BUSIFIN

Chapter 1
Introduction: The finance
Function

•An organization whether political, civic

or business in nature , must be aware of
its immediate and future requirements
for funds , the possible sources there of
and from efficient and effective utilization
of said funds.
Primary Goals
Going into business means investing an activities that can
make available goods and services needed in a
community , realize profit from the investment, increase
the value of the business itself as an economic entity and
improve the quality of life in the community. In other
words, we fill an economics need, gain there from and at
the same time, contribution to the economic and social
well-being of the people in the locality. In as much as a
business is , in it self, an economic entity, its growth and
stability enhances also the economic condition of the
community where it is situated.
The primary goals of a business
concern must therefore be as
follows:

- to earn profit
- to increase its own value as an
economic entity
-to improve the quality of life in the
community
TO EARN PROFIT
•Funds or invested in business to earn
sufficient return on investment. Goods and
services are made available to the public
and are build to costumers/clients with
sufficient markup to cover operating
expenses, financing charges , income taxes
and desired net profit. Net profit realize
results in an increase in assets and owners
equity. Part of it may be distributed to the
owners of the business (or declared as
dividends in the case if a corporation) with
the remainder left in business (or plowed
back into it).
Earnings per Share
(EPS).
This refers to how much net income is earned foe every
share of capital stock outstanding. This is the summary figure that
investors use in evaluating past performance of a business firm. The
simplest formula for EPS is given below.

Net Income Related to Common Stock

EPS = -------------------------------------------------------------
Weighted Average Number of Shares
Outstanding of Common Stocks
•In general, the higher is the EPS,
the higher is the price a stock can
command in the market. In the case
of PLET, its EPS for the year 2004
was P 95.36 and with expected
increase in profit. Market price (at
the time of this writing) is P1,700per
share.
Increasing the Value of a Business
Growth and stability are the primary bases in measuring the
value of a business entity. GROWTH may be measured in
terms of increase in assets that appreciate in value, improved
production capacity accompanied by increased in sales
volume and increase in owners equity. Profitability contributes
to growth and stability specially when part of realized profit is
retain or plowed back into the business.

Stability of a company refers to its ability to weather the

ups and down in the economy or its ability to contrinue
opertions despite anticipated risks in business. It is primarly
based on the relative of amount of owners equity. The
measures of stability, includes the debt/equity ratio and the
number of times a company earns an amount equal to its fixed
charges.,
Owners equity is the difference between total assets and total
liabilities of an entity so that it is also called net aOwners equity is
the difference between total assets and total liabilities of an entity so
that it is also called net assets or net asset value (NAV).

Its primary source is the owners investment or the capital placed in

the business to which realized profit or net income is added. It is
reduced by losses and distribution of earnings (called dividends in
the case of corporations'). It is considered as the margin of safety to
credits because it is the amount by which assets may decline in
value and instable the entity to pay the claims of its creditors. Thus
if total amount to P 300,00 and liabilities are P 180 000, owners and
still, the business would be in a position to pay its debts, It therefore
follows that the greater is the owners equity, the more stable a
company is and the higher is the price that its owners can demand
for their share in their share in equity should they decide to dispose
or sell the same.
•For corporations, the owners equity or
stockholders equity is divided by the
number of shares the capital stock
outstanding to arrive at the book value
per share. This serves as one of the
bases in determining management s
performance and for investors, in
determining what price e to pay for the
shares of stock of a company.
Concept and Functions of Business
Finance
Finance has defined as the “art and science of managing
money’. Inasmuch as most business transactions affect
resource of a company , business finance , may be defined as
the art and science of managing the financial resource of the
business , As such it is concerned with the allocation ,
procedure and efficient utilization of financial resources to
enable a business concern to attain its predetermined
objectives relative to growth, stability, profitability and liquidity.
It involves determination of the requirements of fund available
at least cost and seeing to it that funds are being use as
planned so as to optimize operations and increase the value
of the business itself and consequently to enable the business
to contribute to the economic growth of the community and the
social well being of its population.
The following are the functions of
business finance :

* Allocation of financial resources

*Procedurement of funds
* Efficient and effective utilization of
financial resources
Allocation of Financial
Resources
In accordance with a company's financial
objectives and standards . projects or activities
and operations are carefully planned , evaluated
based on the certain criteria , and subsequently
ranked for the allocation of the finance
resources . The objectives is to be assured that
the funds are channeled to activities that are
considered profitable and/or will increase the
value of the business itself and that company
costs and risks are minimized
The following are some of the questions in evaluating
projects proposals

*Is the project necessary?

* What is its social relevance?
*Are there other relevance?
*How will the proposals affect our current operation?
*What source of the company (labor force, plant,
property and equipment, etc.) can be use in the
project?
*How much are the estimated capital requirement?
*What is the economic life of the project (or its number of
years of operation)?
*How long will it takes to recover our investment? or what
is the payback period?
*What is the rate of the return higher than the cost of the
capital to be used?
*What are the risks involved in the proposals?
The more risky a project is , the higher is the
standard set as minimum desired rate opf the
return on investment. Thus, if a company
desires a 30% rate of the return on its
investment , its may add , say, 5% or more
risky project proposals so that the latter must
have a rate of the return of at least 35% to
meet the rate of the return criteroin. Risks may
be in the form of the possible losses arising
from the decline in revenue, rise in the
operating costs and expenses , and decline in
the property value.

The methods of evaluating long term

investment proposals are taken up in chapter 4.
Procedurement of Funds
Capital must be made available at the
least costs when it is needed. The
procurement function requirement
awareness of the different source of
funds and the costs involved. There are
short term and long term sources of
funds with the varying requirements and
conditions. These are taken up in
Chapter 5. Funds are long generated
for operations.
Costs of capital varies with sources there of . On
borrowed funds, it is in the form of financing charge
(interest, commission and services charge). On the
capital contributed by owners or stockholders, the
corresponding costs is in the form of dividends or
shares in profit

To be assured that repayments of capital used and

the corresponding costs involved can be made from
cash returns from company projects , the repayment
period should be longer than the economic life of the
latter. It can also be done by seeing to it that the
periodic cash returns exceed the required
repayments.
Efficient and Effective Utilization of
Financial Resources

Efficient utilization of financial resource

refers to their economical use. IN other
words , we see to it that the financial
resources are actually being used for what
they have been intented. Inefficiency in the
used of financial resources may be caused
by extravagance in the choice of the
property and equipment , unnecessary
expenditures, tardiness of personnel and
non productive resources.
Effective utilization of financial
resources refers to their used towards
the attainment of predetermined
objects. This requires a period review
of operations to determine whether
they are accordance whit plans or
whether the plans, as considering the
change in the economic environment.
Financial resource must be utilized in a
manner that minimizes company costs
arising from wastages and lost
opportunities due to delays in
operations and idle or non productive
resources . It requires adoption of
effective control measures . When
approved project are already in
operation, there should be constant
follow up by observation. Inspection ,
periodic review of operation with use of
progress reported and
 So that operations may not be
hampered due to inefficient
management of financial resources,
operating requirements are
anticipated and transfers and/or
outlays of financial resources are so
scheduled to minimize if not
eliminate delays in operations.
 Operating requirements for working capital
maybe in the form of salaries, rentals,
purchases of merchandise, raw materials
and supplies, taxes. payment of salaries
must be promptly made on paydays for low
moral among employees can cause
slowdown n operations. In the case of
purchases of merchandise, raw materials
and supplies, suppliers grant cash discounts
for prompt payment.
 It is not also advisable to have excessive
balances of cash, receivables, inventories and
other financial resources because the enterprise
loses opportunities to earn on capital tied up in
these items. Idle cash may be invested on short-
term basis. Too much receivables entail more
collection expenses and greater risk firm bad
debts. I n the case of inventories, over-
investments therein may results in more handling
and storage cost aside form greater risk from
obsolescence. A company having more items to
more repairs and maintenance costs, and
depreciation.
Investment Portfolio
The term portfolio refer to a
brief case that is normally being
used in carrying business papers
and documents. Because of this,
the term came to be used as
referring to the aggregate of
assets held as investments by an
organization or individual.
 A business organization or an individual may
maintain investment in stocks, bonds,money
market placements, real state and precious
stones and metals. Some of these are
maintained because of their periodic earnings,
some are for their increase or appreciation in
value, and some are maintained for both. They
are so managed to maximize their aggregate
value to the extent that investment analysts are
hired to determine when the company should
invest more in one or two of them and when the
investment should be transferred to other items.
 The Financial Manager:
His Primary Activities
In as much as business finance is concerned
with the management of the financial resources of
a company and financial resources refes to all the
resources of a company that are measurable in
terms of the monetary unit, the primary activities
of the financial manager must concern the
different items included in the balance sheet.
Thus, his primary activities must be (a) financial
planning and analysis (b) managing the firms
assets and (c) managing the firms liabilities and
owners equity.
Financial Planning and Analysis
Most business decision affect the financial resources
of a company . The financial manager therefore , takes
part in corporate , strategic an operational planning in an
enterprise . Hs knowledge of economics , particularly ,
managerial economics , enables him to make projection
based on the accumulated data and the different options
of the management. Projections may in the form of
estimates of revenue , costs and expenses , required
capital layouts , changes in company assets, liabilities
and owners equity and the resulting annuals cash flows,
payback period , rate of return on investments , earning
the shares and similar ratios.
Period results of operations
and financial position are
analyzed to pinpoint areas
of possible improvement.
Managing the Assets of the
Company
This activity concerns the left side of the
balance sheet . Example do assets are cash,
marketable securities , receivables , inventories,
plant , property and equipment . The financial
manager determines the mix and type of assets
that a business must have and the sees to t that
they are duly accounted for. The following are
some of the questions he tries to answer.
How much must be in the form of cash , receivables,
inventories and other current assets?

How much must be in plant, property and equipment?

What are the fixed assets to be acquired?

Which of the fixed assets already owned must be

modified or replaced?

Are assets duly safeguarded? Who are accountable for

them?

How effective is the internal control system in the

company?
Managing the Company’s
Liabilities and Owners Equity
The items concerned in this activity are on
the right hand side and long term financing ,
what particular source is the best at a given
point in time, and the level at which the
debt/equity ratio should be maintained.
These are very important because they
affect profitability and liquidity of the
enterprise.
The Financial Manager His
Primary Activities
The financial or finance manager in a
business organization is not always called as
such. His title varies defending on the size and
organization setup in a company. In small
business firms , the financial are this charge by
the sole proprietor, the accountant, or by the
manager. As the organization grows bigger,
the organizational
Set up becomes more sophisticated
so that we may have the finance
functions delegated to the controller
and/or the treasurer. In some cases,
there is a vice-president for financed
to whom the controller and the
treasurer report. The finance
function are usually divided between
the controller and the treasurer.
 In big organizations where the
numerous duties of the controller
and those of the treasurer are so
expanded so that both of them
cannot participate adequately in
general financial management, a
third financial officer is hired, the
vice president for financed,
Financial Decision Making
In general, financial decisions
require knowledge of economics. The
financial manager must have
proficiency in managerial economics.
Costs-benefit analysis is applied. The
nature of data used varies depending
on whether short-term or ling term
financial decisions are being made.
 For short-term financial decisions, the
financial manager gives more emphasis on
items that are affected by current operations
such as current assets
(cash,
marketable securities , Receivables,
inventories , etc.) current liabilities ( account
and notes payable , current maturities of long
term debts etc.) , working capital, current
radio, net income, and variances between
budgeted and actual results of operation.