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BUSINESS FINANCE > BF-M3 > Flashcards

BF-M3 Flashcards

FINANCIAL PLANNING AND TOOLS AND CONCEPTS

1
Q

is an important aspect of the firm’s operations because it provides road maps for guiding, coordinating, and controlling the firm’s actions to achieve its objectives

A

Planning

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2
Q

is about setting the goals of the organization and identifying ways on how to achieve them.

A

Management planning

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3
Q

set the direction of the company.

A

Long term goals

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4
Q

are the specific steps or actions that will ultimately reach the company’s long term goals.

A

Short term goals

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5
Q

Persons Involved:
More participation from top management

A

LONG- TERM PLANNING

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6
Q

Persons Involved:
Top management is still involved but there is more participation from lower-level managers (productions, marketing personnel, finance and plant facilities) because their inputs are crucial at this stage since they are ones who implement these plans.

A

SHORT TERM PLANNING

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7
Q

Time Period:
2 to 10 years

A

LONG- TERM PLANNING

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8
Q

Time Period:
1 year or less

A

SHORT TERM PLANNING

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9
Q

Level of Detail:
Less

A

LONG- TERM PLANNING

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10
Q

Level of Detail:
More

A

SHORT TERM PLANNING

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11
Q

Focus:
Direction of the company

A

LONG- TERM PLANNING

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12
Q

Focus:
Every functioning of the company

A

SHORT TERM PLANNING

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13
Q

6 Steps in planning

A
  1. Set goals or objectives.
  2. Identify Resources.
  3. Identify goal-related tasks.
  4. Establish responsibility centers for accountability and timeline.
  5. Establish the evaluation system for monitoring and controlling.
  6. Determine contingency plans.
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14
Q

Characteristics of an Effective Plan
(target a specific area for improvement)

A

specific

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15
Q

Characteristics of an Effective Plan
(quantify or at least suggest an indicator of progress)

A

Measurable

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16
Q

Characteristics of an Effective Plan
(specify who will do it)

A

Assignable

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17
Q

Characteristics of an Effective Plan
(state what results can realistically be achieved, given available resources)

A

Realistic

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18
Q

Characteristics of an Effective Plan
(specify when the result(s) can be achieved)

A

Time-related

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19
Q

The most important account in the financial statement in making a forecast is sales since most of the expenses are correlated with sales.

A

Sales Budget

20
Q

external factors that should be considered in forecasting sales

A

-Inflation/ Economic Crisis
-Interest rate
-Income tax rates
-Competition

21
Q

internal factors that should be considered in forecasting sales

A

-Production capacity
-Manpower requirements’
-Management style of managers
-Financial Resources of the company

22
Q

provides information regarding the number of units that should be produced over a given accounting period based on expected sales and targeted level of ending inventories

A

Production Budget

23
Q

Production Budget formula

A

Required production in units = Expected Sales+ Target Ending Inventories- Beginning Inventories

24
Q

refers to the variable and fixed costs needed to run the operations of the company but are not directly attributable to the generation of sales.

A

Operations budget

25
Q

give 4 examples of Operations budget

A

=Rent payments
=Tax Payments
=Administrative Costs
=Professional fees

26
Q

is a statement of the firm’s planned inflows and outflows of cash. It is used by the firm to estimate its short-term cash requirements, with particular attention being paid to planning for surplus cash and for cash shortages

A

Cash budget, or cash forecast

27
Q

3 working capital management (operating cycle)

A

cash–>inventory–>accounts receivable

28
Q

is the average number of days to sell its inventory.

A

Days of Inventory or inventory conversion period or average age of inventories

29
Q

Days of Inventory or inventory conversion period or average age of inventories FORMULAS

A

Days of inventory=365(or 360 days) / inventory turnover

inventory turnover=cost of goods sold / beginning inventory + ending inventory/2

(formula without computing for inventory turnover)

Days of inventory=average inventory / average COGS per day

30
Q

is the average time for the company to collect its receivables.

A

Days of Sales Outstanding (DSO) or Average Collection Period

31
Q

Days of Sales Outstanding (DSO) or Average Collection Period FORMULAS

A

Days of Sales Outstanding = 365(or 360 days) / receivable turnover

Receivable turnover = net credit sales / beginning accounts receivable + ending accounts receivable/2

32
Q

also called the net operating cycle, is computed as the operating cycle less days of payable.

A

Cash Conversion Cycle

33
Q

Cash Conversion Cycle
formula form:

A

Cash Conversion Cycle = Operating Cycle- Days of Payables

Cash Conversion Cycle = (Days of Inventory + Days of Receivables) – Days of Payable

34
Q

is the average number of days for the company to pay its creditors.

A

Days of Payables Outstanding (DPO)

35
Q

The formula for DPO is:

A

Days of payable = 365(or 360)days / payable turnover

Payables turnover = net credit purchases / beginning accounts payables + ending accounts payables/2

36
Q

is the administration and control of the company’s working capital. The primary objective is to achieve a balance between profitability and risk.

A

Working Capital Management

37
Q

Basically, there are three types of working capital financing policies the management can choose from:

A
  • Maturity-matching working capital financing policy
  • Aggressive working capital financing policy
  • Conservative working capital financing policy
38
Q

is the minimum level of current assets required by a firm to carry-on its business operations given its production capacity or relevant sales range.

A

Permanent Working Capital

39
Q

is the excess of working capital over the permanent working capital given its production capacity or relevant sales range.

A

Temporary working capital

40
Q

In ______, all permanent working capital must be financed by long- term sources while temporary working capital requirements should be financed by short-term sources.

A

maturity-matching

41
Q

Based on the maturity-matching working capital financing policy, permanent working capital requirements should be financed by _____ while temporary working capital requirements should be financed by _____of financing.

A
  1. long-term sources
  2. short-term sources
42
Q

Long-term sources of financing include long-term debt and equity such as common stock and preferred stock. Short-term sources include short-term loans from a bank.

These short-term loans from banks are called _____ which perfectly describe the reasons why these loans are incurred.

A

working capital loans

43
Q

Under the______, some of the permanent working capital requirements are financed by short-term sources of financing.

A

aggressive working capital financing policy

44
Q

Why do managers of some companies adopt aggressive working capital financing policy? It is because long- term sources of funds have _____as compared to short-term sources of financing. By financing some of the permanent working capital requirements with short-term sources of financing, financing cost is _____ which in turn, improves net income.

But what is the trade-off? Since it is ______, the debt has to be paid soon and the company may not yet have enough cash by the time the debt matures. This refers to _____ and this risk increases with the aggressive working capital financing policy

A
  1. higher cost
  2. minimized
  3. short-term
  4. liquidity risk
45
Q

Based on the _____, even some of the temporary working capital requirements are financed by long-term sources of financing.

A

conservative working capital financing policy

46
Q

This policy minimizes liquidity risk, but it also reduces the company’s profitability because long-term sources of financing entail higher cost.

A

conservative working capital financing policy

BUSINESS FINANCE (5 decks)

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