COLLEGE OF BUSINESS AND

MANAGEMENT
COURSE MODULE IN

SPECIAL TOPICS
IN FINANCIAL
MANAGEMENT
COURSE FACILITATOR: ARMALYN S. CANGQUE, MBA
FB/MESSENGER: Armalyn Segura Cangque
Email: [email protected]
Phone No: 09457243875

MODULE
 MISSION

Northern Negros State College of Science and technology envisions a skillful and productive

manpower, qualified and competent professionals endowed with leadership qualities, commitment to

public service, a common shared values, and capacities to integrate and use new knowledge and skills in

various vocations and professions to meet the challenges of the new millennium.

VISION

To train and develop semi-skilled manpower, middle level professionals and competent and

qualified leaders in the various professions responsive to the needs and requirements of the service areas

providing appropriate and relevant curricular programs and offerings, research projects and

entrepreneurial activities, extension services and develop progressive leadership to effect socio-economic

change and thereby improve the quality of life.

INSTITUTIONAL OUTCOMES

1. Demonstrate logical thinking, critical judgment and independent decision-making on any

confronting situations
2. Demonstrate necessary knowledge, skills and desirable attitudes expected of one’s educational
level and field of discipline
3. Exhibit necessary knowledge, skills and desirable attitudes in research
4. Exhibit proactive and collaborative attributes in diverse fields
5. Manifest abilities and willingness to work well with others either in the practice of one’s profession
or community involvement without compromising legal and ethical responsibilities and
accountabilities.
PROGRAM LEARNING OUTCOMES (CMO #75 s.2017)

The program shall produce a graduate who can:

1. Articulate and discuss the latest developments in the specific field of practice.
2. Effectively communicate orally and in writing using both English and Filipino.
3. Work effectively and independently in multi-disciplinary and multi-cultural teams.
4. Act in recognition of professional, social and ethical responsibility.
5. Preserve and promote “Filipino historical and cultural heritage”.
6. Perform the basic functions of management such as planning, organizing, staffing, directing and
controlling.
7. Apply the basic concepts that underlie each of the functional areas of business (marketing, finance,
human resource management, production and operations management, information technology,
and strategic management) and employ these concepts in various business situations.
8. Select the proper decision-making tools to critically, analytically and creatively solve problems and
drive results.
9. Express oneself clearly and communicate effectively with stakeholders both in oral and written
forms.
10. Apply information and communication technology (ICT) skills as required by the business
environment.
11. Work effectively with other stakeholders and manage conflict in the workplace.
12. Plan and implement business related activities.
13. Demonstrate corporate citizenship and social responsibility.
14. Exercise high personal moral and ethical standards.
15. Analyse the business environment for strategic decision.
16. Prepare operational plans.
17. Innovate business ideas based on emerging industries.
18. Manage a strategic business unit for economic sustainability.
19. Conduct business research.
20. Apply current and relevant practices and trends in the business environment.
21. Conceptualize, utilize and commercialize business research outputs.
22. Demonstrate social responsiveness to the needs of the community in the field of business and
management.
Warm greetings!

Welcome to the second semester of School Year 2020-2021! Welcome to the College of Business and
Management and welcome to NONESCOST!

Despite of all the happenings around us, there is still so much to be thankful for and one of these is the
opportunity to continue learning.

You are right now browsing your course module in BAPF106. As you read on, you will have an overview of
the course, the content, requirements and other related information regarding the course. The module is
made up of 2 lessons. Each lesson has seven parts:

INTRODUCTION- Overview of the lesson

LEARNING OUTCOMES- Lesson objectives for you to ponder on

MOTIVATION- Fuels you to go on

PRESENTATION- A smooth transition to the lesson

TEACHING POINTS- Collection of ideas that you must discover

LEARNING ACTIVITIES – To measure your learnings in the lesson where you wandered

ASSESSMENT – To test your understanding in the lesson you discovered

Please read your modules and learn the concepts by heart. It would help you prepare to be effective and
efficient professional in your respective fields. You can explore more of the concepts by reading the
references and the supplementary readings.

I encourage you to get in touch with me in case you may encounter problems while studying your modules.
Keep a constant and open communication. Use your real names in your FB accounts or messenger so I can
recognize you based on the list of officially enrolled students in the course. I would be very glad to assist
you in your journey. Furthermore, I would also suggest that you build a workgroup among your classmates.
Participate actively in our discussion board or online discussion if possible and submit your
outputs/requirements on time. You may submit them online through email and messenger. You can also
submit hard copies. Place them in short size bond paper inside a short plastic envelop with your names and
submit them in designated pick up areas.

I hope that you will find this course interesting and fun. I hope to know more of your experiences, insights,
challenges and difficulties in learning as we go along this course. I am very positive that we will successfully
meet the objectives of the course.

May you continue to find inspiration to become a great professional. Keep safe and God bless!

Course Outline in BAPF106 – SPECIAL TOPICS IN FINANCIAL MANAGEMENT

Course BAPF106
Number
Course Title SPECIAL TOPICS IN FINANCIAL MANAGEMENT
Course
Description A 3-unit course that will introduce strategy as a discipline and the frameworks used to
conduct strategic analysis. The purpose of this course is to introduce to students the tools,
techniques, and frameworks commonly used as part of market and industry assessments,
on engagements involving substantial operational and organizational analysis. This course
highlights the principal financial analytical tools used to conduct strategic analysis and
indicates the link between corporate strategy and performance through measurement
frameworks used frequently to provide decision making information to management.

No. of Units 3 units

Pre-requisites None
Course 1. Apply the concept of strategy and the strategy-making process and how it relates to
Intended the organizational goals and objectives.
Learning
Outcomes 2. Identify analytical tools, techniques, and frameworks commonly used in assessing
the market and industry.

3. Apply different measurement frameworks in the existing business in the local

market.
Content I. Basic Principles of Financial Management
Coverage II. Role of Strategy-Making Process
References 1. Ruby F. Alminar-Mutya, DBA, Basic Business Finance: Management Approach, 125
Pioneer St., Mandaluyong City 1550: National Book Store, 2010
2. R2. Lawrence J. Gitman, Principles of Managerial Finance 13th Ed., Pearson
Education South Asia PTE. LTD., 2010

Course 1. Quizzes
Requirements 2. Examinations
3. Term Paper
Prepared by: ARMALYN S. CANGQUE, MBA
MODULE
Reviewed and Approved by:
3
Subject Area Coordinator: JOHN RICK B. OGAN, MBA

Dean, CBM : RICHEL P. ALOB, Ph. D.

GAD Director : MARY ANN T. ARCEŇO, Ph.D.

CIMD, Chairperson : MA. JANET S. GEROSO, Ph.D.

QA Director : DONNA FE V. TOLEDO, Ed. D.

VP- Academic Affairs : SAMSON M. LAUSA, Ph. D

 LESSON

4 FINANCIAL FORECASTING FOR STRATEGIC GROWTH

18 HOURS

This chapter presents the methods of computing financial ratios used in business organizations.
This lesson also discusses the interpretation of the respective financial ratios to effect financial decisions in
business organizations that are essential in planning and implementing decisions for the firm.

Learning objectives
1. Know what are the different financial ratios that business organizations are using in the
organization.
2. Know how to interpret and analyse financial information in making sound decision as
financial managers.
3. Identify and apply strategies in business organization using the financial ratios.

What comes in to your mind when you hear or read the word “ratio? Why is it important to know
how the value of something is interpreted or what does a certain result means?

Financial statement is not just a statement with values. Financial statement is an essential tool to compute
financial ratios. What are financial ratios? Financial ratios are certain values that are useful in analyzing
financial statements. Financial ratio is defined as a relationship between two numbers.
FINANCIAL RATIOS
Computing financial ratios is a popular way to analyse financial statement. Financial ratio in general is defined as
a relationship between two numbers, for example, if ratio of A;B = 30:10, then A is 3 times B.

A ratio by itself may have no meaning. Hence, a given ratio is compared to:
a. Ratios from previous years (historical) – internal time series analysis
b. Ratios of other firms/leaders in the same industry – external cross-sectional analysis

USES OF FINANCIAL RATIOS

Within the firm: Financial ratios identify deficiencies in a firm’s performance and take corrective action.
Financial ratios also assist in evaluating employee performance and in determining incentive compensation.
Other uses of financial ratios within the firm are as follows:
 Compare the financial performance of different divisions within the firm.
 Prepare, at both firm and division levels, financial projections.
 Understand the financial performance of the firm’s competitors.
 Evaluate the financial condition of a major supplier.

Outside the firm, financial ratios are used by lenders in deciding whether or not to make a loan to a company, by
credit rating agencies in determining a firm’s credit worthiness, by investors (shareholders and bondholders) in
deciding whether or not to invest in a company and by major suppliers in deciding whether or not to grant credit
terms to a company.

There are Five (5) Key Questions in analysing financial performance:

1. How liquid is the firm?
2. Is management generating adequate operating profits on the firm’s assets?
3. How is the firm financing its assets?
4. Is management providing a good return on the capital provided by the shareholders?
5. Is the management team creating shareholder value?

How liquid is a firm? Liquidity measures the firm’s ability to pay its bills on time. It indicates the ease with which
non-cash assets can be converted to cash, and also the ratio of non-cash assets to current liabilities. Liquidity is
measured by two approaches:
1. Comparing the firm’s current assets and current liabilities
2. Examining the firm’s ability to convert accounts receivables and inventory into cash on a timely basis

In example:
Note the values given in the following illustrations below.
Measuring Liquidity: Approach 1
Compare a firm’s current asset with current liabilities
1. Current ratio
2. Acid Test or Quick Ratio

 Current ratio compares cash and current assets that should be converted into cash during the year
with the liabilities that should be paid within the year.

Formula:  Current assets/Current liabilities

In the example above,
Current assets= $143M
Current liabilities = $64M

Using the given formula, 143M/64M = 2.23M

Interpretation: Davies Inc. has $2.23 in current assets for every $1 in current liabilities.
If Davies peer group ratio is 1.80, Davies average is higher than that of its peer group.

 Acid Test or Quick Ratio compares cash and current assets (minus inventory) that should be
converted into cash during the year with the liabilities that should be paid within the year (current
liabilities).

Formula:  Cash + accounts receivable/ Current liabilities

In the example above,
Cash = $20M
Accounts receivable: $36M
Current liabilities: $64M

Using the given formula, (20M+36M)/64M = 0.875 or 0.88

Interpretation: Davies Inc. has 88 cents in quick assets for every $1 in current liabilities
If Davies peer group quick ratio is 94 cents for every $1 in current liabilities, then Davies is less liquid
compared to its peers.

Measuring Liquidity: Approach 2

These financial ratios measures a firm’s ability to convert accounts receivable inventory into cash.
1. Average Collection Period (ACP)
2. Accounts Receivable Turnover
3. Inventory Turnover
4. Cash Conversion Cycle

*For the given data above, let us just focus first on calculating and interpreting the Average Collection Period and
Inventory Turnover.

Average Collection Period (ACP): How long does it take to collect the firm’s receivables?
ACP measures the time or period to collect the firm’s receivables.
Formula Accounts receivable/(Annual credit sales/365)
Davies Example: = $36M / ($600M/365) = 21.9 days
Let us say that the other company’s ACP is 25 days, then,
Interpretation: Davis is faster than peers in collecting the accounts receivable.

So what do you think is the reason why financial managers should know the average collection period of
a firm’s accounts receivable?

One of the reasons is, so that firms can re-invest these receivables in to something that will make its value grow,
and with this, the company will earn a profit. Take note that the goal of businesses is to earn a profit. No business
envisioned to have losses.
*Please do take note of the interpretation of the values that we are calculating. As future financial managers, it is
not enough to only calculate for the right or correct values, but also to interpret the values because interpretation
will lead to decisions that will have a great impact to your company’s future.

Inventory Turnover: How many times is inventory rolled over per year?
Inventory turnover measures a company’s efficiency in managing its stock of goods. Therefore, this may also
measure how long does a company stock its goods, or how long does these goods stay in inventory before
getting sold.
Formula  Cost of goods sold/Inventory
Davies Example= $460M / $84M = 5.48 times# of days = 365/Inventory turnover= 365/5.48 = 67 days.
Interpretation: Thus Davis carries the inventory for longer time than its competitors if (Competitors =
365/7 = 52 days).

In summary: How liquid is the firm?

Now, knowing these ratios, the financial manager or the management as a whole can now implement plans and
decisions on how to improve or make the company perform better than its current standing. We have tackle about
the strategies in the previous topic. Now, can you think of the appropriate strategies that would make the
company perform better?

Are the Firm’s Managers Generating Adequate Operating Profits on the Firm’s Assets? : This question
focuses on the profitability of the assets in which the firm has invested. The following ratios will be considered to
answer this question.
1. Operating Return on Assets
2. Operating Profit Margin
3. Total Asset Turnover
4. Fixed Asset Turnover

Operating Return on Assets : Indicates level of operating profits relative to the firm’s total assets.
Formula  Operating return/Total assets
In Davies Example, = $75M / $438M = .171 or 17.1% (.171x100)
Interpretation: Thus managers are generating 17.1 cents of operating profit for every $1 of assets
Note: (peer group average = 17.8), therefore, that of Davies’ operating return on assets is less than its peer
group.

Dis-aggregation of Operating Return on Assets

Operating return on assets = operating profits/total assets
= operating profit/sales * sales/assets
=operating profit margin * total asset turnover
MANAGING OPERATIONS:
Operating Profit Margin: Examines how effective the company is in managing its cost of goods sold and
operating expenses that determine the operating profit.
Formula  Operating profit/Sales
Davies Example =$75M / $600M = .125 or 12.5% (.125x100)
Interpretation: Davies managers are not as good as peers in managing the cost of goods sold and operating
expenses, as the average for peers is higher at 15.5%.

From here, you may realize what are the strategies that Davies company must do in order to improve how the
firm’s managers would become better in managing the cost of goods sold and operating expenses.

Managing Assets: Total Asset Turnover  How efficiently a firm is using its assets in generating sales?
Formula  = Sales/Total assets
Davies Example= $600M / $538M = 1.37
Interpretation: Davies is generating $1.37 in sales for every $1 invested in assets, which is higher than the peers
average of $1.15.

This result in the total asset turnover of Davies may be used by managers as a competitive advantage of Davies
from its peers. So what should the company do in order to maintain or improve more this competitive advantage?

Fixed Asset Turnover: Examines efficiency in generating sales from investment in “fixed assets”.
What are fixed assets? By this time, you should have known what fixed assets are.

As a review, fixed assets are assets which are purchased for long-term (by long-term, again we mean more than
a year) use and are not likely to be converted quickly into cash, such as land, buildings, and equipment.

Formula  = Sales/Fixed assets

Davies Example= $600M / $295M = 2.03
Davies generates $2.03 in sales for every $1 invested in fixed assets
(peer group average = $1.75)
Interpretation: Davies generates a higher sales from its fixed assets compared to its competitors.
In Summary, Is management generating adequate operating profits on the firm’s assets?

How is the firm financing its assets?

We are now on the third question. Here we examine the question, Does the firm finance its assets by debt or
equity or both?
We use the following two ratios to answer the question:
1. Debt Ratio
2. Times Interest Earned

Debt Ratio : indicates the percentage of the firm’s assets that are financed by debt (implying the balance is
financed by equity).
Formula: Total debt/Total assets
Davies Example= $235M / $438M = .54 or 54% (.54x 100)
Interpretation: Davies finances 54% of firm’s assets by debt and 46% by equity.
This ratio is higher than peer average of 35%.

This may also imply that the assets were bought through debt/loan/ or credit. Is this good for the company?
Applying our previous lessons, what is your opinion on this?

Times Interest Earned: This ratio indicates the amount of operating income available to service interest
payments
Formula  = Operating income/Interest
Davies Example=$75M / $15M = 5.0
Interpretation: Davies operating income are 5 times the annual interest expense or 20% of the operating profits
goes towards servicing the debt or paying the debt.

This also indicates the capacity of the firm to pay its interest expenses or debt from its income or operating
income in this case.
In Summary, How is the firm financing its assets?

Are the Firm’s Managers Providing a Good Return on the Capital Provided by the Shareholders?
Are the earnings available to shareholders attractive?
This is analyzed by computing the firm’s accounting return on common stockholder’s investment or return on
equity (ROE).
Formula:= Net income/Common equity
Note, common equity includes both common stock and retained earnings

In Davies Example,
ROE= $42M/ $203M = .207 or 20.7%
Interpretation: Owners of Davies are receiving a higher return (20.7%) compared to the peer group (18%).
One of the reasons for higher ROE for Davies is the higher debt used by Davies.
Higher debt translates to higher ROE under favourable business conditions.
In Summary, Is management providing a good return on the capital provided by the shareholders?

Are the Firm’s Management Creating Shareholder Value?

In answering this question, we can use two approaches:
1. Market value ratios (P/E)
2. Economic Value Added (EVA)
These ratios indicate what investors think of management’s past performance and future prospects.

Price/Earnings Ratio : Measures how much investors are willing to pay for $1 of reported earnings.
Formula: Price per share/ Earnings per share
In Davies Example:
= $32.00/ $2.10 = 15.24
Interpretation: Investors are willing to pay less for Davies for every dollar of earnings compared to peers
($15.24 for Davies versus $19 for peers)

Price/Book Ratio : Compares the market value of a share of stock to the book value per share of the reported
equity on the balance sheet.
Formula: = Price per share/Equity book value per share
Davies Example= $32.00 / $10.15= 3.15X
Interpretation: A ratio greater than 1 indicates that the shares are more valuable than what the shareholders
originally paid.
However, the ratio is lower than the peer’s average of 3.70.

Economic Value Added (EVA): How is shareholder value created?

If the firm earns a return on capital that is greater than the investors’ required rate of return.
EVA attempts to measure a firm’s economic profit, rather than accounting profit. (To understand more, you need
to know the difference between economic profit and accounting profit)
EVA recognizes a cost of equity in addition to the cost of debt (interest expense).

Formula: EVA= (r-k) x A

Where:
R= Operating Return on Assets
K= Total Cost of Capital
A= Amount of capital (or total assets)

Example: A firm has total assets of $5,000 and has raised money from both debt and equity in equal proportion.
Further, assume that cost of debt is 8% and the cost of equity is 16%. Assume the firm earns 17% operating
income on its investments.

EVA= (17%-12%) x $5,000 = $250

Cost of capital:
=.5 x (8%) + .5 x (16%) = 12%
In Summary, Is the management team creating shareholder value?

Limitations of Financial Ratio Analysis

Difficult to identify industry categories or comparable peers.
Published peer group or industry averages are only approximations.
Industry averages may not provide a desirable target ratio or norm.
Accounting practices differ widely among firms
A high or low ratio does not automatically lead to a specific favourable or unfavourable conclusion.
Seasons may bias the numbers in the financial statements.

Again, financial ratios may differ in between firms, as stated above, firms may have different accounting
practices. However, these financial ratios serve as a guide in interpreting the standing of the firm. Also, these
ratios help the firm in implementing strategies to improve the firm. Strategies may differ in between organizations.

STRATEGIC PLANNING FOR MY COLLEGE