———— CHAPTER 1 ———— Strategic financial planning
 Long range in scope and has its focus on the
Financial management
 Also referred to as managerial finance,
business finance, and corporate finance
 A decision making process concerned with
planning, acquiring and utilizing funds
 Something more than an art of accounting
and bookkeeping
GOAL: To maximize the current value per share of
the existing stock or ownership in a business firm
Finance
 Body of facts, principles, and theories
relating to raising and using money
 Major functional areas of a business
 Independent specialized function and is well
knit with other functions
TYPES OF FINANCIAL DECISIONS
1.Investment decisions
 Determine how scarce or limited resources
are committed to projects
2.Financing decisions
 Assert that the mix of debt and equity
chosen to finance investments should
maximize the value of investments made.
3.Dividend decisions
 Concerned with the determination of
quantum of profits to be distributed to the
owners
All these decisions aim to maximize the
shareholder’s wealth through maximazation of the
firm’s wealth.
FINANCIAL STATEMENTS
1. Statement of Comprehensive Income
2. Statement of Financial Position
3. Statement of Changes in Shareholder’s
Equity
4. Cash Flow Statement
The four F.S. are linked with each other also known
as articulation.
Proper-risk return management
 Consistent with the objectives of the firm, an
appropriate trade-off between risk and return
should be determined.
———— CHAPTER 2 ————
organization as a whole
 Needed to counter the uncertain and
imperfect market conditions and highly
competitive business environment
Working capital
 A firm short-term asset and its short term
liabilities
Corporate social responsibility
 Effectively enforced through the controls
envisioned by classical economics
———— CHAPTER 3 ————
Corporate governance
 Process of monitoring managers and
aligning their incentives with shareholder’s
goals
Board of directors
 Monitors inside a public firm
 Appointed to represent shareholders”
interest
External auditors
 Examine the firm’s accounting systems and
comment on whether financial statements
fairly represent the firm’s financial position
Investment analysts
 Keep track of the firm’s performance,
conduct their own evaluations of the
company’s business activities, and report to
the investment community
Credit analysts
 Examine a firm’s financial strength for its
debt holders
Ethics
 Primary importance in any practice of
finance
ROLE OF FINANCIAL MANAGER
  Tax savings
 Few government regulations

DISADVANTAGES:
 Unlimited liability
 Limitations in raising capital
 Lack of continuity

2.Partnership
 Legal arrangement in which two or more
persons agree to contribute capital/services
 May operate under varying degrees of
formality
 Partnership may be either general (each
partner has unlimited liability) or limited

ADVANTAGES:
 Ease of formation
 Additional sources of capital
SIMPLIFIED ORGANIZATION CHART  Management base
 Tax implication

DISADVANTAGES:
 Unlimited liability
 Lack of continuity
 Difficulty of transferring ownership
 Limitations in raising capital

3.Corporation
 Artificial being created by law and is a legal
entity separate and distinct from its owners
The incorporation process is initiated by filing the
articles of incorporation with the SEC. It includes:
 Incorporators
 Name of the corporation
 Purpose of the corporation
 Capital stock
 Authorized shares
———— CHAPTER 4 ————
ADVANTAGES:
LEGAL FORMS OF BUSINESS  Limited liability
ORGANIZATION  Unlimited life
 Ease in transferring ownership
1. Proprietorship  Ability to raise capital
 Business owned by a single person
 Legally, the owner is not separable from the DISADVANTAGES:
business and is personally liable for all debts
 Time and cost of formation
 In accounting, the business is an entity
 Regulation
separate from the owner
 Taxes
Par value
ADVANTAGES:
 Ease of entry and exit
 Full ownership and control
  An arbitrary value placed on either common 3. Creditors and Suppliers
stock or preferred stock at the time a 4. Shareholders and Directors
corporation is formed 5. Regulatory and Tax Agencies
6. Customer and Potential Strategic Partners
Board of directors 7. Other decision makers
 Those who have the ultimate responsibility
for managing a corporation CONSTRAINTS ON RELEVANT AND
RELIABLE INFORMATION
Shareholders 1. Timeliness
 Owners of a corporation 2. Balance between benefit and cost
3. Balance between qualitative characteristics
4. True fair view or fair presentation
Additional paid-in capital
 Any amount received by a corporation when
it issues stock that is greater than the par ———— CHAPTER 6 ————
value of the stock issued
Financial statement analysis
Charter  Process of extracting information from
 Formal document that legally allows a financial statements to better understand a
corporation to begin operations company’s current and future performance
and financial condition
Corporate officers
SKIP…. E2 YUNG MADAMI FORMULAS…
 Those who manage the day-to-day
operations of a corporation
PAGE 85
Incorporators
 Those who submit a formal application with ———— CHAPTER 7 ————
the appropriate government agencies to form
a corporation Financial liquidity
 Refers to the “measure to cash” of assets and
Stock certificate liabilities
 Legal document providing evidence of
ownership in a corporation Financial liquidity
Bylaws  Company’s ability to respond and adapt to
 Rules established to conduct the business of financial adversity and unexpected needs
a corporation and opportunities

———— CHAPTER 5 ———— Free cash flow

 Amount of discretionary cash flow a
GENERAL OBJECTIVES OF FINANCIAL company has
STATEMENTS
1. Providing information for economic CLASSIFICATION OF CASH FLOW
decisions ACTIVITIES
2. Providing information about financial 1. Operating activities
position 2. Investing activities
3. Providing information about performance of 3. Financing activities
an enterprise
4. Providing information about changes in INSERT THE BOX CHUCHU
financial position
———— CHAPTER 8 ————
DEMAND FOR FINANCIAL ACCOUNTING
INFORMATION Leverage
1. Managers and Employees
 Represents the use of fixed costs
2. Investors and Analysts
 Two-edged sword
Cost-volume-Profit Analysis Leveraged financial plan
 Powerful tool and vital in many business  Generate higher earnings per share as
decisions operating income or EBIT goes up
 Focused on how profits are affected by:
selling prices, sales volume, unit variable FORMULAS:
costs, total fixed costs, and mix of FORMAT:
products sold. Sales xxx
Variable Expense (xxx)
Contribution margin per unit or marginal income Contribution Margin xxx
per unit Fixed Expense (xxx)
 The amount each unit sold contributes Net Income xxx
toward covering fixed costs and providing
operating profits CM PER UNIT
= Unit Selling Price - Unit Variable Cost
Break-even point
 Starting point CM RATIO
 Level of sales volume where total revenues = CM / Sales
and total expenses are equal, that is, there is
neither profit or loss. BEP (U)
= TFC / CM per unit
Sales mix
 Relative proportions in which a company’s BEP (PESOS)
products are sold. = TFC / 1 - (Variable cost / Sales)

Operating leverage SALES (U)

 Measure of how sensitive net operating = TFC + Desired Profit
income is CM per unit

Degree of operating leverage SALES (PESOS)

 How a percentage change in sales volume = TFC + Desired Profit
will affect profits CM Ratio
 Affecting the assets
WCMR
Financial leverage = Sales Mix Ratio x CMR
 Reflects the amount of debt used in the
capital structure of the firm DOL
 Concerned with the relation between = CM / NOI
changes in EBIT and changes in EPS
 Affecting liabilities and owner’s equity DFL
= EBIT / EBIT - Interest
Degree of financial leverage
 May be defined as the percentage change in DCL
earnings (EPS) = DOL x DFL

Degree of combined leverage BREAKEVEN SALES

 Change in sales or volume on bottom-line = Quantity x Sales
earnings per share
MARGIN OF SAFETY (PESOS)
Conservative financial plan = Total Sales - Breakeven Sales
 Produce better results at low income levels
 Heavy reliance in equity MARGIN OF SAFETY (%)
= Margin of Sales in Pesos
 Total Sales 1. Forecast the Income Statement
2. Forecast the Statement of Financial Position
FREE CASH FLOW 3. Raising the Additional Funds Needed
= Operating Cash Flow - Investment in Operating 4. Consider financing feedbacks
Capital
DETERMINANTS OF GROWTH RATES
INVESTMENT IN OPERATING CAPITAL Profit Margin
= FA - (CA - CL)  Increase in profit margin will increase the
firm’s ability to generate funds internally
———— CHAPTER 9 ———— and thereby increase its sustainable growth

Long range planning Dividend Policy

 Commonly cited for financial distress and
failure
 Means of systematically thinking about the
future and anticipating possible problems
before they occur
 A decrease in the percentage of net income
paid out as dividends will increase the
retention ratio. This increases internally
generated equity and thus increases
sustainable growth.

Financial planning
 Establishes guidelines for change and
growth
 Concerned with the major elements of a
firm’s financial and investment policies
 Formulates the way in which financial goals
are to be achieved
Planning horizon
 First dimension of the planning process that
must be established
Aggregation
 Combined small projects as big project
FINANCIAL PLANNING MODELS
1.Economic Environment Assumption
 States explicitly the economic environment
in which the firm expects to reside over the
life of the plan
2.Sales Forecast
 Projected future sales and the assets and
financing needed to support those sales
Financial Policy
 An increase in the debt-equity ratio
increases the firm’s financial leverage
Total Asset Turnover
 An increase in the firm’s total asset turnover
increases the sales generated for each peso
in assets
FORMULAS:
AFN
= Required Increase in Assets
- Spontaneous Increase in Liabilities
- Increased in Retained Earnings
REQUIRED INCREASE IN ASSETS
= Changes in Sales x Current Assets (present)
Sales (present)
SPONTANEOUS INCREASE IN LIABILITIES
= Changes in Sales x Current Liabilities(present)
Sales (present)
INCREASED IN RETAINED EARNINGS
= Earnings after Taxes - Dividend Payment

3.Pro forma Statements

NET INCOME
 Forecast statements of four financial = Net Profit Margin x Projected Net Income
statements
EPS
4.Asset Requirements = Net Income / Ordinary Shares
5.Financial Requirements
6.Additional Funds Needed (AFN)
DPS
= EPS x Dividend Payout Ratio
STEPS IN PROJECTED FINANCIAL
STATEMENT METHOD
Dividends Paid
= DPS x Ordinary Shares
(Projected) 2. Production Budget
TA = L + E

———— CHAPTER 10 ————

Financial control
 Moves on the implementation phase dealing
with the feedback and adjustment process

Budget
 Plan which sets forth the projected
expenditures 3. Raw Materials Budget
 Needed to carry out tasks and meet financial
goals
 The use of this is known as budgetary
control

Production budget
 Presents a detailed analysis of the required
investments

TYPES OF BUDGET
A. Operating Budget
1. Budgeted income statement
a. Sales budget
b. Production budget
 Materials cost budget
 Direct labor cost budget
 Factory overhead budget 4. Direct Labor Budget
 Inventory levels
2. Cost of Sales Budget
3. Selling and administrative expenses
budget
4. Financial expense budget

5. Overhead Costs Budget

B. Financial budget
1. Budgeted Statement of Financial Position
2. Cash Budget
3. Budgeted Statement of Sources and Uses of
Funds

C. Capital Investment Budget

SCHEDULES
1. Sales Budget

6. Budgeted Cost Of Sales

 9. Budgeted Income Statement

7. Marketing And Administrative Expense

Budget

10. Budgeted Statement Of Financial Position

8. Cash Budget
 ———— CHAPTER 11 ————  Costs associated with not having current
assets
Working capital management
 Associated with short term financial Explicit transaction fees
decision  To replenish the particular type of current
asset
Operating cycle
 Length of time in which the firm purchases Long Term/Permanent Assets
or produce inventory, sell it and receive cash  Consists of PPE, long term investments and
the portion of the firm’s current assets that
Cash conversion cycle remain unchanged over the year
 Length of time funds are tied up in working
capital Fluctuating or Seasonal Assets
 Current assets that vary over the year due to
Inventory conversion period seasonal or cyclical needs
 Average time required to purchase raw
materials and convert them into goods POLICIES FOR FINANCING ASSETS
1. Flexible Financing Policy
Average collection period  Involves the decision to finance the peaks of
 Average length of time required to convert asset requirement with long term debt and
the firm’s receivable into cash equity

Payables deferral period

 Average length of time between the 2. Restricted Financing Policy
purchase of materials/labor/merchandise and  Involves a decision to finance the valleys or
the payment of cash for them troughs of asset, with long term debt and
equity
ALTERNATIVE POLICIES AS TO THE SIZE
OF INVESTMENT IN CURRENT ASSETS
1. Relaxed Current Asset Investment Policy 3. Compromise Financing Policy
 Large amounts of cash, marketable  Involves a firm financing the seasonally
securities and inventories are carried and adjusted average level of asset demand with
under which sales are stimulated long term debt and equity

2.Restricted Current Asset Investment Policy FORMULAS:

 Which holdings of cash, securities, OPERATING CYCLE
inventories and receivables are minimized =inventory Conversion Period + Average Collection
Period
3.Moderate Current Asset Investment Policy OR
 Policy that is between the two above Inventory x 365 + A/R x 365
 Marginal carrying costs and marginal Cost of Sales Credit Sales
shortage costs are equal, thereby minimizing
total cost CASH CONVERSION CYCLE
= Operating Cycle - Average Payment Ratio
Carrying costs
 Cost associated with having current assets OR

Explicit costs
 Costs necessary to maintain the value of the Operating Cycle - Accounts Payable x 365
current assets Cost of Sales

Shortage costs