BF REVIEWER
- Temporary Working capital
LESSON 5: Planning and Control
Planning – very much related to another
management function, controlling.
Management Planning – is about setting the
goals of the organization and identifying ways
to achieve them.
Steps in Planning
1. Set goals or objectives.
a. Short Term – for a year
b. Medium Term – one and three
years
c. Long Term – five to ten years
2. Identify Resources.
Resources include:
a. Production Capacity
b. Human
c. Financial
3. Identify goal-related tasks.
4. Establish responsibility centers for
accountability and timeline.
5. Establish an evaluation system for
monitoring and controlling.
6. Determine contingency plans.
LESSON 6: Working Capital Management
Working Capital – refers to the current assets
used in the operations of the business,
including cash, accounts receivable,
inventories, and prepaid expense.
Importance:
- Deal with the day-to-day operations of
the business.
- There will be no expansion to talk
about or this can lead to the closure of
the company.
3 types of Working Capital Financing
Policies:
1. Maturity-Matching Working
Capital Financing Policy
- Permanent working capital
requirements should be financed by:
a. Long Term sources – long
term debt, and equity such as
common stocks and preferred
stocks.
requirements should be
financed by:
b. Short term sources – short
term bank loans, which are
called working capital loans.
2. Aggressive Working Capital
Financing Policy.
- Financed by short-term sources of
financing.
3. Conservative Working Capital
Financing Policy.
- temporary working capital
requirements are financed by long-
term sources of financing.
Internal Controls over CASH
1. Separating the cashiering function
from the recording or accounting
information - a basic internal control
system should not allow the
assignment of custodial function and
recording function to one person
unless you are the owner.
2. Issuing official receipts for
collections and summarizing
collections in a daily collection
report – these collections reflect the
health of the company.
3. Depositing Collections – good
internal control over cash is by
depositing all connections intact.
4. Adopting the check voucher system
for payments – payments must be
made through a check voucher system.
Parts of a CASH BUDGET
1. Cash receipts – this section includes
collections from receivables, proceeds
from loans or issuance of new shares
of stocks, and advances from
stockholders.
2. Cash Disbursements – includes
payments to suppliers and other
service providers, payments for loans,
and cash dividends.
3. Net cashflow for the period –
deducting cash disbursements from the
collections for the period.
 4. Target cash balance – is the amount
of cash that management wants to
maintain at all times given its present
level of operations, stability of cash
flows, and the macroeconomic and
political conditions.
5. Cumulative excess cash or funding
requirements – the most important
part of the cash budget where the
possible funding requirements are
shown on a cumulative basis.
Primary Reasons for holding cash:
Transactions
 Purchase of inventories
 Salaries
 Utility Services
 Loans
 Dividends
 Other Transactions that affect the
business
Compensating Balances
 Having something to do with having
deposit accounts and loans with banks.
 Minimum amount of deposit that has
to be maintained with the bank with
which a company incurred a loan.
Secondary Reasons for holding cash are:
- Precautionary – it there is an economic
crisis, management may want to
maintain a higher level of cash for
emergencies and to serve as a buffer
for any slowdown.
- Speculative – when there are
economic and political crises, a lot of
things can be put on sale.
5 C’s in Credit Evaluation
1. Character – integrity and reputation of
the customer.
2. Capacity – the capacity to pay.
3. Capital – amount of capital invested
by the owner or, in this case the
customer, into his/her company.
4. Collateral – can be guarantees or
collateral provided by the customer to
support his/her exposure with the
company.
5. Condition - the environment where the
company operates which may affect
the ability of a customer to pay.
Internal Controls that should be considered
to SAFEGUARD INVENTORIES
1. Separating the custodial functions
from the recording or accounting
functions.
2. Aging of Inventories – allows
management to identify the fast-
moving items and the slow-moving
items.
3. ABC Analysis – classifies inventories
into three categories:
a. Most Important
b. Middle importance
c. Least important
LESSON 7: Sources and Uses of Short-term
and Long-term Funds
Short-term funds
- Day-to-day operations of the company
- Working capital requirements such as
A/R and inventories.
- Bridge financing where a company
has some maturing obligations and
does not have enough cash to pay such
maturing obligations.
Sources of Short-term Funds
1. Suppliers Credit – suppliers of raw
materials and merchandise.
2. Advances from stockholders
3. Credit Cooperatives
4. Bank Loans
5. Lending Companies
6. Informal lending sources such as “5-
6”
Long-term Funds
- For long-term investments or
sometimes called capital investments.
- Finance permanent working capital
requirements
Sources of Long-term funds
1. Equity Investors
a. Most patient source of capital
and as far as the company is
concerned, this is the safest
source of financing.
b. Equity investors can be issued
common stocks through
different approaches.
c. For small and medium
enterprises (SMEs), there are
what we call venture capital
companies who are willing to
provide equity financing.
d. For SMEs, friends or relatives
can also be considered to
invest in your company in the
form of equity financing.
2. Internally generated Funds
3. Banks
a. Banks are sources of different
types of financing from short-
term to long-term,
b. Banks provide lower interest
rates as compared to other
financial institutions, but they
have a lot more requirements
and a borrower goes through a
process.
4. Bond Market
5. Lending Companies
LESSON 8: The Future value of money and
the present value of money
I = Interest
P = Principal
R = interest rate
T = Time Period
I = PRT
Simple Interest – interest earned or incurred
is always based on the original principal, then
simple interest is assumed.
Compound Interest – earning interest on
interest.
Future Value of Money
Formula:
Future Value = Initial Value x (1 + R) ^ T
Present Value of Money
Formula:
Present Value = Future Value/(1+R) ^ T
LESSON 9: Types of Investments and the
Related Risks
Describing the Basic Types of Investments
and identifying the Related Risks
1. Is the return provided by the
investment fixed or variable?
2. Who is the issuer of the investment?
3. Can the investment be liquidated
immediately at a known price?
4. How long is the term to maturity of
the investment?
Type of Investment: Deposit
1. Time Deposit Account – it usually
requires a minimum amount of
deposits with a fixed term to maturity,
meaning the depositor cannot
withdraw from his/her account before
the fixed maturity date.
2. Checking Account – it allows the
depositor to issue checks from his/her
account to pay for various
expenditures instead of delivering bills
or coins as payment.
3. Savings Account – Provides a low
fixed rate of return but provides the
convenience of availability by
allowing the depositor to easily
deposit and withdraw from the
account at any banking day.
Minimize the Risk
- Depositors need to determine the
bank’s overall financial position and
performance before transacting with
them.
Comprehensive Rating System (CAMELS)
– developed in assessing the overall condition
of the bank. Stands for Capital adequacy, Asset
Quality, Management Indicators, Earnings
quality, Liquidity, and Sensitivity to Risk
Factors.
Type of Investment: Government Securities
1. Treasury Bills (T-bills)
a. Have maturities of one year or
less
b. Three major types of treasury
bills:
i. 91 days
ii. 182 days
iii. 364 days
c. Considered discount securities
because they are issued at a
discount relative to their face
value.
d. Investors earn from the
difference between the face
value and the discounted price
they paid for upon purchase of
this instrument.
2. Treasury Notes (T-notes) or
Treasury Bonds (T-bonds)
a. T-notes and bonds have
maturities longer than one
year which could be from two
to 25 years.
b. Pay coupon interest at regular
intervals.
Type of Investment: Corporate Debt
Securities
1. Commercial Papers
- these are short-term instruments
issued by corporation for their
immediate needs.
2. Corporates bonds
- Long-term debt instruments issued
by corporations
- most of them provide fixed coupon
payments although there are already
variable-rate corporate securities.
Short-term – 1 to 5 years
Intermediate – 5 to 12 years
Long-term – more than 12 years
Bonds with longer maturities require a higher
rate of return.
Type of Investment: Equity Securities
1. Common Stocks
- Investors earn from an equity
investment through dividends and
capital gains.
- Only corporations’ issue common
shares.
- Do not have a term to maturity. The
shareholder may hold the stock
indefinitely.
2. Preferred Stocks
a. Preference as to Dividends –
corporations are not required
to pay dividends annually to
preferred stockholders.
b. The Absence of voting rights
– preferred shareholders also
do not have voting rights in
stockholders’ meeting.
c. Seniority over claims to
assets – also have preference
over claim to the assets
relative to common
shareholders but not over
creditors.
UITFs – Unit Investment Trust Funds
ETFs – Exchange Traded Funds
Advantages in investing Pooled Funds
1. Most pooled funds only require a
small amount of investment relative to
the capital required in the individual
would create his/her own portfolio.
2. Investing in pooled funds avoids the
transaction costs incurred in buying
individual securities, as well as the
required time spent if one was to
manage his/her own portfolio.
3. Investment professionals with the
appropriate knowledge and skill
manage these pooled funds.
Disadvantages in investing Pooled Funds
1. Numerous fees and charges are levied
against the investor for the
management service rendered.