Modules 1 and 2

• Finance


  Decisions about money, 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
• Types of assets

  • Current: can provide money in a short period of time (more liquid; inventories, supply, consumption in less than a year)
  • Long term: 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, and 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
• 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
• 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, can individually sue and be sued, purchase, sell or own property, and its personnel are subject to criminal punishment for crimes
• Shareholders (owners) of a corporation


  • Dictate the company's direction and policies; owners elect the board of directors, who in turn select the corporate senior officers
• Private vs Public Corporations


  Separate business entity from the owner, individuals can sue the corporation but not the owners; a publicly listed corporation can get more cash from the public through an IPO
• Financial Ratios


  To know effectively how a business is performing
• Income Statement


  Reports the revenue, expenses, and profit or loss of a business for a specific period
• Balance Sheet

  Reports the current value of the business
• Cash Flow Statement


  Showcases the cash inflows and outflows of the business, reports what should be the ending cash balance of a particular period, and has 3 main sections: operating activities, investing activities, and financing activities
• Liquidity Ratios


  Measures how liquid the company is, including current ratio, quick ratio, and net working capital to total assets ratio
• Leverage Ratios

  Look at the debt of the business, including total debt to total assets ratio and total current liabilities to total debt ratio
• Profitability Ratios

  Include gross profit margin, operating profit margin, and net profit margin
• Efficiency and Return Ratios

  Include sales to total assets ratio, operating return on assets ratio, return on assets ratio, and return on equity ratio
• Operating Activities in Cash Flow Statement

  1. Net Income and Depreciation Expense

  2. Changes in current assets like accounts receivable and inventory

  3. Changes in current liabilities like accounts payable and accrued liabilities
• Investing Activities in Cash Flow Statement

  Changes in long-term assets like plant and equipment
• Financing Activities in Cash Flow Statement

  Changes in short-term and long-term debt
• Cash Burn


  The amount of cash spent by the company, including all expenses except depreciation
• Cash Build


  The amount of cash the company generates, starting with sales revenue and adjusting for changes in accounts receivable
• Conversion Periods


  Measures how long cash moves around in a business, including inventory-to-sale conversion period and sale-to-cash conversion period
• Cash burn

  Cash outflow
• To compute for the monthly rate

  Divide it by 12
• Conversion periods


  To gauge how long cash moves around in a business
• Inventory-to-sale conversion period

  Average inventories / COGS / 365
• Sale-to-Cash Conversion Period

  Average receivables / net sales/ 365
• Purchase-to-Payment Conversion Period


  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
• Purchase-to-Payment Conversion Period


  Average payables + average accrued liabilities / COGS/365 (skipping short loans since we are looking at operating)
• Cash Conversion Cycle

  Inventory-to-Sale Conversion Period + Sale-to-Cash Conversion Period - Purchase-to-Payment Conversion Period
• Cash Conversion Cycle


  How fast to convert cash outflow (from inventories) to cash inflow (sale)
• Cash Conversion Cycle


  From the time inventory it takes __ days to convert the cash you spent in the inventory to sales from that inventory
• Cash Conversion Cycle

  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