BUDGETING AND FINANCIAL

STATEMENT PROJECTION
1. Sales Budget

The most important account in the

financial statement in making a forecast is
sales since most of the expenses are
correlated with sales. Given the importance of
the sales forecast, the financial manager must
be able to support this figure with reasonable
assumptions. The external and internal factors
should be considered in forecasting sales.
I. External - factors outside
company
Ex. GDP, Interest rate, Inflation
Rate, Foreign Exchange Rate,
Income Tax Rate, Developments
in the industry, Competition and
etc.)
II. Internal - factors within
company
(Ex. Production capacity,
manpower requirements,
management style of
managers and etc.)
 The data of projected sales in
units are usually provided by the
marketing department based on
trend of previous years and
adjusted accordingly based on the
information gathered from the
market.
 EXAMPLE
Based on the previous years internal and external
factors the manager of the company prepare a
sales budget. Company forecasts sales in units
respectively; 2,000 units, 2,200units, 2,500 units,
2,800 units, 3,000 units for January to May. Each
unit is sold for P100.00.
Prepare sales budget in units and pesos.
 SOLUTION
SALES BUDGET

January February March April May

In Units 2,000 2,200 2,500 2,800 3,000

In Pesos (Units X 200,000 220,000 250,000 280,000 300,000

P100)
 EXERCISE 1

JENNY Manufacturing Company sold 23,430 units of

Product AM in 2019 which was higher by 10% compared
to the units sold in 2018. The products were sold at
Php300 per unit.
Because of heavy advertising and other proportional
activities and shift in buyer’s preferences, the company
expect to increase the sales by 15% in 2020 against the
2019 performance. The company plans to sell the
product at Php350 per unit.
 Solution:
JENNY Manufacturing Company
Sales Budget
For the year 2020
Selling Units
Estimated Price Sales
Projected Sales
( 23,430 x 1.15) P26,945 P 350
P9,431,000
 NOTE
Manager should not understate or overstate
sales forecast. If sales is understated, there
can be lost opportunities in the form of
forgone sales. If it is too optimistic, the
management may decide to unnecessarily
increase capacity or hire more employees
and end up with more inventories.
2. Production Budget

A production budget provides information regarding

the number of units that should be produced over a
given accounting period based on expected sales
and targeted level of ending inventories.
Formula: Required production in units =
Expected Sales + Target Ending Inventories -
Beginning Inventories
 EXAMPLE
The company have already the sales forecast in
units (see. Example 1). Moreover, the company
would like to maintain 100 units in its ending
inventory at the end of each month. Data show that
the beginning inventory at the start of January
amounts to 50 units.
Required: Prepare a production budget of
units should the company produce in order to
fulfill the expected sales of the company.
1. Do you think products and
services which have more
developments in its industry
would likely have a higher
sales forecast?
2. Suppose you are selling bread and
you know that each person in your
community eats an average of one
loaf of bread a day. The population of
your community is 500 people. You
are the only person selling bread in
your town.. How many units of bread
for your sales forecast?
3. Suppose that you have already evaluated
the macroeconomic factors and identified
that there is a very strong market for your
product and consumers are very likely to buy
from you. You forecasted that you will be
able to sell 1,000 units of your product.
However, you only have 20 employees who
are able to produce 20 units each. Your
capacity cannot cover your expected demand
hence, you are limited by it. What would be
your course of action?
 ASSIGNMENT
Answer the problem that follow in your notebook.
Show your process.
The company has 3,100 projected sales, at the
beginning of the month there are 400 units, if the
company would like to maintain 550 units in its
ending inventory for the month. How many units
should company produced?
3. Budgeting Cash

Also known as Operations budget

refers to the variable and fixed costs
needed to run the operations of the
company but are not directly
attributed to the generation of sales.
 Examples:

• Rent Payment
• Wages and Salaries of selling and administrative
personnel
• Administrative Costs
• Travel and representation expenses
• Professional fees
• Interest Payments
• Tax Payments
2. CASH BUDGET

- is a statement of the firm’s planned

inflows and outflows of cash. It is used
by the firm to estimate its short-term
cash requirements, with particular
attention being paid to planning for
surplus cash and for cash shortages.
 STEPS IN FORMULATING A CASH BUDGET

A. Form the sales forecast and identify how

much would be collected.
B. Identify other receipts. (Ex. Interest
received)
C. From the Production Budget, identify how
much of the purchases made will be paid by the
company on the cash budget period. Like sales,
purchases may be made in cash or on credit.
 STEPS IN FORMULATING A CASH BUDGET

D. From the operations budget,

identify which expenses will be
paid in cash during the cash
budget period.
E. Identify all other cash
payments to be made.
 STEPS IN FORMULATING A CASH BUDGET

F. Match the receipts and

disbursements on the periods they
become collectible and payable.
G. Set a minimum required cash
balance.
H. Evaluating the Cash Budget.
 EXAMPLES

A. Form the sales forecast, identify how much would be

collected in the cash budget period. Sales may be made in
cash or for credit. Cash sales are translated to cash at the
point of sale while credit sales are collected depending on
the credit period. Credit periods may range from 10 days to
more than a month depending on the strategy of the
company. Financial Statement Analysis on the implications
of the company’s credit policy. - Continuing from previous
example, assume selling price is PHP100/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% - How much is the total receipts from sales ?
B. From the Production Budget, identify how
EXAMPLES

much of the purchases made will be paid by

the company on the cash budget period. Like
sales, purchases may be made in cash or on
credit depending on the supplier’s credit
terms. – Continuing from previous example:
‣ Assume that the cost per unit is PHP50. ‣
All purchases for this month are paid the
following month.
Provided also that the operation budget &
EXAMPLES

other payment have the following total per

month: January -53,000,February -57,500,
March-38,000, April- 196,000
& May-53,000 respectively;
Step C,D & E, total disbursement: 53,000,
157,500, 148,000, 321,000 & 193,000 for
January to May respectively .
C. Provided, the minimum
EXAMPLES

required cash balance of

Php100,000 is the ending
cash balance and the
beginning cash balance is
Php80,000.
 BUDGETING
- the process or act
of preparing a
financial budget.
 BUDGET
- refers to a plan which
expressed in a
quantitative monetary
value.
Who are involved in the budget
preparation?
 Procedures in Budgeting
1.Prepare the sales budget.
2.Prepare the production budget.
3.Prepare the projected operating expenses and financing
charges.
4.Prepare the financial and capital budget.
5.Prepare the projected statement of comprehensive income
and balance sheet.
 Projected Financial
Statements
- is a tool of the company to set an
overall goal of what the company’s
performance and position will be for
and as of the end of the year.
 Projected Financial
Statements
A. Projected Balance Sheet or
Statement of Financial Position
 Projected Financial
Statements
B. Projected Income Statement or
Statement of Comprehensive
Income
 Projected Financial
Statements
Projected Financial statement sets targets to control
and monitor the activities of the company. The income
statement shows the financial performance of a
business entity for a given period while the statement
of financial position shows the assets, liabilities and
equity of a business in a given period.
What period is covered by the
budget?
STRATEGIC BUDGET

Anchored on the vision-mission

of the business

MEDIUM -TERM BUDGET

Anchored on the vision-mission

of the business

SHORT -TERM BUDGET

Anchored on year budgetary

requirements of each unit
What type of budget is
prepared?
 FIXED BUDGET
– a budget prepared
based only on one level
of production capacity.
 FLEXIBLE BUDGET
– a budget prepared
showing the projected
cost at different levels of
production capacity.
CONTINUOUS OR ROLLING BUDGET

– a one-year budget continuously

prepared every month by adding
another month once the current
month has passed.
 CASH BUDGET

- a budget that reflects the

expected cash receipts.
 LIQUIDITY
It is the primary objective in working capital
management. It refers to the ability of a
business to settle short-term liabilities when
they fail, (Source: Aduana, N. (2017). Business
finance in the Phil. Setting. Manila: C & E
Publishing, Inc.)
 LIQUIDITY
Under liquidity aspect that
directly affects the current asset
management is the cash
conversion cycle of the business.
 CASH CONVERSION CYCLE
1. Purchase of raw materials – it
refers to the period when business
place an order to buy. Ordinarily,
materials are purchased on
account.
 CASH CONVERSION CYCLE

2. Payment of purchases – it
refers to the day when the
purchased raw materials are
paid.
CASH CONVERSION CYCLE
3. Production process – it
refers to the conversion of raw
materials into finished
products.
 CASH CONVERSION CYCLE

4. Selling of finished goods – it

is the stage where goods are
sold to the consumers.
CASH CONVERSION CYCLE
5. Collection of receivable – it
refers to the period where the
receivable arising from sales on
accounts is collected or converted
into cash.
THREE PERIODS INVOLVE FOR
CASH CONVERSION CYCLE
1. Payable deferral period –
length of time from the day the
raw materials are purchases or
received up to the time payment
is made.
THREE PERIODS INVOLVE FOR CASH
CONVERSION CYCLE

2. Inventory conversion period –

length of time to convert raw
materials into finished goods.
THREE PERIODS INVOLVE FOR CASH
CONVERSION CYCLE

3. Receivable collection period

– length of time from the
selling of goods on account up
to the full collection of credits.
IN EQUATION, THE CASH CONVERSION
CYCLE IS EXPRESSED AS FOLLOWS:
CASH CONVERSION CYCLE USING FINANCIAL
STATEMENTS INFORMATION USING THE
FOLLOWING ADOPTED FORMULAS
 EXAMPLE
JENNY Corporation manufactures special types of beds
for the use of elegant hotels. It buys raw materials every
5th day of the month for ₱200,000. The suppliers of the
raw materials provide only 20-day credit terms to
JENNY. It takes 60 days to convert the raw materials
into finished products. Once the products are finished.
JENNY sells them to hotels on account. The buyers are
given 30 days to settle their accounts.
ANSWER
 EXAMPLE
JENNY Processing Company is engaged in the manufacture
of rattan furniture primarily designed for the foreign
market. The inventory conversion period of JENNY is 40
days on average while its payable deferral period has an
average of 20 days. The company, based on its past year’s
experience has a receivable collection period of 15 days.
Compute the cash conversion cycle of JENNY Processing
Company. Write your answer in your notebook.
 EXAMPLE
The following information is taken from the records of YVONE Trading
Company as of December 31:
Sales ₱2,600,000
Cost of Sales 1,950,000
Inventory 490,000
Accounts Receivable 625,000
Accounts Payable 290,000
Compute the cash conversion cycle of the YVONE Trading Company.
CASH MANAGEMENT
TOOLS
 Cash
Being the most liquid asset, cash
is an important account in the
balance sheet that will affect the
liquidity, and solvency of a
company. It is also the most
vulnerable when it comes to theft.
 Working Capital
- is the cash needed
to pay for the day-to-
day operation of the
business.
Two Basic Internal Control
System for Cash

1. Custodial function
2. Recording function
 Safeguarding Cash
1. All cash collections should be supported
by official receipts which are summarized
in a daily collection report.
2. All cash collections should be deposited
intact based on daily cash collection.
3. All payments should be made in check
voucher system.
 Safeguarding Cash
4. Check payments must be crossed-check
by drawing two-lines on the payee section.
This cross-checking requires depositing of a
check. It cannot be encashed. This makes it
more difficult for somebody who stole a
check.
5. For small payments, a petty cash fund
maybe used.
 Budgeting Cash
- Also known as cash budget is
very important for it provides
information regarding the
company’s expected cash
receipts and disbursements
over a given period.
 Example
The cash account of ABC
Company which was under the
custodian of the cashier on
December 31, 2019 was
Php4,415,000 which was
determined to consist of:
 Example
Petty cash fund P 24,000
Undeposited cash receipts 2,070,000
Cash in Allied Bank, per bank statement 2,245,000
Vouchers paid out of collection, not yet recorded 43,000
IOU signed by employees, taken from collection 33,000
P 4,415,000

At what amount of cash should be recorded at the end of the

year?
 Solution
Petty cash fund P 24,000
Undeposited cash receipts 2,070,000
Cash in Allied Bank, per bank statement 2,245,000
P4,339,000
A. Cash receipt of cash budget
Bugay Industries, a defense contractor, is
developing a cash budget for October,
November, and December. Bugay sales in
August and September were PHP100,000 and
PHP200,000 respectively. Sales of PHP400,000,
PHP300,000, and PHP200,000 have been
forecast for October, November, and
December respectively.
 Historically, 20% of the firm’s sales have
been for cash, 50% have generated accounts
receivable collected after 1 month, and the
remaining 30% have generated accounts
receivable collected after 2 months. In
December, the firm will receive a PHP30,000
dividend from stock in a subsidiary.

Required: Prepare the cash

receipts section of cash budget.
Forecasted
Sales 100,000 200,000 400,000 300,000 200,000

Months August September October November December

Cash Sales 20,000 40,000 80,000 60,000 40,000
20%
Collection of
AR
1st Month 50,000 100,000 200,000 150,000
50%
2nd Month 30,000 60,000 120,000
30%
Other Cash 30,000
Receipts
TOTAL
COLLECTION
OF SALES 20,000 90,000 210,000 320,000 340,000
B. Cash Disbursement for Cash Budget
Jungaya Industries has gathered the following data
needed for the preparation of a cash disbursements
schedule for October, November, and December.
- Purchases - The firm’s purchases represent 70% of
sales. Of this amount, 10% is paid in cash, 70% is paid
in the month immediately following the month of
purchase, and the remaining 20% is paid 2 months
following the month of purchase.
 Jungaya Industries, has a Cash
Disbursement Budget for October, November,
and December. Jungaya’s purchases in August
and September were PHP70,000 and
PHP140,000 respectively. Purchases of
PHP280,000, PHP210,000, and PHP140,000
have been forecast for October, November,
and December respectively.
- Rent Payments - Rent of PHP5,000 will be
paid each month.
- Wages and Salaries - Fixed salary cost for the
year is P96,000, or P8,000 per month. In
addition, wages are estimated as 10% of monthly
sales.
- Tax Payments - Taxes of P25,000 must be paid
in December.
- Fixed Assets - New machinery costing
P130,000 will be purchased and paid for in
November.
- Interest Payments - An interest payment of
P10,000 is due in December.
C. From given data of
sample A-cash receipt &
B-cash disbursement,
prepare the net cash
inflows for cash budget
of Jungaya Industries.
Cash Break-even Computation
Determines the amount of cash sales needed
for the cash outlays or requirements to be equal
with the total cash inflows coming from the cash
sales. The cast outlays or payments must be
separated into fixed cash outlays and variable cash
outlays, (Source: Aduana, L (2017). Business
Finance in the Philippines Setting. Manila: C & E
Publishing, Inc.)
Cash Break-even Computation
A. Fixed cash outlays –are cash
requirements that remains constant
during the month or period.
B. Variable cash outlays –are cash
requirements of the business that vary
with the volume of sales.
Step to determine the cash break-even point

1.Determine the cash contribution margin.

Computed as follows:
Cash Sales xxxxxx
Less: Variable cash payment xxxxxx
Cash contribution margin xxxxxx
Step to determine the cash break-even point

2.Determine the contribution margin ratio(CM

ratio)
Computed as follows:
Cash contribution margin xxxxxx
Divide by: Cash Sales xxxxxx
Cash contribution margin ratio xxxxxx
Step to determine the cash break-even point

3. Determine the cash break-even point

Computed as follows:
Fixed cash outlay xxxxxx
Divided by CM ratio xxxxxx
Cash Break-even xxxxxx
Baumol model – is one of the cash management
model to manage cash requirements of the business
Cash Management Techniques

1.Collection of receivables
2.Payment of payables
3.Maintaining optimum cash
balance
Cash Management Techniques
Where:
T - total cost of handling cash
HC - holding cost.
TC - transaction cost
Optimal cash balance formula:
TCC = HC + TC
Cash Break-even Point
NICANOR Manufacturing Company produces plastic
containers for industrial use. The following data are
presented about the company’s operation.
Monthly units produced and sold 600,000 units
Selling price per unit Php8.00
Fixed monthly cash payments Php240,000
Variable monthly cash payment 40% of sales
Cash Break-even Point

First, the contribution margin computed:

 Cash sales (600,000units X Php8.00) Php4,800,000

 Less: Cash variable outlays (Php4,800,000 x 40%) 1,920,000
 Cash contribution margin Php2,880,000
Cash Break-even Point

 Second, contribution margin ratio is determined:

 Cash contribution margin Php2,880,000

 Divide by: Cash Sales 4,800,000
 Contribution margin ratio 60%
Cash Break-even Point

Third, the cash break-even point is computed:

 Fixed monthly cash payment Php240,000
 Divide by: Contribution margin ratio 60%
 Cash Break-even Php400,000
 Baumol Model
 The total cash requirements of ANGEL Company for
paying its obligations and raw materials acquisition for the
whole year is Php5,000,0000. The cost per transaction of
trading marketable securities being converted into cash is
Php80.00. The marketable securities carry an interest rate
of 6% which is foregone once marketable securities are
converted into cash.
 Required: Using the Baumol model, compute the
optimum cash balance of ANGEL Company.
Baumol Model
Receivable & Inventory Management Tools and
Techniques

Accounts Receivable
Accounts receivables spring
out of the need to sell
merchandise.
TWO BASIC PHASES OF
RECEIVABLE
1. The granting of credit
A. Credit standard –guidelines adopted by the
company when assessing customer using the 5 C’s of
credit.
 Five Cs of Credit
 1.) Character – reputation and track record.
 2.) Capacity – ability of customer to pay.
 3.) Collateral – type and kind of assets pledged as guarantee.
 4.) Capital – financial position of borrower.
 5.) Condition – market and economic condition of borrower.
1. The granting of credit
B. Credit terms – refers to standard or negotiated
conditions offered by seller.
a. Credit period – length of time granted to customer to
pay.
b. Discount period – length of time customer can avail
discount.
c. Discount– amount deducted from invoice price once
payment made within the discount period
2. The collection receivable
Aging of receivable – is a tool
to determine whether the
individual account is due already
or not for monitoring of
receivables and set-up estimated
uncollectible.
 Inventory
Refers to a set of items
intended for sale to
individual or industrial
consumers.
Most common types of inventory management
control systems

1.ABC classification system

2.Barcode technology system
3.Fixed-order quantity system
4.Fixed-reorder cycle system
Inventory management tools
- refer to mathematical approach
used to determine the optimum
level of inventory, the inventory
size, or the timing of placing an
order.
HYZEL Company expects to
sell 12,000 units of its product
next year at ₱30 per unit. The
company estimates that the
ordering cost is ₱7.50 and the
carrying cost is ₱2.00 per unit.
Determine the following.
1.Economic order quantity of the
product
2.Total ordering costs
3.Total carrying costs
4.Total inventory costs
 Non-bank Institutions
- A non-banking financial institution or
non-bank financial company is a
financial institution that does not have a
full banking license or is not supervised
by a national or international banking
regulatory agency.
 Banks
- is a financial institution
licensed to receive
deposits and make
loans.
 Banks
- there are several types of
banks including retail,
commercial, and
investment banks.
 Banks
- in most countries, banks
are regulated by the
national government or
central bank.
The usual loan products from banks are:

Auto-Loan
 Housing loan
 Credit Card Loan
 Working Capital Loan
Banks are required to verify the identity
of their customers using KNOW-YOUR-
CUSTOMERS initiative to ensure that the
funds will not be used for illegal activities,
such as, but not limited to, money
laundering and terrorist financing.
The institution’s primary consideration in
approving loan applications is the 5C’s in Credit
Character –the willingness of the borrower to repay the
loan
Capacity – a customer’s ability to generate cashflows
Collateral – security pledged for payment of the loan
Capital – a customer’s financial resources
Condition – current economic or business conditions.
The institution’s primary consideration in
approving loan applications is the 5C’s in Credit
Character –the willingness of the borrower to repay the
loan
Capacity – a customer’s ability to generate cashflows
Collateral – security pledged for payment of the loan
Capital – a customer’s financial resources
Condition – current economic or business conditions.
 Importance of the Banking Industry

1. Provision of Credit and Liquidity

– banks provide credit facilities to
borrowers which allow them to
address their liquidity concerns.
 Importance of the Banking Industry
2. Risk Management Services
– banks provide advisory service on
asset-liability management and can also
provide recommendations regarding the
appropriate financing schemes for a
company’s funding requirement.
 Importance of the Banking Industry

3. Money Remittance
– banks can act as conduits
or intermediaries for
money remittances.
 Importance of the Banking Industry

4. Economic Development
5. Channel for Saving and
Investment
6. Promotion of Entrepreneurship
Duties of the Borrower to Creditors
a. Pay the creditors based on the
payment schedule agreed upon.
b. Provide the collaterals as agreed upon
in the loan negotiation with proper
documentation, if necessary and if
applicable.
Duties of the Borrower to Creditors
c. Comply with the provisions of loan covenant
such as maintaining certain liquidity and leverage
ratios.
d. Notify the creditor if the company is acquiring
another company or the company is now the
subject of acquisition.
e. Do not default on the loans as much as
possible
 EXAMPLE
Mr. Joe Salazar applied for a PHP1.5 million loan in behalf of his business, “Joe’s
Restaurant”, for additional capital in the previous year. He is the Chairman of the
Board of Joe’s Restaurant. In their meeting, the Board decided to open an
additional branch for the restaurant. Joe’s Restaurant currently has 3 branches in
Metro Iloilo and would like to open up a small branch in Passi City. Joe’s
Restaurant has been in the business for 12 fruitful years and has been a previous
borrower of the bank. The company had previous late payments before but the
reasons are usually justifiable, and the balance of the loan, along with any
penalties, if any, is paid. The three branches earn a net income of PHP900,000/
year. The lot where the main restaurant is located is pledged as collateral to the
bank. This property is valued at PHP2 million. Shown below is an excerpt from
Joe’s Restaurant’s consolidated audited financial statements.
EXAMPLE
Identify the information to be used in analyzing the 5C’s of
Credit.

• Character:
Check Joe’s Restaurant’s payment
history and experience in the business.
The fruitfulness of the business proves
Mr. Salazar and the BOD’s ability to
manage the business well.
Identify the information to be used in analyzing the 5C’s of
Credit.
• Capacity:
The positive income from the business and
positive cash flows from operations proves the
borrower’s capacity. Current assets also show that
the borrower has funds easily available for
repayment if necessary. The term of the loan,
should be adjusted to the cash flow of the
borrower.
 Identify the information to be used in analyzing the 5C’s of
Credit.
• Collateral:
The property pledged serves as
collateral. Its value is usually greater
than the loan to provide the bank
security for sudden changes in value of the
collateral, as well as to compensate the
bank for the collateral’s illiquid nature.
Identify the information to be used in analyzing the 5C’s of
Credit.

• Capital:
The audited financial
statements give a preview of
the borrower’s resources.
Identify the information to be used in analyzing the 5C’s of
Credit.
• Condition:
The income statement shows that the business is
earning and is even growing. The business has
already grown to 3 branches. This shows a
preview of the growth in the food industry.
Learners may also research on other business
growth trends to know about macro economic
conditions.
 Answer the following questions.
1.Enumerate the 5C’s of credit
2.What do you think is the most important
consideration of banks in approving a loan?
3.Cite some banks and non-bank
institutions that offer loan products in your
locality.
 LOAN
- is the lending of money
from one source to
another source for a
specified period.
 Types of Loan
1. Secured loan
- one that is connected to a piece of collateral –
something valuable like a car or a home. With a
secured loan, the lender can take possession of the
collateral if you don't repay the loan as you have
agreed. A car loan and mortgage are the most
common types of secured loan.
 Types of Loan
2. Unsecured loan
- is not protected by any collateral. If you
default on the loan, the lender can't
automatically take your property. The most
common types of unsecured loan are credit
cards, student loans, and personal loans.
 General Steps on Loan Application
• Loan applicant inquires with the loan officer to apply for a loan.
• The loan officer provides the loan applicant a loan application
form and interviews the client.
• The loan officer then decides what type of loan product the
borrower qualifies in, and then provides them a list of
requirements.
• The applicant then submits the requirements along with the loan
application form.
• If collateral is required, the corresponding mortgage documents
are made ready.
 General Steps on Loan Application
• The loan officer then forwards the documents to the credit evaluation
department.
• The credit evaluation department checks whether the applicant provided the
complete documents.
• Credit investigation is done, and the credit worthiness of the loan applicant is
evaluated.
• The credit analyst prepares a recommendation and will present the
recommendation before a loan committee who approves the loan application. The
loan committee is generally composed of top executives from the bank.
•If the loan is approved, then the post-approval requirements will be sent to the
loan applicant for compliance.
Sample of Loan Requirements
List of Bank Requirements
for Loan Application for a
Corporation
(Arthur S. Cayanan)
 Pre-approval Requirements:

• Duly accomplished application form

• Securities and Exchange Commission
(SEC)registration
• Articles of incorporation and by-laws
• List of elected officers
 Pre-approval Requirements:
• Board resolution or corporate secretary’s certificate
regarding loan application
• Company profile or business background
• List of major suppliers and customers with contact
information
• Audited financial statements (2 to 5 years depending on
the bank)
• Bank statements (most banks require bank statements
for the past 6 months)
 Pre-approval Requirements:
• Collateral documents such as the following:

 Copy of transfer certificate of title (TCT) or

condominium certificate of title(CCT)
 Copy of tax declaration
 Appraisal Fee with official receipt
 Pre-approval Requirements:
• For construction loan
Building plan or floorplan
Bill of materials and labor cost
Building specifications certified by
architect/civil engineer
Development permit
Copy of lease contracts (if applicable)
 Post-approval Requirements:
• Original certified true copy of latest tax
declaration on land and improvement
• Master deed of declaration
(for condominium)
• Electronic-certified true copy of TCT/CCT
with original official receipt
 Post-approval Requirements:
• Original certified true copy of tax
clearance
• Original real estate tax receipts
• Mortgage redemption insurance
• Fire insurance
Answer the following questions.
1. Why is it important for banks to
collect all the loan requirements?
2. Which requirements are meant
to be used to evaluate each of the
5C’s of credit?
 FINANCING
- it means to provide
funding for a particular
need.
The possible sources of funds for a small business are
(i.e. small sari-sari store).

• Equity Infusion from investors/business

partners
• Start-up capital from owner
• Loan from a bank
• Loan from other financial institutions, etc.
• Loan from family members/friends, etc.
 Settlement Risk
– risk that the bank may not be able to give
back their deposit. Philippine banks are
normally insured by the Philippine Deposit
Insurance Corporation (PDIC). Depositors
may recover up to PHP500,000 per
depositor from PDIC in case of bank
default/bankruptcy.
 Debt Financing
- borrowing money from
lenders and not giving up
ownership.
 Equity Financing
- the method of raising capital
by selling company stock to
investors (stockholders) in
exchange of ownership
interests in the company.
Note that if debt is cheaper, why doesn’t the
company avail of 100% debt financing?

No bank/creditor will provide 100% debt

financing. Creditors evaluate the paying
capacity of borrowers which means the
amount of loans they will tend depends on
the ability of the company to serve the debt.
Normally, this is based on the projected cash
flows of the borrower.
 Note that it is risky because:
• Stockholders are not guaranteed of returns unlike
creditors which have guaranteed interest and
principal payment.
• Under the corporation code, creditors have to be
paid first in case of liquidation before anything is
paid to the stockholders.
• If the company is losing, it’s the stockholders who
bear the loss.
Advantages and disadvantages of debt
financing and equity financing:
 EXAMPLE
1. Fabrics Inc. put up a clothing outlet
worth Php 10 million and funded the
entire amount using a one-year short-
term loan. The company’s average annual
operating cash flows for the last three
years is Php 1.5 million. What do you
think would happen to the company?
 ANSWER
 Given the average annual
operating cash flows of the
company of only Php 1.5 million,
there is a very high probability
that Fabrics Inc. will not be able
to pay the loan within one year.
 ANSWER
 Given the amount of the loan in
relation to operating cash flows,
management may become very stressed
thinking about how to settle this loan.
This will adversely affect the executive
time they spend in managing the core
business of the Company.
 EXAMPLE
2. Dragon Inc. is in the business of fireworks
production. Their peak season is usually during
the holidays, especially during Christmas and
New Year. The company needs additional Php
500,000 to finance their working capital needs
during the holiday season. How this should be
financed? Should it be financed using short-
term loan, long-term loan, or through equity?
 ANSWER
This should be financed by short-term loan.
Long-term loan and equity financing are not
recommended for this temporary financing
requirement because of the following
reasons:

 The need for financing is limited to the

holiday season.
 ANSWER
 Equity financing is the most expensive, as
previously discussed, while interest rates on
long-term debt is also generally higher as
compared to interest rates on short-term debt.
Also, if the funds are needed only for a limited
period, there is no need for the company to
secure a long-term source of funds.
•Short term financing is debt scheduled to be
paid within a year
•Long-term financing is debt to be paid in
more than a year
•Liquidity risk typically refers to the inability of
an investor to buy or sell an asset to avoid
financial loss. It can also refer to the inability to
meet obligations since assets are tied up with
investments or inventory.
• Ratios such as the current ratio and quick ratio
measure the institution’s liquidity. There should be a
balance between liquid funds and investments. Too
high liquidity ratios will have opportunity costs since
these funds could have been invested to yield
earnings. Too low liquidity ratios, however, may cause
the institution to default on payments should
emergency situations arise. Enough liquid assets
should be available to meet short term obligations.
• Suppliers Credit –refers to the extension of payment
due date by suppliers.
• Advances from stockholders or other owners –
personal funds advanced by a stockholder to a company
that usually requires interest. These usually require little
to no interest on advances, especially if the owner is
advancing funds to assist the company in sudden liquidity
crisis. This source, however, is depended on the
availability of funds of an individual.
• Credit cooperatives –provided lending services to its
members. Members usually pay contributions to the
cooperative.
• Banks–provides several loan products catering to
different types of needs.
• Credit Cards –just take note of the
high interest rates on this source of
funds.
• Lending Companies –companies
that are dedicated to lending. They
usuallychargehigherinterestthanbanks
buttheircreditrequirementsare more
lenient compared to banks.
• Pawnshops–provides funds in
exchange for collateral, usually
jewelry, or other items of value.
• Informal lending sources(5/6)
- Interest is usually paid per month,
and monthly interest is (6-5)/5 or
20%. Annual interest is actually
20%*12 or 240%.
 Factors considered in selecting the source of
short-term financing:
• Cost (Interest)
• Informal lending sources like 5/6 may be the most
expensive.
• Availability of short-term funds
• Informal lending sources like 5/6 is most available
because there are no formal requirements to avail of the
facility.
• Risk
• Whatever the source of fund is, if the company defaults,
the lenders may foreclose some of the company’s properties
 Factors considered in selecting the source of
short-term financing:
• Flexibility
• This pertains to the ability of the company to access
funds or example, a bank loan may be cheaper but the bank
may reject the loan application of the borrower because
he/she did not pass the credit evaluation process of the bank.
•This financial flexibility can be influenced by:
1. Nature of the Company’sbusiness
2. Leverage ratio
3. Stability of operating cashflows
 Factors considered in selecting the source of
short-term financing:
• Restrictions (Debt covenants)
• Some lenders like banks may require a
minimum deposit balance
with their branch for as long as the loans
remain outstanding.
• The bank’s approval may also be secured
before cash dividends can be
 Sources and Uses of Long-term Funds
• Equity investors –these are the individuals/corporations which
are issued common stock. They share in the ownership of the
company. There are also equity investors who do not have voting
rights in the company but have a share in dividends, usually a
fixed percentage. These investors are issued preferred stock.
Holders of preferred shares are first to receive dividends than
common stockholders.
• Internally generated funds–not all profits are distributed to
stockholders. Most of the profits are re-invested and used by
companies to finance their needs.
 Sources and Uses of Long-term Funds

• Banks – they provide long-term loans, depending on

the nature of the need. For example, a 5-year to 10-year
loan may be granted if the purpose of the loan is
construction of an office building.
• Bonds –these are debt investments where an investor
loans money to an entity which borrows the funds.
• Lending companies–they can also provide long-term
funds
 Sources and Uses of Long-term Funds

The company’s capital structure is a

major consideration for deciding which
long-term sources of funds to utilize.
The target would be to balance debt
and equity and come up with the
minimum cost of capital.
EXAMPLE
 EXAMPLE
2. Why is it important to distinguish between
long-term or short term financing?
- It is important so that the sources or funds are
matched with the needs of the company/business.
Matching of sources and uses of funds saves the
business from encountering defaults on obligations
and incurring losses, and at the same time, use the
funds at hand to earn profits.
 EXERCISE
1. Discuss when to use short-term funds in
business.
2. Discuss when to use long-term funds in
business.
3. Identify the different sources of short-term
funds and long-term funds. Explain at least
three.