Senior High School

Department of Education
Republic of the Philippines
SCHOOLS DIVISION OFFICE
LAS PIŇAS CITY

BUSINESS FINANCE
Introduction to Financial Management

First Quarter – Module 1

Week 1 to 5

WEALTH
 BUSINESS FINANCE

Business Finance – Grade 12

Alternative Delivery Mode
Quarter 1 – Module: Introduction to Financial Management
First Edition, 2021

Republic Act 8293, section 176 states that: No copyright shall subsist in any work of the
Government of the Philippines. However, prior approval of the government agency or office wherein
the work is created shall be necessary for exploitation of such work for profit. Such agency or office
may, among other things, impose as a condition the payment of royalties.

Borrowed materials (i.e., songs, stories, poems, pictures, photos, brand names, trademarks,
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exerted to locate and seek permission to use these materials from their respective copyright owners.
The publisher and authors do not represent nor claim ownership over them.

Published by the Department of Education

Secretary:
Undersecretary:
Assistant Secretary:

Development Team of the Module

Author: Sandra H. Gali
Editor: Mylene M. Bilog
Reviewers: Ira M. Ocfemia, Jr., Leilani C. Daswani, and Robert B. Reofrir
Illustrator: Sandra H. Gali
Layout Artist: Sandra H. Gali

Management Team:
Dr. Genia V. Santos Dr. Gina L. Aguitez

Chief, CLMD EPS-SDO, Las Piñas

Jennifer L. Tubello Ellaine Margarett U. Baguio

EPS, LRMDS – SDO, Las Piñas PDO – SDO, Las Piñas

Printed in the Philippines by ________________________

Department of Education – Bureau of Learning Resources (DepEd-BLR)

Office Address: ____________________________________________

____________________________________________
Telefax: ____________________________________________
E-mail Address: ____________________________________________
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Introductory Message

For the facilitator:

This is an 80-hour course offered in the ABM strand in the Senior High School. This course
deals with the fundamental principles, tools, and techniques of the financial operation involved in the
management of business enterprises. It covers the basic framework and tools for financial analysis
and financial planning and control, and introduces basic concepts and principles needed in making
investment and financing decisions. Introduction to investments and personal finance are also covered
in the course. Using the dual-learning approach of theory and application, each chapter and module
engages the learners to explore all stages of the learning process from knowledge, analysis,
evaluation, and application to preparation and development of financial plans and programs suited for
a small business.

For the learner:

This is a self-instructional module for Senior High School (SHS) learners in the Department of
Education - Division of City Schools Las Pinas under the Alternative Delivery Mode or ADM. There
are exercises to be accomplished in this particular module which are expected to be submitted to the
faculty or teacher during the face-to-face encounter in field or in an online classroom sessions or other
means of submission.

The exercises provided give emphasis in bridging the gap between theory and practice. SHS
learners are expected to analyze the concepts presented and apply these eventually in their work, for
those who are already have jobs. Before answering the exercises, the learners should have fully
understood the concepts presented. No one could stop the learners to read the modules as many
times as they desire.
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HOW TO USE THIS MODULE

Before starting the module, I want you to set aside other tasks that will disturb you while
enjoying the lessons. Read the simple instructions below to successfully enjoy the objectives
of this kit. Have fun!

Follow carefully all the contents and instructions indicated in every page of this module.

Write on your notebook the concepts about the lessons. Writing enhances learning that is important
to develop and keep in mind.

Perform all the provided activities in the module. Let your facilitator/guardian assess your answers
using the answer key card. Analyze conceptually the posttest and apply what you have learned.

Enjoy studying! What is this module all about?

PARTS OF THE MODULE

Expectations These are what you will be able to know after completing the lessons in the
module

Pre-test This will measure your prior knowledge and the concepts to be mastered
throughout the lesson.

Looking Back to This section will measure what learning and skills did you understand from the
your Lesson previous lesson.

Introduction This section will give you an overview of the lesson.

Brief Discussion This section provides a brief discussion of the lesson. This aims to help you
discover and understand new concepts and skills.

Activities This is a set of activities you will perform to process what you have learned from
the lesson

Remember This section summarizes the concepts and applications of the lessons.

Check your It will verify how you learned from the lesson.
Understanding

Assessment This will measure how much you have learned from the entire module.

References This is a list of all sources used in developing this module.

Answer keys This contains answers to all activities in this module.

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Name: _________________________ Section: _______________________

CONTENT: INTRODUCTION TO FINANCIAL MANAGEMENT

The module is divided into five lessons, namely:

 Lesson 1 – The Concept of Financial Management
 Lesson 2 – Financial Instruments, Financial Institutions and Financial Markets
 Lesson 3 – Flow of Funds and the Role of Financial Manager
 Lesson 4 – Financial Planning Process and Preparation of Budgets and Projected Financial Statements
 Lesson 5 – Tools in Managing Cash, Receivables and Inventory

This module will help you to:

For Lesson 1 to 3:

 Explain the major role of financial management and the different individuals
involved; ABM_BF12-IIIa-1
 Distinguish a financial institution from financial instrument and financial
market; ABM_BF12-IIIa-2
 Explain the flow of funds within an organization – through and from the
enterprise – and the role of the financial manager; ABM_BF12-IIIa-5
For Lesson 4 to 5:

 Identify the steps in the financial planning process; ABM_BF12-IIIc-d-10

 Illustrate the formula and format for the preparation of budgets and projected
financial statement; ABM_BF12-IIIc-d-11
 Explain tools in managing cash, receivables, and inventory. ABM_BF12-IIIc-d

Let us start your journey in learning about Financial Management. I am sure you
are ready and excited to answer the Pretest. Smile and cheer up!

Directions: Read carefully and write the letter of the correct answer of the given
question/sentence.

1. What is the primary goal of a financial manager?

A. maximizing risk C. maximizing wealth
B. maximizing profit D. maximizing return
2. Which of the following groups would be LEAST likely to receive detailed management accounting
reports?
A. stockholders C. sales representatives
B. managers D. production supervisors

3. The wealth of the owners of a corporation is represented by ______________________.

A. profits C. share value
B. cash flow D. earnings per share
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4. Wealth maximization as the goal of the firm implies enhancing the wealth of the ___________.
A. board of directors C. firm’s employees
B. federal government D. firm’s stockholders
5. Most businesses raise money by selling their securities in a _________
A. direct placement C. stock exchange
B. public offering D. private placement
6. It is the largest group of financial institutions in the Philippines.
A. commercial banks C. insurance companies
B. mutual fund D. credit unions
7. Whose responsibility provides assistance in payroll preparation, payment of vendors, and collection of
receivables?
A. VP Finance C. VP Marketing
B. VP Production D. VP Administration
8. Which of the following transaction is a financing decision?
A. offered sales discount of 5/15, n/30. C. issued new shares of stocks to raise capital.
B. distributed profit as dividend. D. purchase inventory by credit.
9. Which of the following is a financial instrument?
A. financial companies C. stock market
B. insurance companies D. bond certificate
10. Banco de Oro is an example of _____________________
A. financial market C. financial institution
B. financial problem D. financial instrument
11. Which of the following is a non-depository financial institution?
A. Thrift bank C. Commercial bank
B. Mutual fund D. Credit union
12. Which is not a function of finance manager?
A. helps management to make financial decisions
B. analyzes trends to find opportunities for expansion
C. prepares financial statements and forecasts
D. provides assistance in payroll preparation
13. These are operating cash inflow activities.
A. Receipt of loan from bank C. Collection of accounts receivables
B. Proceed from sale of fixed assets D. Issued shares of stocks
14. Which of the following is a capital expenditure.
A. purchase of inventory C. purchase of supplies
B. purchase of equipment D. purchase of raw materials
15. Liquidity means
A. Effective utilization of funds
B. Adequate return on investment
C. Availability of sufficient funds at reasonable cost
D. Safety of funds by creating reserves or reinvesting profits

Great! You finished answering the questions. You may request your facilitator to check your work.
Congratulations and keep on learning!

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Lesson
The Concept of Financial Management
1

Competency code: ABM_BF12-IIIa-1

MELC: Explain the major role of financial management and the different individuals involved;

Objectives: At the end of this lesson, the learners will be able to…

1. Define finance;
2. Describe the individuals responsible for financial management within an organization;
3. Describe how financial manager helps in achieving the goal of an organization;
4. Determine the type of financial decision made by a finance manager; and
5. Appreciate financial management.

BUDGET ME PLEASE!
Directions: List down your family’s sources of income for one month in column A and itemized your
answer. In column B, list down all the expenses your family incurred in one month and itemized your answer.
Write the total at the bottom.

A B

Total Income for the month ________________ Total Expenses for the month ______________

From the above data, fill in the following:

Total Income for the month _________________
Less: Total Expenses for the month _________________
Difference ͇͇͇͇͇͇͇͇͇͇͇͇͇͇͇͇͇͇͇͇͇͇͇͇͇͇͇͇͇͇͇͇͇͇͇͇͇

If the total income is greater than total expense, the difference is positive.
If the total income is less than total expenses, the difference is negative.

If the difference is positive, what will you do on the excess cash your family has? And if the difference is
negative, what would be your plan? Write your answer here.
_____________________________________________________________________________________
_____________________________________________________________________________________

If the difference is zero, what would be your suggestion to increase the sources of your family’s income?
_____________________________________________________________________________________
_____________________________________________________________________________________

Good Job! You are already doing a financial planning.

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INTRODUCTION:

Finance is the science and art of managing money. (Gitman &

Zutter, 2012). It is a science because it has strong roots in related-
scientific areas, such as statistics and mathematics. It is an art
because it involves creativity, customization and individual's
behavioral relationship with money. It is a body of facts, principles,
and theories relating to raising and using money by individuals,
business and governments. (Cabrera, 2017)

It is defined as the management of money and includes activities such as investing, borrowing,
lending, budgeting, saving, and forecasting. (Corporate Finance Institute)
It involves the ways people and organizations raise and allocate capital, use monetary resources, and
account for the risks involved. It is a study of how to value all sorts of things such as valuation of a business
enterprise, the payments left on a mortgage of property, the purchase of an entire company or a personal
decision to retire early.

DISCUSSION

Financial Management, also known as corporate finance, managerial

finance or business finance, is a decision making process concerned
with planning, acquiring and utilizing funds in a manner that achieves
the firm’s desired goal which is to maximize the current value of
ownership in a business firm.

Current value of ownership – It involves decisions about:

market price of the
corporation’s stocks.  how to organize the firm in a
manner that will attract capital
To maximize wealth, financial management must achieve the
 how should capital be raised
following:
(debt/equity)
a. ensure the availability of sufficient funds at reasonable cost
(liquidity)  which projects to fund
b. ensure effective utilization of funds (financial control)
 how should the resources (long-
c. ensure safety of funds by creating reserves, re-investing
term or short-term) be allocated
profits (minimization of risk) and managed
d. ensure adequate return on investment (profitability)
e. generate and build-up surplus for expansion and growth  how much capital to retain for
(growth) ongoing operations and new
projects
f. minimize cost of capital by developing a sound and
economical combination of corporate securities (economy)  how to minimize taxation
g. coordinate the activities of the finance department with the
activities of other department of the firm (cooperation)  how to go about paying back
capital providers

WHO ARE RESPONSIBLE FOR FINANCIAL MANAGEMENT WITHIN AN

ORGANIZATION?

Small businesses:
 The head of the firm, the Owner which is also the President and General Manager, often assumes
direct responsibility for marketing, production, finance, human resource, security, etc.
Medium businesses:

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 A separate department headed by an officer, a Finance Manager, may be assigned to be responsible

in financial area.
Large businesses:
 The responsibilities in different departments are divided into different individuals holding key
functions within the organizations.
Different Individuals with key functions within the Organization

SHAREHOLDERS

BOARD OF DIRECTORS

PRESIDENT

VP FOR VP FOR VP FOR VP FOR

MARKETING MARKETING MARKETING MARKETING

Shareholders – investors, the owners of the business. They elect the board of directors.
Board of Directors (the highest policy making body in a corporation)
 Responsible to carry out the objectives of the shareholders.
 Approving officers on the overall company’s strategies, goals and budgets.
 Setting policies on investments, capital structure and dividend policies.
 Appointing and removing member of the top management including the President.
President – chief operation officer
 Responsible to oversee the operations of a company and ensure that the strategies as approved by
the board are implemented as planned.
 Represents the company in professional, social and civic activities.
VP Marketing
 Formulates marketing strategies and plans.
 Performs market and competitors analysis.
 Directs and coordinates company’s sales.
 Conducts research that will allow the company identify new marketing opportunities such as existing
products already offered in the market.
VP Production
 Responsible in meeting the demands of the customer.
 Identifies production technology or process that minimizes production cost and makes the company
cost competitive.
 Responsible in coming up with a production plan that maximizes the utilization of the company’s
production facilities.
VP Administration
 Responsible in coordinating the functions of different department in the organization.
 Assists other departments in hiring employees.
 Provides assistance in payroll preparation, payment of vendors, and collection of receivables.
 Identifies means, processes or systems that will minimize the operating costs of the company.
VP Finance
 responsible in determining the appropriate capital structure of the company
o Capital structure refers to how much of your asset is financed by debt, how much is financed
by equity
 coordinates with the activities of Treasurer and Controller

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o Treasurer – responsible for managing the firm’s cash and credit, its financial planning and its
capital expenditure.
o Controller – handles cost and financial accounting, tax payments, and management
information systems.
Finance Managers are involved in
 Financial analysis and planning – prepare the financial plan, which projects revenues, expenditures,
and financing need over a given period.
 Utilizing funds – allocate the funds to current and fixed assets, to obtain the best mix of financing
alternatives, and to develop an appropriate policy to distribute income to the owners within the
context of the firm’s objectives.
 Financing or acquiring funds – obtain funding for the firm’s operations and investments and seeking
the best balance between debt (borrowed funds) and equity (funds raised through the sale of
ownership in the business)
Types of Financial Decisions a Finance Manager made:
1. Investing decision
2. Financing decision
3. Operating decision
4. Return of capital decision

INVESTING DECISIONS
 Decisions which determine how scarce or limited resources in terms of funds of the business firms
are committed to projects.
 Aims at investment in assets only when they are expected to earn a return greater than a minimum
acceptable return or the hurdle rate.
Two kinds of investments:
Short-term investment – decisions are needed when the company is in an excess cash position
Long-term investment – should be supported by a capital budgeting analysis which is among the
responsibility of finance manager
Examples of investing decisions:
o Whether or not to acquire fixed assets
o Whether or not to replace the asset
o Whether purchase or lease the space
o Whether to merge with or acquire the business
FINANCING DECISIONS
 decisions which concern with the ways in which the firm obtains and manages the financing it need
to support its investment
 examples of financing decisions:
o how and where to raise money
o determination of the debt-equity mix
o impact of interest
o inflation rates
OPERATING DECISIONS
 decisions which concern with the management of working capital.
 ensures that the firm has sufficient resources to continue its operations and avoid costly
interruptions.
 involves in activities related to the receipt and disbursement of firm’s cash.
 examples of operating decisions
o The level of cash, securities and inventory that should be kept n hand
o The credit policy – should the firm sell on credit? What would be the term?
o Should the firm purchase its goods on credit or pay cash?
o Payment of operating expenses
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RETURN ON CAPITAL DECISIONS

 Decisions which concern with the determination of quantum of profits to be distributed to the
owners, the frequency of such payments and the amounts to be retained by the firm.
 Example of return on capital decisions:
o Dividend distribution policy.
o Frequency of payment of dividends
o Percentage of profits to be retained
o Before a company may be able to declare cash dividends, two conditions must exist:
-The company must have accumulated profits to support cash dividend declaration
-The company must have cash.

The basic objective of the investing, financing, operating and return of capital decisions is to maximize
the firm’s wealth. If the firm enjoys the stability and growth, its share prices in the market will improve and
will lead to capital appreciation of shareholders’ investment and ultimately maximize the shareholders’ wealth.

Activity 1 Identify me please!

Directions: Identify whose responsibility are the following tasks or duties. Write your answer on the
blank before the number.
___________ 1. Ensures that the demand of customers are met.
___________ 2. Conducts research on the needs of customers.
___________3. Direct and coordinates the sales of the company.
___________4. Approves company’s budget.
___________5. Assists different departments in hiring employees.
___________6. Represents the company as a whole in terms of profession, social and civic activities.
___________7. Sets policies on investments, capital structure and dividend.
___________8. Ensures that resources are sufficient to operate the business.
___________9. Prepares financial plan which projects revenue.
___________10. Investors of the company.

 Finance is the science and art of managing cash.

 Financial Management is the decision making process concerned with planning,
acquiring and utilizing funds in a manner that achieves the firm’s desired goal.
 The ultimate objective of financial management is maximizing wealth.
 The major functions of financial management are:
o Financial analysis and planning
o Utilization of funds
o Acquisition of funds
 Persons responsible in financial management:
o Small business – owner
o Medium business – finance manager
o Large business – top officer of the firm such as Vice President of Finance
 Different individuals with key functions within the organization:
Shareholders - investors VP Marketing – sales output
Board of Directors – approving body VP Production - manufacturing
President or chief executive officer VP Administration – hiring and payroll
– represents the company as a whole VP Finance - funding

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 Different Financial Decisions:

Investing decision –concern with expansion projects, management of fixed assets or long-term
asset, allocating the excess funds into short term or long term investments
Financing decision – concern with the ways in which a firm obtains and manages the finance it
need to support investment
Operating decision –concern with working capital management
Return of capital decision – determination of quantum of profits to be distributed to the owners, the
frequency of distribution and the amounts to be retained.

Activity 2 Decide me please!

Directions: Determine the type of financial decisions stated in the following statements. Choose the
answer below and write the letter of your answer on the blank before the number.
A. Investing decision C. Operating decision
B. Financing decision D. Return of Capital decision

________1. Equipment was acquired from the supplier with the lowest bid.
________2. Loaned from bank who offered the lowest interest rate and the least requirements.
________3. Declared cash dividend ₱5 per share to be released by end of December, wherein cash is enough.
________4. Offer a discount on sales 5/10, n/30 to intensity collection.
________5. Purchase supplies on credit and pay within the discount period.
________6. Select leasing the office space because it is cheaper than acquiring the building.
________7. Paid creditors on time to avoid penalties.
________8. Invested the excess cash in money market.
________9. Issued new share of stocks to raise additional capital.
________10. Advertise the product to effectively inform, persuade and remind the target markets.

Activity 3 Case Analysis

Directions: Read carefully and analyze the scenario. Determine the decisions made
by the owner and identify what type of decisions he made. List down as many
decisions you identify on the provided column

Scenario:
Alessandro is a senior high school graduate of ABM from Las Piñas. Due to pandemic, he was not able
to enroll into college. He decided to put up a small business within their community. His business is “BALLS ON
THE GO”, which offers different street foods such as fish balls, squid balls, kikiam and the like. He loaned his
capital amounting to ₱10,000 from his uncle Joe. He purchased a cart amounting to ₱3,500 instead of renting
it with a daily rentals of ₱300. Initially, he bought supplies from Zapote market which cost him additional travel
expense of ₱150 a day for picking up the goods and bringing it to his store. After a few weeks, he decided to
order his stocks thru a recommendation of a friend, though it is more costly, from a supplier who offered him
a term of 15 days. After a month of operation, part of the profit he earned was shared to his uncle as a return
of the capital he loaned. The business went well for the next two months. He expands another stall and hired
his friend, Armand to manage the second stall. And they continue to do business happily ever after.
Write your answer here:

Decisions made Type of decision

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Lesson FINANCIAL INSTITUTIONS, FINANCIAL

2 MARKETS AND FINANCIAL INSTRUMENTS

Competency code: ABM_BF12-IIIa-2

MELC: Distinguish a financial institution from financial instrument and financial market

Objectives: At the end of this lesson, the learners will be able to….

1. Identify the different financial institutions

2. Classify the different financial institutions, markets and instruments; and
3. Compare and contrast financial institutions, financial market and financial instruments.

LOOKING BACK TO YOUR LESSON:

Direction: Answer the following:

What are the functions of financial management?

________________________________________________________________________________
________________________________________________________________________________
Who are responsible for financial management within an organization?
________________________________________________________________________________
________________________________________________________________________________
What are the types of finance decisions?
________________________________________________________________________________
________________________________________________________________________________

Guess whose tagline are the following. Write your answer on the blank before the number.
__________________1. “You’re in good hands”
__________________2. “We find ways”
__________________3. “Your success is our business”
__________________4. “Maaasahan ng lingkod bayan”
__________________5. “Ang pinaghirapan may katuparan”

INTRODUCTION:

Financial System in a country refers to the institutional framework

existing to enable financial transactions to be carried out in a smooth
manner. Any financial system has three main segments:
1. Financial institutions
2. Financial markets
3. Financial instruments

Financial system provides ideal linkage between depositors and

investors, thus encouraging both savings and investments. It facilitates expansion of financial markets over
space and time. It promotes efficient allocation of financial resources for socially desirable and economically
productive purposes. It influences both the quality and the pace of economic development.
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DISCUSSIONS:

Financial Institutions are intermediaries that channel the savings of individuals, businesses, and
governments into loans or investments. Intermediaries are the link between parties in dealing business. They
act as mediator to meet both parties.
These are very important and critical to the function of a capital society. Capitalism requires the flow
of capital from those with excess funds to those with good uses for it. There are far more ideas on how to use
money than there are sources of money. In other words, money is scarce resource and it must be able to flow
to the best ideas and projects in order to maximize the benefit to the economy and to society.
TYPES of Financial Institution:
A. Depository institutions
B. Non-depository institutions
A. Depository institutions - include banks, credit unions, saving and loan associations and mutual saving
banks
1. Commercial Banks – the traditional department store of finance serving
a variety of savers and borrowers. These are the largest single group of
financial institutions in the Philippines. These are profit-oriented bank,
which means they operate mainly for the purpose of earning profits and
it is not mandatory for these banks to maintain asset class.
Example: Banco de Oro, Metrobank, BPI
2. Credit Unions - are cooperative associations whose members are
supposed to have a common bond, such as employees of the same firm. Credit unions are often the
cheapest source of funds available to individual borrowers. It is a member-owned financial
cooperative, controlled by its members and operated on the principle of people helping people,
Example: Cooperatiba
3. Mutual Savings Banks - are more or less similar to saving and loan associations. They primarily
accepts savings of individuals and they are lent to the home users and consumers on a long-term
basis. It is a type of thrift institution originally designed to serve low-income individuals. If you open
an account, you are considered an “owner” in the bank.
Example: Eastern bank, Ridgewood bank
4. Savings and Loan Associations-are the financial institutions involved in collecting funds of many
small savers and lending these funds to home buyers and other types of borrowers.
Example: security bank, landbank

B. Non-depository institutions - not banks in real sense.

1. Insurance Companies -are the contractual saving institutions which collect periodic premium from
insured party and in return agree to compensate against the risk of loss of life and properties. These
companies whose savings in the form of annual premiums invest these funds in stocks, bonds, real
estate and mortgages.
Example: Sunlife Insurance, Philamlife
2. Pension/Provident Funds -are financial institutions which accept saving to provide pension and
other kinds of retirement benefits to the employees of government units and other corporations.
Pension funds are basically funded by corporation and government units for their employees, which
make a periodic deposit to the pension fund and the fund provides benefits to associated employees
on their retirement.
Example: GSIS, SSS, Provident fund offered in government employees.
3. Finance Companies - are financial institutions that engage in satisfying individual credit needs, and
perform merchant banking functions. In other words, finance companies are non-bank financial
institutions that tend to meet various kinds of consumer credit needs.
Example: Bancnet, Megalink, Bankard, Pag-ibig
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4. Mutual Funds - are open-end investment companies. They are the associations or trusts of public
members and invest in financial instruments or assets of the business sector or corporate sector for
the mutual benefit of its members.
Example: Philippine Investment Fund Association – Taguig
5. Investment Banks – organizations that underwrite and distribute new investment securities and help
business obtain financing. They help corporations design securities with the features that are attractive
to investors. They can buy these securities from the corporation and then resell them to investors.

OTHER BANKS

Thrift banks – a type of bank that offers specialized services in the real estate sector. It offers savings
accounts facilities and home mortgage loan facilities to local people. These are mutually owned as some of
them are owned by the stockholders while the others are held by their depositors. It is mandatory for the thrifts
to be a member of the FHLBS (Federal Home Loan Bank System).
Rural Banks – specialize in small loans for agricultural purposes as well as to retail traders. Their main
sources of funds are savings and time deposits. It is dedicated to agribusiness, with tailored lending products,
personal banking and savings and investments accounts.
Government banks – created for specialized purposes (controlled by the government)
The Development Bank of the Philippines – established to finance development projects in such areas
as agriculture, industry and low-cost housing. It also undertakes investment banking functions. Initially, this
bank was designed to facilitate postwar rehabilitation, provided long term finance.
The Land Bank of the Philippines – established to assist the government in the acquisition of landed
estates under the agrarian reform programme. It functions as an expanded commercial bank.
Central Bank extensively regulated the commercial banking system and engaged in considerable
rediscounting activity.
Role of Financial Institutions:
 Accepting deposits
 Providing loans
 Discounting and negotiating promissory note
 Buying and selling of foreign exchange
 Issuing share certificates
 Participates in financial markets a both supplier and user of funds

FINANCIAL MARKETS
 are the meeting place for people, corporations and institutions that either need money or have
money to lend or invest.
 are markets where buyers and sellers trade commodities, financial securities, foreign exchange, and
other freely exchangeable items and derivatives of value at low transaction costs and at prices that
are determined by market forces.
 Financial markets exist as a vast global network of individuals and financial institutions that may be
lenders, borrowers or owners of public companies worldwide.

Types of Financial Market:

Primary Market – companies sell stocks to the public for the first time.
Secondary Market – investors and traders buy and sell stocks to each other. The company does not
participate in these transactions.

To raise money, users of funds will go to a primary market to issue new securities (either debt or
equity) through a public offering or a private placement. The sale of new securities to the general public is
referred to as public offering and the first offering of stock is called initial public offering (IPO)
The sale of new securities to one investor or group of investors is referred to as private placement.

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Suppliers of funds or the holders of the securities may decide to sell the securities that have previously been
purchased. The sales of previously owned securities takes place in secondary markets.
Philippine Stock Exchange is both a primary and secondary market.

Different Financial Markets

1. Stock market
The stock market trades shares of ownership of public companies. Each share comes with a price, and
investors make money with the stocks when they perform well in the market. It is easy to buy stocks. The real
challenge is in choosing the right stocks that will earn money for the investor.
2. Bond market
The bond market offers opportunities for companies and the government to secure money to finance
a project or investment. In a bond market, investors buy bonds from a company, and the company returns the
amount of the bonds within an agreed period, plus interest.
3. Commodities market
The commodities market is where traders and investors buy and sell natural resources or commodities
such as corn, oil, meat, and gold. A specific market is created for such resources because their price is
unpredictable. There is a commodities futures market wherein the price of items that are to be delivered at a
given future time is already identified and sealed today.
4. Derivatives market
Such a market involves derivatives or contracts whose value is based on the market value of the asset
being traded. The futures mentioned above in the commodities market is an example of a derivative.

Debt Market vs Equity Market

Debt Market – debt instruments are traded between investors, such as debentures and bonds. These
instruments generally carry a coupon rate, commonly known as interest, which remains fixed over a period of
time.
Equity Market – equity instruments are traded between investors, such as ownership of the business.
Money Market vs. Capital Market
Money Market – for short-term funds, where some individuals, businesses, governments, and financial
institutions have temporarily idle funds and they wish to invest in a relatively safe, interest bearing assets, such
as, treasury bills, commercial papers, and certificate of deposits.
Capital Market – the market where instruments with medium- and long-term maturity are traded. This
is the market where the maximum interchange of money happens, it helps companies get access to money
through equity capital, preference share capital, etc. and it also provides investors access to invest in the equity
share capital of the company and be a party to the profits earned by the company. The major securities traded
in capital markets are stocks and bonds.
Cash Market vs Futures Market
Cash Market – transactions are settled in real-time, the total amount of investment to be paid by the
investors, either through their own funds or through borrowed capital.
Futures Market – the settlement or delivery of security or commodity takes place at a future date.
Exchange-traded market vs Over-the-Counter Market
Exchange traded market – centralized market that works on pre-established and standardized
procedures. In this market, the buyer and seller don’t know each other.
Over-the-counter market – this market is decentralized, allowing customers to trade in customized
products based on the requirement. In these cases, buyers and sellers interact with each other.

FUNCTIONS OF THE MARKETS

1. Puts savings into more productive use
2. As mentioned in the example above, a savings account that has money in it should not just let that
money sit in the vault. Thus, financial markets like banks open it up to individuals and companies that need a
home loan, student loan, or business loan.
3. Determines the price of securities
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 BUSINESS FINANCE

4. Investors aim to make profits from their securities. However, unlike goods and services whose
price is determined by the law of supply and demand, prices of securities are determined by financial
markets.
5. Makes financial assets liquid
6. Buyers and sellers can decide to trade their securities anytime. They can use financial markets to
sell their securities or make investments as they desire.
7. Lowers the cost of transactions
In financial markets, various types of information regarding securities can be acquired without the need to
spend.
ROLE OF FINANCIAL MARKETS
 Help firms and governments raise cash by selling securities
 Allow investors with excess funds to invest and earn a return
 Channel from savers to borrowers
 Allocate resources optimally (provide funds to those who can make the best use of them)
 Help allocate cash to where it is most productive
 Help lower the cost of exchange
 Trade existing securities, assures investors that they can quickly sell their securities if the need arises

FINANCIAL INSTRUMENTS

A Financial Instrument is any contract that gives rise to a

financial asset of one entity and a financial liability or equity instrument
of another entity.
Contract – agreement between two or more parties that has
clear economic consequences that the parties have little, if any, discretion Bill of Exchange
to avoid, usually because the agreement is enforceable by law.

Financial instrument could be any document that represents an asset to one

party and liability to another. It can be a document like bond, share, bill of
exchange, futures or options, contract, check, currency swaps, drafts and
more. All financial instruments serve different purposes. It carries a
monetary value and legally enforceable. One can also create, modify and
trade such instruments, which represent a binding agreement between two or more parties.
Types of Financial Instruments:
1. Primary instruments
2. Derivative instruments
PRIMARY INSTRUMENTS
- a financial investment whose price is based directly on its market value.
It includes the following:
a. Financial assets Shares of stock
b. Financial liability
c. Equity instrument
Financial Assets- are non-physical assets whose value are derived
from a contractual claim
o cash
o demand, savings and time deposits
o undeposited checks - checks received from customers
Bond certificate
and others that are not yet deposited into a bank account.
o foreign currencies -the currency of another country
o money order - a payment order for a pre-specified amount of money
o bank drafts – commitment by banking institutions to advance funds of demand by the party
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 BUSINESS FINANCE

o Trade receivables (delivery receipts and sales invoice)

o Promissory notes - a financial instrument that contains
a written promise by one party (the note's issuer or maker) to pay another party
(the note's payee) a definite sum of money, either on demand or at a specified future date.
o Bond certificates - an instrument of indebtedness of the bond issuer to the holders
Financial Liabilities - are contractual obligation s to deliver cash or similar to another entity or a
potentially unfavorable exchange of financial assets or liabilities with another entity. These are contracts
to exchange financial assets or financial liabilities with another entity under conditions that are potentially
unfavorable to the entity. Also, these are contracts that will or may be settled in the entity’s own equity
instruments.
o Accounts and notes payable
o loans from other entities and bonds and other debt instrument issued by the entity.
o derivative financial liabilities
o obligations to deliver own shares worth a fixed amount of cash
o some derivative to own equity instruments
Equity Instruments – a document which serves as a legally applicable evidence of the ownership right in a
firm, like a share certificate.
o ordinary shares or common stocks - shares entitling their holder to dividends that vary in amount
and may even be missed, depending on the fortunes of the company.
o preference shares or preferred stocks - stock that entitles the holder to a fixed dividend, whose
payment takes priority over that of common-stock dividends
o warrants or written call option that allow the holder to subscribe or purchase ordinary shares
DERIVATIVE INSTRUMENTS
- an instrument whose value is derived from the value of one or more underlying, which can be
commodities, precious metals, currency, bonds, stocks, stocks indices.
Example: a contract allowing a company to purchase a particular asset (e.g. flour) at a designated
future date, at a predetermined price is a financial instrument that derives its value from expected and
actual changes in the price of the underlying asset.

Activity 1: True or False

Directions: Read the sentence carefully. Write TRUE if the statement is true, otherwise, write FALSE if
the statement is false. Underline the word/s that makes the statement false and write the correct word/s at
the end of the statement.

________1. Financial institutions provide lending services.

________2. Credit unions are the largest type of financial intermediary handling individual savings.
________3. Security and Exchange Commission is the agency regulating commercial banking institutions in the
Philippines.
________4. The difference between commercial banks and investment banks is that investment banks are
accepting deposits.
________5. Thrift banks are owned by stockholders, while mutual savings banks are owned by depositors.
________6. Commercial banks are profit-oriented, while thrift banks are not profit-oriented.
________7. GSIS is a financial institution that pay for workers’ retirement.
________8. Credit unions are controlled by the government.
________9. Pag-ibig Fund is an example of mutual fund.
________10. SSS is an example of depository bank.

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REMEMBER:
 Financial Institutions are intermediaries that channel the savings of individuals,
businesses, and governments into loans or investments.
 Types of Financial Institutions:
Depository institutions – a financial institution that accepts deposits and channels the
money into lending activities.
Non-depository institutions – not banks in the real sense. They make contractual
arrangement and investment in securities to satisfy the needs and preferences of investors.
 Financial Markets are markets where debt and equity securities were sold and
bought.
 Primary market – new securities are traded.
 Secondary market – previously issued securities are traded.
o Stock market – equity securities are traded.
o Bond market – debt securities are traded.
o Commodities market – natural resources or commodities are traded.
o Derivatives market – contracts or derivatives are traded.
o Money market – short-term financial assets are traded.
o Capital market – long-term assets are traded.
o Cash market – on the spot payment or real time payment of transactions.
o Futures market – settlement or delivery of security or commodity takes place at a future
date.
o Exchange traded market – centralized, standardized
o Over the counter market – decentralized, customized
 Financial Instrument is a monetary contract between parties. We can create, trade, or modify them.
We can also settle them.
 Types of Financial Instruments are: primary and derivative.
 Primary instruments – generate rights and obligations between the parties involved in the underlying
transactions. It can be classified into Financial assets, Financial liabilities and Equity instruments.
 Derivative instruments is a contract that derives its value from the performance of an underlying
entity. This underlying entity can be an asset, index, or interest rate.

CHECK YOUR UNDERSTANDING

Activity 4: Compare and Contrast

Directions: Compare and contrast the financial institutions, financial markets and financial
instruments. Create Venn diagram to illustrate your answer.

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Lesson Flow of Funds and

3 The Role of Financial Manager

Competency codes: ABM_BF12-IIIa-5

MELC: Explain the flow of funds within an organization – through and from the enterprise – and the role of
the financial manager

Objectives: At the end of this lesson, the learners will be able to…
1. Cite transactions for the different types of cash activities;
2. Calculate cash balances related to cash flow activities;
3. Explain the flow of funds within a business organization and discuss the role of finance manager.

LOOKING BACK TO YOUR LESSON:

Directions: Match the following word/s to its respective class. Write your answer in their
corresponding column below:

Common stock Banco de Oro Stock market

US Dollar Philippine Stock Exchange Charge invoice
Bond Market Bond certificate Credit Unions
GSIS Money Market Promissory notes
Insurance companies Option contract Capital Market

Financial Institution Financial Market Financial Instrument

Congratulations!! Enjoy learning!

Let us now proceed to another topic for today, “the flow of funds within an organization and the role
of finance manager”.

Try this!
Determine the flow of fund whether it is an Inflow or Outflow on the following transactions. Write
your answer on the space provided before the number.
________________1. Purchase of machineries.
________________2. Sale of merchandise.
________________3. Collection of accounts receivable.
________________4. Owner’s investment.
________________5. Payment of dividends.
________________6. Sale of fixed assets.
________________7. Services rendered.
________________8. Borrowed funds.
________________9. Issued shares of stocks
________________10. Payment of expenses
 BUSINESS FINANCE

INTRODUCTION

FUNDS
It refers to all financial resources of the company, current and non-current. Others define it as working
capital while finance professionals and accountant refer it as cash and cash equivalent.
Cash and cash equivalent - comprise of cash on hand and demand deposits with banks as well as short-
term, highly liquid investments that are readily convertible into known amounts of cash and which all subject
to an insignificant risk of changes in value as commercial papers, treasury bills.
Cash which serves as a lubricant of a firm’s operation is the cornerstone of any business, large or small.
Analyzing its movement, where it come from and where it goes, is a fundamental financial management
procedure that business owners and managers cannot afford to disregard.
Finance managers knows that the firm needs cash, not accounting profit to:
- Pay the firm’s obligation as they come due;
- Fund the firm’s operation and growth; and
- Compensate the firm’s owners for their investment.

DISCUSSION

Flow of funds (FOF) are financial accounts that are used to

track the net inflows and outflows of money to and from various
sectors of a national economy.

Statement of Cash Flows is a financial statement that shows the

firm’s cash receipts (inflows) and the cash disbursements (outflows)
over a given period of time.

Three basic types of cash activities:

o Operating activities
o Investing activities
o Financing activities

-activities that generate revenue for the company.

-The cash flows from operating activities offer great insights into a
company’s liquidity
-If the company can generate higher amount of cash from sales
compared to the cash required for expenses, it is a very good sign.

represents the purchase and sale of assets (or investments) by the

company that will offer returns in the future.
-Capital expenditure (or capex) is an important measure found in
this section of a cash flow statement.

-focuses on the cash inflows and outflows from a company as a

result of raising and repaying capital .
This section is of great interest to prospective investors because it
offers information about the company’s dependence on debt for its
cash needs.
Greater financing from debt can impact the company’s profitability
in the long run.

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The following are the different cash activities:

Activity Cash Inflows Cash Outflows

Operating  Sale of merchandise
 Services rendered
 Collections of receivables
 Receipt of rent income
 Receipt of interest income
Investing  Sale of office equipment
 Sale of store equipment
 Sale of other investments
Financing  Owner’s investment
 Issuance of stock
 Issuance of long-term notes
payable
 Issuance of bonds
 Borrowing cash
 Payment to suppliers of inventories
 Payment to other suppliers of supplies
 Payment for operating expenses such as
utilities, salaries, rents advertising, taxes,
insurance, interest
 Purchase of office equipment
 Purchase of store equipment
 Purchase of other investments
 Withdrawal by the owner
 Payment of dividend
 Payment of principal from long-term
notes payable
 Payment of bond principal
 Payment of principal amount of loan

The Role of Finance Manager in the Flow of Funds

1. Estimate the amount of capital required –financial manager makes estimates of funds for both
short-term and long-term. Business firms require capital for:
a. Purchase of fixed assets
b. Meeting working capital requirements
c. Modernization and expansion of business
2. Determine the capital structure – financial manager has to determine the proper mix of equity and
debt and short-term and long-term debt ratio.
3. Choose the source of funds – finance manager has to decide the sources from which the funds are to
be raised. Either from stockholders or from financial institutions
4. Procure funds – financial manager takes steps to procure the funds required for the business. it is
dependent on the cost of raising fund, general market conditions, choice of investors, government
policies.
5. Utilize funds – invest the funds prudently to various assets so as to maximize the return on
investment and be guided by the safety, profitability, and liquidity.
6. Dispose profits or surplus – finance manager has to decide how much to retain for plugging back and
how much to distribute as dividend to shareholders out of the profits of the company. The decision
are influenced by the trend of earnings of the company, the trend of the market price of its shares,
the requirements of funds for self-financing the future programmers.
7. Manage cash – finance manager ensure that there is neither shortage nor surplus of cash with the
firm. Sufficient funds must be available for purchase of materials, payment of wages and meeting
day-to-day expenses.
8. Financial control – finance manager has to evaluate the financial performance of the firm. The
overall measure of evaluation is Return on Investment (ROI). It also includes budgetary control, const
control, internal audit, break-even analysis and ratio analysis.

The financial manager must lay emphasis on financial planning as well.

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 BUSINESS FINANCE

Let’s try this!

Activity 1 Flow me please!

Directions: Write three transactions of each cash inflow (green box) and three transactions of each
cash outflow (blue box) from operating, investing and financing activities:
Operating activities Investing activities Financing activities

REMEMBER
 Funds refer to all financial resources of the company, current and non-current.
 Flow of funds are financial accounts that are used to track the net inflows and outflows of money to
and from various sectors of a national economy.
 Statement of Cash Flow - is a financial statement that shows the firm’s cash receipts (inflows) and
the cash disbursements (outflows) over a given period of time
 Three cash activities:
Operating activities – cash generated from day-to-day operating activities of the company.
Investing activities – cash generated from the sale and purchase of fixed asset and investments.
Financing activities – comes from raising and repaying capital
 Role of finance manager:
Fund raising Supervise employees who do financial reporting
Fund allocation and budgeting
Profit planning Review company financial reports and seek ways
Understanding the capital market to reduce costs
Prepare financial statements, business Analyze market trends to find opportunities for
activity reports and forecasts expansion
Monitor financial details to ensure that Help management to make financial decision
legal requirements are met

CHECK YOUR UNDERSTANDING

Activity 2: Essay
Explain the flow of funds within the business organization and discuss briefly the role of finance manager.

Essay:

Rubrics:
Criteria Point Score
Writing shows strong understanding of the topic 5
Present ideas in an original manner 5
Organized BEMING (beginning, middle and ending) 5
Clear and legible typewritten/ presented words 5
Few technical errors 5
TOTAL 25

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Lesson The Financial Planning Process and

4 Preparation of Budgets and Projected
Financial Statements
Competency codes: ABM_BF12-IIIc-d-10
ABM_BF12-IIIc-d-11

MELC:
 Identify the steps in the financial planning process.
 Illustrate the formula and format for the preparation of budgets and projected financial
statement.

Objectives: At the end of this lesson, the learners will be able to….
1. Identify the steps in the financial planning process;
2. Solve problems related to preparation of budgets;
3. Prepare a pro-forma or projected financial statements

LOOKING BACK TO YOUR LESSON:

Directions: Classify the following transactions whether Operating, Investing or Financing activity.
___________1. Payment of salaries.
___________2. Withdrawal of the owner.
___________3. Bought machineries.
___________4. Paid loan.
___________5. Sold goods.

MOTIVATION:
Directions: Write your name on the circle. In each arrow, write your planning process on how you
see yourself five years from now.

Year 0

Year 1

Year 5

Year 2
___________

Year 4

Year 3
 BUSINESS FINANCE

INTRODUCTION

Planning is an important factor in achieving goals or dreams in life. Without plans, life has no
direction at all. Likewise in business, without plans, operation will be disorganized, employees in
organizations will experience low morale, productivity turnover will lower and this will result into a lowered
profits.
Financial Planning is a process of framing objectives, policies, procedures, programs and budgets
regarding the financial activities of an enterprise.

Objectives of Financial Planning

1. Determine capital requirements - the cost of current and fixed assets,
promotional expenses and long-range planning.
2. Determine capital structure – the composition of capital which
includes the debt-equity ratio both long-term and short-term.
3. Frame financial policies – cash control
4. Ensure that the scarce financial resources are maximally utilized in the
best possible manner
Importance of Financial Planning
a. Ensure adequate funds
b. Help in ensuring a reasonable balance between outflow and inflow of funds so that stability is
maintained
c. Ensure that suppliers of fund are easily investing in companies.
d. Help in making growth and expansion programmes which help in long-run survival of the
company.
e. Reduces uncertainties with regards to changing market trends which can be treated easily
through enough funds.
f. Reduces uncertainties which can be the hindrance of growth of the company.
Financial Plan
- Is the statement of what to be done in the future.
- It gives you a road map for handling your money in a way that cuts stress and build security.
- Financial plan is all about BUDGET.
Financial planning starts with long term plans which would then translate to short term plans.
Long-term Financial Planning Short-term Financial Planning
-Focuses on big picture: Focuses on ensuring that business has enough cash to
o Capital budgeting pay all its liabilities and at the same time is does not
o Dividend policy have more cash than is necessary.
o Financial structure Cash and liquidity management
-The process of projecting revenues and Credit and inventory management
expenditures over a long-term period, using The step by step process of achieving the long-term
assumptions about economic conditions, future plans.
spending scenarios, ad other salient variables. Includes managing working capital, current ratio, quick
-Requires an understanding of short term ratio and cash budget
impacts and capital structure
Long term goals – set the direction of the Short-term goals – are the specific steps or actions that
company will ultimately reach the company’s long term goals.
Example: to finish college Example: to pass the entrance exam

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 BUSINESS FINANCE

Characteristics of an Effective Plan:

Specific – target a specific area for improvement
Measurable – quantity or at least suggest an indicator of progress
Assignable – specify who will do it
Realistic – state what results can realistically be achieved, given available resources
Time-related – specify when the results can be achieved.
Financial Planning Process:
1. Establish your goals and objectives -assess your current financial
Plan: You want to finish college and get a good
situation and identify your priorities. job afterwards.
2. Develop long-term financial goals and short-term financial goals. Process:
3. Gather and consolidate all pertinent information -determine where 1. To finish college
you need to go and how to potentially get there. Review the current 2. Look for a school that caters your
need. Make a canvass. Do a
financial data. Numerous individual budgets are prepared, including
research on how much tuition and
sales, production, selling expenses and administrative expenses. miscellaneous fees you would pay.
4. Analyze the data gathered – develop a profile for your current 3. Analyze the advantage and
situation, including a review of your financial information and disadvantage in enrolling such
relevant documents. Individual budgets are combined to form a school. (accessibility, affordability,
environmental-friendly, etc)
consolidated budget. From the consolidated budget, project the cash 4. If affordable but not accessible and
flow, profitability, and financial conditions. that school will satisfy your needs,
5. Develop a strategy to address your specific need - customized then develop a strategy to address
strategies based on client’s specific financial status, time horizon, risk the gap. (buy bike as transport
means)
tolerance, goals and objective. Develop a short-term and long-term
5. Use your bike to allow you to
plan. Choose ways to achieve your goals. Forecasting and Budgeting understand where you want to be
will help. (“kaya mo pa ba?”)
6. Implement the recommended strategy – simply put your plan into 6. Monitor and assess if you can still
work. carry on or need some changes in
your strategy.
7. Monitor and review your goals and situation – review your financial
situation and asses the need for any changes. Plans evolve and change
just like life. Once plan is created, it is essentially a piece of history. This is why plan need to be monitored from
time to time.
Financial forecasting and budgeting are related, but different, processes. Before budgets are
developed, managers set goals and develop plans. Budget specify the financial resources needed to carry out
plans.
Budgeting - is the process of creating a plan to spend your money. It is simply balancing your expenses
with your income.
Budget – is a financial plan which allows you to determine in advance whether you will have enough
money to do the things you need to do or would like to do.
Forecasting - is the process of making predictions of the future based on past and present data and
most commonly by analysis of trends. This is the starting point of business planning. This helps many businesses
in budgeting, planning and estimating future growth.
Any forecast of financial requirements involves:
a. determining how much money the firm will need during a given period
b. determining how much money the firm will generate internally during the same period
c. subtracting the funds generated from the funds required to determine the external financial
requirements.

QUANTITATIVE APPROACH:
A. Time Series Model:
1. Naive Model – assume that the demand in the next period will
be equal to the demand in the most recent period.
Example: Consider the following sales data for 2019:

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 BUSINESS FINANCE

January ₱5,000
February 5,300
March 3,500

The forecasted sales for April would be ₱3,500.

If the actual sales for April is ₱8,250, how much would be the forecasted sales for May? _________

2. Moving Average – the number of period n, in which the series of average will be created and computed.
Simple Moving Average – used if little or no trend and for smoothing.
D1 + Dt−1+ Dt−n+1
Formula: SMA𝑡+1 = 𝑛

Where n = number of periods to be averaged

D = data or actual occurrence in a period
SMA𝑡+1 = forecast for the upcoming period

Example: Compute for the three-month simple moving average forecast of sales based on the given data
below:
January ₱5,000
5,000+5,300+3,500
February 5,300 = the forecasted sales for April = ₱4,600
3
March 3,500
5,300+3,500+9,300
April (actual sale) 9,300 = = the forecasted sales for May = ₱6,033.33
3
3,500+9,300+5,200
May (actual sale) 5,200 = = the forecasted sales for June = ₱6,000
3

Try this!
If the actual sales for June is ₱12,000, what would be the forecasted sales for July? _____________
Solution: _____________________________________________________________________________

Weighted Moving Average – gives more emphasis on recent data

Formula: WMA𝑡+1 = ∑𝑊𝑡 𝐷𝑡
Where: 𝑊𝑡 = weight assigned in a particular period
𝐷𝑡 = demand for the period
Example: Compute for the three-month weighted moving average forecast of sales based on the given data
January ₱5,000
February 5,300 1/6 x 5,000 833.33 1/6 x 5,300 883.33
March 3,500 2/6 x 5,300 1,766.67 2/6 x 3,500 1,166.67
April (actual sales) 9,300 3/6 x 3,500 1,750.00 3/6 x 9,300 4,650.00
Forecast for April 4,350.00 Forecast for May 6,700.00

Try this!
a. If the actual sales for May is ₱5,200, what would be the forecasted sales for Month Fraction
June? ________________ 1 1/6
Solution: __________________________________________________________ 2 2/6
3 3/6
b. If the weighted moving average is for five-month period and the actual sales for 6
May is ₱5,200, what would be the forecasted sales for June? _____________________________
Solution: _______________________________________________________________________________

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 BUSINESS FINANCE

3. Exponential Smoothing- are similar in that a prediction is a weighted sum of past observations, but the
model explicitly uses an exponentially decreasing weight for past observations. It does not involve
voluminous record to forecast. A continuous adjustment process. The alpha ɑ is used as the smoothing
parameter to minimize the error and has a value of 0 to 1.
Formula: 𝑌′𝑡+1 = ɑ𝑌𝑡 + (1-ɑ) Y’

Where: 𝑌′𝑡+1 = smoothed value

𝑌𝑡 = most recent actual data
𝑌′𝑛𝑒𝑤 = exponential smoothed average to be used as the forecast
ɑ = smoothing constant or coefficient

Example: using exponential smoothing ɑ=0.25, what would be the forecasted sales for April?
January ₱5,000 Smoothed value
February 5,300
March 3,500 Jan 5,000 5,000

Feb 5,300 (.25x5,300) +[(1-.25)x5,000] 5,075

Mar 3,500 (.25x3,500) +[(1-.25)x5,075] 4,681.25

B. Associative or Causal Model

Regression Method - the demand function for a product is estimated where demand is dependent
variable and variables that determine the demand are independent variable. If only one variable affects
the demand, then it is called single variable demand function
Linear Regression - shows the relationship between two variables: the dependent and the
independent.
 Use all data to estimate the cost function.
Estimation of cost: two types of Cost
i. Variable cost – cost that change in total as the level of activity changes in the short run and within
the relevant range.
 In manufacturing – direct materials, direct labor, factory overhead, distribution cost, sales
commission
 In merchandising – cost of sales, sales commission
 In service – direct labor and materials used to perform the services.
ii. Fixed cost -cost that remain constant in total regardless of changes in the level of activity within the
relevant range.
 Committed fixed cost – investment in facilities like depreciation, taxes on realty, rent
 Discretionary fixed cost – advertising, research, public relation
MIXED Cost – contains the variable and fixed cost.
 Use basic statistics to project future values for a target variable.
Formula: Y = a + bx
Where: Y – cost to be predicted – mixed cost (dependent variable)
a – fixed cost (vertical intercept of the line)
b – variable cost per unit of activity (slope of the regression line)
x – independent variable on which the prediction is to be based – level of activity
Example:
JNT Parcel Service operates a fleet of delivery trucks in a large metropolitan area. A careful study by
the company’s cost analyst has determined that if a truck is driven 120,000 miles during a year, the
average operating cost is 11.60 cents per mile. If a truck is driven only 80,000 miles during a year, the
average operating cost increases to 13.60 per mile.
1) Determine the fixed cost and variable cost.
2) If the truck were driven 100,000 miles during a year, what total cost would you expect to be incurred?

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 BUSINESS FINANCE

Given:
No. of miles 120,000 80,000 X = no. of miles (independent variable)
Mixed Cost per mile 11.6 13.6 Y = total cost or the mixed cost
a = fixed cost
Total cost 1,392,000 1,088,000
b = variable cost per unit

Solution: Y = a + bx
Step 1: Eliminate one unknown (a) and solve for b:
Equation 1 1,392,000 = a + b (120,000) Interpretation:
Variable cost is ₱7.60 per mile
Equation 2 -1,088,000 = -a + -b (80,000)
Fixed cost is ₱480,000
304,000 = 0 + b (40,000)
 The cost per mile increases when the
b = 304,000/40,000 total number of miles decreases due
b = 7.6 → variable cost to the effect of the fixed cost.
 The cost per mile decreases when the
Step 2: Substitute the amount of b to any of the equation: total number of miles increases.
Equation 1 1,392,000 = a + 7.6 (120,000)
1,392,000 = a + 912,000
a = 1,392,000 - 912,000
a = 480,000 →fixed cost

Activity 1
1. Consider the following sales data of ABM Corporation for 2020. The Corporation would like to
forecast the sales for the month of January 2021. Four-month moving average is assumed and
smoothing constant of ɑ=0.05.
MONTH SALES MONTH SALES
January 8,150 July 8,175
February 8,250 August 8,785
March 7,950 September 9,250
April 8,250 October 9,550
May 8,050 November 9,750
June 7,950 December 10,250
a) Use naive model; b)Simple moving average; c) Weighted average; and d)Exponential smoothing
2. Utility costs at Service, Inc. are a mixture of fixed and variable components. Records indicate that utility
costs are an average of ₱0.40 per hour at an activity level of 9,000 machine hours and ₱0.25 per hour
at an activity level of 18,000 machine hours. What is the expected total utility cost if the company
works 13,000 machine hours?
3. Starbox Express operates a number of espresso coffee stands in a busy suburban malls. The fixed
weekly expense of a coffee stand is ₱11,000 and the variable cost per cup of coffee served is ₱2.60.
Estimate the total costs and cost per cup of coffee at the indicated levels of activity for a coffee stand.
Round off the cost of a cup of coffee to the nearest tenth of a cent.
Cups of Coffee Served in a Week
1,800 1,900 2,000
Fixed cost ? ? ?
Variable cost ? __________ ? __________ ? __________
Total cost ? ? ?
Cost per cup of coffee served ? ? ?

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 BUSINESS FINANCE

Does the cost per cup of coffee served increase, decrease, or remain the same as the number of cups
of coffee served in a week increases? Explain.

A plan is useless if it is not quantified. A quantified plan is represented through budgets and
projected financial statements.

Budget is a company’s tool both for planning and control. At the beginning of the period, it is
a plan or standard and at the end of the period, it serves as a control device to help
management measure the firm’s performance against the plan so that future performance may
be improved.

Master Budget has three categories:

1. Operating Budget - concentrates on the operating expenditures, including cost of produce sold in the
market or popularly known as cost of sold goods and the revenue or income
2. Financial Budget - predicting the income and expenses of the business on a long-term and short-term
basis. Accurate projections of cash flow help the business achieve its targets in the right way.
3. Capital Budget – involve in determining proposed expenditures for property, plant and equipment to
support expansion.

OPERATING BUDGET: FINANCIAL BUDGET CAPITAL BUDGET

a. Sales budget a. Cash receipt schedule Proposed expenditure for
b. Purchases budget/Production Budget b. Cash disbursement schedule Property, Plant & Equipment
c. Cost of sales budget c. Cash budget Budget
d. Operating expense budget
Overall Budget:
a. Budgeted Income Statement b. Budgeted Balance Sheet c. Budgeted Cash Flow Statement

SALES BUDGET - budget that shows the quantity of each product and the revenue expected to be sold.
ABM Company
Formula Sales Budget
Forecasted sales in units xx For the period

X Selling price per unit xx Period 1 Period 2 Period 3 Period 4 Total

Forecasted Sales in xx xx xx xx xx
Sales Budget xx units
X Selling price per unit xx xx xx xx xx
Sales Budget xx xx xx xx xx
PURCHASES BUDGET - forecast of quantity and value of materials required to purchase during
the budget period. This budget is closely connected to the production budget. Following points are required
to be considered before preparing the purchase budget:

 Opening and Closing balances of stocks  Quantity required by the production

 Materials purchased and reserve for specific purpose  Prices of materials
 Orders already placed  Storing facilities and economic order quantity
 Availability of funds
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 BUSINESS FINANCE

ABM Company
Formula
Purchases Budget
Forecasted sales in units xx
For the period
+ Desired ending inventory in xx
Period Period Period Period Total
units
1 2 3 4
Total inventory requirements xx
Forecasted sales in units xx xx xx xx xx
-Beginning inventory in units xx
+ Desired ending inventory in units xx xx xx xx xx
Estimated purchases in units xx
Total inventory requirements xx xx xx xx xx
x Purchase price per unit xx
Purchase Budget xx -Beginning inventory in units xx xx xx xx xx
Estimated purchases in units xx xx xx xx xx
x Purchase price per unit xx xx xx xx xx
Purchase Budget xx xx xx xx xx
PRODUCTION BUDGET - calculates
the number of units of products that ABM Company
Production Budget
must be manufactured, and is derived For the period
from a combination of the sales forecast Period 1 Period 2 Period 3 Period 4 Total
and the planned amount of finished Raw materials Budget xx xx xx xx xx
goods inventory to have on hand. This Direct Labor Budget xx xx xx xx xx
consist of three components: Direct Overhead Budget xx xx xx xx xx
Materials Budget; Direct Labor Budget; Production Budget xx xx xx xx xx
Overhead Budget.
Production Budget in units Direct Materials Budget Direct Labor Budget Overhead Budget

Forecasted sales in units x Units to be produced
+Desired ending finished x +Desired ending Raw
goods Materials in units
Total requirements x Total Raw Materials need
-Beginning finished goods x -Beginning Raw Materials
Units to be produced x Raw Materials to be
purchased
X Cost per Raw materials
Raw Materials Budget
x Units to be produced x Budgeted direct labor x
x x Direct labor time per x hours
unit x Variable overhead rate x
x Total Hours need x Budgeted variable x
x x Rate per hour x overhead
x Total Direct labor Budget x +Budgeted fixed overhead x
Total Overhead Budget x
x
x

COST OF SALES BUDGET – part of operating Formula for Manufacturing

budget, the direct expense or cost of production Direct Raw Materials Budget xx
for the goods sold by a business. +Direct Labor Budget xx
+Factory Overhead Budget xx
Formula for Merchandising Budgeted Manufacturing Cost xx
Beginning inventory xx +Work-in-process, beginning xx
+ Purchase budget xx -Work in process, end xx
Goods available for sale xx Finished goods manufactured xx
-Ending inventory xx + Beginning finished goods xx
Cost of goods sold budget xx Available for goods for sale xx
-Finished goods end xx
Cost of goods sold budget xx

OPERATING EXPENSE BUDGET - ABM Company

includes fixed costs, such as the Operating Expense Budget
For the period
monthly rent on office space or the Period 1 Period 2 Period 3 Period 4 Total
monthly payment for a photocopier Rent expense xx xx xx xx xx
lease, salaries and wages, interest Salaries & wages expense xx xx xx xx xx
on bank loans, and all other non- Advertising expense xx xx xx xx xx
cash expenses. Interest expense xx xx xx xx xx
Other expenses to paid xx xx xx xx xx
Operating Expense Budget xx xx xx xx xx

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 BUSINESS FINANCE

CASH RECEIPT SCHEDULE - shows the pattern in which a business expects to collect cash from its projected
sales on the sales budget based on its past collection patterns. Collection from credit sales is the estimated
collectibles expected to receive at a given period of time based on sales forecast.
ABM Company
Formula
Cash Receipt Schedule
Cash sales xx
For the period
Collection from credit sales xx
Period 1 Period 2 Period 3 Period 4 Total
Other cash collections expected xx
Total Projected Cash Receipts xx Cash Sales xx xx xx xx xx
Collection of credit sales
One month after sales xx xx xx
Two months after sales xx xx xx
Other cash receipts xx xx xx xx xx
Projected Cash Receipt xx xx xx xx xx
CASH DISBURSEMENT SCHEDULE – shows the expected cash payments to suppliers, for operating expenses,
the capital outlays and the repayment of loans and interest. Payments to suppliers is the estimated
payments to suppliers at a given
period of time based on the ABM Company
Cash Disbursement Schedule
purchase budget. For the period
Period 1 Period 2 Period 3 Period 4 Total
Formula
Cash purchases xx Cash Purchases xx xx xx xx xx
Payment to suppliers xx Payment of credit purchase
Payment for operating expenses xx One month after purchase xx xx xx
Two months after xx xx xx
Payment for capital expenditures xx
purchase
Payment for loans and interests xx
Other cash payments xx xx xx xx xx
Other payments expected xx
Projected Cash Disbursement xx xx xx xx xx
Total Projected Cash Disbursement xx

CASH BUDGET – a budget of expected cash Formula

receipts and disbursements during the Projected cash receipts xx
period. This is an estimated projection of the -Projected cash disbursement xx
company’s cash position in the future. Net cash flow xx
+Beginning cash xx
Ending Cash xx
Maintaining balance xx
Excess cash (need financing) xx

ABM Company
Cash Budget
For the period
Period 1 Period 2 Period 3 Period 4 Total
Projected cash receipts xx xx xx xx xx
-Projected cash disbursement xx xx xx xx xx
Net cash flow xx xx xx xx xx
+Beginning cash xx xx xx xx xx
Ending Cash xx xx xx xx xx
-Maintaining balance xx xx xx xx xx
Positive cash means you have opportunity to invest the excess cash xx xx xx xx xx
Negative cash means additional financing is needed

BUDGETED INCOME STATEMENT - projection of revenue, expenses and results of operations for a definite
period of time.
BUDGETED BALANCE SHEET – the projection of assets or resources needed and source of such assets or
resource.

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 BUSINESS FINANCE

ABM Company ABM Company

Budgeted Income Statement Budgeted Balance Sheet
For the period As of end of month
Forecasted sales xx Current assets: Current liabilities:
-Budgeted Cost of Sales xx Cash xx Trade payables xx
Projected Gross Profit xx Trade receivables xx Other payables xx
-Budgeted Operating Expenses xx Merchandise xx Total current liabilities xx
Projected Operating Profit xx Total current assets xx Long-term liabilities xx
-Finance cost xx Non-current assets: xx Total liabilities xx
Projected profit before tax xx Prop, plant & equip xx Share capital xx
Estimated income tax xx Long term investment xx Retained earnings xx
Projected Net Income xx Total non-current asset xx Total Equity xx
Total assets xx Total liability & Equity xx
Purpose of Budgeting:
1. A forecast of income and expenditure (profitability).
2. A tool for decision making. (motivate managers to achieve the desired results)
3. A means to monitor business performance. (set a standard of evaluating actual performance)

To Illustrate:
ABM Company forecasts sales in unit for January to May as follows:
January February March April May Total
2,000 2,200 2,500 2,800 3,000 12,500

Company would like to maintain 100 units in its ending inventory at the end of each month.
Beginning inventory at the start of January amounts to 50 units.
Selling price is ₱100/unit. Sales for each month are expected to be collected as follows:
‣ Month of sales: 20%
‣ A month after sales: 50%
‣ 2 months after sales: 30%
The purchase cost per unit is ₱50. All purchases this month are paid 10% upon delivery and balance
on the following month. The following expense items will be paid based on the following periods:
‣ Rent payments: Rent of ₱5,000 will be paid each month.
‣ Wages and salaries: Fixed salaries for the year are ₱96,000, or ₱8,000 per month. Wages are
estimated as 10% of monthly sales.
‣ Tax payments: Taxes of ₱25,000 must be paid in April.
The following items will be paid based on the following periods:
‣ Fixed-asset outlays: New machinery costing ₱130,000 will be purchased and paid for in April.
‣ Interest payments: An interest payment of ₱6,000 is due in May.
‣ Cash dividend payments: Cash dividends of ₱12,000 will be paid in January.
‣ Principal payments (loans): A ₱20,000 principal payment is due in February

Company has a beginning cash balance of ₱80,000 and would like to maintain an ending cash balance of
₱100,000 per month.

SALES BUDGET Jan Feb Mar Apr May Total

Forecasted sales in units 2,000 2,200 2,500 2,800 3,000 12,500
x Selling price per unit 100 100 100 100 100 100
Forecasted Sales for Jan-May, 2020 ₱200,000 ₱220,000 ₱250,000 ₱280,000 ₱300,000 ₱1,250,000

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 BUSINESS FINANCE

PURCHASES BUDGET Jan Feb Mar Apr May Total

Forecasted sales in units 2,000 2,200 2,500 2,800 3,000 12,500
Add: Desired ending inventory 100 100 100 100 100 100
Total units required 2,100 2,300 2,600 2,900 3,100 12,600
Less: Beginning inventory 50 100 100 100 100 50
Total units to purchase 2,050 2,200 2,500 2,800 3,000 12,550
Cost per unit 50 50 50 50 50 50
Purchases Budget ₱102,500 ₱110,000 ₱125,000 ₱140,000 ₱150,000 ₱627,500

CASH RECEIPT BUDGET Jan Feb Mar Apr May Total

Month of sale 20% ₱40,000 ₱44,000 ₱50,000 ₱56,000 ₱60,000 ₱250,000
A month after sale 50% 100,000 110,000 125,000 140,000 475,000
Two months after sale 30% 60,000 66,000 75,000 201,000
Cash Receipt Budget ₱40,000 ₱144,000 ₱220,000 ₱247,000 ₱275,000 ₱926,000

CASH DISBURSEMENT BUDGET Jan Feb Mar Apr May Total

Month of purchase 10% 10,250 11,000 12,500 14,000 15,000 62,750
A month after purchase 90% 92,250 99,000 112,500 126,000 429,750
Rent expense 5,000 5,000 5,000 5,000 5,000 25,000

Salaries expense 8,000 8,000 8,000 8,000 8,000 40,000

Wages expense 20,000 22,000 25,000 28,000 30,000 125,000

Tax payment 25,000 25,000
Machinery 130,000 130,000
Interest payment 6,000 6,000
Cash dividend 12,000 12,000
Payment of loan 20,000 20,000
Cash Disbursement Budget ₱55,250 ₱158,250 ₱149,500 ₱322,500 ₱190,000 ₱875,500

CASH BUDGET Jan Feb Mar Apr May Total

Cash Receipt ₱40,000 ₱144,000 ₱220,000 ₱247,000 ₱275,000 ₱926,000
Less: Cash Disbursement 55,250 158,250 149,500 322,500 190,000 875,500
Net Cash Flow (5,500) (14,250) 70,500 (75,500) 85,000 50,500

Add: Beginning cash 80,000 64,750 50,500 121,000 45,500 80,000

Ending cash 64,750 50,500 121,000 45,500 130,500 130,500
Maintaining balance 100,000 100,000 100,000 100,000 100,000 100,000
Excess cash (required financing) to be (35,250) (49,500) 21,000 (54,500) (30,500) 30,500
use in other operation to generate
more profits

30
 BUSINESS FINANCE

ABM Company ABM Company

Budgeted Income Statement Budgeted Balance Sheet
For the period As of end of month
Forecasted sales ₱1,250,000 Current assets: Current liabilities:
-Budgeted Cost of Sales 625,000 Cash ₱130,500 Trade payables ₱135,000
(12500 sold X 50 cost) Trade receivables 261,500 Other payables-tax 98,250
Projected Gross Profit 625,000 Merchandise 5,000 Total current liabilities 233,250
Total current assets 397,000 Total Equity 293,750
-Budgeted Operating
Non-current assets: 130,000
Expenses:
Total assets ₱527,000 Total liability & Equity ₱527,000
Rent 25,000
Salaries & wages 165,000

Projected Operating Profit 435,000

Total Equity 293,750
-Interest expense 6,000
Projected profit before tax 429,000 Projected Net Income 343,200
Estimated income tax 20% 85,800
Projected Net Income ₱343,200 Excess of Projected income over equity 49,450

ABM Company
Budgeted Cash Flow Statement
As of end of month
Cash Flow from Operating Activities:
Collections from customers 926,000
Payment to suppliers (492,500)
Payment for operating expenses (190,000)
Payment for tax (25,000)
Payment for dividend (12,000)
Payment for interest (6,000) 200,500
Cash flow from Investing Activities
Purchase of machinery (130,000)
Cash flow from Financing Activities
Payment of loan (20,000)
Net cash for the period 50,500
Beginning cash 80,000
Projected cash, ending 130,500

Analysis and interpretation:

Based on the projection and forecast, in terms of profitability, the forecasted sales has a positive
outcome as shown in the projected income statement which yield a projected net income of 343,200 or 27.46%
net profit margin. However, the cash budget shows a need for additional financing for the first two months in
order to maintain the cash balance of the business. It also shows that on the fourth month, the total cash
receipt is lesser than the total cash disbursements which resulted into a negative cash flow, this is because a
capital outlay of 130,000 is lined up on the budget. Moreover, starting on the third month to fifth month, there
is an excess cash which the company could reinvest to earn more profit. Overall, the excess of projected income
over the equity indicates that the company’s performance can suffice the operation of the business and there
is no need for additional financing as of now.

Activity 1:
Cookie Products, a distributor of organic beverages, needs a cash budget for September. The following
information is available:
a. the cash balance at the beginning of September is ₱9,000.
b. Actual sales for July and August and expected for September are as follows:
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 BUSINESS FINANCE

July August September

Cash sales ₱6,500 ₱5,250 ₱ 7,400
Sales on account 20,000 30,000 40,000
Total sales ₱ 26,500 ₱ 35,250 ₱ 47,400

Sales on account are collected over a three-month period in the following ratio: 10% collected in the
month of sale, 70% collected I the month following sale, and 18% collected in the second month following
sale. The remaining 2% is uncollectible.
c. Purchases of inventory will total ₱25,000 for September. Twenty percent of a month’s inventory purchase
are paid for during the month of purchase. The accounts payable remaining from August’s inventory purchases
total P16,000, all of which will be paid in September.
d. Selling and administrative expenses are budgeted at P13,000 for September. Of this amount, P4,000
is for depreciation.
e. Equipment costing ₱18,000 will be purchased for cash during September, and dividends totaling
₱3,000 will be paid during the month.
f. The company must maintain a minimum cash balance of ₱5,000. An open line of credit is available from
the company’s bank to bolster the cash position as needed.

Required:
1. Prepare a schedule of expected cash collections for September
2. Prepare a schedule of expected cash disbursement during September for inventory purchases.
3. Prepare a cash budget for September. Indicate in the financing section any borrowing that will be
needed during September.

Activity 2:

Reliance Company budgets sales at ₱2,000,000 and expects a net income before tax of 10% of the sales.
Expenses are estimated as follows:
Selling 15% of sales
Administrative 9% of sales
Finance 1% of sales

Labor is expected to be 40% of the total manufacturing cost. Factory overhead is to be applied at 75% of
direct labor cost. Inventories are as follows:

January 1 December 31
Materials ₱250,000 ₱300,000
Work in Process 200,000 320,000
Finished Goods 350,000 400,000

Compute for the following:

1. Cost of goods sold
2. Total manufacturing cost
3. Factory overhead
4. Materials purchases

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REMEMBER

 Financial Planning is a process of framing objectives, policies, procedures, programs and

budgets regarding the financial activities of an enterprise.

 The financial planning process – remember the acronym EGADIM.

o Establish goal or objective
o Gather data
o Analyze the gathered data
o Develop a strategy to address your specific need
o Implement the plan
o Monitor and review your goals and situation
 Master Budget - comprehensive financial planning document.
o Operating budget – budget that show the expenditures in the operation of the business
including its cost of goods sold, finance cost and dividend.
o Financial budget – budget that shows the position of cash flow
o Capital budget – budget that shows the capitals outlays for property, plant and equipment.
 Operating budget includes the following:
a. Sales budget
b. Purchases budget
c. Production budget
d. Cost of sales budget
e. Operating expense budget
 Financial budget includes:
a. Cash receipt schedule
b. Cash disbursement schedule
c. Cash budget
 Capital budget – this topic will be discussed in lesson 7.

CHECK YOUR UNDERSTANDING

Activity 3: Budget me please!

ABM Company forecasts sales in units for January to June, 2020 as follows:
January February March April May June

3,000 3,300 3,600 4,000 4,400 5,000

 The company would like to maintain 100 units in its ending inventory at the end of each month.
 Beginning inventory at the start of January is 250 units.
 Assume selling price is ₱200/unit.
 Sales for each month are expected to be collected as follows:
‣ Month of sales : 25%
‣ A month after sales: 40%
‣ 2 months after sales: 35%
 Assume that cost per unit is ₱90
 All purchases this month are paid the following month.
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 BUSINESS FINANCE

 The following expense items will be paid based on the following periods:
‣ Rent payments: Rent of ₱8,000 will be paid each month.
‣ Wages and salaries: Fixed salaries for the year are ₱12,000 per month. Wages are estimated as 10% of
monthly sales.
‣ Tax payments: Taxes of ₱45,000 must be paid in April.
 The following items will be paid based on the following periods:
‣ Fixed-asset outlays: New machinery costing ₱195,000 will be purchased and paid for 12 monthly
instalment starting February.
‣ Interest payments: An interest payment of ₱10,000 is due in May.
‣ Cash dividend payments: Cash dividends of ₱20,000 will be paid in January.
‣ Principal payments (loans): A ₱50,000 principal payment is due in February.
 The company has a beginning cash balance of ₱120,000 and would like to maintain an ending cash
balance of ₱100,000 per month.

REQUIRED: Prepare the following budget:

1. Sales Budget
2. Purchase Budget
3. Cost of Sales Budget
4. Operating Expense Budget
5. Cash Receipt Budget
6. Cash Disbursement Budget
7. Cash Budget
8. Projected Statement of Comprehensive Income
9. Projected Statement of Financial Position
10. Projected Cash Flow Statement
11. Analysis and Interpretation

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 BUSINESS FINANCE

Lesson Working Capital Management and

5 Tools in Managing Cash, Receivables and
Inventories
Competency codes: ABM_BF12-IIIc-d-12
MELC:
 Describe the concepts and tools in working capital management.
 Explain the tools in managing cash, receivable and inventory.

Objectives: at the end of this lesson, the learners will be able to….
1. Explain the techniques in managing cash, receivables and inventories;
2. Describe the concepts and tools in working capital management.
3. Solve problem related to managing cash, receivables and inventories.

LOOKING BACK TO YOUR LESSON:

Direction: Identify what describes the following. Write your answer on the blank before the
number.
_______________1. It is the sum of raw materials used, direct labor and overhead.
_______________2. It is the result of multiplying the sales forecast in units by its selling price per unit.
_______________3. It resulted to ___________ after deducting the cost of goods sold from the revenue.
_______________4. A budget that projects the position of cash in the future.
_______________5. It is the result of adding the beginning inventory and new purchases.

INTRODUCTION
Cash is the lifeblood of the business. Without cash, no business is operating. Inventories make money,
without it, business cannot operate (no merchandise to be sold). Receivables encourage people to buy
products or services, without it, the turnover of inventory will not move fast. These three accounts form a
working capital, a capital that works for the business. These are the investment of the owner in the business
that makes the business works. To ensure that a firm is able to continue its operations and that it has sufficient
ability to satisfy both maturing short-term debt and upcoming operational expenses, managing the working
capital is necessary.

DISCUSSION
Working capital is defined as the total current assets, cash, receivables and inventory of a company,
minus its current liabilities, which are all debts due in less than 12 months. It is a measure of the liquidity
of a company. A manager's goal is to always be increasing working capital, which can be easily tracked on
a daily or monthly basis. A business that is making a profit and has a positive cash flow should always be
increasing its working capital position.
Formula: Working Capital = Total Current Assets – Total Current Liabilities.
Current assets > Current Liabilities
 A positive working capital ensures that a company can fully cover its short-term liabilities as they
come due in the next twelve months. This is a sign of a company’s financial strength.
Current assets < Current Liabilities
A negative working capital indicates that the company may have incurred a large cash outlay or a
substantial increase in its accounts payable as a result of a large purchase of products and services
from its vendors. It also indicates that the company is struggling to make ends meet and have to
rely on borrowing or stock issuance to finance its working capital.

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 BUSINESS FINANCE

Working capital serves as a metric for how efficiently a company is operating and how financially
stable it is in the short-term. It is a daily necessity for businesses, as they require a regular amount of cash to
make routine payments, cover unexpected costs, and purchase basic materials used in the production of
goods.
Cash Flow Schedule - Every company should have a weekly cash flow
schedule plotted on a spreadsheet that shows when money is coming in, going out
and how much will be left. When a business sells its products on terms to a
customer, the funds from the sale may not be collected for 30, 45 or even 60 days.
Current liabilities, on the other hand, will typically have to be paid on shorter terms.
This difference in timing illustrates the importance of having a large working capital
position.
An Operating Cycle (OC) refers to the days required for a business to receive inventory, sell the
inventory, and collect cash from the sale of the inventory. It is an indicator of the company’s liquidity and asset-
utilization. Companies with longer operating cycles must require higher return on their sales to compensate
for the higher opportunity cost of the funds blocked in the inventories and receivables.
Formula: OC = DIO + DIO = No.of days in a period Ave. inventory
Inventory turnover(IT) Beg + End inventory
DSO =
IT = Cost of goods sold/Ave. Inventory 2
No.of days in a period
DSO =
Accounts Receivable turnover(ART) Ave. Accts Receivable
ART = Net Credit Sales/Ave. Accounts Receivable Beg + End Receivable
=
2
DIO – days inventory outstanding – the average number of days in which a company sells its inventory.
DSO – days sales outstanding – the average time period in which receivables pay cash.
No. of days in a period – the number of days covered in one period e.g. 30 days for 1 month, 90 days for 1
quarter, 180 days for semi-annual; 365 days for 1 year.
Inventory turnover – an indicator of company’s ability to sell its inventories.
Accounts Receivable turnover – an indicator of company’s ability to sell products and collect its funds.
Cash Conversion Cycle (CCC) is the net operating cycle which subtracts the days a company takes in
paying its suppliers from the operating cycle.
Formula: CCC = OC - DPO = No.of days in a period Ave. Accts Payable
Accounts Payable turnover(APT) Beg + End Payable
DPO =
APT = Net Credit Purchase/Ave. Accounts 2
Payable
DPO = days payable outstanding – the average number of days it takes the company to pay its suppliers.
Accounts Payable turnover -an indicator that shows how many times a company pays off its accounts
payable during the period.
To illustrate:
Puregold Supermarket is all about inventories. Find its operating cycle and cash conversion cycle on
the following information for the year 2019:
Total Sales ₱5,691,600 DIO 365/{2,276,400/[(287,500+325,900)/2]} = 49
Cash Sales 1,920,500 DSO 365/[(5,691,600-1,920,500)/396,000] = 38
Cost of Sales 2,276,400 DPO 365/(2,238,000/288,000) = 47
Inventories as at Dec. 31, 2019 287,500 Beg inventory 325,900
Inventories as at Dec. 31, 2018 325,900 + Purchase ?
Average Accounts Receivable 396,000 Goods available for sale
Average Accounts Payable 288,000 -End inventory 287,500
Cost of sale 2,276,400
OC 49 + 38 = 87 days
CCC 87 - 47 = 40 days

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 BUSINESS FINANCE

Analysis and Interpretation:

The above information shows that it takes an average of 49 days to sell its inventories and an average
of 38 days to recover cash from receivables. This resulted to an operating cycle of 87 days to convert
inventories into cash. The cash conversion cycle of 40 days represents the average number of days from
paying his inventory to receive the cash from its sales.
Factors affecting working capital position:
1. The kind of firm – manufacturing, merchandising, servicing
2. The volume of sales – more current assets (accounts receivable and inventory), are needed to
support higher level of sales
3. The variability of cash flows – the greater the fluctuation of the cash inflows and outflows, the
greater the level of net working capital required
4. The length of the operating cycle – shortening the operating cycle reduces the amount of time
funds are tied up in working capital and thus lowers the level of working capital required.

Permanent Working Capital (PWC) vs Temporary Working Capital (TWC):

PWC – the minimum level of current assets required by a firm to carry-on its business operations given its
production capacity or sales range.
TWC – the excess of working capital over the permanent working capital given its production capacity or
relevant sales range. This is the fluctuating capital that arises from the seasonal events
During the year, sales varies monthly, that’s why companies have slack season and peak season. The
net working capital during the slack season is lower than those during the peak season. A permanent working
capital during slack season is needed, and during peak season a temporary working capital is required.

To illustrate:
Mr. Patrick is managing the working capital of Jolibee Food Corporation. The following are the sales
volume, and the working capital needed based on the recent year:
Quarter Sales Working Capital Interpretation:
Jan to Mar ₱2,000,000 ₱1,200,000 Quarter 1 has the least sales that requires the minimum
Apr to June 9,000,000 3,000,000 amount of working capital. This shows that ₱1.2M is the
July to Sept 7,500,000 2,500,000 permanent working capital of the business.
Oct to Dec 3,500,000 1,500,000 A temporary working capital were invested on the ffg:
2nd Qtr = 3,000,000 – 1,200,000 = 1,800,000
3rd Qtr = 2,500,000 – 1,200,000 = 1,300,000
4th Qtr = 1,500,000 – 1,200,000 = 300,000

An effective working capital management requires strategies to manage the level, position and
financing of firm’s current assets. It sets guidelines or policies: ( two decisions in setting policies)
i. Level of investment – pertains to current assets
 relaxed current assets – unrestricted, free to use
 restricted current assets – holding of cash, receivables, securities and inventories are minimized.
 moderate current assets – between relaxed and restricted
ii. Manner of financing – pertains to current liabilities
 Aggressive strategies – high risk, high return approach – borrows heavily on short-term basis. Risk –
short-term interest rate are more volatile than long-term rates (pabago-bago ang interest)
 Moderate strategies – moderate risk, moderate return approach – short-term needs are finance by
short-term sources and long-term needs are finance by long-term sources.
 Conservative strategies – low risk, low return approach – holding liquid assets and minimizing the
use of short-term financing and substituting long-term financing for short-term financing.

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Tools in Managing Cash, Receivables and Inventory

Cash is the primary asset of an individual or company. Companies with a multitude of cash inflows and
outflows must be properly managed to maintain adequate business stability.
Managing cash is
 meeting the cash disbursement needs;
 minimizing the funds committed to transactions and precautionary cash balances; and
 avoiding misappropriation and handling losses in the normal course of business.
Tools in managing cash:
1. Cash Flow Statement
2. Cash Budget
3. Cash Receipt Schedule
4. Cash Disbursement Schedule
Accounts Receivable Management
Receivables are created by extending a line of credit to customers to intensify the sales of a firm. These
are considered as part of working capital. Managing accounts receivables helps strengthen the company’s
financial position and its liquidity.

Tools in managing Accounts Receivables:

1. Evaluate the credit standard of the customer:
 Character –the willingness of the borrower to repay the loan
 Capacity – a customer’s ability to generate cash flows
 Collateral – security pledged for payment of the loan
 Capital – a customer’s financial resources
 Condition – current economic or business conditions
2. Credit terms:
 Involve both the length of the period and the discount given
3. Collection program:
 A good system should lead to the sending of statements of account to customers on time.
 Follow-ups through phone calls or any form of gentle reminders should be made if customers fail to
pay on time. These follow-ups can also serve as the management’s way of validating if the contact
details given by customers are still valid and if the customers still occupy the same office.
4. Delinquency and default:
 Aging of receivables is a control measure to determine the amount of receivables that are still
outstanding and past due.
 Accounts which have been past due for more than 90 days have higher probability to default. The
aging of receivables is useful in determining the allowance for doubtful accounts.

To illustrate the Aging of Receivables:

Humanity Company provided the following information. The company used certain percentages to
the aging of accounts receivable in determining the allowance for bad debts.

Prepare an Aging Schedule of Accounts Receivable as of December 31, 2019:

Classification Balance Uncollectible
November to December 3,000,000 5%
July to October 2,500,000 10%
January to June 1,800,000 25%
Prior to January 1, 2019 500,000 75%

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Humanity Company Interpretation:

Aging of Accounts Receivable Based on the aging of accounts receivables,
As of December 31, 2019 the amount of ₱1,225,000 is already the
Days past due Amount Collectibles Allowance for bad estimated bad debts as of the end of 2019.
debts In this regard, the company should do
0 – 60 days ₱3,000,000 ₱2,850,000 ₱150,000 something to intensify collection from the
61 - 180 days 2,500,000 2,250,000 250,000 customers through sending billings, follow
181 - 360 days 1,800,000 1,350,000 450,000 ups or offering discounts and other
Over 360 days 500,000 125,000 375,000 techniques to remind the unsettled
Total ₱7,800,000 ₱6,575,000 ₱1,225,000 accounts of the customers.

Inventory Management
Inventory is often the largest item in the current assets. Issues with inventory can contribute to
business losses, even failure. Proper management of supply chain can allow a business to thrive. Inventory
management strikes a balance between the amount of inventory coming in and going out and it controls the
timing and costs of non-capitalized assets and stocks, allowing a business to reach optimal profitability.
Maintaining too much inventories has costs such as carrying cost or holding sot, possible obsolescence or
spoilage. On the other hand, too low inventory can result to stock out or loss of sales.
Types of inventory in manufacturing:
a. Raw materials - these are purchased materials not yet put into production.
b. Work in process – these are goods and labor put into production but not yet finished.
c. Finished goods - these are goods put into production and finished. These are ready to be sold

Tools in managing Inventories:

1. ABC Analysis – segregation of materials for selective controls:
Category A – most valuable or items with highest investment in pesos
Category B – medium cost items
Category C – small cost items
2. Economic Order Quantity (EOQ) – identifies the greatest numbers of product units to order to
minimize related cost such as ordering cost and carrying cost.
Ordering cost is the cost associated in placing and receiving an order, such as, cost to enter the
purchase order, cost to process the receipt, inspection cost, vendor payment and the freight.
Carrying cost is the cost associated with having the inventory on hand, such as storage cost,
interest, insurance, tax.
2 𝑋 𝐴𝑛𝑛𝑢𝑎𝑙 𝑑𝑒𝑚𝑎𝑛𝑑 𝑖𝑛 𝑢𝑛𝑖𝑡𝑠 𝑋 𝐶𝑜𝑠𝑡𝑠 𝑝𝑒𝑟 𝑜𝑟𝑑𝑒𝑟
Formula: EOQ = √
𝐶𝑎𝑟𝑟𝑦𝑖𝑛𝑔 𝐶𝑜𝑠𝑡 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡
Example:
A television manufacturer buys wooden cabinet from outside supplier at ₱400 per set. Total
annual needs are 5,000 sets at a rate of 20 sets per working day.
The following costs are available:
Desired annual return on inventory investment: 10% x ₱400 ₱40
Rent, insurance, taxes per unit per year 10
Carrying cost per unit per year 50
Cost per purchase order:
Clerical cost, stationery, postage, telephone 40
What is the economic order quantity?
2 𝑋 5,000 𝑋 40 The ideal quantity to purchase a wooden
EOQ = √ = 89 sets
50
cabinet is at 89 sets in order to minimize the
cost or ordering and storing/carrying the item.

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3. Reorder Point – identifies the level of inventory which triggers an action to replenish that particular
inventory stocks.
Safety stock -the quantity of goods that are carried as a protection against possible stock out.
Lead time – the time interval between placing an order and receiving delivery.
Average usage per unit of time = Annual usage/no. of working days
Formula: Reorder Point = Average lead time usage + safety stock
Average Lead Time Usage = Average usage per unit of time x Lead time
Safety Stocks = (Maximum expected usage – Average usage) x lead time
Example:
Otis Company buys pingpong balls at ₱25 per dozen from its wholesaler. Otis will sell 35,000
dozen baseball evenly throughout the year. Otis desires a 12% return on investment (cost of capital)
on its inventory investment. In addition, rent, insurance, taxes for each dozen pingpong balls in
inventory is ₱0.50. The order cost is ₱10. Lead time is constant at two weeks and there are 50
working weeks in a year. The maximum expected requirement per week is 850 dozens.
Determine:
a. Economic Order Quantity
b. Safety Stocks
c. Reorder Point
Max expected usage 850 dozens 35,000
EOQ = √
2 𝑋 35,000 𝑋 10 ROP = x 2 weeks + 300
50 𝑤𝑒𝑒𝑘𝑠
3.5 Ave. usage per week 700
= 447 dozens Excess 150 = 1,700 dozens
X Lead time 2 weeks
Safety stock 300 dozens

3.5 = 12%(₱25)+.05 700 = 35,000/50 weeks

Interpretation:
 The ideal quantity to purchase in order to minimize related cost is at 447 dozens.
 To protect against possible running out of stocks, the company must maintain a 300 dozens.
 When the inventory falls on 1,700 dozens, it triggers the company to make an order again to
replenish the stocks.

4. Just in time (JIT) – items arrive only when needed. The disadvantage is the availability of stocks from
the suppliers.

CHECK YOUR UNDERSTANDING:

Activity 1
Answer the following:
1. Upside Down Company has total assets of ₱3,500,000, total current assets of ₱1,350,000, total
liabilities of ₱1,950,000 and total current liabilities of ₱985,000. How much is the working capital of
the company?
2. Side by Side Company has a total liability of ₱2,600,000 and total equity of ₱1,500,000. The total non-
current asset is ₱3,000,000 and the total non-current liability is ₱1,800,000. How much is the working
capital?
3. Sideline Company has a total equity of ₱400,000 and total assets of ₱1,500,000, of which the current
asset is ₱900,000. How much is the working capital if the noncurrent liability is equal to current
liability?

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Activity 2
Sunny Side Up Company provided the following information for the year 2020. Assume a 365-day year.
Total Sales ₱4,500,000 Calculate the following and give your
Cash Sales 1,800,000 interpretation on the result.
Cost of Sales 2,200.000 1. Average Sales Period
Average Inventory 150,000 2. Average Collection Period
Average Accounts Payable 250,000 3. Average Payment Period
Average Accounts Receivable 420,000 4. Operating Cycle
Ending inventory 130,000 5. Cash Conversion Cycle

Activity 3:
A local computer repairs shop uses 36,000 units of a part each year (A maximum consumption of 100
units per working day). It costs ₱20 to place and receive an order. The shop orders in lots of 400 units. It cost
₱4 to carry one unit per year of inventory.
Compute for the economic order quantity. Interpret the result.

Activity 4:
Give one technique of managing cash, receivables, and inventories and explain each technique.

Essay:

Criteria Point Score

Writing shows strong understanding of the topic 5
Present ideas in an original manner 5
Organized BEMING (beginning, middle and ending) 5
Clear and legible typewritten/ presented words 5
Few technical errors 5
TOTAL 25

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Before we move on to your next exciting lesson, let us have your quiz.

ASSESSMENT:
Direction: Read and analyze each sentence. Choose the correct answer. Encircle the letter
of your answer.

1. Using the principles of ABC inventory analysis to organize store’s inventory, which of the following types of
item would be placed in category B?
A. Items which bring in the highest overall revenue.
B. Low-priced items that generate low volumes of sales
C. Items purchased from suppliers whose names start with the letter B.
D. Items which are seasonally strong sellers, but not consistently in high demand.
2. It is the act of preparing a budget.
A. Master budget B. Budgeting C. Planning D. Controlling
3. The cash budget is part of which main category of the master budget?
A. Capital expenditures budget B. Operating budget C. Financial budget D. Administrative
budget
4. Production budget Rhino Bikes makes and sells specialty mountain bikes. On June 30, the company had 50
bikes in finished goods inventory. The company’s policy is to maintain a bike inventory of 5% of the next
month’s sales.
The company expects the following sales activity for the third quarter of the year:
July = 1,200 bikes; August – 1,000 bikes; September – 900 bikes
What is the projected production for August?
A. 950 bikes B. 995 bikes C. 1,000 bikes D. 1,200 bikes
5. Using cash inflows and cash outflows, what does a cash budget allow a company to do?
A. Monitor their bank balances over time
B. Manage payroll and rent payments
C. Determine their debts versus income
D. Determine if cash is sufficient to cover operational needs
6. What is receivables management?
A. Keeping track of the inventory going in and being produced
B. Keeping track of what customers buy on credit form a company
C. An accounting term for output of product
D. Managing a CEO’s account.
7. The cash conversion cycle equals:
A. Inventory period + collection period – payables period
B. Payables period – inventory period – collection period
C. Payables period + inventory period – collection period
D. Inventory period – collection period + payables period
8. A company with current assets of ₱550,000 and current liabilities of ₱585,000 indicates that
A. The company has the ability to pay its current debts when it becomes due
B. The company has a positive working capital
C. The company is experiencing a substantial increase in accounts payable
D. The company has enough funds to cover its obligations.
9. Below are the reasons for holding cash EXCEPT:
A. transaction motive B. retaining motive C. speculative motive D. compensating motive
10. How are collections from current and past sales reflected on a cash budget?
A. Cash collection B. cash inflows C. cash outflows D. accounts receivables

Congratulations! Keep on learning.

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 BUSINESS FINANCE

References:

BOOKS:
Agamata, F. (2014). Management Services.
Cabrera, Ma. Elenita B., Business Finance Principles and Applications 2017 Edition
Cabrera, Ma. Elenita B., Management Accounting Concepts and Applications 2017 Edition
Cayanan and Borja. Business Finance. 2016.

Doran, G. T. (1981). "There's a S.M.A.R.T. way to write management's goals and objectives". Management
Review (AMA FORUM) 70 (11): 35–36.
Gitman, L. (1976). Principles of managerial finance. New York: Harper & Row.
Gitman, L. & Joehnk, M. (1981). Fundamentals of investing. New York: Harper & Row.
Horngren, C. (1972). Cost accounting; a managerial emphasis. Englewood Cliffs, N.J.: Prentice-Hall.
Roque, R. (1990). Reviewer in Management Advisory Services. Roque Press, Inc.
Teaching Guide in business finance K-to-12 in collaboration with PNU

INTERNET WEBSITES:
o https://corporatefinanceinstitute.com/resources/knowledge/finance/what-is-finance-definition/
o https://www.wallstreetmojo.com/thrift-bank/
o https://marketbusinessnews.com/financial-glossary/financial-
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o https://en.wikipedia.org/wiki/Banknotes_of_the_Philippine_peso
o https://www.edelweiss.in/investology/fundamental-analysis-218cf3/what-are-cash-flow-
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o https://www.investopedia.com/terms/f/finance.asp#:~:text=Finance%2C%20as%20a%20field%20of,
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o https://www.perennialfinancialservices.com/financial-planning
o https://www.yourarticlelibrary.com/organization/importance-of-planning-its-features-limitations-
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o https://www.managementstudyguide.com/financial-planning.htm
o https://efinancemanagement.com/financial-management/financial-planning
o https://www.invensis.net/blog/finance-and-accounting/types-of-financial-forecasting-methods/
o https://corporatefinanceinstitute.com/resources/knowledge/modeling/forecasting-methods/
o http://www.businessdictionary.com/definition/timeseries.html#:~:text=Time%20series%20consist%
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o https://yourbusiness.azcentral.com/inventory-important-business-2957.html
https://vaderanco.com/accoutn-receivable-why-is-it-important/
o https://www.investopedia.com/ask/answers/100715/why-working-capital-management-important-
company.asp#:~:text=Working%20capital%20serves%20as%20a,short%2Dterm%20debts%20and%20
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o https://corporatefinanceinstitute.com/resources/knowledge/finance/cash-
management/#:~:text=Cash%20management%2C%20also%20known%20as,of%20an%20organizatio
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 BUSINESS FINANCE

o https://www.careerride.com/fa-purchase-budget-
explained.aspx#:~:text=Purchase%20budget%20is%20a%20forecast,and%20Closing%20balances%20
of%20stocks
o https://www.accountingtools.com/articles/2017/5/15/production-
budget#:~:text=The%20production%20budget%20calculates%20the,for%20unexpected%20increases
%20in%20demand).
o https://www.myaccountingcourse.com/accounting-dictionary/cash-
budget#:~:text=Definition%3A%20A%20cash%20budget%20is,cash%20position%20in%20the%20fut
ure.
o https://bizfluent.com/info-8073390-useful-tools-working-capital-management.html
o https://prettyprovidence.com/jelly-bean-game/