Finance is a field that mainly deals with the study of investments

and the management of business resources to maximize profits and

increase the company's value

What is Financial Management?

Financial management refers to the planning, directing, controlling,

monitoring and organizing the monetary resources in such a way to
achieve the overall goals of an entity

What are the 3 key financial management decisions?

Working Capital Management ensures the firm has sufficient

resources to continue its day-to-day operations and avoid costly
interruptions. Focuses more on the company'ss short-term financial
management.
Capital Budgeting concerns the company's long term investment
ensuring that the company makes the right investment decisions.
Capital Structure concerns how the company obtains the financing
it needs to support its long term investments. It involves identifying
the ideal mixture of debt and equity financing.

Finance Department

1. Chief Finance Officer (CFO) - also known as the Vice President

for Finance is considered the top finance officer in an organization
reporting directly to the President or Chief Executive Officer. This
officer is primarily responsible for managing the financial risks of the
corporation and is also responsible for financial planning and record-
keeping. The CFO oversees the entire finance organization of the
company. Reporting to this officer are the Controller and Treasurer,
both handle two different aspects of finance.
2. Treasurer is the person in charge of the entity's Treasury function
which includes managing the firm's cash and credit, its financial
planning and its capital expenditures.

3. Controller - heads the controllership function of finance.

Controllership includes: Tax Reporting, Cost Accounting, Financial
Accounting and Financial Data Processing.
What is a Financial Market?A Financial Market performs the
function of channeling funds from those who have a surplus of fund
to those who are in need of funds. Take note, the financial
market need not refer to a physical place. It refers to
the concept of transferring funds from one entity to another.

What is a Financial Institution?

A Financial Institution is a physical establishment that facilitates

financial marketing activities (channeling funds from those with
excess to those who lack). As compared to the financial market
which is a concept, a financial institution is a physical establishment.
What are Financial Instruments?

Financial Instruments are legal agreements between the holder

and the issuer that gives the holder the right to receive payment with
interest or a right to share in company earning or dividends from the
issuer.
What are cash flows?
This is defined as the specific set of cash flows that should be
considered in a capital budgeting decision.

What is a statement of cash flows?

Statement of Cash Flows is a statement reporting the impact of a
firm's operating, investing and financing activities on cash flows over
an accounting period. The statement of cash flows separates
activities into three categories:

Operating Activities, which includes net income, depreciation

and changes in current assets and current liabilities other than
cash and short-term debt
Investing Activities which includes investments in or sales of
fixed assets and from investments in the financial markets and
operating subsidiaries
Financing Activities which includes cash raised during the
year by issuing short-term debt, long-term or stock. Also, since
dividends paid or cash used to buy back outstanding stock or
bonds reduces the company's cash, such transactions are
included here.
What is debt financing?
Debt financing a type of financing where cash is borrowed
from a lender at a fixed rate of interest and with a predetermined
maturity date.

What is equity financing?

Equity financing is a type of financing where a business cash

is paid into the business by investors, such as the business
owner.

What is the role of a cash manager?

A Cash Manager is a type of financial manager that monitors

and controls the flow of cash that comes in and goes out of the
company to meeth the company's business and investment
needs.
Financial Planning is the process of determining a company's
financial needs or goals for the future and how to achieve them.
Corporate financial planning involves deciding what investments and
activities would be most appropriate under both the company's
individual and broader economic circumstances.

TWO TYPES OF FINANCIAL PLANNING PROCESS

1. Short term financial planning

It involves less uncertainty than long-term financial planning
because market trends are more easily predictable in the short
term. Likewise, short-term financial plans are more easily
amendable in case something goes wrong.
2. Long term financial planning
It is a strategy encompassing more than one year that
involves the planning for future operations
The financial planning process involves four steps:

1. Make assumptions about Sales, Costs, etc. - it involves

establishing target sales and all costs and expenses that is expected
to be incurred in achieving the net sales targets
2. Prepare projected financial statements - involves consolidating
all inputs/assumptions made during the 1st step to summarize all
inputs and present them in financial statement format for better
understandability and easier to analyze.
3. Calculate projected financial ratios - involves making analysis
based on the projected financial statements.
4. Reexamine the plan and revise as needed - involves going
through management review either through budget meetings or one
on one meetings and any other means.
Budgeting
It is the process of creating a formal plan and translating goals into
a monetary amounts. It involves the development and organization
of systems and people in identifying opportunites, creating
strategies, developing methods and processes in allocating
resources to a common plan and expressing the same into monetary
statements.

The budgeting process is done in the following sequence:

1. Sales Budget - refer to the sales target (amount and/or quantity)

set by management. Usually is a percentage increase from prior
period sales.

Formula:
Sales Target set by Management / Sales Price per Unit = Unit Sales
Example: Management set a sales target of P100 000 for face mask
worth P1000 per box
P100 000 / P1000 per box = 100 boxes must be sold to reach sales
target
OR
Unit Sales Target set by Management x Sales price per unit = Sales
Value to be reported in the projected Income Statement
Example: Management set a unit sales of 100 boxes of face mask
before the end of the month. Each box is sold P 1000
100 boxes x 1000 php per box = 100 000php sales value

2. Inventory budget - refers to the quantity of ending inventory that

is expected to be held by end of budget period

Formula:
Unit Sales Target for the period + Safety stock (Unit sales x safety
stock percentage) x Inventory cost per unit = Inventory to be
reported in projected balance sheet
3. Production Budget - refers to the quantity of units to be
produced/ manufactured

Formula:
Unit sales target for the period + target ending inventory for the
period - projected beginning inventory = Projected units to be
produced

4. Purchases Budget - refers to the quantity of raw materials to be

purchased

Formula:
Projected units to be produced x Raw materials required per unit of
inventory - beginning raw materials inventory(units) = units of raw
materials to be purchased

5. Cash Budget - refers to the amount of cash that is to be reported

in the projected balance sheet

Formula:
Beginning cash balance + Projected cash inflow(collections, loan
receipts etc.) - Projected cash outflow (inventory and expenses =
cash to be reported in the projected balance sheet
Cash Management is the practice of managing and spending cash.
From a business perspective, cash management is an integral part
of a company's financial stabiity. It helps ensure that the company
has enough liquidity and solvency to avoid running out of cash. On
the other hand, Receivable Management is defined as the
collection of steps and procedure required to properly weigh the
costs and benefits attached with the credit policies. The receivables
management consists of matching the cost of increasing sales
(particularly credit sales) with the benefits arising out of increased
saleswith the objective of maximizing the return on the investment of
the firm. Inventory Management is the practice overseeing and
controlling of the ordering storage and use of components that a
company uses in the production of the items it sells. Inventory
management is also the practice of overseeing and controlling of
quantities of finished products for sale.
Loan is a debt provided by an entity (organization or individual) to
another entity at an interest rate, and evidenced by a promissory
note which specifies among other things, the principal amount of
money borrowed, the interest rate the lender is charging and date of
repayment. A loan entails the reallocation of the subject asset(s) for
a period of time between the lender and the borrower.

Loans are divided into two main categories:

Retail/Consumer Loans are amounts of money lent to an

individual(usually on a unsecured basis) for personal, family or
household purposes. Also called consumer credit or consumer
lending. Examples of consumer loans are Home Loan, Car Loan and
Personal Loan
Corporate Loan is a loan specifically intended for business
purposes. As with all loans, it involves the creation of a debt which
will be repaid with added interest. Some examples of corporate loans
are Term Loan, Working Capital Loan, Supply Chain Financing etc.

What are the general categories of loan requirements?

General Application Documents include:

1. Loan Application Form

2. 2 valid IDs
3. Signature/s of borrower, spouse, and co-borrower(last two is
required only if it applies)

Income Documents will depend whether the borrower is employed

or self-employed. Other categories will depend per bank/lending
institutions. these other categories include if the borrower is an
expat, a public practitioner(doctor, lawyer, CPA, etc.)and other
categories , which the bank deems fit.

Income documents include:

For employed: Certificate of Employment and Copy of Income Tax

Return
For self-employed:

Articles of Incorporation and by-laws with SECc Registration

Certificate
Audited Financial Statements for the last 2 years
DTI Registration
Income Tax Return w/ Statement of Assets and Liabilities(SAL)
for the last 2 years
List of Trade References (at least 3 names with telephone nos
of major suppliers/customers)
Bank Statements for the past 6 months

Collateral Document (for secured loans) the collateral and its

corresponding document would depend on the type of loan

Housing loan

Clear copy of Owner's Duplicate Copy of TCT/CCT

Lot Plan with Location/Vicinity Map certified by licensed
Geodetic Engineer
Photocopy of Tax declaration/Tax receipts/ tax clearance
 Endorsement Letter/computation sheet/ Contract to Sell from
developer stating the contract price

Auto Loan

To be provided by car dealer to the bank thus will not need any
intervention from the borrower
Time value of money is the idea that money available at the
present time is worth more than the same amount in the future due
to its potential earning capacity. The time value of money (TVM) is
an important concept to investors because a peso on hand today is
worth more than a peso promised in the future. This is since the
peso on hand today can be used to invest and earn interest or
capital gains.

Present value of money is the present day value of an amount that

is received at a future date while the future value of money is the
value of a sum of cash to be paid on a specific date in the future if
invested using a certain interest rate. The formula to compute the
future value of money is as follows:
Example:
Donna puts $100 in the bank for five years at five percent interest.
Lets use the formula to see the future value of money in 5 years

FV = 100 (1 + 0.05)5

FV = 100 * 1.2762

FV = $127.62 in five years

Annuity
An annuity is a contract between you and an insurance company in
which you make a lump-sum payment or series of payments and, in
return, receive regular disbursements, beginning either immediately
or at some point in the future.

What is the formula to compute the present value of ordinary annuity

formula?
The present value of ordinary annuity formula determines the value
of a series of future periodic payments at a given time. The present
value of ordinary annuity formula is as follows:

Example:
Donna applied for an annuity that would give her $1000 yearly from
the bank in the bank with 5% interest rate for over 5 years. She
wants to know how much she must give to the bank to give her
$1000 every year for 5 years

As per computation above, she would need to pay $4 329.48 to the

bank for the bank to give her $1000 every year for 5 years.
Amortized loan is a loan with scheduled periodic payments that
consists of both principal and interest. In general, with an amortized
loan, the payment amount remains constant over the life of the loan,
the principal portion of each payment increases over the life of the
loan. Because interest is calculated based on the most recent ending
balance of the loan, the interest portion of the loan payment
decreases as payments are made. This is because any payment in
excess of the interest amount contributes to reducing the principal
and this reduces tha balance in which interest is calculated.

Present value of annuity is applied in amortized loan in order to

specify the amount that would have to be deposited in one lump sum
today in order to produce exactly the same balance at the annuity's
maturity.

Formula to compute the amortization payments

A loan is amortized if both the principal and interest are paid by a

sequence of equal periodic payments
Example:
Jenny wants to buy a house but she doesn't have enough funds.
She then proceeds to secure an amortized loan with a bank. The
bank loan offered her P100 000 of loan payable in 3 years or 36
months with 5% interest rate. Compute how much she would pay
monthly.
A risk includes the possibility of losing some or all of the original
investment while a return consists of the income and the capital
gains relative on an investment.

What is a risk-return trade off?

Risk-return trade off is the concept where higher risk is associated

with greater probability of higher return and lower risk with a greater
probability of smaller return.
What are the different types of return measures?
In general, there are three different types of return measures:

Return on investment - This is calculated by dividing the cost

of the investment by the difference between the cost of the
investment and the gain on the investment
Return on equity - This is used measure of return used by
those analyzing business performance
Return on assets - This is used as a measure of return by
those analyzing financial stocks

What is a capital market efficiency?

The capital market efficiency, or also known as efficient market
hypothesis, is the degree to which the present asset price accurately
reflects current information in the market place. It is the theory that
the market is efficient - that is, it reflects all the information made
availabe to market participants at any given time.

Which is riskier, debt or equity?

Equity is riskier than debt. Because a company typically has no

legal obligation to pay dividends to common shareholders, those
shareholders want a certain rate of return. Debt is much less risky for
the investor because the firm is legally obligated to pay it.
Investment is an asset or item that is purchased with the hope that it
will generate income or will appreciate in the future.

In finance, an investment is a monetary asset purchased with the

idea that the asset will provide income in the future or will be sold at
a higher price for a profit. For example, the purchase an equipment
to raise total newspaper output is an investment. Since the
equipment will be used to produce more newspaper, the owner will
consequently earn higher income from selling the additional outputs
(newspapers)
Types of Investments

Savings Account
A type of investment that is one of the most common and least risky
ways to store money for the short term.

Bond
It is an investment type where an investor loans money to an entity
which borrows the funds for a defined period of time at a variable or
fixed interest rate.

Share
 It is a type of investment which gives an owner a stake in a
company and its profits.

Example of a confirmation document for my purchase of share of

GMA 7 at a disclosed amount.

Property
A form of investment which a person or business owns and has
legal title.
Certificate of deposit
An investment in the form of a certificate issued by a bank to a
person depositing money for a specified length of time
Commodities
A type of investment that doesnt pay interest or dividends but
fluctuates in which can result in a capital gain
Business
A type of investment where money is used as owner's capital to
sell goods/services to earn a profit

Mutual Funds
A type of investment that pools money with a number of others
investors and enables the investor to pay a professional manager to
select specific securities for him/her
Money market fund
A type of investment that provides investors with a safe place to
invest easily accessible, cash equivalent assets
Trade Life Policy (TLP)
A life policy that has been sold by the original policy owner to an
investor other than the insurer itself.
Real Estate Investment Trusts(REITs)
A type of security that invests in real estate through property or
mortgages and often trades on major exchanges like a stock
Investment risk is a measure of the chance that an investment will
not be as good as expected.

Kinds of investment risk

Inflation risk
also called purchasing power risk, is the chance that the cash
flows from an investment wont be worth as much in the future
because of changes in purchasing power.

Interest risk
A risk of the possibility that a fixed-rate debt instrument will decline
in value as a result of a rise in interest rates.
Business risk
A risk of the possibility that the issuer of a stock or a bond may go
bankrupt

Credit risk
A risk that bond issuer will not be able to make expected interest
or principal payments.

Taxability risk
This is a risk that reflects the fact that some bonds are taxed
disadvantageously compared to others

Call risk
A risk of the possibility that a debt security will be called prior to
maturity

Liquidity risk
The risk that a company or a bank may be unable to meet short
term financial demands.
Market risk
The risk of the possibility for an investor to experience losses due
to factors that affect the overall performance of the financial markets.

Reinvestment risk
The risk that future coupons from a bond will not be reinvested at
the prevailing interest rate from when the bond was initially
purchased.

Social/Political/Legislative risk
Risk associated with the possibility of nationalization, unfavorable
government action or social changes resulting in a loss of value.

Currency risk
A form of risk that arises from the change in price of one currency
against another.
WAYS TO REDUCE INVESTMENT RISK

1. Determine your tolerance to different kind of risks

Every investment involves some level of risk. Understanding
the type of risk or the combination of types of risk is essential in
reducing those risks.
2. Do your own due diligence
In a nutshell that means research your investments before you
make them. Check out the investment's history, earnings
growth, management team and debt load.
3. Diversify your investment portfolio across investment
product types and economic sectors.
Diversification reduces your overall risk by spreading it over a
variety of products.
4. Monitor your investments regularly and reallocate your
resources as necessary
The proper allocation of your investments depends on such
factors as your age, how long you have to invest and your
investment temperament.
Personal Finance is defined as the management of money and
financial decisions for a person or fmaily including budgeting,
investments, retirement planning and investments.

PERSONAL FINANCE PHILOSOPHIES:

1. Dave Ramsey's Envelope System

involves budgeting each paycheck down to the last cent,
itemizing all expected expenses. After itemizing all expenses, fill
envelopes for each category with the pre-determined amounts.
During the course of the month, if you spend all of the cash in one of
the envelopes you cant spend any more money in that category until
the next month.
2. Alexa von Tobel's 50/20/30 System
involves this breakdown for spending: 50% of your take home
pay goes to essentials like rent, groceries and transportation.
20%goes to your future like emergency savings, debt repayment and
retirement planning. 30%goes to everything else like shopping, travel
and entertainment.

3. Peter Dunn's "Ideal Budget"

 involves this breakdown for spending. Note: These percentages
may need to be adjusted slightly from person-to-person

25% of your income on housing

15% on transportation
12% on groceries and dining out
10% on savings
10% on utilities and your phone bill
5% on charity
5% on clothing
5% on entertainment
5% on medical expenses
5% on holidays and gifts
3% on miscellanous expenses

4. Money Scripts
are one's deepest held convictions and beliefs about money.
These inform every aspect of dealings with money. Money script
may serves me you or can lead to self defeating and self destructive
behaviors. Below are the different money scripts

Money Avoidance - people with this money script believe that

money is bad or that they do not deserve money. For the
money avoider, money is often seen as a force that stirs up fear,
anxiety, or disgust. People with money avoider scripts may be
worried about abusing credit cards or over drafting their
checking account; they may self-sabotage their financial
success, may avoid spending money on even reasonable or
necessary purchases.
Money Worship - people with this money script believe that the
greater ones spending power is the happier they are. This
money script is associated with higher levels of credit card and
other debt.
Money Status - people with this money script believe that the
more money one hold, the more powerful and the better one is
compared to his/her peers. The money status script can lock
individuals into the competitive stance of acquiring more than
those around them, these individuals believe that money is
status and see a clear distinction between socio-economic
classes
Money Vigilance - people with this money script tend to be very
thrifty and mindful about what and how much they spend. Those
with Money Vigilance script are secretive about their finances.
Their approach to money is generally exceptionally watchful and
worried about not having enoug money when needed. This
approach to money may encourage saving and frugality,
excessive warienss or anxiety regarding pending financial
danger.
Steps to Money Management Success

1. Build Savings
This step involves allocating a portion of your income to a
saving/s investment fund. Percentage allcoation would depend on
one's personal finance philosophy and saving method.
2. Pay bills on time
This step involves avoiding late payment charge and high
interest debts to build a positive credit standing. One of the reasons
why a person would be in mountain of debt is because of late
payment and interest charge. Note that late payment charge is
different from interest charge. Thus, to avoid both, it is ideal to pay
the FULL PAYMENT ON/BEFORE DUE DATE

3. Pay more than minimum payment

This step involves minimizing interest charge on outstanding
debts. Minimum payment is the amount that needs to be paid to
avoid LATE PAYMENT CHARGE but paying only the minimum
payment would still lead to an INTEREST CHARGE for amount of
unpaid principal amount.

4. Research for the best deal

This step involves comparing prices of different vendors before
making a purchase. When you are looking to open up credit or
shopping for merchandise, do your homework before you sign the
bottom line or make the purchase. Taking the time in doing that extra
step can save you money in the end.
This may lead to financial success because a penny saved today
can be invested, grown and become a dollar tomorrow.
MASLOW'S HIERARCHY OF NEEDS
Maslow's hierarchy of needs is a motivational theory in
psychology comprising a five tier model of human needs often
depicted as hierarchical levels within a pyramid.

First priority are physiological needs, such as food and shelter

followed by needs related to safety. Next, there are needs of love
and belonging. Fourth, humans have needs of esteem such as the
need for being respected. The final need in the hierarchy is the need
for self-actualization .

This hierarchy suggests that basic needs must be met prior to less
basic needs; for example, a starving person will seek food before
self-actualization. In accordance to Maslow's Hierarchy of Needs, in
what order of priority should one allocate his/her income?

The bottom most item in Maslow's Hierarchy are physiological

needs. These can also be noted as ESSENTIAL or NECESSITIES.
This includes items that one would have a hard time living without
e.g. food, shelter, utilities(water and electricity), clothing. Next are
safety needs, these includes items needed for a person to have
peace of mind and protection against uncertainty. This includes
contingency funds, insurance, savings and investments. In contrast
to physiological needs which focuses on being able to survive on a
daily basis, safety needs looks at surviving for a longer period e.g.
Contingency fund is established just in case emergencies needing
immediate funds arise( need to buy medication, accidents needed
imemdiate medical attention, unexpected obigation rising) .
Both physiological and safety needs are important because they
significantly contribute to a person's survivability. Items following
both physiological and safety needs are those that contribute to
further satisfaction, convenience and pleasure rather survivability
these are "love and belonging needs", "self esteem needs" and "self
actualization needs". Love and belonging needs are items for one to
improve interpersonal relationships, specific spends under this are
movie tickets to watch movie with friends, gasoline expense for road
trip with the girlfriend etc. Self esteem needs are those that boost
one's confidence spends under this category are beauty products,
voice products , gym memberships, etc. Lastly, self0actualization
needs are those items to related to fulfilling one's passions and life's
purpose, spends under this category includes cost to sustain leaving
one's job to travel around the world in the hopes of finding one's
purpose in the world.