a short review on basic finance

8/12/2019 A short review on basic finance

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FINMGMT Reviewer

Finance Department Organizational Chart

Financial Statements

Income Statement

a. Multiple-step = net income/net loss

b. Single-step = revenue – expense = net

income/net loss

c. Departmental = income derived from

various hotel departments

d. Consolidated = overall income statement

of the hotel

Balance Sheet – assets, liabilities and equity

Cash Flow Statement – cash receipts and cash

payments; cash inflow and outflow

a. Operating activities

Cash inflow:

Fr sale of goods and services

Returns on interest and

dividends(loans/equity securities)

Cash outflow:

Suppliers from inventory,

employees for services

Gov’t for taxes

Lenders for interest, others for

expenses

b. Investing activities

Cash Inflow:

Fr sale of property,

equipment and plant

Fr sale of debts or equity of

other entities

Fr collection of principal on

loans to other entities

Cash outflow:

To purchase property, plant and

equipment

To make loans to other entities

To purchase debts or equity

securities of other entities

c. Financing activities

Cash inflows

Fr.sale of equity securities(own stock)

Fr issuance of debts(bonds/notes)

Cash outflow

to stockholders as dividends

To redeem long term debt or reacquire

capital stock

Working Capital = current assets – current liabilities

Cash – most liquid asset



Internal Factors:

Over the counter receipts

Mail receipts

Cash Disbursement

Objectives of Financial Management

a. Set up company goals

b. sources of funds and capital are available

c. allocation of funds

Goals of Financial Management

Give a statement for its current market

position

Identify customers for its target on the

market plan

Give guidelines for allocation of resources.

Identify when the growth of the company

will be

Provide indicators how your product will

differ from your know competitor.

Focus management’s attention on

marketing strategies to conform with its

mission statement

Give basis for internal communication

Give directions to employees on what

action to take in the attainment of

company objectives

Give basis for control and evaluation

Financial Management Definition

Financial management is a managerial function that

involves directing, controlling, planning, organizing,

the financial activities and resources of an

organization.

Tools in Financial Statement Analysis

Horizontal Analysis – trend analysis; determine the

increase or decrease of the financial data over a

period of time expressed in amount or percentage

FORMULA:

% =

x 100

Vertical Analysis – common-size analysis; evaluate

the financial data by expressing each item in a

financial statement as a percentage of a base

amount

FORMULA:

BASE AMOUNT % =

Ratio Analysis - relationship among selected items

of financial statement data

TYPES:

LIQUIDITY RATIO - measures the short term ability

of the company to pay its maturing or due

obligations and to meet the need for unexpected

need for cash.

EFFICIENCY RATIO – shows the company’s

productivity

PROFITABILTY RATIO - Measures of the income or

operating success of a company for a given period

of time. This is the ultimate test of management’s

operating effectiveness. This will tell if the

company will be granted credit or equity financing.



SOLVENCY RATIO - Measures of the ability of the

company to survive over a long period of time. Long

term creditors and stockholders are interested to

know if the company can pay their interest charges

or repay the face value of their loans on maturity

time.

FORMULAS:

LIQUIDITY RATIO and EFFICIENCY RATIO

Current ratio =

Use: measures short term debts paying ability

Acid (quick) test ratio

=

Use: measures immediate short term liquidity

Receivables turnover =

Use: measures liquidity of receivables

Inventory turnover =

Use: measures liquidity of inventory

Average Receivables Collection Period =

⁄

Average Inventory Period =

⁄

PROFITABILITY RATIO

Profit margin =

Use: measures net income generated by each peso

of sales

Asset turnover =

Use: measures how efficiency assets are used to

generate sales

Return on assets =

Use: measures overall profitability of assets

Return on common stockholder’s equity =

Use: measures profitability of owner’s investments

SOLVENCY RATIO

Debt to assets =

Use: measures the percentage of total assets;

provided by creditors

Times interest earned =

Use: measures ability to meet interest payments as

they come due

MARKET-VALUE RATIO – shows how the firm is

valued by investors; overvalued/undervalued

Price-earnings Ratio =

CREDIT COLLECTION

A journal entry recording an increase in

assets; recorded when income is received;

recorded and recognized when income is

earned



A contractual agreement in which a

borrower receives something of value now

and agrees to repay the lender at some

later date

Borrowing capacity of an individual or

company

CREDIT LINE - arrangement in which a bank or

vendor extends a specified amount of unsecured

credit to a specified borrower for a specified time

period

CREDIT TERMS - length of time a consumer has to

repay the amount of debt owed on an obligation;can also include interest payments

AGED DEBTOR ANALYSIS - list which analyses a

company's debtors, showing the number of days

their payments are outstanding

ACCOUNTS RECEIVABLE AGING - periodic report

showing all outstanding receivable balances,

broken down by customer and month due

KINDS OF CREDIT

PERSONAL - credit-borrowing by an individual on

his own personal capacity such as with credit card

companies, or lending institutions or friends and

relatives for that matter

COMMERCIAL - borrowing by companies with

secured collaterals such as real estate or securedbank deposits with the purpose of financing the

business

PROCESS IN CREDIT CARD

AUTHORIZATION

CLEARING AND SETTLEMENT

IMPORTANCE:

Controls the cash flow of the hotel

Eliminates bad debts

Ensures that the Accounts Receivables of

the hotel will be collected on time with

minimal cost

Reduces credit risk and improves collection

FEASIBILITY STUDY - a study that will let you know

if the business you like to do is viable or not;

identifies the potential problems of the business

and it will let you know if you will proceed or not

IMPORTANCE:

It lists all the details of all things needed by the

business including location, business near you,

spaces etc.

Identifies the logical and other business problems

and solutions

Marketing strategies to make your business a

success and convincing the bank and your investors

that your business is good

It is the foundation of your business plan

COMPONENTS:

Market feasibility – knowing your products, sales,

competitors

Financial feasibility – knowing your working capital,

sources of capital, ROI

Comparative feasibility – legal, corporate structure

a short review on basic finance

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