Review for Financial Management

Theories and Concepts

Chapter 2

 Entrepreneurship is the ability and readiness to develop, organize and run a business
enterprise along with any of its uncertainties in order to make a profit
 The entrepreneur is defined as someone who has the ability and desire to establish,
administer, and succeed in a startup venture along with risk entitled to it, to make profits
 Sole Proprietorship – a company owned by one person, called the proprietor. All profits
earned shall go to the proprietor
 Partnership – a company owned by two or more persons pooling their money in order to
put up a business
 Corporation – a company is created when one or more persons decide to incorporate.
The resulting entity becomes an artificial being under the law. It has certain rights and
powers based on it Articles of Incorporation. The corporation is managed by the Board of
directors who are elected by the stockholders

Chapter 3

 a feasibility study is: “An analysis and evaluation of a proposed project to determine if it
(1) is technically feasible, (2) is feasible within the estimated cost, and (3) will be
profitable.
 The marketing aspects include the research made on actual and potential demand for
the product, competition, selling price and marketing plans
 Organizing and management aspects cover the type or form of business organization
and division of functions within the organization
 The technical aspects should dwell on the manufacturing process, operating
requirements, plant capacity, and plant layout.
 Finance aspects include the determination of financing requirements, sources of
financing and cost of capital
 Benefit analysis – determine economic benefits of the project
 Cost analysis – Determine the economic cost of the project
 Net present value (NPV) is the difference between the present value of cash inflows and
the present value of cash outflows over a period of time. NPV is used in capital
budgeting and investment planning to analyze the profitability of a projected investment
or project.
 A benefit-cost ratio (BCR) is a ratio used in a cost-benefit analysis to summarize the
overall relationship between the relative costs and benefits of a proposed project. ... If a
project has a BCR greater than 1.0, the project is expected to deliver a positive net
present value to a firm and its investors.
 The internal rate of return (IRR) is a metric used in capital budgeting to estimate the
profitability of potential investments. The internal rate of return is a discount rate that
makes the net present value (NPV) of all cash flows from a particular project equal to
zero.
 Promotion refers to any type of marketing communication used to inform or persuade
target audiences of the relative merits of a product, service, brand or issue. The aim of
promotion is to increase awareness, create interest, generate sales or create brand
loyalty
 Advertising is any paid form of non-personal presentation and promotion of ideas,
goods, or services by an identified sponsor.
 Publicity involves placing newsworthy information about a company, product, or person
in the media. *The principal function of publicity is to build an image
 7 Steps for a Feasibility Study
o Conduct a Preliminary Analysis
o Prepare a Projected Income Statement
o Conduct a Market Survey, or Perform Market Research
o Plan Business Organization and Operations
o Review and Analyze All Data
o Make a Go/No-Go Decision
 Promotion is one of the 7 marketing strategies that also includes product, price, place,
packaging, positioning and people
  Product Promotion:
o Explains the major features and benefits of its products (especially in relation to
competitors),
o tells where the products are sold,
o advertises sales on those products,
o answers customer questions, and
o Introduces new products.
 What are the 5 promotional strategies?
 These elements are personal selling, advertising, sales promotion, direct
marketing, and publicity

Chapter 4

 Forecasting is a projection of the future

 Financial planning refers to the process of determining the best uses of the financial
resources of an organization to attain its predetermined objectives and the procurement
of the required funds at the least cost
 Corporate planning is a formal and systematic managerial process, organized by
responsibility, time and information
 Strategic planning is the process of making decisions which will tend to optimize the
organizations future position despite changes in future environment
 Project planning refers to working out the detailed execution of an action outside the
scope of current operations, and is also known as capital expenditure planning
 Operational planning refers to forward planning of existing operations
 Management science is a collective effort of interdisciplinary talent concentrating on the
development and applications of models(usually mathematical ) to aid management in
solving executive problems
 Probability is the numerical measurement of the likelihood that an event will occur.
 Expected value is an arithmetic mean, a weighted average using the probabilities as
weights
 Pay off table shows the actions, outcomes with their probabilities and the monetary
values of all p[possible action/outcome combinations
 Time series typically has four components:
1) Trends is the gradual upward or downward movement of data overtime
 2) Seasonality is a data pattern that repeats itself after a period
(days,week,month,quarters)
3) Cycle is a pattern of the data that occurs every several years. It is associated
with business cycle and is very important I short term business analysis and
planning
4) Random variations are blips in the data caused by chance and unusual
situations. They follow no discernible pattern, so they cannot be predicted

 Naive model forecasting assumes that the demand in the next period will be equal to the
demand in the most recent period. 
 Moving average – the simplest among the time series model. In using this model, the
averages are immediately updated as new information becomes available.
 Weighted moving average – when a detectable trend or pattern is present, weights can
be used to place more emphasis on recent values. 
 Exponential Smoothing – does not involve voluminous record to forecast, and is easy to
use and effective for short run forecasting.
 Trend Projection – fits a trend line to a series of historical data points and then projects
the line into the future for medium-to-long-range variables. 
 Regression analysis is a quantitative technique used to make predictions or estimates of
the value of a dependent variable from given values of an independent variables
 Techniques in separating variable and fixed cost from a semi variable expenses
o Simple regression analysis is a useful technique in determining fixed and variable
elements of a semi-variable expense.
o Least-squares method has the highest degree of precision in separating a semi-
variable costs into its fixed and variable components
o Correlation analysis is a mathematical techniques that can best determine the
effect of changes in semi-variable costs in relation to another item, such as labor
hours, used to discover and evaluate possible cause-and-effect relationships
o Statistical scatter graph method

Chapter 5
 Budget – it is a quantitative expression of the objectives and goals of an enterprise. It is
a tool used for both planning and control
 Master budget- a comprehensive plan for overall activities of the enterprise. It
summarizes the forecast contained in the operating budget, the financial budget and the
capital expenditures budget. The mast budget is a complete blueprint of the plan
operations of the firm for a period
 Operating budgets – a forecast of income, sales volume, and estimate the cost of gods
sold, administrative and other expenses for a given period.
 Financial budgets – a forecast of the flow of cash and other funds in the business and
project the income statement and the statement of financial position
 Capital Expenditures budgets – It is prepared for individual capital expenditure projectss,
like replacement, acquisition or construction of plants and major equipment
 Budget period – it is the length of time for which a budget is to be prepared and
implemented
 Annual budgets – a budget prepared for one fiscal year
 Continues (rolling) budget – an annual budget which continues to delete one month or
period and add one month or period, so that a twelve month forecast is always available
 Flexible (variable) budget – a budget prepared for different levels of activity
 Fixed (static) budget – a budget based on one level of activity
 Long range budge – a forecast that covers more than one fiscal year which normally
covers 5 to 10 years plan
 Sales forecast – a forecast of a firm’s unit and peso sales for some future period;
generally based on recent sales trends plus forecasts of the economic prospects for the
nation, region, industry and so forth.
 Projected financial statement method – a method of forecasting financial requirements
based on forecasted financial statements.
 Spontaneously generated funds – funds that are obtained automatically from routine
business transactions.
 Dividend payout ratio – the percentage of earnings paid out in dividends.
 Pro forma financial statement – same as letter (b)
 Additional funds needed (AFN) – funds that a firm must raise externally through
borrowing or by selling new common or preferred stock.
 AFN formula = Required increase in assets – Spontaneous increase in liabilities –
Increase in retained earnings
 Capital intensity ratio – the amount of assets required per peso of sales (A/S).
 Lumpy assets – assets that cannot be acquired in small increments but must be
obtained in large, discrete units.
 Financing feedback – the effects on the income statement and balance sheet of actions
taken to finance increases in assets.