BUSINESS FINANCE

CHAPTER I
BUSINESS FINANCE—is responsible for allocating resources, creating economics
forecasts, reviewing opportunities for equity and debt financing
BUSINESS-- Is an undertaking or venture for the primary purpose of making a gain
or profit.
BUSINESS—has been defined as an organization of the people with varied skills,
which uses property and talents, to produce goods or services, which can be sold
to others for more than their cost.
BUSINESS—includes any lawful activity carried on continuously, which involves
buying and selling, or manufacturing or financing or the rendering of service for
money.
FINANCE—is the study of how individuals or businesses evaluate investment
opportunities, business proposals, and business projects, and raise capital to fund
them.
FINANCIAL MANAGEMENT—on the other hand, means the efficient and effective
management of funds.
WHY STUDY FINANCE
1. To make informed economic decisions.
2. To make informed personal and business decisions.
3. To make informed career decisions
CAREERS IN FINANCE
1. REAL PROPERTY ORGANIZATION
a. Real Estate Broker—they market and sell residential and/or commercial
property.
b. Mortgage analyst—they analyze real estate loan applications
c. Insurance agent—they sell insurance to individuals to minimize their risks.
 d. Research analyst—they analyze the investment potential of real estate
property.

2. SECURITY MARKETS
a. Investment banking analyst—they conduct financial valuation of new
stocks or securities being issued.
b. Financial planner assistant—they analyze individual client insurance
needs to meet their retirement goals.
c. Stockbroker—they assist client in purchasing stocks to build up their
investment portfolio.
d. Security analyst—they analyze and make recommendations on the
potential of specific stocks.

3. FINANCIAL MANAGEMENT
a. Credit analyst—they evaluate credit applications and collect such
amounts from customers.
b. Tax analyst—they prepare financial statements for tax purposes.
c. Financial analyst—they evaluate financial performance and prepare
financial plans.
d. Cost analyst—they compare actual from budgeted operations and suggest
recommendations.

4. DEPOSITORY FINANCIAL INSTITUTIONS

a. Bank teller—they assist customers with everyday banking transactions.
b. Investment research analyst—they conduct researches for investment
opportunities of the bank.
c. Loan analyst—they evaluate the loan applications of customers.

OPENING A BUSINESS
1. Banko Sentral ng Pilipinas- (BSP)—it is an administrative unit through the
Monetary Board. The BSP is the monetary banking and credit system of our
country.
 2. Securities and Exchange Commission (SEC)—it handles the registration,
licensing, regulation and supervision of all corporations and partnerships
organize in the Philippines.
3. Department of Trade and Industry (DTI)—they are responsible for the
industrial development promotions, for small and medium enterprises, like
single proprietorship.
4. Department of Labor and Employment—(DOLE) is In-charged with the
promotion of workers and manpower development.

5. Department of Finance (DF) –it handles collection of all taxes, issuance,

implementation and enforcement of tax laws, and negotiation of loans with
foreign government and banks.

1.1 FINANCIAL INSTITUTIONS AND THE KEY INDIVIDUALS WHO PLAY VITAL ROLES

FINANCIAL INSTITUTION
EVALUATION OF INVESTMENT
FINANCIAL INSTITUTION
LENDS FUNDS
1
2
BORROWER BUSINESS
DEPOSITOR
PROJECTS
4 3

FINANCIAL INSTITUTION
FINANCIAL INSTITUTION
PAYS INTEREST
RETURNS OF INVESTMENT
THE ROLE OF FINANCIAL INSTITUTION

THE MAIN ROLE OF THE FINANCIAL INSTITUTION IS TO ACT AS FINANCIAL

INTERMEDIARY, ACTING AS FINANCIAL INTERMEDIARY- MEANS TO BE IN THE
MIDDLE, TO BE THE GO BETWEEN OR LINK BETWEEN THE DEPOSITORS WHO HAVE
THE MONEY AND THE BORROWERS WHO NEED THE MONEY.

THE KEY INDIVIDUAL ROLES

1. DEPOSITOR—is the person who has the money and deposit it in a savings
account with a bank that pools this together with the savings from other
depositors.
2. BORROWER—is the party at the other end, he is the small business owner.
He is the one who needs the funds and borrows the funds through a bank.

FINANCIAL INSTRUMENT AND FINANCIAL MARKETS

1. FINANCIAL INSTRUMENTS—are the tools that help business daily operations
and eventually make it grow.
a.)MONEY MARKET INSTRUMENTS—are an inexpensive way for government
and financial institution to raise funds. These funds are usually available
for short period of time.
b.)MONEY MARKET INSTRUMENTS—earns higher interest. Individual who
can be individuals or business owners avail of these instruments because
of their liquidity.
Table 1
List of different money market instruments and their characteristics.
FINANCIAL INSTRUMENT BASIC CHARACTERISTICS
Money market debt:
-Issued by the treasury/government
TRESURY BILLS -Matures within one year
-is generally default -free as gov’t.
 will exert all effort to pay

-issued by financially-sound
businesses to fund investments in
COMMERCIAL PAPERS inventories and receivables.
-Maturity is about nine months
-Generally low default risk as
businesses have good credit
standing.

-Issued by banks or mutual fund

companies
-No specific maturity date
MONEY MARKET FUNDS -The degree of default risk is low
-These funds are usually invested in
money market instruments,
treasuries, and commercial papers.

-Issued by banks, credit unions,

CONSUMER CREDIT, finance companies.
CREDIT CARD DEBT -Maturity date varies
-Default risk varies

TWO TYPES OF MARKETABLE INSTRUMENT-LONG -TERM DEBTS

 1. BONDS—is a security that represents the debt of government or business
promising to pay a fixed interest to the holder of the bond for a definite
period of time.
2. NOTE—is a security that has longer term than a money market instrument,
but shorter term than Bond.

TABLE 2- FINANCIAL INSTRUMENT AND THEIR BASIC CHARACTERISTICS.

FINANCIAL INSTRUMENT
LONG-TERM DEBT:
TREASURY NOTES AND BONDS
BASIC CHARACTERISTICS
-Issued by the government
-notes mature in two, five, or
ten years.
-bonds mature longer ten years
or more
-no default risk as governments
exerts all effort to pay
- the price of bonds usually falls,
Becoming less attractive as
interest rates in the market rise

-Issued by local governments

MUNICIPAL BONDS -Matures longer after 30 years.
LOCAL GOVERNMENT BONDS - More risky than government
securities

-Issued by corporations
CORPORRATE BONDS -Matures in 40 years, some
corporations issued 100 years.
-More risky than gov’t. security

STOCK—is a type of security that signifies ownership in a corporation, and

represents claim on parts of the corporation’s assets and earnings.
TWO TYPES OF STOCKS
FINANCIAL INSTRUMENTS BASIC CHARACTERRISTICS
-Issued by corporations in exchange for
units of ownership
1. PREFERRED STOCK -Has no maturity date
-Pays dividends when declared
-More risky than corporate bonds
-Has no voting rights
-Has preference over common stocks in
asset liquidation, hence the term
“preferred”

-Units of ownership in a public

corporation
-Pays dividends when declared
-Owners are entitled to vote on the
selection of directors and other
important matters
2. COMMON STOCK -In the event of a corporate liquidation,
claims of preferred stockholders take
precedence over common stock
stockholders.
-For the most part, common
stockholders enjoy potential profits
from the capital appreciation of their
stock.
FINANCIAL INSTITUTIONS AND FINANCIAL SERVICES
DIFFERENT KINDS OF BANKS
1. THRIFT BANK—are deposit taking financial institutions that also extend credit
to the consumer market, thrift bank usually caters to the countryside or rural
areas.
2. COMMERCIAL BANKS—are mainly deposit taking financial institutions that
extend credit to the retail and consumer market. Commercial bank and
Universal bank have the same major role in raising funds for businesses that
are starting up or expanding.
3. UNIVERSAL BANKS—lend to multicompanies or companies with global
presence. Their transactions are larger than commercial banking
transactions.
4. INVESTMENT BANKS—are known to successfully raise funds for big
corporation and governments. They deal with the “big ticket items” and are
able to raise funds from the” investing public” through bond issuances and
initial public offerings.

NONBANKS THAT LEND OR RAISE FUNDS FOR BUSINESSES

1. LEASING COMPANIES—are not banks and are not governed by the central
banks. Yet leasing companies also extend credit or financing to companies
that need it for their projects.
2. INVESTMENT COMPANIES—are regulated by the securities and exchange
commission (SEC) and perform similar functions as banks in the sense that
they can provide funding to companies.
3. MUTUAL FUNDS—are collective investments or fund of small investors
pooled together and manage to be able to reach maximum returns.
4. INSURANCE COMPANIES—sell life and nonlife insurance, to provide
guarantee of compensation for specified death, illness, accident, loss or
damage to property in return for payment of a premium.
5. PRIVATE EQUITY FUNDS—are not regulated by government or any
regulatory body. They are fund manage by private fund managers and
private investors and hence, the owner’s are able to invest more
aggressively in the financial markets.

THE FLOW OF MONEY AND THE ROLE OF FINANCIAL MANAGERS

Remember that the goal of finance is to maximize profit. Therefore, it is

expected that the financial manager invests this money in a projects that
are worthwhile. He invests in a new business venture, or a new
manufacturing plant. Also, he can invest it to expand his already thriving
because he has a dream of bigger enterprise.
What is the ultimate goal of all his endeavors? He aim to make money
work for him, to make money grow, and to make his business earn profit
so that,

 He can pay his employees and in turn, his employees can feed their
families and send their children to school;
 He can pay the rent or amortization on his office property;
 He can pay his creditors the interest from the borrowed money;
 He can reinvest some of the profits to the business, thereby
sustaining all who depend on it.

EVALUATION OF THE BUSINESS

MEASURING LIQUIDITY
Will the business /projects/investment be liquid?
Are regular cash flows expected? Will debt be paid on time?
IDENTIFYING CAPITAL STRUCTURE
How was the business funded: fifty percent financed through debts and
fifty percent financed through owner’s capital
ASSETS MANAGEMENT EFFICIENCY
Is the business efficient? Does it used all his assets (inventory ,plant, and
equipment) efficiently to generate sales and revenues.
MEASURING PROFITSBILITY
Is business profitable?
Are revenues growing faster than cost
CHAPTER 2
FINANCIAL STATEMENT ANALYSIS
This involves the assessment of a company’s past performance and future
potentials; it is one way of determining a company’s strengths and weaknesses.
FORMS OF BUSINESS ORGANIZATIONS
1. SOLE or SINGLE PROPRIETORSHIP—is a business owned by one person. This is
the simplest form in terms of getting started, operating and managing.
2. PARTNERSHIP—Is a business organized by two or more owners called
partners.

KINDS OF PARTNERSHIP
a. Capitalist partner—one who contributes money or property to the
business.
b. Industrial partner—one who contribute his service to the business.
c. Capitalist industrial partner—one who contributes money or property and
services to the business.
d. General partner—one who is liable to outside creditors even to the extend
of his personal assets.
e. Limited partner—one who is liable to outside creditors only to the extend
to his capital contribution.
f. Silent partner—one who does not take an active role in the management
of the partnership.
g. Secret partner—one who is not known to third persons as a partner.
h. Dormant partner—one who does not take an active role in the
management of the partnership and is not known to third persons as
partner.

3. CORPORATION—is the most complicated form of business organization.

Form by five or more persons, it is a juridical or legal person separate and
distinct from its owners (stockholders). It has rights, duties, and privileges of
an actual person.
KINDS OF CORPORATION
a. Stock Corporation—is a business corporation created for the purpose of
making a profit which may be distributed in the form of dividends to
stockholders on the basis of their investment capital.
b. Non-stock Corporations—do not issue stock and distribute dividends to
their members. They are created not for profit but for the public good
and welfare.
c. Public corporation—these are those formed or organized for the
government or for the state.
d. Private corporations—those form for some private purpose, benefit or
end,

COMPONENTS OF A CORPORATIONS

a. Corporators—refers to all persons composing a corporation, whether they

are stockholders or members.
b. Incorporators – refers to corporators mentioned in the articles of
incorporation as originally forming and composing the corporation, and
who signed and executed as such.
c. Stockholders – refer to someone who owns at least one share of stock in a
stock corporation.
d. Members—refers to someone who is a part of a non-stock corporation.
e. Board of directors—governing body for a stock corporation.
f. Board of trustees—governing body for a non-stock corporation.

ROLE OF THE FINANCIAL MANAGER

1. CAPITAL BUDGETING DECISION—can be TANGIBLE and INTANGIBLE
ASSETS.
TANGIBLE ASSETS
a. Cash—these would include coins and currency, checks, bank
draft, and money orders.
 b. Cash equivalents—these are investments that are readily
convertible to cash with a short maturity of three months or
less from the date of its acquisition.
c. Equipment—it could be in the form of computers, delivery
trucks or machines used in the factory.
d. Trading securities—these are short term investments in stocks.
e. Inventories—these are assets that are held for sale in the
normal course of business.
f. Supplies—these are assets used in the office like ballpen, bond
paper, and pencil.
g. Land—it is the assets owned by the business where a building
is being constructed.
h. Building – these are structures owned by the company that is
used in the operation of the business
i. Furniture and fixtures—it may be in the form of chairs, tables,
cabinets, and display racks.

INTANGIBLE ASSETS
a. Computer software—operating systems of different
machines of the business.
b. Patents – rights to exclusively distribute inventions for a
certain period of time.
c. Copyrights—right to distribute any literary, artistic or
musical creation.
d. Customers list—roaster of valued clients of the company.
e. Licenses – right to operate a certain kind of business.
f. Franchise—right to make use of the processes, products and
business models of well-known companies.
g. Trademarks – it is recognizable sign which identifies
products or services of the company.

4. COOPERATIVE—this is a business organization form at least fifteen members.

 TYPES OF BUSINESS ACTIVITIES

1. SERVICE BUSINESS—offers products with no physical form like skills, field

of expertise, and consultancy. Examples are;
a. Laundry shops d. Hotels, Motels
b. Schools e. banks
c. Salons f. Law firms
h. Restaurant
2. MERCHANDISING BUSINESS—is the “buy and sell” business. Firms under
this classification buy products and sell the same at a higher price without
changing the form of the products. Examples are;
a. Convenience stores
b. Grocery stores
c. Hardware stores

3. MANUFACTURING BUSINESS—This type of business buys products known

as raw materials, with an intention of transforming them into new
products. with the combination of labor and factory costs, the raw
materials go through a production process, and then the finished goods
are sold to customers. Examples are;
a. car manufacturers
b. food manufacturing companies
c. plastic manufacturers

BASIC FINANCIAL STATEMENT

1. INCOME STATEMENT—Shows the performance of the business for a given

period of time.
2. BALANCE SHEET—Shows the financial position of the business as of a
particular date.
 PERFORMANCE MEASUREMENTS

1. LIQUIDITY—is the ability of the business to pay its currently maturing

liabilities as they fall on its due date.
2. SOLVENCY—Is the ability to pay long -term creditors are interested in the
solvency of a business because they are concerned about the receiving
interest payments and more so of principal payment for the loan granted to
the company to the company.
3. FINANCIAL STABILITY—Measures how a business can survive in the long run.
It depends on how the business is being funded.
4. PROFITABILITY—Addresses a very basic goal of any business: to earn the
highest possible profit or return on its investment.

FINANCIAL RATIOS
RATIO—is a mathematical relationship between two numbers, and commonly
expressed in percentages or decimal.

COMPUTATIONS OF FINANCIAL RATIOS

LIQUIDITY RATO:
1. Current ratios – (also known as working capital ratio) is one way to assess the
overall liquidity of a company by comparing current assets to current
liabilities as follows.
Current assets
Current Ratio = ----------------------------------------
Current Liabilities

2021 2022
3,047,720 2,421,678
Current Ratio= ------------------------------------------
1,224,936 1,766, 108
 = 2.5:1.0 1.4 : 1.0
The current Ratio means it has current ratio of 2.50 for every P1.00 liability.

2. ACID TEST RATIO or QUICK RATIO—Is more conservative in the sense that it
does not include all current assets in the computation.

Cash + Marketable Securities

Quick Ratio= ---------------------------------------------------------
Current Liabilities

2021 2023
1,031,086 684,203
Quick Ratio = -------------------------------------------------------
1,224,936 1,766,108

= .84 : 1.0 .39 : 1.0

Show that quick ratio is not enough to pay the current liabilities.
RECEIVABLES TURNOVER AND AGE OF RECEIVABLES –to assess the liquidity
of these assets, compute how long it takes for the company to convert assets
into cash.
Net credit Sales
Receivable turnover = --------------------------------------------------------
(Beginning Balance + Ending Receivables)/2

2021 2022
7,457,736 6,396, 040
Receivable turnover = ------------------------------------------------------
807,936 676,411
= 9 times 9 times