BUSINESS

FINANCE
CHAPTER III. PLANNING AND WORKING
CAPITAL MANAGEMENT

CHAPTER IV. SOURCES AND USES OF SHORT-

TERM AND LONG TERM FUNDS

CHAPTER V. BASIC LONG-TERM FINANCIAL

CONCEPTS
CHAPTER VI. INTRODUCTION OF
INVESTMENTS

CHAPTER VII. MANAGING PERSONAL

FINANCE
 CHAPTER III. PLANNING AND WORKING
CAPITAL MANAGEMENT
LEARNING OBJECTIVES:
At the end of the chapter, the students are expected to:
1. appreciate the importance of planning
2. know and apply the tools used in planning and
forecasting
3. learn and apply the tools used in budgetting
4. undestand the composition of working
capital and the working capital financing
5. appreciate the management of cash, accounts
receivable and inventories.
Assignment 3.1

As students, what are your

goals, vision and mission in
life.
 WHAT IS PLANNING?
PLANNING is a process of gathering ideas
and information, identifying the resources and
is much related to another management
function, CONTROLLING.
MANAGEMENT PLANNING is about setting
goals of the organization and identifying ways to
achieve them. This may broken down into long-
term plans and short-term plans.
 STEPS IN PLANNING

1. SET GOALS OR OBJECTIVES

2. IDENTIFY RESOURCES
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
 1. SET GOALS OR OBJECTIVES
The goals of a company can be divided into
short-term, medium-term, and long-term goals.
*Short-term goals- a year
*Medium-term goals- between 1-3 years
*Long-term goals-5 or10 years or even longer
(medium and long term goals are established during strategic planning
where vision and mission of the company are formulated and revisited.
Short term goals are designed to support the M and L goals. These are
planned every year and be broken down into quarterly goals for
monitoring purposes.
 VISION and MISSION
VISION describes what top managers want their
company to become while MISSION describes
how the company will achieve its vision and
makes the purpose and objectives of the company
clears.
2. IDENTIFY RESOURCES
Resources include production capacity, human
resources who will man the operations and
financial resources.
 3. IDENTIFY GOAL-RELATED TASKS
Management must figure out how to achieve
an objective.
4. ESTABLISH RESPONSIBILITY CENTERS FOR
ACCOUNTABILITY AND TIMELINE
If the tasks are already identified to achieve goals, the
next important step to do is to identify whuch department
should be held accountable for this task. Provide timeline
for the activities esp. to those activities which are not
normally done on a daily basis.
 5. ESTABLISH AN EVALUATION SYSTEM FOR
MONITORING AND CONTROLLING
Management must establish a mechanism which
will allow plans to be monitored. This can be down
through quantified plans such as budgets and
projected financial statements.
6. DETERMINE CONTINGENCY PLANS
In planning, contingency must be considered
well. Budgets and projected financial
statements are achored on assumptions.
 QUIZ
Test 2: ESSAY
1. Why is planning important in the success
of an organization?
2. What is the importance of quantifying a
plan?
 BUDGET PREPARATION

1. SALES BUDGET
2. PRODUCTION BUDGET
3. OPERATING BUDGET
4. CASH BUDGET
1. SALES BUDGET
The most important financial statement
account in forecasting is sales because almost
all other accounts in the financial statements
are affected by sales. If you analyze the
statement of profit or loss, the accounts such
as cost of sales, gross profit and variable
operating expenses are based on the sales
figure.
 Forecasting is a decision-making tool used
by many businesses to help in budgeting,
planning, and estimating future growth. In the
simplest terms, forecasting is the attempt to
predict future outcomes based on past
events and management insight.
2. PRODUCTION BUDGET
It is a schedule which provides information
regarding the number of units that should be
produced over a given accounting period based
on the expectedsales and targeted level of
ending inventories.
Required Production (unit)=Expected sales
+ Target ending Inventories - Beginning
Ineventories
Formula:
Required Production (unit)=Expected sales + Target ending Inventories
- Beginning Inventories
QUARTERS

1 2 3 4 YEAR

PROJECTED SALES 20 000 22 000 25 000 30 000 97 000

TARGET LEVEL OF 3000 3 500 5000 3 500 3 500

ENDING INVENTORIES

TOTAL 23 000 25 500 30 000 33 500 100 500

LESS: BEGINNING 2 500 3 000 3 500 5 000 2 500

INVENTORIES
REQUIRED 20 500 units ________ ________ _______ _________
PRODUCTION
DCD COMPANY -PRODUCTION BUDGET (IN UNITS)
FOR THE YEAR ENDING DECEBER 31, 2015
 QUARTER

1 2 3 4 YEAR

PROJECTED SALES 20 000 22 000 25 000 30 000 97 000 units

TARGET LEVEL OF 3000 3 500 5000 3 500 3 500

ENDING INVENTORIES

TOTAL 23 000 25 500 30 000 33 500 100 500 units

LESS: BEGINNING 2 500 3 000 3 500 5 000 2 500

INVENTORIES
REQUIRED 20 500 units 22 500 units 26 500 units 28 500 units 98 000 units
PRODUCTION

*Note: The target level of ending inventories of the 4th

quarter is the same as that for the year while the beginning
inventory of the 1st quarter is the same as the beginning
inventory for the year
3. OPERATING BUDGET (or known as Projected
Financial Statement)

It is a detailed projection of what a company

expects its revenue and expenses will be over a
period of time. Companies usually formulate an
operating budget near the end of the year to show
expected activity during the following year.
Formula: Operating Budget= Gross Profit -
Operating Expenses
Formula: Operating Budget= Total Revenue - Total Expenses
 4. CASH BUDGET
• It is an estimation of the cash inflows and
outflows for a business or individual for a
specific period of time which can be weekly,
monthly, quarterly, or annually.
• A company will use a cash budget to
determine whether it has sufficient cash to
continue operating over the given time frame.
 Cash received represents inflows, while money
spent represents outflows.

A company must manage its sales and expenses to

reach optimal cash flow.
 PARTS OF CASH BUDGET
1. CASH RECEIPTS
A cash receipt is a proof of purchase issued when the buyer has paid in
cash. This cash receipt form is perfect for any industry and can be
provided as proof of payment, or payment received.
2. CASH DISBURSEMENTS
Cash disbursement payments show how much
money is flowing out of a business. A cash
disbursement is the outflow of cash paid in
exchange for the provision of goods or services. It
can also be made to refund a customer, which is
recorded as a reduction of sales.
Purchasing inventory or office supplies, paying out
dividends, or making business loan payments with cash or
cash equivalents are examples of disbursements.
3. NET CASH FLOW FOR THE PERIOD
This provides information regarding the
amount of excess cash or cash deficit for
the period, whether its net cash flows are
positive or negative, providing you with
insight into your short-term financial
viability.
Is a negative cash flow bad?
Negative cash flow isn’t always a bad thing. A
negative cash flow from investments may
indicate that you’ve spent a significant amount
of money on an investment that’s going to boost
your revenues in the future. For example, while
investing in new machinery or real estate may
leave you in the red, you can expect to make
your money back relatively quickly.
Is a positive cash flow good?
It’s important to remember that some activities
resulting in a positive cash flow may not be
good for the business’s overall health. For
example, your business may have received an
injection of cash after taking on a new debt.
This may result in a positive cash flow, but it’s
not necessarily ideal for your finances moving
forward.
 4. TARGET CASH BALANCE

It is an amount of cash that management

wants to maintain and reserve it all times
given its level of operations, stability of
cashflows and the macroeconomic and
political conditions.
5. CUMULATIVE EXCESS CASH OR FUNDING
REQUIREMENTS

This is the most important part of the cash budget where

the possible funding requirements are shown on the
cumulative basis. It is very important in planning
because if the management can estimate the amount of
cash they will need in the future and when it will
possibly arise, management can identify the possible
sources of cash.
Why is excess cash flow important in financial
planning?

According to Harvard Business School:

“Having an excess of cash allows the
company to reinvest in itself and its
shareholders, settle debt payments, and find
new ways to grow the business.”
WORKING CAPITAL MANAGEMENT
It is a business strategy designed to ensure that a
company operates efficiently by monitoring and
using its current assets and liabilities to their most
effective use. Also, it improves a company's cash
flow management and earnings quality through the
efficient use of its resources.
Good management of working capital accounts:
• allows the company to pay mature obligations
on time.
• helps in developing good business relationships
with the suppliers
• relieves managers of unnecessary stress, and
• gives them more executive time to improve the
business operations.
ACCOUNTS RECEIVABLE
Accounts receivable refer to the money a
company's customers owe for goods or services
they have received but not yet paid for. For
example, when customers purchase products on
credit, the amount owed gets added to the accounts
receivable. It's an obligation created through a
business transaction.
 FIVE C’s OF CREDIT
1. CHARACTER
2. CAPACITY
3. CAPITAL
4. COLLATERAL
5. CONDITION
 FIVE C’s OF CREDIT
1. CHARACTER- it refers to the integrity and
reputation of te customers. The educational
background and experiences in the business are
also considered.
2. CAPACITY- it refers to the capacity to pay.
3. CAPITAL- it refers to the amount of capital
invested by the owner or in this case, the customer,
into his company.
4. COLLATERAL- this can be guarantees provided
by the customer to support his exposure with the
company. This strengthen the motivation of the
customer to pay his obligations.
5. CONDITION - this describes the environment
where the company operates which may affect the
ability of a customer to pay. It includes economic
and political conditions, the state of competition in
the industry where the company operates and the
prospects of its industry.
 ACTIVITY
1. Why is management of working capital
important?
2. Discuss the importance of cash budget.
3.Why is it important to keep good relationship
with suppliers?
 CHAPTER IV. SOURCES AND USES OF SHORT-
TERM AND LONG-TERM FUNDS
LEARNING OBJECTIVES:
At the end of the chapter, the students are expected to:
1. identify the different sources of short-term and long-
term financing.
2. Differentiate debt financing from equity financing.
3. Understand the advantages and disadvantages of the
different sources of financing
2 MAJOR CATEGORIES OF FINANCING
1. Debt Financing- involves borrowing money
and paying it back with interest. The most
common form of debt financing is a loan.

Debt financing can be riskier if you are not

profitable as there will be loan pressure from your
lenders.
2. Equity Financing - selling a portion of a
company's equity in return for capital.

For example, if Company ABC decided to

raise capital with just equity financing, the
owners would have to give up more
ownership, reducing their share of future
profits and decision-making power.
 For example, the owner of Company ABC
might need to raise capital to fund business
expansion. The owner decides to give up 10%
of ownership in the company and sell it to an
investor in return for capital. That investor now
owns 10% of the company and has a voice in
all business decisions going forward.
Debt and equity financing are ways that businesses
acquire necessary funding. Which one you need
depends on your business goals, tolerance for risk,
and need for control. Many businesses in the
startup stage will pursue equity financing, while
those already established and those who have no
problem with debt and possess a strong credit score
might pursue traditional debt financing types like
small business loans.
SOURCES AND USES OF SHORT-TERM FUNDS

Short-term funds are normally used to finance

the day-to-day operations of the company. It
cab also be used for 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- it happens if good relationship
has nurtured with the uppliers. Suppliers of
raw materials and merchandise are the best
sources of short-term working captial.
2. Advances from stockholders- if you
have enough personal assets and ypu
control the company, advancing funds to the
company when there are financial
requirements is an easy way for the
company to raise funds.
3. Credit cooperatives- You have to be a
member so that you can borrow from credit
cooperatives BUT you can borrow in your
personal capacity from the cooperative IF
you own a company which is in need of
funds and you are not member of the credit
cooperatives at the same time.
4. Bank loans - can provide both short-long
term loans, credit facilities, not just big
corporations, but also small and medium
enterprises.
ex. DBP, LBP and Government banks offer
short-term credit facilities to small and
medium enterprises.
5. Lending companies- these are small
lending companies which cater
normally to small and medium
enterpises. The lending process is
much faster as compared to banks but
they charge higher interest.
6. Informal lending sources (such as 5-
6)- this is very expensive source of
financing and should be avoided. It is
called such because for every 5.00 that
you borrow, you have to return 6.00.
This 20% interest is just for a month.
SOURCES AND USES OF LONG TERM FUNDS

Long-term funds are used for long-

term investments or sometimes called
capital investments. This includes
expansion, buying new equipments or
buying a piece of land which will be
the site of future expansion.
 SOURCES OF LONG TERM FUNDS
1. Equity investors - is the most patient
source of capital, the safest source of
financing. Unfortunately, it is not always
available when the comoany needs it and
even the big corporations have to identfy
correct timing oropportunity for them to
issue more shares.
Equity investors are investors (retail or
institutional investors) invested in a
company (whether publicly or privately
held) to achieve a financial gain or return
via capital appreciation, dividend payments,
the addition of shares, etc., usually for a
substantial period.
2. Internally generated funds- the
company can use internal generated
funds for the expansion or finance
other types of capital investments.
3. Banks- are sources of diffirent types
of financing. They provide lower
interest rates as compaed to the other
financial institutions but they have a
lot of requirements to submit and
borrowers goes through the process.
4. Bond Market - allows capital to be
transferred from savers or investors to
issuers who want funds for projects or
other operations. This market is
gaining more popularity among the big
publicly listed companies for the
fundraising activities.
5. Lending Companies - they provide
long-term loans ranging from 2-5
years. These lending companies can
process loans faster but they chare
higher interest rates.