FINN 115

• Finance


  Decisions about money. Financial decisions deal with how money is raised and used by businesses, governments, and individuals
• Concepts for sound financial decisions

  • More value is preferred to less
  • The sooner cash is received, the more valuable it is
  • Less risky assets are more valuable than (preferred to) riskier assets
• Firms that make decisions with these concepts can provide better products to customers at lower prices, pay higher salaries to employees, and still provide greater returns to investors
• Financial Management


  Also called Corporate Finance; relates to decisions on how much and what type of assets to acquire, how to raise capital needed to buy the assets, and how to run the firm to maximize its value and the value of its owners/investors
• Assets


  • Current assets: can provide money in a short period of time (more liquid; inventories, supply, consumption in less than a year)
  • Long-term assets: objects which you expect that have a long life span (more than a year) (like equipment)
• Capital Markets


  Markets where interest rates, along with stocks and bonds, are determined and where savers who have money to invest are brought together with the businesses and other entities in need of capital for various purposes
• Entities involved in Capital Markets

  • Financial Institutions that supply capital to businesses: banks, investment houses, stock brokers, mutual funds, and insurance companies, etc.
  • Regulatory Bodies such as the Central Bank that regulates banks and controls the money supply, and the Securities & Exchange Commission that regulates the trading of stocks and bonds in public markets
• Investments


  Decisions concerning stocks, bonds, and other financial instruments as well as activities like security analysis, portfolio theory, and market analysis
• Principles of Finance

  • Cash Flow is What Matters
  • Money has a Time Value
  • Risk Requires a Reward
  • Market Prices are Generally Right
  • Conflicts of Interest Cause Agency Problems
• Sole Proprietorship


  A business owned by a single individual. The proprietor retains the title to the business's assets and is responsible, generally without limitation, for the liabilities incurred. The proprietor is entitled to the profits from the business but must also absorb any losses.
• Partnerships


  An association of 2 or more individuals joining together as co-owners to operate a business for profit. The relationship among partners is dictated entirely by the Partnership Agreement, which may be oral or a formal document.
• Types of Partnerships

  • General Partnerships: All partners are jointly liable without limitation for the indebtedness incurred by the partnership.
  • Limited Partnerships: One or more partners have limited liability, restricted to the amount of capital invested in the partnership. Conditions for qualifying as a limited partner include having at least one general partner with unlimited liability.
• Corporations


  An artificial being, invisible, intangible, and existing only in the contemplation of law; an entity that legally functions separate and apart from its owners. Functions include being able to individually sue and be sued, purchase, sell or own property, and have its personnel subject to criminal punishment for crimes.
• Types of Corporations

  • Private Corporations
  • Public Corporations
• Shareholders (owners) of a corporation dictate the company's direction and policies; they elect the board of directors, who in turn select the corporate senior officers
• Financial Ratios


  Used to know effectively how a business is performing
• Financial Statements

  • Income Statement
  • Balance Sheet
  • Cash Flow Statement
• Operating Activities


  Directly related to revenue generating portion of the business
• Investing Activities


  Purchasing of long-term assets/non-current assets (investments that lasts more than a year)
• Financing Activities

  Investing in the business (short-term loans - patch problems in a short period of time; long-term loans-expanding business)
• Liquidity Ratios


  Measures how liquid the company is
• Liquidity Ratios

  • Current Ratio
  • Quick Ratio
  • NWC to Total Assets Ratio
• Leverage Ratios


  To look at your debt, the leverage of your creditors to you
• Leverage Ratios

  • Total Debt to Total Assets
  • Total current liabilities to Total debt ratio
• Profitability Ratios

  • Gross profit margin
  • Operating profit margin
  • Net profit margin
• Efficiency and Return Ratios

  • Sales to Total Assets Ratio
  • Operating Return on Assets Ratio
  • Return on Asset Ratio
  • Return on Equity Ratio
• Cash Flow Statements


  Showcases the cash inflows and outflows of the business
• Cash Flow Statement Sections

  • Operating Activities
  • Investing Activities
  • Financing Activities
• Cash Burn


  The amount of cash spent by the company
• Cash Build


  The amount of cash the company builds
• Conversion Periods


  To gauge how long cash moves around in a business
• Conversion Periods

  • Inventory-to-sale conversion period
  • Sale-to-Cash Conversion Period
  • Purchase-to-Payment Conversion Period
• Cash Conversion Cycle

  Inventory-to-Sale Conversion Period + Sale-to-Cash Conversion Period - Purchase-to-Payment Conversion Period
• To compute for the monthly rate

  Divide it by 12
• Inventory-to-sale conversion period

  1. Average inventories / COGS / 365

  2. For the company it takes them a 113 days to convert a batch of their inventory to sales
• Sale-to-Cash Conversion Period

  1. Average receivables / net sales/ 365

  2. How long the company converts its receivables into cash

  3. Interpretation: If the company allows installments
• Purchase-to-Payment Conversion Period

  1. Average payables + average accrued liabilities / COGS/365 (skipping short loans since we are looking at operating)

  2. How fast you are able to pay current liabilities; the products you have to sell is acquired by getting loans and not paying employees on time
• Cash Conversion Cycle

  1. Inventory-to-Sale Conversion Period + Sale-to-Cash Conversion Period - Purchase-to-Payment Conversion Period

  2. How fast to convert cash outflow (from inventories) to cash inflow (sale)

  3. From the time inventory it takes __ days to convert the cash you spent in the inventory to sales from that inventory

  4. Subtract Purchase-to-Payment to get rid of the days that are financed by liabilities since you are looking at the circulation of the cash you already have

  5. If all are added, it takes too long so essentially the reason why you would get rid of the days P-t-P related to liabilities because actually, cash wasn't spent on it
• Current ratio


  Average Current Assets / Average Current Liabilities
• Quick ratio

  Average Current Assets - Average Current Inventories / Average Current Liabilities