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CHAPTER 1: BUSINESS
MANAGEMENT REVIEW Macroeconomics deals with the society as whole
and its dynamic relationship with the rest of the
Strategic Business Analysis involves the thorough world.
evaluation of all facets of enterprise operations that
starts with a good foothold in the knowledge and Economic Issues permeate society in various ways.
applicable of basic principles of economics, human
resource management, production and operations Economic Principles and Concepts can be found
management, marketing management, as well as in everyday dynamics, from large scale activities
financial management to aid in decision making. such as movements in the stock market, government
directives on poverty and health care, multi-million
Economic Analysis allows business managers to involvement in trade, to as simple as fluctuations in
compare those resources in the larger view of local the market price of basic commodities.
and global economic activities.
Economic seeks to answer the question of what,
Human Resource Management underscores the how and for whom a good or service is produced.
process of developing a job analysis as a requisite
for the creation of a human resource management Economic Activities begin with an individual,
plan. progressing to the small unit of society, which is the
household, on the larger entities such as the
Knowledge of production and operations companies and the international communities.
management will clarify the processes involved in
answering the questions of what, how and for whom Understanding Economics is a futile exercise if
to produce. scarcity is not discussed and if people need not
choose among existing alternatives and practice
The production and operations management areas of trade-offs.
planning and control, materials management,
inventory management and project and supply chain Scarcity of Resources leads one to explore the
management are important to appreciate to ably economics of things.
apply them when one conducts strategic business
analysis. Scarcity should not be confused with shortage.

Economic Activities are further fueled by Scarcity - it refers to the existence of limited
marketing initiatives. resources that are not enough to address unlimited
human needs and demands.
Marketing Management allows for the movement
of goods from production to consumption side and Shortage refers to a market occurrence whereby the
creates other economic activities in between. demand is more than the supply available at a given
time.
Financial Management puts the valuation of
economic activities in place. This is the area where Rationalization allows one to evaluate the value of
costs are accounted for and where receipts are the goods being obtained based on the cost that
reconciled with expenses to determine the financial must be expended for its exchange.
viability and sustainability of a business enterprise.
Scarcity of Resources evolves into the
identification of alternatives and a decision to trade-
LESSON 1: ECONOMIC PRINCIPLES
off.
Economics is the study of how to manage money
The loss from setting aside the value of pursuing
and the financial status of an individual, an
other alternatives with the same amount is referred
enterprise, an organization, or a country.
to as the Opportunity Cost.
Learning how to invest, how to spend, and
how to save money are other critical aspects of
Free Resources are not actually resources that can
economic understanding.
be obtained and used without costs.
Classified into two branches, microeconomics and
Cost in Economics can be either intrinsic or
macroeconomics, the principles and concepts apply
extrinsic, that is, a cost with no actual cash outlay or
similarly but different in scope.
a cost to simplify the complexity of economic
issues.
Microeconomics only deals with individuals,
households, and specific companies.
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Human Needs and Wants, when not satisfied, Goods that directly satisfy human needs and wants
results to a feeling of inadequacy or distress. are called Consumption Goods.

Generally, human needs and wants involve other Capital Goods are those goods that indirectly
noneconomic factors such as political, emotional, satisfy human needs and wants.
social, technological, emotional and even legal.
Based on nature or level of scarcity, economic
Primary Needs are those that are essential for one’s resources are either scarce or free.
survival. These are resources that an individual
cannot live without. Scarcity is relative to areas or situations such that a
resource is only considered scarce if the need for it
Secondary Needs are those that are directly exceeds the availability quantity.
associated with one’s happiness or a person’s
elevated status in society. These secondary needs Free Resources are either renewable or
are what we refer to as wants nonrenewable. Renewable Resource such as
watersheds and forests are regenerative and
On the economic activity of production, a fixed sustainable although this can usually happen only
input can only be useful until its maximum output. over a long period of time. On the other hand,
Hence producers should be aware of the principle Nonrenewable Economic Resource such as coal,
of diminishing marginal returns. mineral and gas are exhaustive and only exist in
 When the consumption of a product is lower limited quantities.
than the amount of energy spent on it,
diminishing returns happen. Resources can also be classified according to their
physical form and are either natural, man-made
In the beginning, the benefits are higher than the capital or human.
value, but gradually they decrease with continuous
consumption. This law is very useful in our daily What exists in nature such as land and bodies of
life. water are Natural Resources.

Economic Activities refer to production, Man-made or Capital Resources are those goods
distribution and consumption of goods and that were produced by men from combining natural
services. resources and were created for an identified
purpose.
The goods that go around these economic activities
are classified as to either Human Resources come in the form of labor
1. Tangible - are goods with physical identity; services such as doctor, a writer or a fisherman.
2. Intangible - refers to services.
Economics explains the causes and effects of
Economic Activity would refer to the movement of poverty, unemployment, income inequality, gross
both goods and services in a production, domestic production and gross national product,
consumption and distribution process to satisfy inflation and deflation, peso exchange rates, low
human needs and wants. economic growth or trade deficits and the ways by
which they can be addressed.
The magnitude, type and extent of resource
involvement differ in every economic activity. LESSON 2: HUMAN RESOURCE
MANAGEMENT BASICS
All the economic activities are motivated by either
directly or indirectly satisfying human needs and Human Resources Management involves the
motivations. This is the reason why human needs monitoring of the culture of the organization and is
and wants are identified as the fundamental cause responsible for the recruitment of appropriate
of any economic activity. workforce, in the recommendation of market-based
compensation and benefits that are in accordance
Multiple ways by which needs and wants are met with the company’s current and potential resources
 Varying individual resources and in the crafting of an overall strategic employee
 Priorities development plan.
 Situations
 Motivations It is also the management function that conducts
 Preferences research and makes policies and recommendations
 Level of satisfaction covers five functional areas:
 Organizational design;
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 Staffing; operation and responsibilities of a specific job. Its

 Rewards; immediate products are job description and job
 Benefits and compensation system; specification.

 Training and development; Job description contains the job title, location,
 Performance management and appraisal summary of duties, machines, tools, equipment
system needed to perform the job, including the supervision
that is expected to be given or received, as well as
Organizational Design is about ensuring that there working conditions and possible risks.
is an employee-job fit for all the positions in an
organizations to fulfill its mission. This is done Job specification, on the other hand, contains the
through the corollary functions of planning and job statement of manpower qualification for a specific
analysis. job. This includes the required minimum education,
experience, training, judgment, initiative, physical
Staffing deals with the recruitment of individuals effort, skills, responsibilities, communication level
whose skills, abilities, knowledge and experiences and emotional and social characteristics.
are deemed appropriate for the jobs in the
organization that needs to be filled. Corollary Job analysis is required in human resource
functions to staffing are recruitment and selection. planning, recruitment and selection, training and
development, job evaluation and performance
The design of rewards, benefits and compensation appraisal, the creation of a compensation and
system that includes compliance, rewards based on rewards system, and the establishment of health and
job evaluation, and direct and indirect employee safety policies.
benefits and compensation. Its compliance
component includes the legal aspects of human Designing organizational structures also
resource management. considers efficient work progress and dynamics.
This being said, due considerations is given not only
Employee and organizational training and to the daily processes but more so to the
development seek to ensure that employees have organization’s priority areas that are more often
the necessary knowledge and skills that will allow accomplished over a longer period.
them to satisfactorily perform their jobs and steer
the company toward its advancement in its sector. Human resource management emphasizes
accountability in the design of structures and
Performance management and appraisal uses systems that involves people and resources. As
performance evaluation tools developed and such, a level of independence and clear standards
adopted by the organization to help identify must be established at the onset, to ensure that
interventions to enhance work efficiency. processes will run smoothly and with the least
disturbance or delays.
The dynamic demands and expectations of
consumers in both public and private entities, profit Ensuring the efficient function of planning,
and not-for-profit organizations across the globe organizing, directing and controlling are within the
necessitate the finding of more valuable in creating context of designing the organizational
strategically designed human resource units. structures.

A critical and careful assessment of how a company Planning pertains to formulating strategies of
operates to best align with its overall mission and personnel programs ahead of use and will contribute
goals results in a more positive outcomes for to overall organizational goals.
people, systems, as well as technology in the
context of human resource management. Organizing is an essential process of allocation of
task amongst members of a specific structure, with
At the core of human resource management is the identified relationships, responsibilities and
attraction, placing, rewarding, training, and accountabilities within an integrated activity toward
retention of the right people according to the the achievement of a common goal.
objectives of the organization.
Directing is a function that allows for the activation
A job analysis outlines the human resource of people at various levels of skills and tasks, and
management plan. ensures that each one is able to maximize his or her
contribution to organizational goals.
Job analysis is the process of collecting and
studying various factors that are related to the
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Given appropriate motivation and reward, directing test, interview types, on the other hand, can be
employees at different levels becomes possible even informal, formal, planned, patterned, nondirective,
with the slightest exercise of authority. in-depth, stress, group or panel.

Controlling comes after planning, organizing and Placement is the process of giving the selected
directing and necessitates the review of the candidates the most suitable job in terms of the
employees actual performance. It also includes organizational requirement and the prospective
verifying deviations and comparing results from employees’ qualification after the formalities of
identified plans and offering corrective actions for screening. This phase of matching then leads to
improvement. eventual orientation.

Business experts suggest that to be able to predict A good orientation program is critical in improving
organizational successes is to ensure that the right employee morale in reducing employee turn over, in
people are placed in the right position in the curtailing absences, in lessening work accidents and
company’s functional process. in avoiding industrial strife.

Placement to Work Performance Flow

Human resource management is valuable to the
organization as it helps attract and retain the right
people. Valuable to human resource management
This process of structural assessment and re- efficiency is having a good reward, benefits and
design involves the referencing of existing compensation system.
employees and carefully examining if they perform
roles that are based on their ability and expertise. This process involves wage and salary
administration, providing incentive and fringe
Staffing comes after job analysis and human benefits schemes, as well as social security
resource planning. It includes recruitment, selection, insurance and creation of retirement funds.
placement and orientation.
Compensation is a direct reward for the work done,
Recruitment is the process of searching for benefits emanate from a defined company incentive
prospective employees and providing an program.
encouraging environment for them to pursue their
job application in the organization. Benefits as are indirect payments for working
beyond what a job requires.
Recruitment may be internal and external to the
organization. As one motivational tool, rewards, benefits and
incentives may be financial or nonfinancial in
1. Internal recruitment can be in any of the nature.
following forms: promotion, transfer, job
posting or employee referrals. Employers are encouraged to exercise their
2. External recruitment can in a form of creativity in developing other types of rewards and
advertisement, through direct recruitment, benefits, beyond what is government mandated.
via employment exchanges, using
employment agencies, networking the Training and development are the process of
professional associations, campus creating avenues for employee improvement,
recruitment or even word of mouth reskilling and up-skilling for managerial
announcements. development, career planning, and transfer or
promotion.
Selection is the process of determining the
qualification, knowledge, skills, attitude, Training is the imparting of technical and
experiences and values of an applicant with the operational skills that are needed for the current job.
purpose of ascertaining job suitability.
Development is the process of conducting suitable
Selection involves screening of applicants, having programs to improve one’s human and managerial
applicants take tests or other methods of screening capability to handle a more expansive role in the
and shortlisting such as interviews, reference and organization.
background verification, medical job candidates
include aptitude test, psychomotor test, job Provisions for training and development of
knowledge test, vocational or interest test, employees should be embedded in corporate
personality test and group discussion participation policies as a way of cementing information on how
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the company puts a premium on professional project management, supply chain management and
development. inventory management.

Policies on training and development provide the Production and operation management finds its
needed direction for the creation of employee value in connecting consumer demands and the
development plans as well as performance capacity of business enterprises to provide such
improvement mechanisms. demands through the use and combination of
various economic resources.
Training and development differ in periods, focus, Production and operations management
orientation, motivation, objectives, number of identifies the process that transforms raw materials
beneficiaries, and purpose. to finished products and the series of processes that
convert to a service.
Training and development exercises make for
effective human resource management as they During production and operation, other types of
solidify teamwork and promote team spirit among utilities are formed. These are place, time, form,
organizational members. service and knowledge utilities.

Training and development programs provide Place utility happens when there is a change from
excellent growth opportunities for people who have the place of availability to the place of use through
big potential to move up in the organizational ladder transportation.
through diligence and commitment.
Time utility happens when the input or the output is
Having a good training and development program stored as part of the utilization process of the
improves organizational productivity, affects society consumers.
and economy, reduces costs, maximizes scarce
resources and improves profits and overall work From utility happens when the input change in
conditions of people. size, weight, color, shape or all at the same as it
converts into a consumer product.
Performance management and appraisal defines
the direction and movement of the careers of people Service utility happens when service is rendered to
in the organization. This systematic assessment of a client either directly or indirectly.
an individual’s job performance and their potential
for advancement results in further training, coaching Knowledge utility happens when information is
or correction as needed. The results of performance imparted to customers through presentations in the
appraisal may be promotion, transfer or retention. form of advertisements.

Human resource management of late has included Production management encompasses production
new ideas such as artificial intelligence, big date, planning and development, production
hybrid work models, healthy organizations instead administration, implementation function and other
of mere employee wellbeing, diversity, equity and allied activities such as standardization,
inclusion, the onboarding of people with power simplification, specialization, quality control and
skills, reskilling as much as up-skilling, gig research and development.
economy concept, and cyber security.
Production system deals with the functions of
LESSON 3: PRODUCTION AND converting inputs to output using processes, on
OPERATIONS MANAGEMENT demand forecasting and on manufacturing control.
BASICS
Production process refers to manufacturing
activities that result in either semi-finished product,
A product or service is the primary object of
finished product or a by-product.
consumer interest in a market.
Operations process refers to activities that result in
The need and want satisfying capacity of an item
the availability of a complete service or an allied
determines its value as a product or service.
service.
The process and systems that convert raw materials
Production and operations management is the
to another product are the core of production and
application of the management functions of
operation management.
planning, organizing, directing and controlling in
the process of manufacturing goods or in the
Production and operations management involves
provision of a service.
major areas of production planning and control,
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quantity is produced in short of demand, leads to

A set of inputs would undergo a process to create shortage of products.
outputs. This process is in the form of
manufacturing operation, assembly of parts, producing within the right time is also an important
finishing of parts, and inspection of quality and parameter to judge the effectiveness of a production
quantity. department, which must aim to make the optimal
utilization of input resources to achieve its
Organizations are designed mainly to produce objective.
products or services. right manufacturing cost must be established
before the product is manufactured.
Production is about the creation of all goods and
services, regardless of type or kind. Location of facilities for operations is a long-term
capacity decision, which involves a long-term
Operations refer to any process that accepts inputs commitment about geographically related factors
and uses resources to change those inputs in useful that affect a business organization.
ways.
Layout decisions include the capacity of the
Both production management and operation organization to make substantial investments in
management play an important role in an money and effort, its commitment to maintain the
organization in increasing efficiency and facility and a full evaluation of cost efficiency to the
productivity. operations.

Operation management is focused on Practical reasons behind modifications in an

administration, planning and execution of organization’s decision for its operations layout:
operations involved in production of goods and
services and trying to minimize the resources at the
same time increasing the output, is more concerned
with input/output and churning out products in the
shape of desired finished product.

Production management deals with planning,

control and decision making necessary for carrying
out the production process. Defined as the design,
operation, and improvement of the systems that
create and deliver the firm’s primary products and
services.

Effectiveness refers to goal achievement

Productivity is the aim in production and
Efficiency is related to the cost resource utilization operations management. The efficient combination
involved in the production and operation activity. of land, labor, capital and management to optimally
produce goods and services determines the level of
System provides an efficient and effective operational productivity. Before an enterprise is
framework of activities necessary to attain an organized, product design is decided.
objective.
Product design is dynamic in the context of
Element consists of: changes in consumer preferences, economic
 Men situation, sociological and demographic factors, as
 Materials well as political and legal challenges.
 Machines
 Process and information network Product design deals with conversion of ideas into
reality and every business organization must design,
Attainment of right quality, which is based upon develop and introduce new products as a survival
the customer’s needs. The right quality is not and growth strategy.
necessarily the best quality. It is determined by the
cost of the product and the technical characteristics Process design is a macroscopic decision-making
as suited to the specific requirements. of an overall process route for converting the raw
materials into finished goods. These decisions
If they are produced more than demand, the capital encompass the selection of a process, choice of
will block up in the form of inventory and if the
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technology, process flow analysis and layout of the A production planning and control system is
facilities. created with the aim of maximizing the use of
economic inputs, determining the requirements of
Production processes can be classified in three production in men, machines and materials and
categories: ensuring that production is done at the right time
 flow production with the right quantity and quality.
 batch production
 unit production The availability of products in accordance with the
- denotes a production process that runs requirements of the marketing department of an
in sequence. organization is also ensured in production planning
and control.
Quality control can be ensured in the type of raw
materials used in the manufacturing system before The scope of production planning and control
the final product is brought out of the encompasses those that concern production
manufacturing facility. materials
 Manpower
Batch production divides production output in  Methods
component parts. In this category, the whole  Machines and equipment
production process is divided in parts, with the  Routing of work
unfinished product in the form of various finished  Establishment and estimation of work
parts. standards
 Leading and scheduling
Batch production is applicable for a product that  Dispatching
uses a different machines and tools depending on  Expediting
the parts to create.  Inspection
 Evaluation
Quality can be checked at every batch production  Cost control
and production parts can be made available at
another functional area. Production planning and control varies depending
on products, manufacturing facilities and
Unit production happens when production is made organizational nuances.
according to when the customer specifically
requires it. Production processes of this nature Controls need not be elaborate and complex but
follow a standard, quality and specification in size, simple enough yet able to create an efficient
weight, form, color and packaging. This type of operation of optimal production at the least cost.
production process is best used for products that do
not require repetitive steps, nor has high demand. Its Project management evolved from Henry Gantt’s
cost concerns also limit its use. famous Gantt chart and Henri Fayol’s Five
Management Functions
Production planning and control is about 1. Planning
implementing plans in terms of job schedule, 2. Organizing
machine appropriation, and actual workflow. 3. Commanding
4. Coordinating
Production requires the successful conversion of 5. Controlling
raw materials to finished goods whether in parts or
as a whole, the role of a production manage A project is an organized initiative that has a:
becomes critical.  Concept phase
 Project initiation phase
Plans are to be carried out with the optimum cost  Planning
efficiency and utmost quality standard.  Execution
 Monitoring and control
The control functionality can be seen in producing  Project closure
better quality products at the best reasonable price
within the most systematic manner. Project management systems are meant to
simplify and break down milestones for time and
Planning in production is in foreseeing probable resource use efficiency.
glitches in the production process and finding
remedies for their early solution. Supply chain management is the management of a
network of business activities and processes that
includes procurement, manufacturing, transportation
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of finished goods, warehousing, distribution and Manufactured products and services reach its final
inventory management. user, production and operations management enters
the picture in the form of creating a system for
Global business scenario, the expanse of supply efficiently utilizing inputs of materials, equipment,
chain management is magnified and characterized labor, money, methods and management to create
by geographically distinct markets, by diversely outputs of value.
obtained raw materials, by more efficient
manufacturing and procurement processes LESSON 4: MARKETING
elsewhere, and by cheaper labor markets abroad. MANAGEMENT BASICS
Supply chain management involves a broad Businesses continue to face the challenges and
function that sees planning, design, control and opportunities presented by globalization,
implementation of processes related to procurement, technological advancement, better communication,
manufacturing, distribution and sales functions of and the market deregulation.
an enterprise.
Marketing management is the entire process of
The network of service providers of the supply product creation, promotion, selling, delivery and
chain process, called vendors, are efficiently continuous development.
coordinated and integrated by supply chain
managers to ensure that the production and A market is any individual, organization or group,
distribution and all other activities in between will which has an existing or potential transaction or
not be vulnerable to the risks of distance and time. exchange, beginning with a customer and ending
with another customer. At the core of marketing
Supply Chain Management goes beyond the activities is the creation and delivery of superior
management of the flow of goods as it also deals customer value in the form of a manufactured
with securing and exchanging information, data and product or in the provision of a service.
documents between transacting parties.
Production Concept of Marketing holds the
Logistics acts as the post-procurement function of customers are inclined to choose products, which
delivering raw materials from the source to the are available and are affordable.
production plant and the transportation of finished
goods from the production to the various points of Product Concept of Marketing holds that
distribution. customers are inclined to choose products that
provide the best quality, performance, and features.
Warehouse management completes the logistics
process in ensuring the security and safety of goods, The selling concept of marketing puts importance
finished or unfinished, at any stage of raw materials on the sales efforts that must be exercised for
procurement, production and distribution. customers to buy the product or service.
Production and operations management is Profit Concept of Marketing emphasizes that
continuously influenced by an ever-changing global profitability is the responsibility of marketing even
environment and must therefore adjust to the if the production and operations side determine the
challenges, trends, and developments in this area. cost of manufacturing products and rendering of
service.
Adaptation to the global context, in entering in
supply chain partnership, in just-in-time Modern Marketing Concept puts the customer at
performance and real-time monitoring, to mass and the center of any marketing effort, valuing his/her
high valued and diverse workforce, production and satisfaction, unique needs and preferences, and
operations management will remain a dynamic area expectations.
that is worthy of focus in doing strategic business
analysis. Marketing management efforts must be focused on
creating the unique selling proposition of the
Tangible products are created from combining raw product or service to meet customer requirements
materials as inputs put together by labor using
human capital. Social Marketing Concept underscores the need
for marketing activities to support and ensure social
Services, on the other hand, are provided through well-being.
the rendering of transactions in service entities such
as banks, schools, or hospitals. Within the system of marketing management are
key networks of advertising agencies, marketing
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research firms, retailers, distributors, freight Customers will buy from the firm whom they
transportation companies, direct marketing people, perceive to offer the best customer value and total
public relations consultants and event managers. customer cost.

A buyer’s satisfaction is a function of the product’s

perceived performance and the buyer’s
expectations.
Different variables are put together according to the
needs of the firm and the situation of the market. Quality is the totality of features and characteristics
These variables are: of a product or service that bears on its ability to
satisfy stated or implied needs.

Total quality is the key to value creation and

customer satisfaction.

LESSON 5: FINANCIAL
MANAGEMENT BASICS

The nature and scope of financial management,

its function and its new role in the contemporary
Product decisions involve in determining product scenario is covered in understanding the finance
features such as size, color, materials, form, objectives of maximizing profit and satisfying
composition, packaging, product line, and product customer wants. It also covers the areas of profit
purpose. and wealth creation, welfare and agency
relationships, cost minimization, risk-return trade-
These features are altered according to the off, and time valuation of money.
identified place of the product in the product cycle
of introduction, growth, maturity, and decline. Financial management covers the following:

The characteristics of the product itself, the buying

behavior of customers, and the financial resources
of both the buyer and the seller determine the place
o channel of distribution activities.

Price is determined and played around based on

production cost, level of demand, degree of
competition, buyer behavior and market
psychology.

People in service marketing account for the skills

and personality of people involved in the marketing
process, and whether these skills and personality
can impact customer relationships and promote
customer loyalty.

Process in the service marketing management Financial management includes the investment
considers cost efficiency in logistics, delivery and decision process, developing cash flow, provision of
schedule as well as the kind of experience from the data for the financing of new projects, capital
service obtained. budgeting techniques, traditional and discounted
cash flow methods, the net present value, internal
Physical Evidence includes packaging and design rate of returns and approaches for reconciliation
for differentiation, information, and adding value to under conditions of risk and uncertainty.
the service and its corollary products.
Financial management in business operation
Customers are value-maximizing entities who form analysis also includes the concept of cost of capital,
an expectation of value and eventually act on it. debt, equity and retained earnings.
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Financial management involves the planning,

organizing, directing, and controlling of financial
activities such as procurement and utilization of
funds of the enterprise. It means applying general
principles to the financial resources of the
enterprise.

Financial management covers decision-making in

the areas of investment, financial operations and
shareholders dividends.

Elements of Financial Management

 Investment decisions that include
investment in fixed assets, also known as
capital budgeting, or working capital
decisions.
These activities in the monitoring of cash movement
 Financial decisions relate to the raising of
become part of the bigger financing and investment
funds from various resources that are based
decision of raising and allocating funds where the
on types of sources, period of financing, cost
role of the financial manager is highlighted as
of financing and return from financed
follows:
projects.
 Dividends decision is about decisions on
distribution of net profits that are generally
divided into dividend for shareholders and
retained earnings.

The objective of financial management is the

maximization of shareholders wealth. It aims to
ensure adequate returns to the shareholders based on
its earning capacity, the market price of the share
and the expectation of the shareholders.

An important basis of any financial management

Financial management functions in areas of
initiatives is a sound financial plan.
liquidity, raising funds, management of flow of
internal funds, and enterprise profitability. More
Financial planning is the process of estimating the
specifically, financial management operates on the
capital required and determining its competition.
following areas:

Financial planning is important as the

process of framing objectives, policies,
procedures, programs and budgets regarding
the financial activities of an organization,
which ensures that effective and adequate
financial and investment policies exist.

Sound financial planning ensures that

funds are adequate, that there is a reasonable
Part of financial management is the creation of a balance between outflow and inflow of
system for the movement of cash flow between funds so that stability is maintained, that the
capital markets and the needs of the firm for its suppliers of funds are easily investing to
operations. The cash that circulates in this
movement from source to user includes:
grow and expand the organization, that
uncertainties are reduced with regard to
changing market trends, thus helping in the
organization’s long-term stability and
profitability.
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The various forms of business External equity, which is business owner’s original
organization: investment, as opposed to internal equity, which is
capital form the retained profit of the organization.
Proprietorship, which is an unincorporated
The company’s income is derived from its revenue
business that is owned by a single individual, has
less the expenses it incurred during the period.
advantages, the inherent ease of organization, its
inexpensive operation, having less government
Revenue is the sales from the products sold and
regulations, and having lower taxes applied to it.
services rendered.
However, proprietorship type of business has
unlimited personal liability, has limited business life
Expenses include the cost of producing the product
and its challenged by its difficulty to raise capital.
or service, including operating expenses such as
marketing, selling, administrative expenses and
Partnership operates within the same realm of
depreciation, and other financing cost such as
advantages and disadvantages as a proprietorship
interest and taxes that were paid.
type of business, with the number of ownership as
the only difference between them.
Cost of goods sold is the free incurred in producing
or acquiring the goods and services that will be sold
Corporations have more flexibility that can be
by the company, which when then deducted from
provided for business expansion and a robust
sales should yield gross profit.
financial management system can be beneficial with
its nature of limited liability, ease in raising capital
Cost that involves marketing and selling, general
and transferring ownership, as well as having
and administrative expenses, and depreciation are
unlimited business life. However, corporations are
all classified under operating expenses.
prone to double taxation as well as reporting and
compliance oversights.
Earnings before interest and taxes (EBIT) are
paid as operating income, and this os derived by
Transactional effects on accounts are summarized
deducting total operating expenses, depreciation and
into two major reports. The statement of financial
amortization from sales.
performance is called income statement or profit
and loss statement, and the statement of financial
Financing costs is the amount of interest expense
position is called balance sheet. The entire exercise
owed to providers of funds, normally creditors.
of recording and interpretation of an enterprise’s
transactions is its accounting system, with
Net income is distributed to the owners or are put
accounting records and reports as the system’s
back and reinvested to the company and is
outputs.
computed from the amount that was invested in the
previous year minus also the expenses and taxes
A major cause of business failure is financial
due.
liquidity, or the lack of funds.
A depreciation expense is a cost that is related to
Assets are valuable factors for organizational
fixed assets whose value diminishes at specific rate
growth, and firms must understand that acquiring
over a period and is actually every year.
assets require financial capacity.
The income statement provides the profitability
Net income, which depends on the amount of sales,
profile of a business organization and helps possible
cost of goods sold, operating expenses, interest
creditor or potential investors to ascertain the
expense and taxes. The total sales represent the
possible length of time that returns from their
gross income of the firm, with the net income
investment can be expected.
arrived at their cost, expenses and taxes had been
deducted.
The balance sheet or the statement of financial
position provides a picture of a firm’s financial
Working capital, which are the current assets,
situation at a point of time, through its assets,
account receivable, and inventory that are required
liabilities and owner’s equity.
in the daily operations of the firm and is derived by
deducting current liabilities from the current assets.
Current assets or gross working capital are
resources that can be converted into cash within the
Liquidity, which is also known as the company’s
firm’s operating cycle and may be in the form of
current ratio, and determined by dividing the firm’s
cash, account receivable and inventory.
current assets by its current liabilities.
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Cash can be in the form of currencies, cash Liquidity ratio reflects the ability of the business to
equivalents or negotiable instruments. pay its debts when they come due by converting its
assets to cash.
Accounts Receivable is the amount of credit that
are extended to customer that is currently Current ratio and quick ratio are two kinds of
outstanding. liquidity ratio.
 Current ratio is computed by dividing the
Under current assets is the inventory in the form of current assets over the current liabilities.
raw materials or finished products that are expected  Quick ratio is derived by current assets less
to be on sale. inventories and then divide by its current
liabilities.
Fixed assets or noncurrent assets are assets that
are relatively permanent in nature such property, Solvency ratios measure the long-term viability of
plant and equipment, and other intangible assets a business and determines the long-term risks in the
such as copyrights, patents and goodwill. interest of investors and stockholders.

Accumulated depreciation is the total expenses Profitability ratios reflect the company’s
deducted over the asset’s life, which when deducted profitability in relation to its assets and measures
to gross fixed assets are known as net fixed assets. the ability of a business to earn profit in relation to
its expenses.
Liabilities or debts are business financing provide
by its creditors and mat be current or short term, or Return on assets is the rate of return on the total
long-term in nature. assets invested in a business. It is the rate of return
on the total assets invested in a business. And is
Current debt, otherwise known as short-term determined by getting the operating income and
liabilities, include accounts payable, accrued dividing it with total assets.
expenses and short-term notes.
The return on equity is the rate of return earned by
Accounts payable are business credits payable to the investment of the owner. This can be derived by
suppliers getting the net income and divide it by the owner’s
equity investment.
Accrued expenses are short-term liabilities incurred
but not paid, and short-term notes are cash amounts Efficiency ratio or asset and debt management
borrowed that must be repaid within a short period ratios. These ratios determine the right mix
of time. between assets versus sales and debt against equity.

Long-term debts are loans that mature beyond a Market value ratio. Also called market prospect
year ratios. These ratios help predict the possible
amount of earnings in the investment. The earnings
Mortgage is a type of loan that is guaranteed by a of the investors can be through higher stocks value
collateral. or dividends.

Equity is net worth of a business, with owners’

equity is the money invests in the business.

Retained earnings are profits minus the dividends

withdrawn from the business.

A sound financial management allows for the

preparation of reports that will show the firm’s
ability to settle its debt as it comes due, the amount
of debt that the business is utilizing and the rate of
return on investment by the company.

Ratios are important tools in financial management

and are used to compare financial data to yield
information about the organization’s liquidity,
solvency, profitability, and others.