Basic Finance Reviewer

Financial Planning is the process of determining goals, evaluating available resources, and
preparing a plan of action to reach financial objectives.

FINANCIAL GOALS SHOULD BE IN SMART GOALS

Specific - Refers to being as specific as possible with the desired goals. Generally, the
narrower and more specific a goal is, the clearer the steps to achieving it will be.
Measurable - Refers to ensuring there will be evidence that can be tracked to monitor progress.
Achievable - Refers to ensuring the set goal is realistic and possible to complete or maintain
within the set time frame.
Relevant - Refers to making sure the goal itself aligns with the value, long term goals and
objectives,
Time-Bound - Refers to making sure the goal is set within an appropriate time frame.

OBJECTIVES OF FINANCIAL PLANNING

1. Ensuring Adequate Capital - Excessive funding or lack of funding can be avoided by
ensuring a suitable balance between the inflow and outflow of finances. It helps to keep
the business's capital maintained and ensures smooth operations.
2. Minimizing Risk - Reducing risk and uncertainty requires wise expenses on profitable
projects that are driven by financial planning.
3. Maximizing Profit - Financial planning increases productivity and increases profitability
for the organization by providing adequate money, careful planning, and effective
resource management.

IMPORTANCE OF FINANCIAL PLANNING

Financial planning is crucial for individuals and families to achieve financial security, stability,
and prosperity. Some key reasons highlighting the importance of financial planning include:

1. Financial Security - A carefully designed financial plan creates protection and

emergency strategies for dealing with financial crises, offering a safety net during difficult
times like illness, job loss, or economic crises.
2. Goal Achievement - Financial planning assists both individuals and businesses in
identifying their financial goals and creating effective strategies to reach them, whether
those goals are owning a house, college funding, or a comfortable retirement.
3. Long-Term Wealth Preservation - Financial planning is essential in order to ensure
financial freedom, create and maintain long-term wealth, and leave a legacy for future
generations.

PERSONAL PLANNING PROCESS FINANCE

It can be defined as every financial action and decision taken by an individual. Look at these
typical circumstances you will most likely encounter in life:
● Finance your daily living expenses.
● Borrow money to buy a new car.
 ● Save for retirement.
● Invest your 13th month bonus.
● Plan for wedding.
● Provide for your children's education

POSSIBILITIES TO CONSIDER
● Short Term Goals - Short Term Goals defined as accomplishment that takes 3 months
to a few years. For example, build an emergency fund that can cover at least three
months of living expenses. Keep new credit card charges limited to what you can pay off,
in full, each month.
● Long Term Goals - Long Term Goals are usually completed in 3 to 5 years, or longer.
Examples are to start saving at least 10% gross salary every year for your retirement.
Save for a home down payment. Save for a child’s education.

LIFE CYCLE FINANCIAL PLANNING

Life Cycle Financial Planning is the act of dealing with the challenges concerning money that
occur at different times in our life. Individuals should carefully monitor their plans. They have to
adjust the financial plan or add or remove goals and objectives.

FIVE (5) STAGES OF FINANCIAL PLANNING

1. Teenage Years (13-17) - For most people, this stage of the financial life cycle is where
they start to learn how to manage their money and plan their spending.
2. Young Adulthood (18-25) - At this age, they already have a part-time job. This is the
stage where they start to think about their financial future while working and at the same
time studying to have a bachelor's degree.
3. Starting a Family (26-45) - Whether your goal is a house full of kids, sharing your home
with your partner, the biggest part of this stage is preparing for the financial responsibility
that comes with having a family.
4. Planning to Retire (46-64) - This stage of life is the largest source of income. Children
typically move out during this stage so it can be easier to save money than it was during
the family stage.
5. Successful Retirement (65+) - This is the calmest stage in life cycle financial planning.
 FINANCIAL PLANNING TOOLS AND CONCEPTS

PREPARING BUDGETS
Budgeting is the process of creating a plan to spend your money. A budget serves as a
roadmap for managing your finances, helping you stay on track with your spending and achieve
your financial objectives.

KEY COMPONENTS OF PREPARING BUDGETS

INCOME - All the money you receive.
EXPENSES - The costs of everyday life.
• Needs
• Wants
• Savings
FINANCIAL GOALS - Your aspirations for your financial future.

STEPS TO CREATE YOUR BUDGET

1. Track Your Income and Expenses: Start by gathering information about your income and
expenses.
2. Categorize Your Expenses: Once you've gathered your income and expense data,
categorize them into needs, wants, and savings.
3. Set Financial Goals: Determine your short-term and long-term financial goals.
4. Creating a Budget Plan: Based on your income, expenses, and financial goals, create a
budget plan that outlines how you will allocate your money.
5. Monitor and Adjust: Regularly review your budget and track your spending to ensure you're
staying on track.

CASH MANAGEMENT
Cash is a vital asset that everyone recognizes, often thought of as the currency and coins we
carry, as well as the funds in our checking accounts.

BASIC BANK SERVICES

Banks and financial institutions offer a variety of services, including assisting individuals in
managing their cash. They protect funds, maintain detailed and independent records of cash
transactions, and provide access to cash financing.

BASIC BANK SERVICE

1. Opening a Bank Account
2. Opening a Current/Checking Account with bank
3. Opening a Savings account
RECEIVABLES MANAGEMENT
Firms usually prefer to sell for cash, but competition often forces them to offer credit. This
means they ship goods, reduce inventory, and create accounts receivable.

CONTROL OF RECEIVABLES
A. Collection Policy - Guidelines for how and when to collect payments from customers.
B. Monitoring of Receivables - Keeping track of outstanding invoices and customer payments.
C. Ageing Schedule - A report that lists all the money owed to the company (accounts
receivable) and groups these amounts based on how long they have been unpaid.

TYPES OF COLLECTION
• Reminder Letters to make the payment
• Telephone calls for follow up
• Personal Visits
•Seek assistance from Collection Agencies
• Legal Action

INVENTORY MANAGEMENT- the process of planning, organizing, and controlling the

movement of goods and materials from their source to where they are used. It involves keeping
track of the quantity, location, and value of inventory, as well as ensuring that the right amount of
inventory is available at the right time to meet customer demand.

inventory management is a core operations management activity. effective inventory

management is important for the successful operation businesses

WHAT IS INVENTORY?
An inventory is a stock or store of goods. inventories are a vital part of business. not only are
they necessary for operation, but they also contribute to customer satisfaction.

TYPES OF INVENTORIES
• Raw materials
• Partially completed goods, called WIP (work-in-process)
• Finished-goods inventories or merchandise
• Maintenance and repairs inventory
• Goods-in-transit to warehouse, distribution or customer

REQUIREMENTS FOR EFFECTIVE INVENTORY MANAGEMENT

1. A system to keep track of the inventory on hand and on order.
2. A reliable forecast of demand that includes an indication of possible forecast error.
3. Knowledge of lead times and lead time variability.
4. Reasonable estimates of inventory holding cost, ordering cost, and shortage cost.
5. A classification for inventory items.
INVENTORY COST
1. Purchase Cost
2. Holding Cost or Carrying Cost
3. Ordering Cost
4. Shortage Cost

TECHNIQUES OF INVENTORY MANAGEMENT

FIFO (First In, First Out)- Sells oldest inventory first, ideal for perishable goods, reduces waste,
and simplifies record-keeping.
LIFO (Last In, First Out)- Sells newest inventory first, beneficial in inflationary periods to reduce
taxable income, but requires careful application for accurate financial records.
JIT (Just In Time)- Orders inventory only as needed, minimizing holding costs and waste, but
requires precise supply chain control.
ABC Analysis- Categorizes inventory into A (high-value, low-frequency), B (moderate), and C
(low-value, high-frequency) to prioritize management efforts.
Safety Stock Reorder Points- Extra inventory to cover unexpected demand or delays,
determined by demand variability and lead time.
Reorder Points- Specific inventory levels triggering new orders, based on daily usage and lead
time to avoid stockouts.
PAR LEVELS- Minimum and maximum inventory levels for items, ensuring timely replenishment
and preventing overstock.
Cycle Counting- Regular counting of a portion of inventory for accuracy, helping identify
discrepancies early.
Inventory Management Software- Tools that streamline tracking, forecasting, and order
management, enhancing efficiency and decision-making.
Dropshipping- Selling products without holding inventory, reducing upfront costs but potentially
lowering
margins.
Consignment Inventory- Supplier provides goods without upfront payment; retailer pays only
upon sale, reducing costs but requiring coordination.
Economic Order Quantity (EOQ)- Formula to calculate optimal order quantity, minimizing total
inventory costs.
Perpetual Inventory Management- Continually updates inventory levels, providing accurate
inventory views and improving turnover.
Minimum Order Quantity (MOQ)- Minimum units required per order, which can limit flexibility
but reduce shipping costs.
Bulk Shipping- Purchasing in large quantities to reduce costs, but may lead to overstocking,
especially for perishables.
Batch Tracking- Tracks groups of similar items through the supply chain, essential for
perishable goods or recalls.
Financial Statement
- Financial statements are pieces of paper with numbers written on them, but it is also
important to consider the actual assets that underlie the numbers.

Types of financial statements

● Balance Sheet
● Income Statement
● Cash Flow Statement
● Statement of Owner’s Equity

Balance Sheet - provides an overview of a company’s financial condition as of a specific date,

which shows what the firm owns (assets) and how they were financed between liabilities and
stockholders' equity.

Income Statement- a statement that summarizes the sum of a company's revenues and
expenses over a given accounting period, which is usually a quarter or year.
Revenues - Expenses = Net Income

Cash Flow Statement - summarizes a company's cash flows for the year. This is accomplished
by isolating the company's operating, investment, and financing cash flows and reconciling them
with changes in cash and marketable securities throughout the year.
Net Cash Flow = Total Cash Inflows – Total Cash Outflows

For Indirect method of operating activities:

Net cash from operating activities = Net income +/− depreciation and amortization +/−
Change in working capital (You will need to base on income of statement if you choose an
indirect method).

Combine all the net cash from operating, investing and financing activities to reveal the ended
cash for the report period.

Statement of Changes in Equity- statement of changes in equity presents the developments

or changes in owner’s equity.
 FUNDAMENTAL CONCEPTS IN FINANCIAL MANAGEMENT

RATIO ANALYSIS
- Involves a method of calculating and interpreting financial ratios to analyze and monitor
the firm’s performance.
- They use ratios to generate an overall picture of the company's financial condition and to
monitor the firm's performance from period to period.

FINANCIAL RATIO ANALYSIS

The process of evaluating a company's financial performance by calculating key ratios

based on its financial statements, such as the balance sheet and income statement.

KEY OF FINANCIAL RATIOS:

A. Liquidity Ratio- shows how easily a company can pay its debt
B. Activity Ratio- also called “efficiency ratio”. It answers how efficient is the
company in using its assets to generate sales for the company. Also talks about
the speed
C. Stability Ratio- measures the ability to pay its long term obligation
D. Profitability Ratio- can tell us how good a company is at making money.
E. Market Ratio- also known as valuation ratios or price ratios, are financial metrics
that help investors gauge the worth of a company's stock in relation to its market
price

IMPORTANCE OF FINANCIAL RATIO

- These ratios help stakeholders, such as investors, managers, and creditors, to assess
the company's strengths, weaknesses, profitability and the overall financial health.

- These also provide valuable insights into a company’s operational efficiency and
financial stability.

LIMITATIONS OF FINANCIAL RATIOS

- Firms engaging in multiple lines of business may be challenging to categorize within an
industry.
- Published peer-group or industry averages are only approximations and do not
represent scientifically determined averages of all firms within an industry.
- Variations in accounting practices among firms can lead to differences in computed
ratios, such as inventory valuation and depreciation methods.
- Financial ratios can be too high or too low, and industry averages are not necessarily
desirable target ratios.
- Seasonality in operations affects balance sheet entries and corresponding ratios,
requiring the use of average account balances.
 LIQUIDITY RATIO

It measures a firm’s ability to satisfy its short-term obligations as they come due. They
show if the company has enough cash or assets that can quickly be turned into cash.

The two basic measures of liquidity are:

1. Current Ratio
2. Quick or acid test Ratio

CURRENT RATIO
- Current ratio or also known as working capital ratio. Measures the firm’s ability to pay its
short-term obligation. It is defined as current assets divided by current liabilities.

$2,879 / $2,614 =1.10

If the ratio is above 1, the company likely has enough to cover its bills. If it’s below 1, the
company might struggle to pay.

QUICK OR ACID- TEST RATIO

The quick ratio, or acid-test ratio, measures a company's ability to cover its short-term
liabilities using its most liquid assets, excluding inventory. It is calculated by subtracting
inventory from current assets and dividing the result by current liabilities.

7,500-3,200 = 4,300
4,300/2,500 = 1.7 (rounded to 1.7)

So, the quick ratio of 1.7 means the company has $1.70 in liquid assets for every $1.00
of short-term debt, indicating strong liquidity.
 ASSET MANAGEMENT RATIOS

Address the fundamental efficiency with which a company is run. They help an analyst
understand the firm's basic competitiveness

Commonly Used Asset Management Ratios:

● Inventory Turnover Ratio

● Average Collection Period / Days Sales Outstanding
● Fixed Asset Turnover
● Total Asset Turnover
● Sales

THE AVERAGE COLLECT PERIOD (ACP)

- Average collection period refers to the amount of time it takes for a business to receive
payments from its clients.

● The average accounts receivable is calculated by taking the average of the beginning
and ending balances of a given period.
● It is common to practice to use a 360 day year made up of twelve 30-day months
● Be mindful of the seasonality of the account's receivable balances when analyzing the
average collection period.

FIXED ASSET AND TOTAL ASSET TURNOVER

- Fixed Asset or Total Asset measures the relationship of a firm’s assets to a year sales

● Fixed Asset or Total Asset measures the relationship of a firm’s assets to a year sales
● These ratios show the relationship between assets and sales.
● The two ratios allow us to focus on either fixed or total assets.
● The total assets ratio tends to be more widely used. The ratio using fixed assets is
appropriate in industries where significant equipment is required to do business.