BUSINESS CONCEPTS

Lecture Copy for Prefinals

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THE BUSINESS AND THE FINANCE MANAGER

The Primary Goals of a Business A business organization exists primarily in order to gain profit for its owners. Going into business means investing in activities that make goods and services available to the public and getting profit from these activities. It is able to survive by filling a need in the community and gaining from this activity. However, a good business organization should not stop at this it should also contribute to the economic and social well being of the community. !herefore, the primary goals of every business organization ought to be" #. $arning a profit % money is invested in a company. &aid company provides either goods or services to the community 'or market( at a certain price. ). Increasing its *alue as an $conomic $ntity % the value of a company as an economic entity is usually measured by its growth and stability. a. Growth % may be measured in terms of the increase in its assets, production capacity, sales, and profits b. &tability % refers to the ability of the company to face and withstand the challenges that a business entity encounters. It is a measure of the company+s ability to survive and function in the face of crises. ,. Improving -uality of .ife % a business exists within a certain community. /hether its owners intent it or not, the activities of a company can and will affect the community 'local, national or even global(. The Finan e Fun !ion an" !he Role of !he Finan ial Mana#er 0I1A12$ % the art and science of managing money,. 3ractically all business transactions involve money. &pecifically, 0inance has the following functions in the company" #. Allocation of financial resources ). 3rocurement of funds ,. $fficient and effective utilization of financial resources 4asically, 0inancial 5anagers must ensure that" 0unds are allocated to pro6ects that would give the best return to the company ). 0unds are sources with the lowest possible cost ,. &ufficient but not excessive funds must be available at the right time and must be used efficiently and effectively 0I1A12IA. 5A1AG$7 % are persons who are responsible for most, it not all, of the ma6or financing decisions of the firm or the business. !here are managers who specialize in finance. Among these are the treasurer and the controller. !he different functions of each are listed below" !reasurer #. 4anking relationships ). 2ash management ,. 8btaining financing 9. 2redit management :. ;ividend management <. Insurance =. 3ensions management 2ontroller #. 3reparation of financial statements ). Internal auditing ,. Accounting 9. 3ayroll :. 2ustody of records <. 3reparing budgets =. !axes !he treasurer+s task is primarily to obtain and manage the company+s capital whereas the controller+s primary function is to ensure that these funds are used efficiently. .arge corporations usually appoint a 2hief 0inancial 8fficer '208( to oversee both the treasurer and controller. !he 208 is also involved with financial policy making and corporate planning. #. Pro ess in Or#ani$in# a Business a or"in# !o Classifi a!ion% #. &ole 3roprietorship a. 7egister 4usiness 1ame

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b. 3ay 5unicipal .icense and obtain permits c. Apply for *A! or 1on>*A! number d. 7egister with the 4I7 3artnership a. 7egister 4usiness 1ame b. ;raw up partnership agreement c. 8btain a !I1 d. 7egister with &$2 e. 3ay 5unicipal .icense and obtain permits f. Apply for *A! or 1on>*A! number g. 7egister with the 4I7 2orporation a. *erify 2orporate 1ame b. ;raft and execute Articles of Incorporation c. ;eposit cash d. 0iling of Articles of Incorporation together with the following" #. !reasurer+s affidavit ). &tatement of Assets and .iabilities ,. Authority to verify bank deposits 9. 2ertificate of deposit of cash paid for the subscription of shares :. 3ersonal Information &heet of Incorporators <. 2ommitment to change corporate name in case it is found similar to an existing corporate name e. 3ayment of filing and publication fees f. Issuance of 2ertificate of Incorporation g. 7egistration of corporate name h. 3ay 5unicipal .icense and obtain permits i. Apply for *A! or 1on>*A! number 6. 7egister with the 4I7

ACCOUNTING AND FINANCE

Defini!ions of Terms% 'see attachment" Handout 9( Finan ial S!a!emen!s% The Balan e Shee! !he 4alance &heet presents a snapshot of the firm+s assets at a given time and the source of the money that was used to buy those assets. Assets are the things that the company owns. !he assets are listed on the left side of the 4alance &heet. &ome assets can be turned to cash more easily than others these are known as &i'ui" or urren! asse!s( !he other assets in the 4alance &heet are collectively called fi)e" asse!s( !his may vary from one company to another but usually fixed assets. All fixed assets except for .and, depreciate in value over time. 0or instance, when a piece of e?uipment is purchased, the company expects to be able to use it during a certain period of time % this is called the asset+s useful life. 4ecause of this, fixed assets are listed in the 4alance &heet at their original ac?uisition cost less the accumulated depreciation of that particular asset. !he net amount is referred to as its *oo+ ,alue. 4ook value is different to market value of the asset. Mar+e! ,alue is the price which potential buyers are willing to pay for should the asset be offered for sale. Another factor is obsolescence, especially in e?uipment where the technology advances fast. 0or instance, a company may own several condition pagers or beepers that were once used by its sales force. 7egardless of its book value or condition, there will probably no buyers for this e?uipment. Hence the market value may be zero. In this case, the asset may be written off as a loss. If the customer that bought the items on credit goes bankrupt, the company may be unable to collect the full amount listed as receivables. @ncollected receivables are referred to as *a" "e*!s. !he right side of the 4alance &heet shows the &ia*ili!ies an" O-ner.s E'ui!y or sim/ly e'ui!y( .iabilities refer to the money owed by the company to its creditors. In short, the liabilities portion is a list of the company+s debts. &ome liabilities need to be settled or paid within a short period of time % these are called urren! lia*ili!ies. !hese are usually a oun!s /aya*le( In!eres!s of long term debts are usually part of current liabilities since these have to be paid periodically and regularly. &on#0!erm "e*! or &on#0!erm lia*ili!y , as the term applies, refers to debts that the company does not have to pay within a short period of time. The "ifferen e *e!-een !he om/any.s !o!al asse!s an" !o!al lia*ili!ies is alle" o-ner.s e'ui!y . !his represents the amount of money that the owners have personally invested in the company. &ometimes the e?uity portion will list re!aine" earnin#s. !his

represents profits earned that have been kept or plowed back into the business by the owners. !he difference between the current assets and the current liabilities is called the firm+s ne! urren! asse!s or -or+in# a/i!al. !he pro forma balance sheet reflects the position of the business at the end of the first year. It summarizes the assets, liabilities and net worth of the entrepreneurs.
Assets 2ash 1otes 7eceivable Accounts 7eceivable 5erchandise Inventory 3repaid $xpenses .and 4uilding 8ther Asset 2ategories and Accounts D .iabilities C 8wner+s $?uity INCREASES Additional Investments Additional 7evenues DECREASES /ithdrawals $xpenses

PRODUCTION MANAGEMENT
3roduction is the creation of goods and services to satisfy human wants and other needs. !hus, production of more goods and services offers unlimited opportunities for social and economic upliftment. 3roduction also creates employment and income. !he need for efficient production is made possible if there is efficient production management 3roduction 5anagement % involves planning, organization, coordination and control of resources in order to maximize the creation of goods and services and to minimize the costs of production. 2ost of 3roduction % is the payment for using the factors of production. !hese are wages for labor, rent for land, interest for capital. !he sum of all these costs is called !8!A. 28&!&. In production" >Fi)e" Cos!s 1FC2 % are costs which remain the same whether there is production or not. >3aria*le Cos!s 13C2 % are costs which vary in production to production. !his means that, more outputs or production results to more expenses. 0ixed 2ost C *ariable 2ost D !otal 2osts &a- of Diminishin# Re!urn !he law states that as more and more units of a variable factor are combined with a fixed factor, a point is reached beyond which additional products decrease progressively. RU&ES OF PRODUCTION !hese set of rules apply in a long>run period" If !7 E !2, the rule is to produce more to gain more profit If !7 F !2, the rule is to stop producing because it results to loss If !7 D !2, the rule is to maintain production which results to breakeven !hese set of rules apply in a short>term period" If !7 E *2, organization should continue to operate If !7 F *2, the company should shut down Rele,an! Te hnolo#y !echnology refers to the process of transforming resources into goods and services. /ith the technological advancement, modern machines result to less number of workers. 4in"s of Te hnolo#y #. 3rimitive ). Intermediate ,. Advance In,en!ory Con!rol Inventories are stocks of goods and materials. !here are three ',( types of inventory" a. 7A/ 5A!$7IA.& I1*$1!87G % are stockpiles of materials for inputs of production b. /87H>I1 3782$&& I1*$1!87G % are partially completed pro6ects that re?uire further processing c. 0I1I&H$; G88;& I1*$1!87G % are completed goods for delivery to customers -@A.I!G 281!78. % it is the process of ensuring that goods and services are produced in accordance with their design and specifications because the ?uality of goods and services could become a competitive advantage. 378;@2!I*I!G % is referred to as the efficient creation of goods and services. It is measured by the number of products or goods produced. 3roductivity is a result of several various factors or elements. !hese are the workplace, lighting, ventilation, and sanitation. In a favorable work environment, higher productivity may be achieved.

1otes 3ayable Accounts 3ayable 8ther.iability 2ategories A Accounts

The In ome S!a!emen! If the 4alance &heet is a snapshot of the firm+s assets, liabilities and e?uity at a given time, the Income &tatement is like a video because it shows the results of the firm+s operations within a given period of time. It is also called the 3rofit and .oss &tatement. 3ro 0orma Income &tatement 7evenues Minus 2ost of Goods &old or 2ost of &ervices Minus $xpenses 7ent $xpense &alary A /age $xpense @tilities $xpense &upplies $xpense Advertising $xpense Interest $xpense 3roperty !ax $xpense P R O F I T &ervice 7evenue &ales 7evenue

E'uals

The Cash Flo- S!a!emen! !he &tatement of 2ash 0lows shows the firm+s cash inflows and outflows from its operations as well as its investments and financing activities. It contains several sections namely" #. 2ash flow generated by the firm+s operations ). 2ash invested in plant and e?uipment ,. 2ash flow generated from financing activities such as the sale of new bonds and stocks. 2ash 0low is not the same as profit. 3rofit is the result of subtracting expenses from sales, whereas cash flow results from the difference between actual cash receipts and cash payments. 2ash flows only when actual payments are received or made. &ales may not be regarded as cash because a sale may be incurred but payment may not be made for ,B days. 8n the other hand, cash payments to reduce the principal on a loan do not constitute a business expense but do constitute a reduction of cash. Also, depreciation on capital assets is an expense, which reduces profits, not a cash outlay. 8ne of the ma6or problems that new ventures face is cash flow. 8n many occasions, profitable firms fail because of lack of cash. !hus, using profit as a measure of success for a new venture may be deceiving if there is a significant negative cash flow. 0or strict accounting process there are two standard methods used to pro6ect cash flow" a. Indirect 5ethod % in this method the ob6ective is not to repeat what is in the income statement but to understand there are some ad6ustments that need to be made to the net income based on the fact that actual cash may or may not have actually been received or disbursed. b. ;irect 5ethod 2ash 7eceipts 2ash ;isbursement 2ash Available money>in money>out money available for a specific time