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www.shsph.blogspot.com, , SENIOR HIGH SCHOOL, , BUSINESS FINANCE, Module 2 - Quarter 1, , Financial Planning Tools and, Concepts, , WWW.GOOGLE.COM, , Department of Education • Republic of the Philippines

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www.shsph.blogspot.com, , SENIOR HIGH SCHOOL, , BUSINESS FINANCE, Module 2 - Quarter 1, , Financial Planning Tools and, Concepts, , This instructional material was collaboratively developed and reviewed by, educators from public and private schools, colleges and universities. We, encourage teachers and other education stakeholders to email their, feedback, comments and recommendations to the Department of, Education at [email protected], , We value your feedback and recommendations., , Department of Education ● Republic of the Philippines, II

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www.shsph.blogspot.com, , TABLE OF CONTENTS, , Page No., Cover page, , II, , Table of Contents, , IV, , Overview, , V, , General Instructions, , V, , Lesson 2: Financial Planning Tools and Concepts, , 1, , What I Need to Know?, , 1, , What I Know, , 1, , What’s In, , 2, , What’s New?, , 5, , What is it?, , 5, , What’s More?, , 16, , What I Have Learned?, , 17, , What Can I Do?, , 18, , Assessment, , 19, , Additional Activities, , 19, , Answer Key, , 20, , References, , 21, , IV

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www.shsph.blogspot.com, , OVERVIEW, , In every organization, Financial planning is important especially the tools, and concepts that determine the best uses of the Financial resources of an, organization. It helps the business to attain its objectives and to ensure the, sufficiency of funds within the organization and reduces the uncertainties which, can be a hindrance to growth of the business to safeguard the stability and, profitability in concern., This module emphasizes the understanding financial concepts, tools and use, of decision making that is related to the financial management of the business. It, includes 6 steps in Financial Planning process, Preparation of budgets and, Projected Financial statement and Working Capital Management. This topic is, directed towards the senior high school students to acquire skills in some basic, finance concepts and apply this not only on their personal finance but also the, chosen career in the future., , GENERAL INSTRUCTIONS, For the teacher:, To facilitate and ensure the students’, learning from this module, you are, encouraged to do the following:, , For the learners:, To be guided in achieving the, objectives of this module, do the, following:, , 1. Clearly communicate learning, competencies and objectives, 2. Motivate through applications, and connections to real life., 3. Give applications of the theory, 4. Discuss worked-out examples, 5. Give time for hands-on, unguided classroom work and, discovery, 6. Use formative assessment to, give feedback, 7. Introduce extensions or, generalizations of concepts, 8. Engage in reflection questions, 9. Encourage analysis through, higher order thinking prompts, 10. Provide alternative formats for, student work, 11. Remind learners to write their, answers in their Philosophy, Activity Notebook, , 1. Read and follow instructions, carefully., 2. Write all your ANSWERS in, your Activity Book, 3. Answer the pretest before, going through the lessons., 4. Take note and record points, for clarification., 5. Compare your answers, against the key to answers, found at the end of the, module., 6. Do the activities and fully, understand each lesson., 7. Answer the self-check to, monitor what you learned in, each lesson., 8. Answer the posttest after you, have gone over all the lessons., , V

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www.shsph.blogspot.com, , Lesson, , 2, , FINANCIAL PLANNING TOOLS AND CONCEPTS, , What I Need to Know?, After going through this module, you are going to:, 1. Illustrate the financial planning process, 2. Prepare budgets such as projected collections, sales budget, production, budget, income-projected statement of comprehensive income, projected of, financial position, and projected cash flow statement, 3. Describe concepts and tools in working capital management, , What I Know, Let us determine how much you already know about the financial planning tools, and concepts., Direction: Read each question carefully, choose the letter with the correct answer, and write your answer on the space before each number., _____1. What are the two management functions reinforce each other for the, success of an organization., A. Planning and Controlling, C. Staffing and Planning, B. Controlling and Directing, D. Organizing and Planning, _____2. Which of the following is not part of financial planning process?, A. Identify goal related task, C. Identify resources, B. Set goals/Objectives, D. Establish strong Management, _____3 A plan expresses in quantitative terms, which emphasizes the resource use, and resource allocation of an entity over a specified period of time?, A. Sales, C. Sales Budget, B. Budget, D. Cash Budget, _____4. Which of the process to closely monitoring of in and out of cash in the, business?, A. Cash flow statement, C. Statement of financial Position, B. Income statement, D. Budgeting, 1

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www.shsph.blogspot.com, _____5. It is a tool of the company to set an overall goal of what the company’s, performance and position will be for and as of the end of the year., A. Forecasting, C. Budgeting, B. Inventory, D. Projected Financial Statement, _____ 6. Components of a firm’s cash conversion cycle include:, A. average collection period, average age of inventory, B. average payment, average collection period, C. average age of inventory and average payment period, D. average age of inventory, average collection period and average payment, _____7. Which of the following statements is true regarding working capital, management?, A. There is a risk and profitability tradeoff in working capital management, B. A firm’s working capital is not essential in managing its operations, C. Cash, inventory and long-term receivables are common working capital, components, D. All statements are true, _____8. Which of the following is not a common collection technique for accounts, receivables?, A. Sending letter of demands, C. sending legal notices, B. making phone calls, D. writing off customer’s accounts, _____9. It is a technique used in granting credit to customers., A. Credit score, C. Credit limit, B. Credit standards, D. All of the above., _____10. It represents assets of the entity that expected to be collected and thus,, converted to cash., A. Inventory Management, C. Accounts Receivable Management, B. Marketable Securities Management D. Cash Management, , What’s In, Direction: Complete the elements of the financial system., , Savers, , Financial, Intermediaries, , 2, , Users of Funds, (Borrowers/Investors)

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www.shsph.blogspot.com, What is Financial Planning process?, , https://www.proprofs.com/quiz-school/story.php?title=financialplanning-process, , Planning is very much related to another management function, controlling., These two management functions reinforce each other, and both are very important, for the success of an organization. Management planning is about setting the goals, of the organization and identifying ways to achieve them. This maybe be broken, down into long-term plans and short-term plans. Long-term plans reflected in a, company’s business strategy. In the process of planning, resources have be, identified. These resources include work force resources, production capacity, and, financial resources., Once a plan is set, it has been quantified. A plan that is not quantified is, useless because there will be no basis for monitoring performance and hence, no, way of gauging success. Quantified plans are in form of budgets and projected, financial statements. These budgets and projected financial statements has, compared with the actual performance. This is where the controlling function, comes into play. It does not mean that if actual; performance falls short of the, budgets or of the projections, the management is not doing its function. Reasons, have be identified for the shortfall so that corrective measures has made. In, addition, the analysis will show whether the reasons for not meeting the projections, are due to management incompetence or factors outside its control., Steps in Financial Planning?, 1. Set goals or objectives. For corporations, long term and short term identify, objectives. These has shown in company’s vision and mission statements. The, vision statement states where the company wants to be while the mission, statement states the plans on how to achieve the vision., , 3

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www.shsph.blogspot.com, • Examples of a company’s Vision-Mission statements are as follows:, Jollibee Foods Corporation (JFC) Vision: To excel in providing great tasting food, that meets local preferences better than anyone; To become one of the three largest, and most profitable restaurant companies in the world by 2020., Mission: To serve great tasting food, bringing the joy of eating to everyone., , 2. Identify resources. Resources include production capacity, human resources, who will operate the operations and financial resources., 3. Identify goal-related tasks. In this step, management must figure out how to, achieve an objective. For example, if the target for this year is to increase sales by, 15%, we must consider the task in achieving this goal. One task is to hire more, sales agents, if the management believes that number of sales agents is not enough, to support this 15% increase in sales., 4. Establish responsibility centers for accountability and timeline. If we, identified the task to achieve goals, the next important step to do is to identify, which department held accountable for this task., 5. Establish an evaluation system for monitoring and controlling. For, corporations, the management must establish a mechanism to allow plans to, monitor. This has been done, through quantified plans such as budgets and, projected financial statements. The management will then compare the actual, results to the planned budgets and projected financial statements. Any deviations, from the budgets will undergo investigations., 6. Determine contingency plans. In planning contingencies or unforeseen events, must be considered as well. Budgets and projected financial statements anchored, on assumptions., , 4

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www.shsph.blogspot.com, , What’s New, , Direction: Supply the missing amount of the receipts from sales., , Jan, 2,000, , Units, Sales in Pesos, Collection, from, monthly sales (Sales, in Pesos x 20%), , Feb, , Mar, , Apr, , May, , Total, , 2,200, , 2,500, , 2,800, , 3,000, , ________, , 200,000, , 220,000, , 250,000, , 280,000, , 300,000, , 1,250,000, , 40,000, , 44,000, , 56,000, , 60,000, , 250,000, , 125,000, , 140,000, , __________, , Collection, from, previous, monthly, sales (Sales in Pesos, x 50%), , None, , ________, , Collection from two, months prior sales, (Sales in Pesos x, 30%), , None, , None, , Total, Collections, from sales, , 40,000, , 110,000, , 60,000, , 75,000, , 150,000, , 84,000, , _________, 144,000, , 220,000, , 247,000, , 275,000, , 926,000, , What is it?, Read and understand the information very well then find out how, much you can remember and how much you learned by doing the activity and, assessment., , Preparation of Budgets and Projected financial statement, What is budget?, Budget is a description in quantitative usually monetary terms of desired, future result. The process of preparing the budget requires management at all level, to focus on the future of the business entity., Examples of Budgets:, Sales Budget - is a prediction of the firm’s sales over a specific period, based, on external and internal information. The sales budget has constructed by, multiplying budgeted unit sales by the selling price. See illustration below., , 5

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www.shsph.blogspot.com, Series no., 1, 2, , Sales budget of ABC Company, For the year ended December 31, 2019, Particulars, Quarter 1, Sales unit (Forecasted), 6,000, X Price per unit, 100, Sales Revenue, Php 600,000, , Quarter 2, 5,000, 150, Php 750,000, , Production Budget- is a financial planning related to the units of, production that the management think that the business should produce in the, upcoming period to match the estimated sales quantity, based on the, management’s judgement related to the competition in the market, economic, conditions, production capacity, consumer prevailing market demands and past, trends. See illustration below., , Series no., 1, , Production Budget of XYZ Company, For the year ended December 31, 2019, Particulars, Quarter 1, Sales unit (Forecasted), 8,000, Add: Finished goods Inventory, 2,000, Total Productions, 10,000, Less: Beginning inventory of, 2,500, finished goods, Units to be Produced, Php 7,500, , Quarter 2, 9,000, 3,000, 11,000, 2,000, Php 9,000, , Cash budget- is a statement of the firm that has planned inflows and outflows of, cash. It forecasts the timing of theses cash outflows and matches them with cash, inflows from sales and other receipts. The cash budget is also a control tool to, monitor the way the company handles cash. See illustration below., Example: Assume selling price is Php 100/unit sales for each month that has, expected to be collected as follows:, Month of sales: 20%, A month after sales: 50%, 2 months after sales: 30, How much is the total receipts from sales?, Jan, Units, Sales in Pesos, Collection, from, monthly sales (Sales, in Pesos x 20%), , 2,000, , Feb, , Apr, , May, , Total, , 2,200, , 2,500, , 2,800, , 3,000, , 12,500, , 200,000, , 220,000, , 250,000, , 280,000, , 300,000, , 1,250,000, , 40,000, , 44,000, , 50,000, , 56,000, , 60,000, , 250,000, , 100,000, , 110,000, , 125,000, , 140,000, , 60,000, , 66,000, , 220,000, , 247,000, , Collection, from, previous, monthly, sales (Sales in Pesos, x 50%), Collection from two, months prior sales, (Sales in Pesos x, 30%), Total, Collections, from sales, , Mar, , 40,000, , 144,000, , 6, , 75,000, , 275,000, , 150,000, , 84,000, , 926,000

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www.shsph.blogspot.com, Projected financial statements is a tool of the company to set an overall, goal of what the company’s performance and position will be for and as of the end, of the year. It sets targets to control and monitor the activities of the company., Forecast or calculate the following reports:, ‣ Projected Income Statement, ‣ Projected Statement of Financial Position, Application of the Projected Financial Statements Approach, be, Step 1. Forecast the Income Statement, a. Establish a sales projection, b. Project the cost of sales, c. Prepare the production schedule and project the corresponding production, costs, direct materials, direct labor and overhead for manufacturing, companies), d. Estimate selling and administrative expenses., e. Consider financial expenses if any, f. Determine the net profit, Step 2. Forecast the Statement of Financial Position., a. Project the assets needed to support projected sales., b. Project funds generated (through accounts payable and accruals) and by, retained earnings through profits generated., c. Project liability and stockholder’s equity accounts that will not rise, spontaneously with sales (e.g., notes payable, long-term bonds, preferred, stock, and ordinary shares) but may change due to financing decisions made, later., d. Determine if additional funds needed by using the following formula., Additional Funds Needed (AFN) = Required Increase in Assets - Spontaneous, Increase in Liabilities - Increase in Retained earnings, The additional financing needed raised by borrowing from the banks as, notes payable, by issuing long-term bonds by selling new ordinary shares or by, some combination of these actions., Step 3. Raising the Additional funds needed., The financing decision will consider the following factors:, a. Target capital structure:, b. Effect of short-term borrowing on its current ratio;, c. Conditions in the debt and equity markets; or, d. Restrictions imposed by existing debt agreements., Step 4. Consider financing feedbacks., Depending on whether additional funds borrowed or has raised through, ordinary shares, consideration has given on additional interest in the income, statement or dividends, thus decreasing the retained earnings., Illustrative Case: Financial Forecasting (Percent of Sales Method), , 7

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www.shsph.blogspot.com, The Mellinial Company has the following statements representative of the, company’s historical average., Mellinial Company, Income Statement, For the year ended Dec. 31, 2019, Sales, Cost of Sales, Gross profit, Operating expenses, Earnings before interest and taxes, Interest expense, Earnings before taxes, Taxes (35%), Net Income/Earnings after taxes, , P 2,000,000, (1,200,000), 800,000, (380,000), 420,000, 70,000, 350,000, (122,500), P, 227,500, , Dividends, , P, , 136,500, , Mellinial Company, Statement of Financial Position, For the year ended Dec. 31, 2019, Assets, Cash, Accounts receivable, Inventory, Total Current Assets, , P, , 50,000, 400,000, 750,000, P 1,200,000, , Fixed Assets (net), , 800,000, , Total Assets, , P 2,000,000, Liabilities and Stockholder’s equity, , Accounts payable, Accrued Expenses, Accrued Taxes, Total Current Liabilities, Notes Payable-bank, Long-term debt, Total Liabilities, Ordinary shares, Retained Earnings, Total Shareholder’s equity, Total liabilities and equity, , P 250,000, 10,000, 20,000, P 280,000, 70,000, 150,000, P 500,000, 1,200,000, 300,000, 1,500,000, P 200,000, , The firm is expecting a 20% increase in sales next year, and management is, concerned about the company’s need for external funds. The increase in sales, expected to carry out without any expansion of fixed assets, but rather through, more efficient asset utilization in the existing store. Among liabilities, only current, liabilities vary directly with sales., , 8

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www.shsph.blogspot.com, Using the percent-of-sales method, determine whether the company has external, financing needs or a surplus of funds., Solution:, Step 1. Forecast the Income Statement., The projected income statement will show the following:, Sales (P2M x 120%), Cost of Sales (P2.4M x 60%), Gross Profit, Operating expenses (P2.4M x 19%), Earnings before interest and taxes, Interest expense, Earnings before taxes, Taxes (35%), Earnings after taxes, , P 2,400,000, (1,440,000), 960,000, 456,000, 504,000, (70,000), 434,000, (151,900), P 282,100_, , Dividends (36% payment), , P, , 101,600, , Step 2. Forecast the Statement of Financial Position, The projected statement of financial position will show the following:, Assets, Cash, Accounts receivable, Inventory, Total current assets, , (1), (2), (3), , Fixed assets (net), Total Assets, , (4), , P, , 60,000, 480,000, 900,000, P1, 440,000, 800,000, P2, 240,000, , Liabilities and Equity, Accounts Payable, Accrued Wages, Accrued taxes, Total Current liabilities, Notes payable-bank, Long-term debt, Ordinary shares, Retained Earnings, Total, Additional Financing required, Total, , (5), (6), (7), (4), (4), (4), (8), , 9, , P 300,000, 12,000, 24,000, P 336,000, 70,000, 150,000, 1,200,000, 480,000, P2, 236,500, 3,500, P2, 240,000

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www.shsph.blogspot.com, Supporting computations:, (1) Cash = 2.5% x P 2.4M sales, (2) Accounts receivable = 20% of 2.4M, (3) Inventory = 37.5% x P 2.4 M, (4) No percentages computed for fixed assets, notes payable, long-term debt, ordinary, shares and retained earnings because they are not assumed to maintain a direct, relationship with sales volume. For simplicity, depreciation is not explicitly, considered., (5) Accounts payable = 12.5% of 2.4M, (6) Accrued expenses = 0.5% of P 2.4M, (7) Accrued taxes = 1% of P 2.4M, (8) Retained earnings = P 300,000 + P 282,100 – P 101,600, Formula Method * Additional Financing needed (AFN) may also be computed as, follows:, Additional funds needed = required increase in assets – Spontaneous, increase in liabilities – Increase in retained earnings, Where:, Required increase in assets = Change in Sales, , x, , Current Assets (present), Sales (present), , Spontaneous increase = Change in Sales x Current Liabilities (present), in liabilities, Sales (present), Increase in retained earnings = Earnings after taxes, , -, , Dividend, , Applied to Millenial Co., AFN computed as follows:, AFN = 400,000 x 1,200,000, 2,000,000, , _, , 400,000 x 1,200,000, 2,000,000, , = 240,000 – 56,000 -180,500, = P 3,500, , 10, , _ 282,100 -101,600

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www.shsph.blogspot.com, What is Cash Flow Statement?, It is a process of closely monitoring of in and out of cash in the business., Example: Ms. Amelia Enriquez engaged in a laundry shop. It was already her 2 nd, year of operation and all the in and out of cash for the month as follows:, , Date, , Particulars, , Debit, , Feb.1, , Initial Investment, , P 350,000, , Credit, , 3, , Withdrawal, , P 5,000, , 4, , Purchase of Laundry, Equipment, , P 25,000, , 6, , Purchase of Laundry, Supplies, , P 25,000, , 8, , Laundry Revenue, , 9, , Payments of Utilities, Expenses, , P 6,000, , 12, , Payments of Laundry, Equipment, , P 50,000, , 15, , Payments, Expense, , P 4,000, , 18, , Collection, , 28, , Salaries expense, , P 8,000, , 28, , Payment, Expense, , P 4,000, , 28, , Advance payment, , P 15,000, , Total, , P405,000, , of, , balance, , P 30,000, , Rent, P 10,000, , Telephone, , 11, , P 127,000, , P 278,000

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www.shsph.blogspot.com, Amelia Laundry Shop, Statement of Cash Flow Statement, For the month of February 28, 2019, Cash flow from operating Activities:, Cash received from customers (dated Feb. 8, 18, 28), Payment for purchase of Supplies, Payments for Utilities, Payments for Rent, Payments for Salaries, Payments for Laundry Equipment, Payments for Repair & Maintenance, Net Cash used from operating activities, , P 55,000, (25,000), ( 6,000), ( 4,000), ( 8,000), (50,000), ( 4,000), , Cash flow from investing activities:, Purchase of Laundry Equipment, Net Cash used from Investing Equipment, , (25,000), , Cash flow from Financing Activities:, Investment by Owner, Owner’s Withdrawal, Net Cash used from financing activities, Net Increase in Cash, Add: Beginning Balance, Ending Cash Balance, , P (42,000), , (25,000), , 350,000, (5,000), 345,000, 278,000, -0-___, P 278,000, , Let us assume that Amelia laundry shop projected 3 months of cash flow for, planning an expansion of her business. Let us say that there is an increase of, collection of 25% and all expenses will stay the same. By month of May, Amelia, granted a loan amounted Php 150,000. How much is the cash flow ending balance, of Amelia for the month of May?, Projected Cash Flow statement, March, Beginning Cash, 278,000, Balance, Cash coming in, Cash received from, 68,750, customers (Sales), Loan transfer, Total cash in, P 346,750, Cash out, Supplies, 25,000, Utilities, 6,000, Rent, 4,000, Salaries, 8,000, Laundry Equipment, 50,000, Repair and Maintenance, 4,000, Total, P 97,000, Ending Cash balance, 249,750, , April, 249,750, , May, 221,500, , 68,750, , 68,750, , P318,500, , 150,000, P 440,250, , 25,000, 6,000, 4,000, 8,000, 50,000, 4,000, P 97,000, 221,500, , 25,000, 6,000, 4,000, 8,000, 50,000, 4,000, P 97,000, 343,250, , 12

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www.shsph.blogspot.com, , Amelia has P343, 250 of cash used for expansion of the business. If, , cash is flowing out of your business significantly faster than it is coming in, you, need to examine three aspects of your cash flow:, , , how and when cash comes into your business, , , , how and when it goes out again, and, , , , Where it has tied up in the meantime (in inventory and equipment, for, example)., , To fix your cash flow, you need more money coming into your business (increase, sales, collect past-due accounts receivable), less money going out of your business, (reduce costs of goods and labor), and less money tied up in your business (reduce, inventory and leased equipment)., WORKING CAPITAL MANAGEMENT?, , Businesses require adequate capital to succeed, There are two types of capital required by business:, capital. Businesses require investment in asset, which, period. These long-term investments considered as, machinery, etc., , in business environment., fixed capital and working, has utilized over a longer, fixed capital, e.g. plant,, , Working capital refers to company’s investment in short term asset such as cash,, inventory, short-term marketable securities, and account receivable., Net Working capital refers to the difference between the firm’s current assets and, current liabilities. If the firm’s current assets exceed its current liabilities, the firm, has a positive working capital. On the other hand, if current liabilities exceed, current assets, the firm has a negative working capital., Working Capital Management specifically refers to the efficient management of, the firm’s current assets (cash, receivables, and inventory) and current liabilities, (short-term payables). Through working capital management, managers have given, the challenge to balance risk and profitability that comes along each current asset, and liability to contribute positively to the firm’s value., Cash Management System, The cash management involves the maintenance of a cash and marketable, securities investment level, which will enable the company to meet its cash, requirements and at the same time optimize the income on idle funds., A financial officer has the following specific objectives in monitoring cash balances:, , , , , To meet the ash disbursement needs (payments schedule), To minimize the funds committed to transactions and precautionary cash, balances; and, To avoid misappropriation and handling losses in the normal course of, business, , 13

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www.shsph.blogspot.com, Reasons for Holding Cash, Although cash has generally considered a non-earning asset, business firms must, hold cash for the following reasons:, 1. Transaction Motive - cash needed to facilitate the normal transactions of the, business, that is, to carry out its purchases and sales activities., 2. Precautionary Motive - Cash may held beyond its normal operating requirement, level in order to provide for a buffer against contingencies such as unexpected, slow-down in accounts receivable collection, strike or increase in cash needs, beyond management’s original projections., 3. Speculative Motive- cash held ready for profit making or investment, opportunities that may come up such as a block of raw materials inventory offered, at discounted prices or a merger proposal., 4. Contractual Motive-A company may be required by a bank to maintain a certain, compensating balance in its demand deposit account as a condition of a loan, extended to it., Cash Conversion Cycle - A firm operating cycle begins from the time goods for sale, manufactured to the eventual collection of cash from the sale of these goods. The, operating cycle of a firm is mainly composed of two current asset categories:, inventories and accounts receivable. It measures as the sum of the Average Age of, Inventory and Average Collection Period. The average age of inventory refers to the, time that lapsed when a good manufactured and eventually sold. The average, collection period on the other hand refers to the time when the sale made and, collected. Both measured in days., Operating cycle= Average Age of Inventory + Average Collection Period, Firms would generally want to speed up their operating cycle. The faster their, operating cycle is, the faster they can convert other forms of current assets to cash,, which has used to pay current obligations., However, in the process of producing and selling goods, firms would incur, obligations for purchases of raw materials or finished goods on account which, results in accounts payable. An account payable reduces the number of days a, firm’s resource has tied up to its operating cycle. Thus, including accounts payable, in our earlier equation, gives us the firm’s cash conversion cycle., Cash Conversion Cycle = Operating Cycle – Average Payment Period, The average payment period is the time it takes for the firm to pay its accounts, payable expressed in number of days. The operating cycle less average payment, period provides us the firm’s cash conversion cycle. Carefully analyzing the, equations provided above, a firm’s cash conversion cycle re expressed as follows., Cash conversion cycle = Average Age of Inventory + Average Collection Period –, Average payment period., , 14

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www.shsph.blogspot.com, Illustration:, Bloom Manufacturing had an average age of inventory of 18.5 days, an, average collection period of 48.5 days and an average payment period of 53.5 days., Bloom is operating and cash conversion cycle obtained as follows:, , Operating Cycle = Average Age of Inventory + Average Collection Period, = 18.5 days, , + 48.5 days, , = 67days, Cash Conversion Cycle = Operating Cycle – Average Payment period, = 67days, , - 53.5 days, , = 13.5 days, Inventory Management- The objective in managing inventory is to convert it as, quickly as possible to cash without losing sales due to stock outs. Therefore, the, financial manager plays a crucial role in overseeing that the firm maintains an, appropriate quantity of inventory – not too much and not too little. Maintaining too, much inventory implies that the firm incurs more costs associated with carrying, these inventories. However, carrying too little inventory quantities might lead to, possible stock outs that could further lead to lost sales, and worst, lost customers., Inventory in A Manufacturing Company - In a manufacturing company, there, are three types of inventory:, , a. Raw materials – these are purchased materials not yet put into, production, b. Work in process – these are goods and labor put into production but, not finished., c. Finished goods – these are goods put into production and finished., These are ready to be sold., One of the common techniques in inventory is the ABC Inventory system/ABC, Analysis. Inventories classified as “A” are high valued items, which should, safeguarded the most. • B items, on the other hand, are average-cost items that, should be safeguarded more than C items but not as much as A items. • While C, items have low cost and is the least safeguarded., Accounts Receivable Management - represents assets of the entity that expected, to be collected and thus converted to cash. A firm would generally want to collect, its receivables as quickly as possible without losing customers due to imposing very, tight collection procedures. Thus, sound accounts receivable management practices, would form three parts: credit selection, credit terms and credit monitoring., , 15

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www.shsph.blogspot.com, One popular credit selection technique is the use of the 5 C’s of credit:, a. Character: The applicant’s record of meeting its past obligations has judged., However, if the applicant does not have any credit history, he or she may be, required to have a co-maker. A co-maker is another person who signs the loan and, assumes equal responsibility for repayment., b. Capacity: This emphasizes the customer’s ability to repay its obligations in, reference to its current financial position or standing. It determines whether the, customer has sufficient resources or sources of funds that it can use to settle, obligation, c. Capital: The applicant’s net worth which can be arrived at by deducting total, liabilities from total assets., d. Collateral: The amount of assets the customer has that could serve as a security, in the event that the obligation is not paid., e. Condition: This includes current economic and industry conditions that might, affect the customer’s ability to repay its obligations., The use of the 5C’s of credit will allow the firm to carefully assess the, customer’s ability to repay its obligations along with the level of risk that the firm, will be subjected to once it decides to grant credit to the customer. It requires, experience to fully assess and review the credit worthiness of customers and, subsequently decide., Credit Scoring- Another used in granting credit to customers is through credit, scoring. Credit scoring applies statistically derived weights to a credit applicant’s, scores on key financial and credit characteristics to predict whether he or she will, pay the requested credit on time. In this procedure, a credit score obtained that, reflects the customer’s creditworthiness, reflecting its overall credit strength. The, score obtained has compared to a pre-determined standard in order to arrive at a, decision of whether accepting or rejecting the customer’s credit. This method is an, inexpensive way to obtain credit ratings for customers., , What’s more?, Direction: Compute the Net Working Capital of ABC Company. See table below and, answer directly., , Cash, Marketable Securities, Accounts receivable, Inventory, Total Current Assets, , ABC Company, Balance Sheet, P 60,000, Account Payable, 10,000, Accrued Expense, 40,000, Notes Payable, 50,000, Current Portion-Long term, debt, 160,000, Total Current Liabilities, , 16, , P 30,000, 20,000, 5,000, 10,000, 65,000

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www.shsph.blogspot.com, Required:, 1. How much is the net working capital of ABC Company?, 2. Is it positive or negative? Explain briefly., , What I Have Learned?, , Activity 2.4, Direction: Read and understand the case below and continue to fill in the sales, budget table., 1. XYZ Merchandising, which is engaged in the reselling of branded bags, is in the, process of preparing its budgets for the calendar year 2016. Last year, XYZ was, able to sell 1,500 bags with a selling price of 2,500 per bag. For the current year,, the basis of both external and internal information. First quarter sales expected to, be 400 bags. The firm also expects that unit sales per quarter would increase by, 10%. Selling price is also expected to increase by 5% for 2016., , Expected, Sales in Units, Unit Sales, price, Total Sales, , XYZ Merchandising, Sales Budget, For the year ended December 31, 2016, 1st quarter, 2nd quarter 3rd quarter 4th quarter, Ex. 400, 2,625, 1,050,000, , Required:, 1. Complete the projected sales budget for each quarter., 2. How much is the total projected sales budget?, , 17, , Total

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www.shsph.blogspot.com, , What I Can Do?, , Direction: Answer the problem below and forecast the Income statement using, percent of Sales Method., The Gospel Company has the following statements, which are representative, of the company’s historical average., , Gospel Company, Income Statement, For the year ended Dec. 31, 2018, Sales, Cost of Sales, Gross profit, Operating expenses, Earnings before interest and taxes, Interest expense, Earnings before taxes, Taxes (35%), Net Income/Earnings after taxes, , P 2,500,000, (1,500,000), 1,000,000, (380,000), 620,000, 80,000, 540,000, (189,500), P, 350,500, , Dividends, , P, , 140,200, , Additional Information:, 1. The firm is expecting a 25% increase in sales next year., 2. The company expecting to declare 30% of dividend, , Required:, 1. Prepare the projected income statement of Gospel Company., 2. How much is the net income?, 3. How much is the dividend?, , 18

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www.shsph.blogspot.com, , Assessment, Directions: Identify the term is being describe by each statement, ____________________ 1. Shows the planned inflows and outflows of cash in the, entity for a given period., ____________________ 2. It refers to company’s investment in short term asset such, as cash, inventory, short-term marketable securities, and, account receivable, _____________________3. The applicant’s record of meeting its past obligations has, judged., ____________________4. Firms operating cycle begin from the time goods for sale has, manufactured to the eventual collection of cash from the, sale of these goods., ____________________5. Cash needed to facilitate the normal transactions of the, business, that is, to carry out its purchases and sales, activities., , Additional Activities, Direction: Write and explain the 6 steps in Financial Planning process for your, own Business (Choose any business)., ___________________________________________________________________________, __________________________________________________________________________________, __________________________________________________________________________________, __________________________________________________________________________________, _________________________________________________________________________________,, __________________________________________________________________________________, __________________________________________________________________________________, __________________________________________________________________________________, __________________________________________________________________________________, _________________________________________________________________________________., __________________________________________________________________________________, __________________________________________________________________________________, __________________________________________________________________________________, _________________________________________________________________________________., __________________________________________________________________________________, __________________________________________________________________________________, __________________________________________________________________________________, _________________________________________________________________________________., , 19

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www.shsph.blogspot.com, , Congratulations!, , You have completed your journey in, this lesson. You did a great job!, , It’s now time to go on to the next, adventure…Good luck!, , Answer Key, , Cash budget, Working capital, Character, Cash conversion cycle, Transaction Motive, , Assessment, , 1., 2., 3., 4., 5., , What I Know, , 1. a, 2. d, 3. b, 4. a, 5. d, 6. d, 7. a, 8. d, 9. a, 10. c, , 20