Republic of the Philippines

Department of Education

MONTESSORI PROFESSIONAL COLLEGE OF ASIA

Table of Contents
Lesson 1 Introduction to Financial Management
Page 3
Lesson 2 Review of Financial Statement Preparation, Analysis and
Interpretation
Page 11
Lesson 3 Planning and Working Capital Management
Page 21
Lesson 4 Sources and Uses of Short-Term and Long-Term Funds
Page 30
Lesson 5 Basic Long-Term Financial Concepts
Page 37
Lesson 6 Introduction to Investments
Page 45
Lesson 7 Managing Personal Finance
Page 55
 Republic of the Philippines
Department of Education
MONTESSORI PROFESSIONAL COLLEGE OF ASIA

What I Know
Identify the following. Write your answer to the space given below.
1. ___________________ means planning, organizing, directing and controlling
the
financial activities such as procurement and utilization of funds of the
enterprise. It means applying general management principles to financial
resources of the enterprise.
2. __________________ - a report which provides information regarding the
liquidity position and capital structure of a company as of a given date.
3. _____________ is a management function that is about setting the goals
of the organization and identifying ways to achieve them.
4. _____________ and Equity are the Categories of Financing.
5. According to Albert Einstein, ___________is the greatest invention of
mankind.
6. An ___________ is an asset or item acquired with the goal of generating
income or appreciation.
7. _______________ is a term that covers managing your money as well as
saving and investing.

Republic of the Philippines

 Department of Education
MONTESSORI PROFESSIONAL COLLEGE OF ASIA

Lesson 1 Introduction to Financial Management

Financial Management starts with a plan. This applies to both individuals and
companies. It is not enough to have cash and other resources today. Such
resources, if not managed properly, can be wiped-out. Hence, financial
management is a must.
From the perspective of a corporation, financial management deals with decisions
that are supposed to maximize the value of shareholders’ wealth. This means
maximizing the market value of the shares of stocks. Shares of stocks represent the
form of ownership in a corporation.
On an shareholders’ point of view, understanding financial management greatly
helps in deciding on where to best put his resources.

What’s In
MANAGING YOURS OR SOMEONE’S RESOURCES
In 2 to 4 years’ time, you will be joining the corporate world. You may have taken a
career as someone’s fund manager, insurance agent, broker or get employed in a
company’s treasury department.
If you were to be trusted for others resources, where will you put them. Similarly, if you
have the resources, where will you put them? Over time, the resources will
accumulate for future use.
Have you heard of investment? Yes, it is.

Republic of the Philippines

 Department of Education

MONTESSORI PROFESSIONAL COLLEGE OF ASIA

• Households
• Individuals
• Corporations /
Companies
• Government
Agencies
• Banks
• Insurance companies
• Stock exchange
• Stock brokerage firms
• Mutual Funds
• Other financial
Institutions
Savers Financial
Intermediaries User of Funds
(Borrowers / Investors)
• Households
• Individuals
• Corporations /
Companies
• Government
Agencies

What’s New
The Philippine economy is currently at recession. For the positive minded and
investment experts, it is the best time to put someone’s resources in exchange for
shares of the market. When this period in the economy ends, the value of said
resources may go up. It is with full hope that it will accumulate from when the shares
were bought. However, their value reach will depend on to where they were put in,
if this is a good company, product or service.
Largely, the success of an investment is greatly relied on someone who is referred to
as investment or fund manager. A good manager understands clearly the trend and
utilizes it for a sound investment. So, if you are so much interested with this kind of
things read on and someday be a good at this career or you can start early as now.

What is It
What is financial management?
Financial Management means planning, organizing, directing and controlling the
financial activities such as procurement and utilization of funds of the enterprise. It
means applying general management principles to financial resources of the
enterprise.
Primary Objective: Maximizing shareholders’ wealth through maximization of share/
stock prices.
Factors that may directly or indirectly increase or decrease value of share prices:
1. Profit
2. Innovation, investing in technology, and efficiency in operation
3. Employee satisfaction and productivity
4. Relationship with suppliers and creditors
5. Regulatory and Statutory compliance
6. Corporate Social Responsibility (CSR)
Savings come from excess of cash inflow over cash outflow. These are then
channeled to borrowers, users of fund and investors through Financial Intermediaries
or Institutions.
The following are the Financial Institutions:
1. Banks – funds earn through interest on deposits. This is also earned by banks
through lending these funds to borrowers; charging an interest. Banks also
invest these funds in some financial instruments such as government securities
or corporate bonds. They are regulated by Bangko Sentral ng Pilipinas (BSP).
2. Insurance Companies
a. Life Insurance – protects the insured from loss of life
b. Non-life Insurance - protects the insured from the loss or damage to
properties
The insured pays premiums to the insurance company which then the
company uses to fund claims. The excess of these may be invested by the insurance
company.
3. Stock Exchange – The Philippine Stock Exchange (PSE) provides a system for
the trading of equity securities of publicly listed companies.
4. Stock Brokerage Firms - Investing in the market has to be coursed through
stock brokerage firms whether with online or live brokers.
5. Mutual Funds – With this, investments are pooled and the investments are
invested by professional managers for a fee. Mutual funds can be invested to
stocks, bonds or both.
6. Other Financial Institutions – includes pension funds like GSIS, SSS, Investment
banks and others.

FINANCIAL INSTRUMENTS
Categories:
1. Equity Securities
a. Preferred Stocks – holders have preference over common stockholders in
terms of claims over the company’s assets and cash dividend declaration;
preferred stocks have fixed dividend per share
b. Common Stocks – holders have voting rights, dividend per share is not
fixed
2. Debt Securities
a. Treasury Bonds and Bills – form of indebtedness of the National
Government; these are issued by the National Treasury; interest for these
securities are paid quarterly or semi-annually to the holder
b. Corporate Bonds – issued by private corporations with maturity from 5 – 10
years; interest is subject to 20% final tax;
ORGANIZATIONAL CHART and the Roles of each Key Position
1. Board of Directors (BOD) – highest policy making body in the organization;
primary responsibility is to ensure that the corporation is operating to the best
interest of the stockholders; elected by stockholders with voting rights equal
to the percentage of their share to total shares

Responsibilities of BOD:
a. Setting policies on investments, capital structure and dividends
b. Approving company’s strategies, goals and budgets
c. Appointing and removing members of the top management including the
president
d. Determining top management’s compensation
e. Approving the information and other disclosures reported in the financial
statements
2. President – head of the organization / company; Oversees the operations of
a company and ensuring that the strategies as approved by the board are
implemented as planned; performs all areas of management; represents the
company in professional, social, and civic activities
3. VP for Sales and Marketing –assistant to the President for formulating
marketing strategies and plans; Directing and coordinating company sales;
Performing market and competitor analysis; Analyzing and evaluating the
effectiveness and cost of marketing methods applied; Conducting and
directing research that will allow the company top identify new marketing
opportunities; Promoting good relationships with customers and distributors
4. VP for Production - assistant to the president for ensuring production meets
customer demands; Identifying production technology/process that
minimizes production cost and makes the company cost effective; Coming
up with a production plan that maximizes the utilization of the company’s
production facilities; Identifying adequate and competitively priced raw
material suppliers
5. VP for Administration– assistant to the president for coordinating the functions
of administration, finance, and sales and marketing departments; Assisting
other departments in hiring employees; Providing assistance in payroll
preparation; Determining the location and the maximum amount of office
space needed by the company; Identifying means, processes, or systems
that will minimize
6. VP for Finance – assistant to the president for managing financial resources in
relation to Financing, Investing, Operating and formulating Dividend policies
Decisions to Make as a Responsibility of the VP for Finance
1. Financing Decisions – how to finance long-term investments and working
capital which deals with the day-to-day operations of the company
2. Investing Decisions – involves capital budgeting analysis which requires
forecasting of the cash flows to be generated by investments
3. Operating Decisions – determining how to finance working capital accounts
such as receivable and inventories
Dividend Policies
Dividends are values in the form of cash or stocks declared and distributed by
the company to its stockholders.

Factors which affect declaration of cash dividends:

1. Availability of investment opportunities
2. Access to Long-Term Source of Funds
3. Capital Structure

What’s More
Activity 1.1 Select the Letter of the correct answer:
1. Financial Management start with what?
a. Budget
b. Plan
c. Analysis
d. Record
2. What is the primary purpose of financial management?
a. Proper Segregation of Resources
b. Keeping Debt Low
c. Increasing Profit
d. Maximizing shareholder’s Wealth
3. Stakeholders include ________.
a. Employees
b. Suppliers
c. Top Management
d. All of the Above
4. I. Financial Intermediaries are the channels to which savers and users of fund
meet.
II. Financial Instruments are categorized to Equity and Bond Securities.
a. Statement I is true.
b. Statement II is true.
c. Both statements are false.
d. Both statements are true.
5. What are the types of Equity Securities?
a. Common Stock and Treasury Bills
b. Preferred Bills and Common Stock
c. Preferred and Common Stock
d. Common Bonds and Corporate Bonds
6. Interest for Treasury Bills are paid _______.
a. Quarterly
b. Annually
c. Only when there is a profit
d. Monthly
7. These are decisions to be made by the VP for Finance except
a. Financing Decisions
b. Operating Decisions
c. Investing Decisions
d. Marketing Decisions

8. During claims of assets or liquidation of a company, who will get

compensated first before the others have theirs?
a. Bond Holders
b. Preferred Stock Holders
c. Top Management
d. Common Stock Holders
9. Preferred Stock Holders is to claims of assets while common Stock Holders is to
_______.
a. Dividends
b. Cash Dividends
c. Stock Dividends
d. Voting Rights
10. What do you get after deducting Cash Outflows from Cash Inflows?
a. Debt
b. Savings
c. Profit
d. Investment
What I Have Learned
- How do financial managers maximize shareholder’s wealth?
- Explain how factors such as profit, innovation and regulatory compliance affect
stock prices.
- For you, in what financial institution will you channel your resources to get the
maximum value?
- What are the responsibilities of the VP for Finance? Explain each in detail.
- Explain the financial system and enumerate the participants in it.
What I Can Do
Check a newspaper dated today or access the Philippine Stock Change through
the internet. Check the current stock prices. To which companies will you put your
resources right now? It is best that you read also the history of these companies so
you would be able to choose the right stocks.

Assessment
- Financial Management means 1) _________, 2) _________, 3) ________ and 4)
__________the financial activities such as procurement and utilization of funds of
the enterprise.
- Financial system links: 5________ and 6)_______ through 7) ______________.
- The assistant to the president for financial management in an organization is the
8) _____________. He makes decisions in Financing, 9) ___________ and 10)
_______________.

Additional Activities
1. Explain why the same company can be a saver and a user of funds.
2. Given that you have excess funds, where will you invest the funds? Your
choices are time deposits, corporate bonds, and stocks. Enumerate the
factors that could affect your decision.
3. Will you want to be a financial manager? What skills are you strong at right
now which you think will make you a good financial manager?
4. Aside from the corporate setting, give other scenarios which use financial
management.
5. Check the Philippine Stock Exchange (PSE) for a month. Plot the prices and
make an observation report of the trend.

2 Review of Financial Statement

Preparation, Analysis and Interpretation
Can you tell if a company is healthy or unhealthy? Before the end of this chapter,
you should be able to answer this question. As a financial manager, you should be
able to check the financial standing of the company and make the appropriate
decisions for its sustainability.

What’s In
READ IT RIGHT
Have you heard of the basic equation A is equal to L + C? If you are an aspiring
accountant, you might have discovered them. They are actually Assets, Liabilities
and Capital. These are what makes up the financial reports or so what the financial
world refers to as Financial Statements. If you have a business, what are your As, Ls
and Cs? What will these tell about your business? Assign an amount value for each
and try to use them in the following activities. Make a summary of your findings or
reading of your business’ condition after the lesson.
What’s New
Go to Google and search for “Financial Statement of San Miguel Corporation.” The
search will give you the straight link to the San Miguel’s Financial Statements through
the years. As a listed (stocks in trading) company in PSE, its financial statements are
available to the public.

FINANCIAL STATEMENTS
For comparison of December 2019 and June 2020, the following were presented:
June 2020 December 2019
Profitability:
Return on Average 0.16% 6.36%
Equity Attributable to Equity
Holders of the Parent Company
Interest Rate Coverage Ratio 0.92 2.38
Return on Assets 1.00% 2.78%
It says that from December 2019, the Return on Average Equity, Interest Rate
Coverage and Return on Assets decreased on June 2020. For the corporation’s
perspective, it’s not good news. However, aside from profits, there are other factors
which affect the standing of the company like its capability to generate cash from
its other resources or its reputation to bounce back high after a recession. These are
all considered by stock investors.

What is It
Basic Financial Statements
1. Statement of Financial Position or Balance Sheet– a report which provides
information regarding the liquidity position and capital structure of a
company as of a given date.
a. Liquidity – refers to the ability of a company to pay maturing obligations.
b. Capital Structure– provides information regarding the amount of assets
financed by debt or liabilities and equity.
2. Statement of Profit or Loss or Income Statement– provides information
regarding the revenues or sales, expenses, and net income of a company
over a given accounting period.
3. Statement of Cash Flows– provides an explanation regarding the change in
cash balance from one accounting period to another;
Categories:
a. Operating Activities - provides information regarding the quality of
earnings of a company; in this section, the accrual income from profit or
loss is converted to cash.
b. Investing Activities - shows how much investment the company is making
over a given accounting period.
c. Financing Activities - provides information whether there is a proper
matching of investing and financing activities; financing activities should
be studied properly to minimize the probability of future liquidity problems.

4. Statement of Changes in Stockholders’ Equity– provides information that

explains the changes in the stockholder’s equity account from one
accounting period to another.
Changes may be due to a) profit or loss for the accounting period, b) cash
dividend declaration, c) Issuance of new shares of stocks and, d) other
transactions that affect the stockholders’ equity such as other comprehensive
income, treasury stocks, and revaluation of assets.
5. Notes to Financial Statements – an integral part of the financial
statements which provides a) brief description of the company, b) summary
of significant accounting policies and, c) breakdown of amounts found in the
financial statements.

Review of Financial Statement Preparation

1. Analyzing business transaction – a transaction is analyzed if it needs to be
recorded; it needs to be recorded if it affects the company.
2. Recording in the journals – once transaction is identified; a journal entry is
prepared. Special journals (sales, purchase, cash receipts and cash
disbursements) are used for repetitive transactions and for those that does not
fall into these journals, they are recorded in the general journal.
3. Posting to ledger accounts – posting to this provides a chronological detail as
to how transactions affect individual accounts; two types of the ledger are a)
general ledger which serves as a summary for b) subsidiary ledgers (e.g.
general ledger for accounts receivable and subsidiary ledgers for different
customers).
4. Preparing the unadjusted trial balance – done at the end of each accounting
period; prepared from the balances found in the general ledgers; debit and
credit balances are added and should be exactly equal at both sides; if
there are discrepancies, this are reconciled.
5. Making the adjusting entries – accruals, prepayments, depreciation and
amortization, and allowance for noncollectable accounts entries are
prepared.
6. Preparing the adjusted trial balance – prepared after the adjusting entries are
considered.
7. Preparing the financial statements – once trial balance is done, Balance
Sheet, Income Statement and Cash Flows Statement can be prepared.
8. Making the closing entries – Income statement accounts such as revenues
and expenses are closed to retained earnings; if revenue exceeds expenses,
retained earnings increase and vice-verse.
9. Post-closing trial balance – prepared to test if the debit balances equal the
credit balances after closing entries are considered.
Financial Statement Analysis is used for investment and credit decisions. It is also
used for regulating companies such as what the Energy Regulatory Commission
(ERC) for power distribution companies and other energy companies.

For management, it is used for monitoring performance and identifying strategies to

further improve the company’s operations.
Financial Ratios
1. Profitability Ratios
a. Return on equity (ROE) = Net Income / Stockholder’s Equity; measures the
amount of net income earned in relation to stockholder’s equity.
b. Return on Assets (ROA) = (Operating Income / Total Assets) x 100%;
measures the ability of the company to generate income out of its
resources.
c. Gross Profit Margin = (Gross Profit / Sales) x 100%; measures the ability of
the company to cover its cost of goods sold from its sales; to improve it,
raise prices and find ways to bring down production cost can be done.
d. Operating Profit Margin = (Operating Income / Sales) x 100%; measures
the ability of the company to generate income from its core business or
main operation; income is before tax.
e. Net Profit Margin = (Net Income / Sales) x 100%; measures how much net
profit a company generates for every peso of sales or revenue it
generates; income is after tax.
2. Efficiency Ratios – also known as turnover ratios; measure the management’s
efficiency in utilizing the assets of the company.
a. Total Asset Turnover Ratio = Sales / Total Assets; measures the company’s
ability to generate revenues for every peso of asset invested.
b. Fixed Asset Turnover Ratio = Sales / Property, Plant and Equipment (PPE);
measures efficiency of asset management.
c. Accounts Receivable Turnover Ratio = Sales / Accounts Receivable (A/R);
measures the efficiency by which accounts receivable is managed;
becomes meaningful when converted to average collection period.
Average Collection Period = Days in a Year (360) / A/R Turnover Ratio
d. Inventory Turnover Ratio = Cost of Sales /Inventories; measures efficiency
in managing inventories; converted to Days’ Inventories = Days in a Year
(360) / Inventory Turnover Ratio.
e. Accounts Payable Turnover Ratio = Cost of Sales / Trade Accounts
Payable (A/P); provides information by which trade payable are paid;
converted to Days’ Payable = Days in a Year (360) / A/P turnover Ratio.
Cycles:
a. Operating Cycle = Days’ Inventories = Days’ Receivable; it covers the
period from time merchandise is bought to the time the proceeds from
the sale are collected.
b. Cash conversion Cycle = Operating Cycle – Days’ Payable.

3. Liquidity Ratios – measure the ability of a company to pay maturing

obligations from its current assets.
a. Current Ratio = Current Assets / Current Liabilities; current assets include
cash and other assets that are expected to be converted to cash within
12 months while current liabilities are accounts payable and other
obligations which are expected to be settled within 12 months.
b. Acid-Test or Ratio or Quick Asset Ratio = (Cash + Current Accounts
Receivable + Short-Term Marketable Securities) / Current Liabilities; higher
quick ratio isn’t a guarantee for a better liquidity but of the quality of the
accounts receivable, if it can be collected fast.
4. Leverage Ratios shows the capital structure of the company; that is if how
much of the total assets of the company is financed by debt and how much
is financed by stockholder’s equity.
Capital Structure of a company is affected by a) nature of business, b) stage
of business development, c) Macroeconomic Conditions, d) Prospects of the
industry and expected growth rates, e) Bond and stock market conditions, f)
Financial Flexibility, g) Regulatory environment, h) Taxes, and i) Management
style.
a. Debt Ratio = Total Liabilities / Total Assets; measures how much of the total
assets are financed by liabilities.
b. Debt to Equity Ratio = Total Liabilities / Total Stockholder’s Equity; a ration
of more than 1 means that a company has more liabilities as compared to
stockholder’s equity.
c. Interest Coverage Ratio = Earnings Before Interest and Taxes (EBIT) /
Interest Expense; provides information if a company has enough
operating income to cover interest expense.

Vertical and Horizontal Analysis

1. Vertical Analysis or sometimes called as common-size analysis; all accounts in
the statement of financial position are presented as percentage of total
assets while accounts in the statement of profit or loss are presented as
percentage of sales or revenues
Gross Profit Percentage = Gross Profit / Sales
2. Horizontal Analysis or trend analysis shows changes in financial statement
accounts over time. Changes can be shown both in absolute currency
amounts or percentage
Change (Sales) = Sales-June 2020 – Sales-June 2019 (amount or percentage)
Quality of Earnings
In analyzing a statement of profit or loss, you can tell if earnings are good or not by
checking on the following:
1. Earnings coming from the core of business is good, while if they come from
nonrecurring transaction, then, they are not good.
2. Net Income Translated into Cash Flows.
3. Income Stability depends on the nature of business, be it utility service it
provides or products/services that vary with demand.

Limitations of Financial Statement Analysis

1. Financial analysis deals only with quantitative data.
2. Management can take short-run actions to influence ratios.
3. Different companies may use different accounting principles though they
come from the same industry.
4. Different formulas can be used in computing financial ratios.
5. The amounts found in the financial statements are already part of historical
data.
6. A financial ratio standing alone is useless.
What’s More
Activity 2.1 Select the Letter of the correct answer:
1. All are financial statements except,
a. Balance Sheet
b. Income Statement
c. Cash Flows Statement
d. General Ledger Statement
2. It provides information whether there is a proper matching of investing and
financing activities.
a. Marketing Activities
b. Investing Activities
c. Operating Activities
d. Financing Activities
3. Capital structure provides information regarding the amount of assets
financed by _____ or liabilities and equity
a. assets
b. debt
c. capital
d. all of the Above
4. Notes to Financial Statement provide
a. brief description of the company
b. summary of significant accounting policies
c. breakdown of amounts found in the financial statements.
d. all of the above
5. Special Journals do not include
a. Purchase Journal
b. Sales Journal
c. General Journal
d. Cash Receipts Journal
6. What is the effect of ‘Revenue exceeding Expenses’ to Retained Earnings
(R/E)?
a. Increase R/E
b. Decrease R/E
c. Equal to R/E
d. Discrepancy to R/E
7. Which of the following is a leverage ratio?
a. Net Profit Margin
b. Return on Equity
c. Return on Asset
d. Debt Ratio
8. Which of the following is true?
a. Vertical Analysis (Change = Cost of Sales 2020- Cost of Sales 2019)
b. Horizontal Analysis (Change = Sales / Net Income)
c. Horizontal Analysis (Change = Cost of Sales – Cost Sales 2019)
d. Vertical Analysis (Percentage = Operating Expenses 2019 / Sales 2019)
9. All are limitations of Financial Analysis except
a. Different formulas can be used in computing financial ratios.
b. Financial analysis deals only with quantitative data
c. A financial ratio standing alone is useless
d. None of the Above
10. Compute for the Operating cycle of Company XYZ. Days’ Inventories – 12
days, Days’ Payable – 30 days, Days’ Receivable – 24 days
a. 42 days
b. 36 days
c. 54 days
d. 66 days

What I Have Learned

- Identify and describe all financial Information that can be found in the following
financial statements:
a. Statement of Financial Position
b. Statement of Profit and Loss
c. Statement of Cash Flows
d. Statement of Changes in Stockholders’ Equity
- Name the different steps in preparing financial statements.
- Give examples of financial statement accounts which require adjusting entries.
- Name the four major groups of Financial Ratios covered in this lesson and
explain briefly.
Republic of the Philippines
Department of Education
MONTESSORI PROFESSIONAL COLLEGE OF ASIA

What I Can Do
Supposed that you offer food and other products online. The business operations are
situated in your home. For the 1st half of 2020, you have the following information:
Sales = 35,457.00
Cost of Sales = 23,745.92
Operating Expenses = 3,927.45
Total Assets = 52,0485
Liabilities = 24,048.67
Inventories = 12,946.84
Receivables = 10,450.34
With all the information and knowledge you have in financial analysis, check your
business if it is still healthy or not.

Assessment
- Statement of Financial Position or Balance Sheet – a report which provides
information regarding the 1)_________ position and 2)_________ structure of
a company as of a given date
- Financial Statement Analysis is used for investment and 3)________decisions. It
is also used for 4)_________companies. For management, it is used for
5)__________performance and identifying strategies to further improve the
company’s operations.
- Capital Structure of a company is affected by 6)____________, 7)______________,
8)____________, Prospects of the industry and expected growth rates, Bond and
stock market conditions, Financial Flexibility, 9)_____________ Taxes, and
Republic of the Philippines
Department of Education
MONTESSORI PROFESSIONAL COLLEGE OF ASIA

Business people plans to succeed and as a precaution for not succeeding, they
come together to create an annual plan that expands from 5 years to ten years with
their committed goals. Sales and growth are every company’s consistent direction
and to achieve it is a financial plan with the right forecast and flexibility.
As said, financial management starts with a plan and that in this lesson, you are
going to have an idea on what are being considered to come up with a good one.
What’s In
PLAN AS THE FIRST STEP TO A GOAL
Imagine you and your peers are planning to save for a travel to Baguio by the end
of 2021. To be able to have extra money to save, you are going to open a food stall
on weekends and to start, you meet with your peers to talk about how you will do it.
You will be able to come up with a list like the equipment needed, manpower
assignments (cook, cashiering, purchasing, and etc.), time duration, contribution
and also a projected income which will yield your supposedly needed budget for
the travel. The activity you are going to do is planning, the first step of financial
management, as well as for any project, for personal or corporate purpose.

What’s New
Do you know your school’s Vision and Mission? Have you been curious what they are
for or if they are even achieve? All organizations exist because of this vision and
mission, written or not, stated or silently committed. In order to achieve this, there are
several types of plans that may guide specific areas in a business. Strategic Plans,
Tactical Plans, and Operational Plans are just a few. In financial planning, budget is
the most familiar term. To target the budget, middle and top management devise
ways to increase revenue, rationalize cost and implement financial policies. These
are then clearly communicated to the staff and operating team.

What is It
PLANNING is a management function that is about setting the goals of the
organization and identifying ways to achieve them.
Category:
1. Long-Term Plans – reflected in a company’s business strategy
2. Short-Term Plans
Resources to be Identified:
1. Manpower
2. Production Capacity
3. Financial Resources
Once plan is set, it has to be quantified. Quantified plans are in the form of
budgets and projected financial statements.
CONTROLLING is another management function which comes hand-in-hand
with planning. It is where budgets and projections are compared to actual
performance. In it, reward and penalty system are included for either
delivering beyond, equal or fall short of the projections.
STEPS IN PLANNING:
1. Set goals and objectives – Goals can be short-term (1 year),
 2. mediumterm (3-5 years) or
3. long term (5 to 10 years or even longer)

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
clear.
2. Identify resources
3. Identify goal-related tasks - how to achieve an objective
4. Establish responsibility centers for accountability and timeline – identify
departments or groups who will carry-out a task, as well as other
departments in support of this department
5. Establish an evaluation system for monitoring and controlling – can be
done through quantified plan - mechanism which allows plan to be
monitored
6. Determine contingency plans – alternative plans when assumptions
used in budgets do not become realities

BUDGET PREPARATION
1. Sales budget – All other accounts in the financial statements are
affected by sales making it the most important account in the financial
statement. Sales forecast is then given attention and also, supported
by reasonable assumptions. One should have a good understanding
of the industry where the company operates, enough historical
financial data to establish trend, and a knowledge about corporate
plans to come up with a set of reasonable assumptions.
Factors to consider:
a. External – GDP, Interest Rate, Foreign Exchange Rate, Income Tax
Rates, Competition, Economic Crisis, Regulatory Environment,
Political Crisis
b. Internal – Pricing, Promotion Activities, Distribution, Area/Outlet
Coverage, Production Capacity, Human Resources, Management
Style of Managers, Reputation and Network of the Controlling
Stockholders, and Financial Resources of the company
2. Production budget – a schedule which 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
3. Operating budget
4. Cash budget

Projected Financial Statements

Steps in projecting financial statement:
1. Forecast Sales
2. Forecast cost of sales and operating expenses – the average cost of
sales over the historical data analyzed can be used; for operating
expenses, variable and fixed expenses should be determined
3. Forecast net income and retained earnings – there should be
information on income taxes and how much financing cost a
company will have
4. Determine balance sheet items that will vary with sales or whose
balances will be highly correlated with sales – cash, accounts
receivable, inventories, accounts payable and accrued expenses
payable
5. Determine payment schedule for loans – to be based in the disclosures
provided in the notes to financial statement
6. Determine external funds needed
EF = Change in Total Assets – (Change in Total Liabilities + Total
Change in Stockholders’ Equity)
7. Determine how external funds needed will be financed.

Working Capital Financing Policies

1. Maturity-matching working capital financing policy – permanent
working capital requirements should be financed by long-term sources
while temporary working capital requirements should be financed by
short-term sources of financing.
2. Aggressive working capital financing policy – some permanent working
capital requirements are financed by short-term sources to minimize a
higher financing cost.
3. Conservative working capital financing policy – some of the temporary
working capital requirements are financed by long-term sources of
financing.
Management of Working Capital Working Accounts
A. CASH
Internal Controls to safeguard cash:
1. Separating cashiering function from the recording or accounting
function
2. Issuing official receipts for collections and summarizing collections in
a daily collection report
3. Depositing collections
4. Adopting the check voucher system for payments
Cash Budget shows the expected cash receipts and disbursements for
an accounting period.

Parts of a cash budget:

1. Cash receipts
2. Cash disbursements
3. Net cash flow for the period
4. Target cash balance
5. Cumulative excess cash or funding requirements

Reasons for holding cash include a) primary – for transaction and

compensating balance purposes and b) secondary – for
precautionary and speculative purposes.

5 C’s of Credit:
1. Character
2. Capacity
3. Capital
4. Collateral
5. Condition

Management of Accounts Receivable:

1. Credit evaluation
2. Having a good billing and collection system
3. Aging of accounts receivable
C. INVENTORIES
Internal controls to safeguard inventories
1. Separating custodial functions from the recording functions
2. Aging of Inventories
3. ABC Analysis
D. TRADE ACCOUNTS PAYABLE
Manage Trade Accounts Payable by:
1. Increasing Days’ payable
2. Following credit terms and request for a longer credit term
What’s More
Activity 3.1 Select the letter of the correct answer:
1. Which of the following is the first management function?
a. Controlling
b. Planning
c. Staffing
d. Organizing

2. It is the management function for which an outcome is measured.

a. Controlling
b. Leading
c. Organizing
d. Leading

3. Which of these is not a plan?

a. Strategy
b. Budget
c. Policy
d. Feedback

4. Google’s vision and mission –

I. “to organize the world’s information and make it universally accessible and
useful”
II. “to provide access to the world’s information in one click.”
III. “to bringing the best user experience to its customers through its innovative
hardware, software, and services.

a. Statement I is the vision of Google.

b. Statement II is the mission of Google.
c. Statement I is the mission of Google
d. Statement III is the vision of Google
5. A projected financial statement for XYZ company has been created from
January 2020 to December 2024. What kind of plan is it?
a. Long-term plan
b. Medium-term plan
c. Short-term plan
d. None of the above
6. Which of the following will help achieve a 15% increase in Sales?
a. Recording sales
b. Train sales agents
c. Reduce raw material cost
d. Borrow capital from the bank
7. The responsibility center that should make sure that there are enough products to
sell and of good quality.
a. Distribution
b. Production
c. Quality Control
d. Sales
8. An increase in Income Tax from 30% to 32 % will likely to be considered in
formulating what budget?
a. Operating Budget.
b. Sales Budget
c. Cash Budget
d. Production Budget
9. How much external funds will be needed if a) change in total assets = 100,000,
change in total liabilities = 55,000, change in stockholders’ equity = 13,000?
a. 142,000
b. 58,000
c. 32,000
d. 168,000
10. Which “C” of credit is this statement? “Give me your land title as a guarantee
that you will pay me in 5 years.”
a. Capital
b. Character
c. Condition
d. Collateral

What I Have Learned

- Why is planning important in the success of an organization?
- How is controlling related to planning?
- Enumerate the different steps of planning and explain each briefly.
- Differentiate primary reasons from the secondary reasons for holding cash.
Provide an example for each.
- How do you classify Inventory in ABC Analysis?
What I Can Do
Forever incorporated is a new company which offers services for weddings from
event planning to cater to venue and etc. To provide a direction to the company,
the vision and mission should be stated. If you are going to write it for them, what
would it be?
Assessment
- Quantified plans are in the form of 1) __________ and 2) _____________..
- These quantified plans are then compared with the 3) ______________.
- The amount of 4) ________ that a company maintains, its 5)
____________ and 6) ___________, 7) _________, _______, and __________ 8)
___________
are affected by sales.
- 9) ___________ a check requires depositing it. It cannot be 10)
__________.
Additional Activities
- JFC is a commissary company with the following financial data:
2015 to 2019 Average Cost of Sales – 55% of Sales
2015 to 2019 Average Operating Expenses – 12% of Sales
Annual Interest Expense is 12% of Net Income
Income Tax is at 32%
Sales is expected to be Php2,356,900 for the year 2020.
Supply the following projections for 2020:
1. Cost of Sales
2. Income Tax
3. Gross Profit
4. Interest Expense
5. Net Income after Tax
- If EFN is Negative, what does it mean?
- Cite ways to keep a good relationship with suppliers. Why are these
important?