary Control
• Definition of Time Value of Money
Gabion, Marafe • Function of Budgetary Control
• Definition of Financial Leverage
Licudine, Paul Jhon • Significance of Financial Leverage
• Function of Financial Leverage
Macabata, Jess-Cyr • Definition of Operating Leverage
• Significance of Operating Leverage
Mariano, Abegail • Function of Operating Leverage
• Definition Contribution Margin
• Function of Time Value of Money
Mariano, Jhiezel • Definition of Financial Performance and
(Leader) Financial Performance Tools
• Significance of Time Value of Money
• Group Paper Compilation
Noblejas, Erika • Significance of Contribution Margin
• Function of Contribution Margin