Finance Tutorial

Japan has been fairly successful in neutralizing the harmful effects of giant industries on the growth of smaller enterprises. While her capital-intensive automotive and shipbuilding industries are produced by big firms, production of components are manufactured by smaller ones.

In the Philippines, the progressive Car Manufacturing Program (PCMP) uses a similar approach. Participants in the program are czars in the car business: Ford, General Motors, Delta Motors, etc. the spare parts and other minor components are supposed to be produced by numerous smaller firms. Read the rest of this entry »

In the present century, especially in highly industrialized societies, the entrepreneur has become less prominent amid the growing complexity of business organization. Corporate bigness has become the key, and transnational corporations – business firms with branches reaching the four corners of the earth – the door to wealth and power. Read the rest of this entry »

The word “portfolio” came from a French word meaning a portable case for holding drawings, writing materials, documents, and similar whatnots. Perhaps, businessman of earlier times came to use such a brief case to carry their whatnots around. So it came to pass that the word portfolio now also refers to earnings assets, in the form of corporate securities as stocks or bonds, held by a firm. Read the rest of this entry »

Business projects entail financial support. The finance manager plays a decisive role in choosing which project to implement with his expertise in projecting capital needs, planning financial strategy in raising the capital needed, and most important, determining the profitability of the project. Read the rest of this entry »

Procuring adequate capital at least cost gives a firm an excellent start. But the ultimate objective is the efficient use of funds so profit can be maximized and the value of the enterprise raised accordingly. Investors, whether part-owners or creditors, expect earnings from the funds they have invested. Moreover, the owners – the proprietor, the partners, the stakeholders – anticipate growth of the business to increase the value of their proprietary interests in the firm.

In recent years, a new dimension has been added to a firm’s obligations: social responsibility. The pressures of public conscience and government legislation have led to salary hikes, better working conditions and direct participation of business firms in civic and community affairs.

The social constraints to business operations have broadened immensely since the energy crisis which started in 1973. In the Philippines, these came in the form of emergency allowances (e.g., PDs 390, 525 and 1123), a 13th-month pay (PD 851), minimum wages, a formidable array of government taxes, plus the multifarious donations expected from the more affluent companies. They have been cutting deeply into the profit margins of business firms. Read the rest of this entry »

Capital is said to be the lifeblood of a business. Capital is to a business what gasoline is to car, without funds, business does not move. Naturally, major financial decisions are undertaken by the owners or by top management.

In a single proprietorship, say a small grocery store the proprietor decides on the amount of capital needed, the allocation of funds for purchasing merchandise, and raises it himself. He marks up his goods, determining the margin of profit he would like to have. Except, of course, for goods under price control, where there is price control.

In a medium-sized manufacturing concern, perhaps in a partnership, the principal partner with financial know-how makes the major financial decisions. He may be assisted by the accountant or the executive who is next in line.

In big corporations – multinationals or conglomerates – the finance function may be handled by specific departments under which are a number of sections. At the head is the treasure, sometimes called the comptroller or the vice-president for finance.

Financial decision-making is spread among a number of positions within a corporation. The board of directors undertakes such major financial decisions as dividend distribution to stakeholders, purchase of or merger with another firm, and the establishment of new branches or new product lines.

But the decision of the board relies heavily on the feasibility study and recommendations made by the finance department. And the man at the helm is the finance manager.

For the sake of convenience, we shall refer to the financial decision-maker – whether he be the sole proprietor, the partner, or the vice-president for finance – as the finance manager. Read the rest of this entry »

At the center of every business operation is the need for funds. Business-wise, the term funds has a wider connotation than the layman’s concept of cash. Funds refer to the means of payment, whether in cash or credit, for goods and services.

The need for funds, which is loosely synonymous to capital, remains a foremost concern of a business entity from its organization to its dissolution. Virtually no business activity is planned without any fund-raising problems. Regardless of size or nature, a firm’s financial needs can be classified into the long-term and the short-term.

Long-term capital financing. Long-term capital usually supports expansion expenditures where the payback period (or investment cycle) takes several years. The payback period refers to the length of time it takes to recoup the cost of a project from the earnings it generates. Or the period from the time the sum of money spent on the project was first used to the time this amount is fully recovered.

Capital expenditures, as allocations for expansion expenditures are called, involve investments in fixed assets requiring a large outlay of funds. Hence, it takes a longer time for the company to recover its investment.

Capital expenditures do not usually come one after the other. More often, a company is faced with a line-up of essential projects requiring long-term capital financing. Plant facilities may have to be replaced or may need major repairs. New branches may have to be established. New product lines may have to be adopted.

With only a limited supply of capital available, a firm has to choose between these projects. It resorts to capital budgeting, a process of ranking projects in the order of their urgency, feasibility and profitably.

Business finance plays a decisive role in the implementation of such a first-things-first policy. Financial management is concerned with estimating capital needs, strategies for capital procurement and projecting the profitability of and particular uses of capital in each project.

Short-term capital financing. Short-term capital financing provides working capital where there is an expectation of investment flowback within one year or less. Short-term capital supports expenditures expected to be recovered within usually less than a year. Short-term funds provide working capital which finances day-to-day operations.

Unlike capital expenditures financed by long-term funds, short-term funds are invested in current assets such as the stock of goods intended either for processing or for sale. Planning for the adequacy of funds for maintaining required inventory levels and for the payment of taxes, salaries, insurance premiums and interest on borrowed capital is a containing challenge to the expertise of finance officers.

Receivables and inventories must be kept moving towards cash. Efficient management of money position requires avoiding shortage of funds or keeping capital idle. Delays in the flow of funds in the form of slow-moving inventories or gaps in receivables collections are common headaches that plague even the most affluent business firm.

The synchronization of operating and long-term capital requirements is one of the imperatives of financial planning. Traditionally, working capital needs are financed by tapping such sources as commercial banks, financing companies and the money market, or by availing of trade credits to minimize interest charges. On the other hand, capital expenditures are financed from long-term borrowings, the insurance of bonds or stocks, or purchases of fixed assets on an installment basis.

The 1970s saw increasing acceptance of financing short-term needs from long-term sources. This has been largely influenced by the growing number of investment outlets foe excess, and otherwise idle, capital. Unemployed capital need not remain locked up when it has a chance to earn yields higher than the interest expense paid on it. Additional income for the firm can be generated.

What would be highly risk and too expensive is financing long-term capital requirements from short-term funds.

Business finance is a branch of study concerned with the allocation, procurement and efficient management of business capital so that a firm can maximize profit, increase its value and fulfill its social role.

Business finance involves techniques of estimating and acquiring adequate capital from alternative sources at the best possible terms for the users and their most profitable employment in business operations.

The study of business finance, therefore, covers three major spheres:

The allocation of an adequate supply of capital for business needs, both short-term and long-term;

The procurement of funds at the most favorable terms at least cost to the business; and

The efficient management of capital for profit-maximization and increasing the value of the firm.