MGT. 204 :FINANCIAL
MANAGEMENT
First Semester 2020 Cluster C
CRB EVELYN S. CORPUZ, CPA, MBA,LLB (Professor)
Learning Session: Day 2
WHAT
Are the 3 Basic Business Decisions?
The Three Basic Business Decisions
INVESTMENT
FINANCING
OPERATIONS
INVESTMENT DECISIONS

Selecting, implementing, and monitoring all
investments with sound economic analysis and
effective management.

Selecting
and
commitments
making
sound
resource
OPERATIONS DECISIONS
GUIDING all OPERATIONS of the business profitably through proper trade offs
and effective use of all resources employed.
TO CREATE VALUE
OPERATING RESOURCES IN A COMPETITIVE COST-EFFECTIVE MANNER.
FUNDING DECISIONS
 PRUDENTLY
FINANCING THE
BUSINESS BY
CONSCIOUSLY
TRADING-OFF THE
REWARDS EXPECTED
AGAINST THE RISK
ENCOUNTERED
WHEN USING
EXTERNAL
FINANCING
 Selecting
and
sourcing prudent
funding options.
THE BUSINESS SYSTEM
Investment
Operations
Financing
• Investment Base, New Investment
•
Dis investment
• Price ----------------Volume
•
Variable Cost , Fixed Cost
• FUNDING POTENTIAL (Operating Profit, Retained Earnings, Equity
Dividend , Interest
• Long-term debt )
INVESTMENT –basic driving force of business
activity. Committing funds into:
 Working
Capital
 Physical
assets
 Major
spending programs
WORKING CAPITAL :
Cash balances, Receivables due from customers
 and Inventories less trade credit from supplies
and other normal obligations

Formula:
 WORKING CAPITAL = Current Assets less Current
Liabilities.

PHYSICAL ASSETS

Land

Buildings

Machinery and Equipment

Office Furnishings

Laboratory Equipment

Other Structures

Plants
MAJOR SPENDING PROGRAMS
Research and development
Product or service development
Promotional programs
Acquisitions (take overs)
The Investment Segment
Key yardsticks
present value
net present value
Internal rate of return
Discounted payback
RATE OF RETURN
return on investment
return on net asset
return on asset employed
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KEY STRATEGIES
*
*
*
*
Capital Budgeting
Types of Investments
Emphasis and deployment
Disinvestment
OPERATIONS SEGMENT
Key
yardsticks
Key strategies
Operating Ratios
Utilization of Resources
Contribution Analysis
Market Selection
Activity Analysis
Competitive Position
Comparative Data
Pricing Strategy
Benchmarking
Cost Effectiveness
Operating leverage
Core capabilities
FINANCING SEGMENT
Key
yardsticks
Earnings per Share
Cash Flow per share
Key strategies
Disposition of Operating Profit
*Dividends to owners
Payout Ratio
Interest to Lenders
Interest Coverage
Retention of Profits
Return on Equity
Capital Structure Proportions
Return on Capitalization
Types of Equity
Debt/Equity Ratio
Types of Debt
Debt Service
Financial Leverage
Cost of Capital
Risk /Reward trade off
Shareholder value
FINANCIAL STATEMENTS : NATURE
Financial condition
Results of operations
Funds Flow
Patterns
 Transactions are recorded at costs
 Adjustments to current values if values decline
 Revenues and cost are recognized when
committed to not when cash changes hands
 Periodic matching of revenues and costs via
accruals, deferrals , accounting allocations
 Allowances for negative contingencies are
required in the form of estimates that reduce
profits and recorded value.
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THE BALANCE SHEET
“The Balance Sheet , prepared as of a specific date , records the categories and
amounts of assets employed by the business. The Funds committed and the
offsetting liabilities incurred to lenders and owners (funds obtained)
ASSETS = LIABILITIES + CAPITAL
(EQUITY)
The Balance Sheet is also known as Statement of Financial Condition or
Statement of Financial Position.
MAJOR CATEGORIES OF ASSETS (FUNDS
COMMITTED )
 CURRENT ASSETS
 FIXED
–Cash, Marketable securities, Accounts receivable,
 Inventories
ASSETS ( PPE)- Land , Buildings, Equipment, Machineries,
Vehicles
 OTHER
ASSETS – Deposits, Patents, various Intangibles, Goodwill
MAJOR CATEGORIES OF FUNDS OBTAINED
 CURRENT
LIABILITIES –Obligations to vendors, tax authorities,
employees, lenders due within 1 year
 LONG
TERM LIABILITIES – variety of debt instruments repayable
beyond one year such as bonds, loans and mortgages.
 OWNERS
EQUITY – net amount of funds contributed by various classes
of owners of the business as well as the accumulated earnings
retained in the business after dividends.
MAJOR CATEGORIES OF FUNDS OBTAINED
 CURRENT
LIABILITIES –Obligations to vendors, tax authorities,
employees, lenders due within 1 year
 LONG
TERM LIABILITIES - Land , Buildings, Equipment, Machineries,
Vehicles
 OTHER
ASSETS – Deposits, Patents, various Intangibles, Goodwill
MANAGEMENT DECISION AREA
Investment
Operations
Financing
BALANCE SHEET
ASSETS






Current Assets
plus
Fixed Assets
plus
Other Assets
equals
LIABILITIES & NET WORTH






Current Liabilities
plus
Long term Liabilities
plus
Owner’s Equity
equals

________________

_________________________

Total Assets

Total Liabilities and Net Worth
MANAGEMENT DECISION AREA
Investment
Operations
Financing
OPERATING STATEMENT
Revenues

less

Cost of Sales

equals

Gross Margin ( Gross Profit)

Less

Operating Expenses

less

Operating earning (Loss)

equals

Income Taxes
equals


__


Net Profit or Loss
(to be closed to Owner’s Equity)
FUNDS FLOW STATEMENT ( CASH FLOW
STATEMENT)
Investments
Investment (increases)
in all types of assets are
uses of cash, disinvestments
(reductions)in all types of
assets are sources of cash.
Operating
Profitable operations
are a source of cash ,
losses drain cash from
the system. Accounting
Write-offs or write ups
Do not affect cash, their
profit impact must be
adjusted for.
Financing
Trade Credit and new financing
(increases in liabilities & equity)
are sources of cash ; repayments
of liabilities, dividends, and return
of capital are uses of cash.
Next meeting , pls study and read:
1. Context of Financial analysis
2. How do you assess business performance?
Questions?
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