Financial Management

Prelims Topic – 2nd Semester

History of Finance 6. Raises the total worth of businesses or
 Field of finance emerged in the 1940s and 1950s organizations.
as a separate study of theory and practice from 7. Ensures financial stability.
economics. 8. Encourages employees with their own financial
 Writings of Myron Scholes, Fischer Black, planning by encouraging them to save money.
William F. Sharpe and Harry Markowitz were Goals of Financial Management
the first. 1. Profit Maximization
 Realms of finance are banking, lending, and  Reduction of expenses, improving the
investing and it has been around in some form product or service quality.
since the dawn of civilization.
 Refers to the net income of the company.
 In the 1800 BCE, the Babylonian Code of
Hammurabi codified the early Sumerian way of 2. Wealth Maximization
doing a business.  Refers to the total assets of the company.
 The credit, agricultural labor employment, 3. Sustenance of Liquidity
and land ownership/rental were all governed by  Able to pay your short-term obligations.
these regulations. 4. Financial Requirements
 Loans also existed in those days and the interest  Able to meet the company’s financial
was assessed on them. requirements.
 Whether you borrow grain or silver, the rates 5. Utilization of Finances
differed.
6. Minimizing Cost
 By 1200 BCE, in China they used cowrie shells
7. Risk Management
as a currency.
8. Improved Efficiency
 In the first millennium BCE, it was the
introduction of the coined money. The Roles of Financial Management in Legal
and Business Context
 Around 564 BCE, the King Croesus of Lydia
(Turkey) was among the first to strike and use  Business Context
gold coins. The phrase “rich as Croesus”. 1. Budgeting and Planning
 The priests and temple employees where  Creation of financial plans and strategies the
thought to be the most honest and pious people to complements corporate goals.
protect property.  It includes estimating sales, expenses and
 Coins were kept in the in the basement of the earnings as well as making sure the company
ancient Roman temples. can function within its means.
 Temples served as large cities’ financial hubs by 2. Capital Allocation
lending money as well.  It determines where and how to use resources
Finance to get the best returns or gains.
 According to Webster’s dictionary, it is a system  It involves choosing whether to invest in
that includes the circulation of money, the technology, buy new assets, or enter new
granting of credit, the making of investments markets.
and the provision of banking facilities. 3. Financial Risk Management
Financial Management  It recognizes possible financial risks such as
 It is concerned with the acquisition, financing, changes in the market or inefficiencies in
and management of assets with some overall operations and cresting plans to reduce them.
goal in mind.  A company must prepare for things like
 The decision function of financial supply chain interruptions, interest rate
management can be broken down into three fluctuations, and inflation.
major areas: 4. Cashflow Management
 Investment  It ensures that the company has a sufficient
 Financing cash on hand in the commerce of the
 Asset management decisions company to cover up immediate liabilities.
 It is a strategic practice of establishing,  Understanding whether the company can pay
controlling, and monitoring all financial its debts, employees, and other
resources to achieve your business goals. responsibilities on schedule is made easier
Importance of Financial Management with the aid of cash flow analysis.
1. Helps in the financial planning of organizations. 5. Profit Maximization and Cost Control
2. Helps organizations with funding planning and  It preserves equilibrium between expense
acquisitions. containment and income generation, in
3. Aids organizations in efficiently distributing and simple terms, it increases revenues and
using the money they have earned or obtained. decrease expenses.
4. Assist businesses make important financial  The job of a financial managers is to increase
decisions. revenue streams and reduce wasteful
spending in order to maximize profitability.
5. Helps increase an organization’s profitability.

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Financial Management
Prelims Topic – 2nd Semester
 A good example is the Jollibee that expands 6. Mergers and Acquisitions (M&A)
its business by franchising.  The legal teams are critical in the financial
 Legal Context management of mergers, acquisitions, and
1. Legal Compliance and Regulatory Adherence business restructures. They help ensure that
the financial deals are legally structured, due
 A company must have to abide by a number
diligence is performed, and risks are
of financial laws such as those pertaining to
minimized.
taxes, securities, and anti-money laundering.
Financial Statement Analysis and Forecasting
 To make sure that financial reporting,
transactions, and practices comply with the  The balance sheet, income statement,
law, legal experts collaborate with financial statement of cashflow and statement of
management. changes in equity are part of financial
statements.
 AMLA or Anti-Money Laundering act is an
act in 2001.  Income accounts represents the revenues of the
company and expense accounts are expenses
2. Contract Law and Negotiations
occurred in the company.
 To ensure that conditions pertaining to
 Income statement sees the operations of the
payments, liabilities, or profit-sharing are
company whether earning or loss.
transparent, enforceable, and compliant with
the law, the financial managers and legal  Balance sheet sees the position of the company.
experts must collaborate when creating  Fiscal year – any days of the year until
contracts and financial agreements. succeeding year.
 Collaborative sharing must be focused.  Calendar year – from January to December.
 There should be a transparency.  3 components of Balance sheet
 In 2010, the JFC acquired 70% of Mang 1. Total assets – both current and non-
Inasal for 3 billion pesos (68.8 million current.
dollars). 2. Total liabilities – both current and non-
 In 2016, the JFC acquired 30% of Mang current. Notes payable usually long-
Inasal, the remaining 30% for 2 billion term and accounts payable usually
pesos. short-term.
 JFC recognized the potential in Mang 3. Total equity/capital – includes capital,
Inasal’s development and growth. retained earnings (restricted earning’s
 JFC sought to purchase its rival with the cannot be touched) and unrestricted
fastest growth rate. earnings.
 Mang Inasal is one of the portfolios of  Income statements are nominal accounts and
brands that JFC owns and operates. balance sheets are real accounts.
3. Litigation and Dispute Resolution  Techniques are different ratios, historical data,
informed financial decisions, financial data and
 The legal teams assist in settling
evaluate financial health.
disagreements about financial management
such as fraud, financial mismanagement, or Financial Ratios
contract violations through arbitration,  Profitability ratios measures how efficient a
litigation, or negotiation. company generates profits relative to its revenue,
4. Intellectual Property Protection assets, or equity.
 This is frequently necessary for businesses to 1. Gross Profit Margin = (Gross Profit /
safeguard their intellectual property such as Revenue) × 100
patents, trademarks, or unique technology = (P500,000 / P1,200,000) × 100
against theft or financial exploitation. = 41.67%
 Drafting an agreements and contracts that  This ratio shows the percentage of revenue
protect these assets is aided by the legal that remains after deducting the cost of goods
counsel. sold (COGS).
5. Estate Planning and Asset Protection  Analysis: A 41.67% margin means that for
 It also extends to personal and corporate every peso of sales, P0.42 remains as gross
estate planning. profit before deducting operating expenses.
 Ensuring that assets are appropriately  A higher margin indicates better efficiency in
protected and that taxes and liabilities are production and pricing strategies.
minimized during transfers or inheritance. 2. Net Profit Margin = (Net Income / Revenue) ×
 Transferring of business needed to go 100
through BIR and etc. = (P245,000 / P1,200,000) × 100
 Succession planning – training of people for = 20.42%
managing the business.
 This measures the percentage of revenue that
 Safeguard your assets: becomes net income after all expenses,
 Last will and testament including operating expenses, interest, and
 Leave your legacy to your children taxes.

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Financial Management
Prelims Topic – 2nd Semester
 Analysis: A 20.42% margin means that for = 0.67 (indicates a balanced capital structure)
every P1.00 in revenue, the company retains  This ratio compares total liabilities to
P0.2042 as profit. shareholder equity, indicating financial
 A higher net profit margin reflects strong cost leverage.
control and profitability.  Analysis: A 0.67 ratio means that for every
3. Return on Assets (ROA) = (Net Income / Total P1.00 of equity, the company has P0.67 in
Assets) × 100 debt.
= (P245,000 / P1,000,000) × 100  A lower ratio suggests lower financial risk,
= 24.50% but some debt is beneficial for growth.
 It indicates how efficiently the company uses 2. Debt Ratio = Total Liabilities / Total Assets
its assets to generate profit. = P400,000 / P1,000,000
 Analysis: A 24.50% ROA means that every = 0.40 (40% of assets are financed by debt)
P1.00 in assets generates P0.245 in net  This ratio shows the percentage of total assets
income. financed by debt.
 A higher ROA suggests that the company is  Analysis: A 40% debt ratio means that 40%
effectively utilizing its resources. of the company’s assets are funded by
4. Return on Equity (ROE) = (Net Income / Total liabilities, and the remaining 60% is financed
Equity) × 100 by equity.
= (P245,000 / P600,000) × 100  A moderate debt ratio (below 50%) indicates
= 40.83% balanced financial health.
 It measures how much profit a company 3. Interest Coverage Ratio = Operating Income /
generates with its shareholders’ investment. Interest Expense
 Analysis: A 40.83% ROE means that for = P400,000 / P50,000
every P1.00 in shareholder equity, the = 8.0 (indicates strong ability to cover interest
company earns P0.4083 in profit. expense)
 This is a strong return, indicating good  This ratio measures the company’s ability to
management performance. pay interest expenses on outstanding debt.
 Liquidity ratios  Analysis: A 8.0 ratio means the company
1. Current Ratio = Current Assets / Current earns P8.00 in operating income for every
Liabilities P1.00 in interest expense.
= P400,000 / P150,000  A ratio above 3.0 is considered good,
indicating strong ability to cover debt costs.
= 2.67 (indicates strong liquidity)
 A strong profitability means the company has
 The current ratio indicates how well a
high profit margins, good returns on assets and
company can cover its short-term liabilities
equity.
with its short-term assets.
 A good liquidity means the company has enough
 Analysis: A 2.67 ratio means that the
short-term assets to cover liabilities.
company has P2.67 current assets for every
P1.00 in current liabilities.  A moderate leverage means the debt levels are
manageable, with a low debt-to-equity ratio and
 A ratio above 1.5-2.0 is considered good,
high interest coverage.
showing financial stability.
Time Value of Money
 2.0 is the standard since 2 current assets for
every liability.  It denotes the value of money over time. This
means that money changes its value over time.
 Within 1 year.
 Since money can be put to productive use, its
2. Quick Ratio (Acid Test Ratio) = (Current
value is different depending on the date of receipt
Assets – Inventory) / Current Liabilities
or payment.
= (P400,000 – P50,000) / P150,000
 Inflation is an economic disorder characterized
= 2.33 by continuous increase in the price level of goods
 This is a stricter liquidity measure that and services without the corresponding increase
excludes inventory (since it may not be in the production of these goods and services.
quickly converted to cash).  When a production does not increase, the supply
 Analysis: A 2.33 quick ratio means the of goods does not increase. When the price
company has P2.33 in liquid assets for every increase without the corresponding increase in
P1.00 in current liabilities. the supply of goods, inflation happens.
 A ratio above 1.0 is preferred, showing the  The concept of time value of money is based on
company can meet short-term obligations the notion that a peso received today is worth
without selling inventory. more than a peso received in the future.
 Leverage ratios measures financial risk and the Simple Interest
extent to which a company is funded by debt.  Ordinary Interest = Principal Amount × Rate
1. Debt-to-Equity Ratio = Total Liabilities / Total × Time / 360
Equity
= P400,000 / P600,000
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Financial Management
Prelims Topic – 2nd Semester
 Exact Interest = Principal Amount × Rate  Drawing on the concept of PV, the total PV of all
× Time / 365 future cash flows is obtained.
 If no date, year or annual or the problem is silent  Deducting the investment or principal, needed
assumed to use ordinary interest. If exact, used for the project or investment form this total PV,
the exact interest. the result is the NPV.
Compound Interest  If the NPV is positive, the project or investment
 The interest is computed by adding the interest alternative is rejected.
to the principal to be used as the new basis or  Present Value Factor = 1 / (1 + r) n
new principal for the succeeding year or period. Year Cash flow PV PV
 Factor
 This is on the assumption that interest is not 1 P1,500,000 0.943 P1,414,500
paid monthly, but is accumulated until
maturity date. 2 P1,500,000 0.890 P1,335,000
 The idea of compounding is interest added to the 3 P1,500,000 0.840 P1,260,000
original principal becomes the new principal. 4 P24,500,000 0.792 P19,404,000
Year Principal Rate Time Interest Principal MV Total Present
1 P1,000,000 5% 1 P50,000 P1,000,000 P1,050,000 Value
P23,413,500
2 P1,050,000 5% 1 P52,500 P1,050,000 P1,102,500 Investment
(P20,000,000)
3 P1,102,500 5% 1 P55,125 P1,102,500 P1,157,625 required

Future Value and Compounding Net Present

P3,413,500
Value
 Future value is the sum of money which will be
received in the future period resulting from
investment, taking into account the interest it will Compiled by:
earn. Hannah Therese Atanes
BS Legal Management – 2A
 Compounding or accumulation is the process
in which future value is determined.
Year P r I FV (P + I)
1 P1,000,000 10% P100,000 P1,100,000
2 P1,100,000 10% P110,000 P1,210,000
3 P1,210,000 10% P121,000 P1,331,000
4 P1,331,000 10% P133,000 P1,464,00
 Future Value = P (1 + r) n
 1 is constant, r is the rate and n are the period.
 The factor used to multiply the principal with is
(1 + r) n which represents the future value of 1 at
the end of a given period, the future value factor
available in the future value table.
Present Value and Discounting
 Present value is the value at the current time of
the cashflow expected to be received after some
period of time. It answers the question how much
is the worth today of an amount that will be
received in the future.
 The present value is always a smaller quantity
than the future amount.
 The method of determining the present value is
discounting.
 The rate applied in discounting is called discount
rate (DR).
 The DR is the expected rate of return.
 The net cash flow could be received in two ways:
 After a number of years
 Annually
 Present Value = CF [1 / (1 + r) n]
 CF is the net cash flow and r is the discount rate.
Net Present Value
 The concept of NPV is used in financial
decision-making, particularly in evaluating
investment alternatives.

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