Basic Finance Theory
Defined as the art, science of managing money, almost all individuals and organizations earn or obtain money and spend or invest money.
Finance relates to the process, institutions, markets, and instruments that participate in the transfer of money between people, such as companies and governments.
Main areas of finance and opportunities.
Financial Services (Insurance banking institutions).
Within financial services we have Banking and related Institutions (Credit executives, bank managers, fiduciary executives)
Personal financial planning.
Financial planners.
Investments.
Stock brokers.
Securities analyst.
Portfolio managers.
Investment bank executives.
Real estate.
Real estate agents or brokers.
Appraisers.
Lenders in real estate.
Mortgage bankers.
Property managers.
Insurance
Insurance agents or brokers.
Insurers.
Job description:
Credit executives: are those who evaluate and recommend various types of loans.
Bank managers: they run bank offices and supervise the programs that the bank offers.
Fiduciary executives: are those who manage the trust funds of states, foundations, foundations and companies, offering financial services in personal financial planning, investments, real estate and insurance.
Personal financial planning. They are those independent people, as well as employed by an institution and advise people on all aspects of their personal finances and help them develop a complete financial plan that meets their objectives.
Investments:
Stock brokers: They are those who help clients choose to buy and sell securities.
Securities analyst:
It studies the bonds and stocks generally of specific industries and provides advice to securities and insurance companies regarding these.
Portfolio managers:
They create and manage portfolio of securities for companies and individuals.
Investment banking executives.
They advise the issuers of securities and act as intermediaries between them and the buyers of bonds and newly issued shares.
Real estate.
Real estate broker agents: advertise residential and commercial properties, for sale, lease, and conduct negotiations.
Appraisers: calculate the market value of all types of properties.
Real estate lenders: They are those who recommend and make decisions regarding loan applications.
Mortgage bankers: they are those who seek and arrange financing for real estate projects.
Property managers: they are those who direct daily operations of the properties in order to obtain the maximum returns for the same owner.
Insurance
Insurance agents or brokers.
They are those who create insurance programs and sell policies to meet the needs of clients, collect, premiums and help in the processing and settlement of debts.
Insurers: They are those that value and select the risks that your company will insure and establish the corresponding premiums.
Finance for the administration.
Financial Analyst.
Budget Analyst or Manager.
Finance project manager.
Cash Management Manager.
Credit analyst or manager.
Manager of the pension fund.
Finance for the administration.
They are those that are related to the obligations of the Finance manager in a company, knowing that they themselves actively manage the financial affairs of large and small, lucrative and non-profit public or private companies.
In recent years the economic and regulatory environments have increased the importance and complexity of the duties of the finance manager.
Another important trend is the globalization of business.
Financial Analyst.
He is mainly responsible for preparing the plans and financial budgets of any type of company, another obligation is to carry out financial forecasts, prepare the analysis of financial reasons and work closely with accounting.
Financial Reasons: formulas that indicate the solvency, liquidity, solidity, leverage of a company.
Capital Budget Analyst or Manager.
He is responsible for the evaluation and recommendation of proposed assets, participates in the financial aspects of the execution of approved investments.
Finance project manager.
In large companies he arranges financing for approved asset investments and coordinates consultants, investment bankers and legal advisers.
Cash management manager.
He is responsible for the maintenance and control of the company's daily cash balances, directs cash collection, disbursement activities and short-term investments of the company, also coordinates short-term loan applications and relationships banking.
Credit analyst or manager.
It is the one that administers the credit policies of the company through the evaluation of credit applications, the granting of credits, the supervision and collection of accounts receivable.
Manager of the pension fund.
He is responsible for the supervision and administration of the assets and liabilities of the employee pension fund.
Basic forms of the Business Organization.
Advantages and disadvantages.
| Advantage | Companies with the exclusive right of property. | Society (service providers) | Anonymous society. |
| The owners receive all the profits. | Raises more funds than companies with exclusive property rights. | The owners have a LIMITED liability, which guarantees that they cannot lose more than what they invested. | |
| Low cost of organization. | Greater financing power for a larger number. | It reaches a large size, due to the sale of shares. | |
| Income included and assessed on the tax return. | Greater administrative capacity. | Long life of the company. | |
| Independence. | Income included and assessed on the partner's tax return. | Property transfers easily. | |
| Total discretion. | You have better access to financing. | ||
| Dissolution facilities. | You can hire trained and experienced staff. | ||
| Receive tax benefits. | |||
| Disadvantages | The owner has UNLIMITED liability and all his wealth can be used to pay off debts. | Owners have UNLIMITED liability and may have to pay off other partners' debts. | Generally, taxes are higher because both corporate income and dividends paid to owners are taxed. |
| Limited ability to raise funds inhibits growth. | The partnership is dissolved when one of the partners dies. | More expensive organization than others. | |
| The owner must have the skills to perform various functions. | Difficulty liquidating or transferring the company. | Subject to a greater number of government regulations. | |
| Difficulty providing employees with long-term career opportunities. | It lacks any discretion because shareholders must receive financial reports. | ||
| It lacks continuity when the owner dies. |
Role of Finance in the administration.
The function of finance for management is described in a general way by considering its role within the organization, its relationship with the Economy, relationship with accounting and the main activities of the Finance Manager.
The organization of the Finance function.
The size and importance of the Finance function for the Administration depend on the size of the company, such as small companies in the department. In Accounting, he usually performs Finance functions and as the company grows, it becomes the responsibility of creating an independent department where 2 very important positions were generated:
Treasurer: who will be responsible for the administration of financial activities, as well as financial planning and obtaining funds and decision-making in capital investments and the management of cash, credit and the pension fund.
Controller: is the one who generally directs the accounting activities, both corporate financial and costs, as well as the management of taxes.
Relationship with the Economy.
The field of finance is closely related to the economy since you must know the economic structure and be aware of the consequences of the levels of variation in economic activity and changes in economic policy.
The most important economic principle used by finance for administration is MARGINAL ANALYSIS, which establishes that it is necessary to MAKE FINANCIAL DECISIONS and intervene in the Economy only when the additional benefits exceed the added costs and having as a consequence that all financial decisions they are oriented to a calculation of their benefits and marginal costs.
MARGINAL ANALYSIS
There are basically two differences between Finance and Accounting, one of them is: Cash flow and the other is: Decision Making.
Importance of cash flows.
The main function of the accountant is to generate and provide information to measure the performance of the company, evaluate its financial position and pay the respective taxes logically through the use of certain generally accepted principles.
The accountant prepares Financial Statements that record income at the point and time of sale and expenses when incurred, calling these the ACCUMULATION method.
On the other hand, the Finance manager highlights above all cash flows, that is, cash inflows and outflows, while the solvency of the company is maintained by planning the cash flows required to meet its obligations and acquire the necessary equipment to achieve the goals of the company.
The finance manager uses this method by calling the CASH METHOD to record income and expenses only with respect to actual cash inflows and outflows.
Example:
| Income Statements | Cash Flow | ||
| Sales | 100 | Tickets by periods | 10 |
| Sales cost | 80 | Made up of cash and banks | |
| Utility | twenty | Departures | two |
| Operating costs | 10 | ||
| Profit before tax | 10 | ||
| It might be on credit and not immediately available. |
Decision making.
The second most important difference between Finance and Accounting has to do with decision making.
The financier uses this information as it is and analyzes it and adjusts the information without considering the main purpose in making decisions that the fundamental principles between Finance Accounting are different.
Main Activities of the Finance Manager.
They are related to the basic financial statements of the company, having the following main activities:
Carry out the analysis and financial planning.
Take decisions.
Make financing decisions logically.
Analysis execution and financial planning are related to:
• The transformation of financial information to a more useful way to monitor the financial condition of the company.
• Evaluation of the need to increase or reduce production capacity.
• Determination of the type of financing required.
Although this activity is based primarily on Financial Statements, its main objective is to calculate cash flows and create an adequate cash flow to support the objectives of the company.
Investment decision making.
Investment decisions determine both the mix and the type of assets that appear on the left side of the balance sheet generated, referring to cash or fixed assets, that is in order to maintain the optimal levels of each type of current assets, deciding which assets Fixed assets that will be acquired and the time when existing ones must be modified, replaced or logically modified, these decisions influence the success of the company in order to meet its objectives.
Financing decision making.
It is necessary to establish the mix of short and long-term financing, but it is also important to determine which are the best individual sources of the same financing, since the need dictates many of these needs but some require a more in-depth analysis of the financial alternatives, their costs. and its long-term implications.
Logically for the achievement of its objective of the company.
Financial statements, depreciations and cash flows.
The Financial Statements to use are:
Statement of income.
Balance sheet.
Statement of Retained Earnings.
Cash flow statement.
The Income Statement provides us with a financial summary of operating results for a given period. There are Income Statements that cover periods of one year and others that operate on a monthly financial cycle.
Balance Sheet: it is a statement that summarizes the financial position at a certain time and makes a comparison between the assets of the company, that is, what it owns and its financing, which can be debt owed or capital what the partners.
There is a difference between assets and liabilities in the short term, as well as in the long term it is customary to list assets starting from the most liquid to the least liquid immediately and therefore precede fixed assets.
The statement of retained earnings: it is one that achieves the net income obtained during a year obtained and any dividend paid in cash between the beginning and the end of the year.
Statements of Cash Flows, this statement is sometimes called, State of Origin and Application, helping to understand the operating cash flows of investment and financing.
| Statement of income | |
| Sales | 1700 |
| Selling expenses | 1000 |
| Gross profit | 700 |
| Operating costs | 330 |
| Selling expenses 80 | |
| Administration Expenses150 | |
| Expenses of From p.100 | |
| Utility operation | 370 |
| Financial expenses | 70 |
| Profit before tax | 300 |
| Taxes | 120 |
| Net profit after taxes | 180 |
| Stock dividend | 10 |
| Preferential available profit for common shareholders | 170 |
| Earnings per share (100) | 1.70 |
Statement of Retained Earnings
| Statement of Retained Earnings | |
| Retained earnings balance | 500 |
| + Net profit after tax | 180 |
| = Dividends in bills paid | 680 |
| Preferred stock | |
| Common actions | |
| -Total dividends paid | (80) |
| = Balance of retained earnings | 600 |
Income statement on a cash basis.
Flow (only depreciations are removed)
| Sales | 1700 |
| Selling expenses | 1000 |
| Gross profit | 700 |
| Operating costs | 230 |
| Selling Expenses 80 | |
| Administration Expenses 150 | |
| Utility operation | 470 |
| Financial expenses | 70 |
| Profit before tax | 400 |
| Taxes | 120 |
| Cash flow from operations | 280 |
Breakeven.
The breakeven point is a very important analysis technique used as a profit planning tool for decision making and problem solving.
To apply this technique it is necessary to know the behavior of income, costs and expenses, separating those that are variable from the fixed or semi-variable, the fixed costs and expenses are generated over time regardless of the volume of production and sales and are called COSTS AND STRUCTURE EXPENSES, because they are generally hired or installed for the structuring of the company, such as: of these costs and expenses, depreciation, income, salaries can be mentioned, which are not directly related to the volume of production.
On the contrary, variable expenses are generated due to production and sales volumes, for example: labor paid according to the units produced, the raw material used in finished or manufactured products, taxes and commissions on sales., etc.
There are other expenses and costs that are applied proportionally to the volume of production and are called semivariable and for the purposes of this technique they are also classified as variable or fixed.
For this, it is necessary to calculate the equilibrium point that is generally defined as the moment or economic point at which a company generates neither profit nor loss, that is, the level at which the marginal contributions (variable income-variable costs and expenses) is of such magnitude that it exactly covers the costs and fixed expenses and for planning purposes the behavior of expenses, costs and profits can be taken into consideration, as well as the specifications of the products, manufacturing methods, productivity, waste, mixing of volumes and products or unit sales prices.
Cash Flows
Both cash and marketable securities represent a liquidity reserve that increases with cash inflows and decreases with cash outflows, these cash flows are divided into:
Operating flows: these are cash inflows and outflows that are directly related to the production and sale of the company's products and services.
Investment flows: these are cash flows that are linked to the purchase and sale of both fixed assets and business areas.
Of course, purchase transactions produce cash outflows, while sales transactions generate cash inflows.
Financing flows. They originate from debt financing transactions and equity, the fact of contracting to pay a short-term debt or a long-term debt, would result in a corresponding inflow and outflow of cash, in the same way the sale of shares would generate a cash inflow, the payment of cash dividends, or the redemption of shares would produce a financing outflow.
Classification of the origins and application of funds.
| origins | Applications |
| Decrease in any asset | Increase of any asset |
| Increase in any liability | Decrease in any liabilities. |
| Net profit after taxes | Net loss. |
| Depreciation and other non-cash expenses | Dividends paid |
| Sale of shares | Refund or withdrawal of shares. |
In the Cash Flow Statements summarizes the sources (origins) and uses (applications) of the funds during a specific period.
The decrease of an asset such as the cash balance is a source of cash flow, because the cash that has been immobilized in the asset is released and can be used for another purpose such as the repayment of a loan on the other hand the increase in the Cash balance is an application of cash flow or cash flow.
Cash Flow.
Study and analyze the need to forecast with reference to their sources and uses in a specific future period of a company in order to control short-term and long-term investments of an economic entity.
Therefore, the concept of cash flow is the study, analysis and forecast of the sequence in order to plan and control money.
Goals:
- Better management of funds.Investments in securities.Investment in operating assets.Economies for advance payments.Dividends payable.Obtaining loans.Coordination between collections and payments.Base for the respective budget.Short and long-term forecasts.
Regarding the best management of funds, try according to the circumstances to maintain outputs as low as possible without hurting financial stability, managing to implement control and information measures of the applications of cash, until obtaining results that are in line with the study provided flow analysis.
Investments in securities: in accordance with the foregoing, the administration will be able to apply the availabilities in short-term and long-term investments.
Investment in operating assets: it refers to the convenience of reducing the circulation of cash, since through statistical studies, it has been shown that with the investment of operating assets a higher profitability is obtained.
Savings from advance payments: when there are surplus cash, it is important to think about advance payments to reduce obligations, as long as it represents savings compared to other alternatives.
Dividends payable: the program that is established for these disbursements will be influenced in a decisive way by a good study of the cash forecasts, therefore the importance of this concept is obvious.
Growth policies: they play a very important role in companies, expansion programs and if there is adequate information on future applications of cash. It will be possible to choose the right moment for its achievement, taking into consideration the most appropriate types of financing since it will allow choosing the appropriate alternatives such as: own, foreign or mixed capital in the short, long term.
Obtaining loans: it is necessary to have solid information such as cash forecasts as this provides the traditional answers.
How much? For how long? Payment method?
Coordination between collections and payments: refers to the opportunity of entries and exits, maintaining a satisfactory cash balance.
Basis for the respective budget.
Short-term and long-term forecast: short-term refers to the forecast that indicates the obtaining and applications of cash for normal operations in a year or less and in the long term it serves for expansion or reorganization policies.
For the purposes of the cash flow technique it is necessary to make a study of the capital funds which are:
Cash funds.
Operating funds.
Cash funds that refer to capital whose availability is immediate and is normally held in equivalent assets to cover obligations or for the acquisition of goods.
Operating funds: these are investments in items of immediate availability and that as their name indicates were acquired for the normal work of the company, said funds are: capital for inventories and fixed assets.
The previous classification is made to specify the continuous circulation of capital whose cycle can be summarized by saying that it goes from money to assets, to accounts receivable that are converted back into money.
To know the sequence perfectly, it is necessary to study:
Circulation of money in business. In general, the following phases can be established:
A) Cash is invested in: merchandise, raw materials, direct wages and salaries, indirect production costs.
B) The articles have been partially or totally transformed, they are sold with a margin and profit.
C) As a consequence of the sale, cash or accounts receivable are obtained including the previous concepts, cost and profit.
D) The cash collected is deposited in banks and from here you can follow different destinations such as: investments in securities, payments in general, purchases of equipment, interest, sales and administration expenses, taxes, etc.
The flow is divided into two:
Net profit: to withdraw or invest.
Money that is circulated again in materials, wages and salaries and indirect production expenses.
The cash forecast in financial management.
Fundamentally, the result of the forecast must provide management with information that allows it to solve problems in cash handling.
Regarding the duration of the project, they are divided into:
Short term (they cover less than one year and not more than one year).
Long term (more than one year and no more than 3 years).
Daily Cash Forecast:
| Cash at the beginning of the period | $ | |
| + Collection, accounts receivable | $ | |
| + Other cash charges | $ | |
| Total cash increases | $ | |
| -Debts to pay | ||
| -Wages and salaries | ||
| -Other manufacturing expenses | ||
| -Sales and administration expenses | ||
| -Purchase of fixed assets | ||
| -Other taxes | ||
| -Dividends payable | ||
| -Others | ||
| Total cash deductions | $ | |
| Cash at the end of the periods | $ |
Forecast of cash by the method of inflows and outflows.
| Beginning cash balance at the beginning of the month | January | February | |
| Tickets | |||
| Payment to clients | |||
| Sales charge | |||
| Patent royalties | |||
| Total tickets available | |||
| Departures | |||
| Purchasing of materials | |||
| Payroll | |||
| Taxes | |||
| Cousins | |||
| Other expenses | |||
| Fixed asset | |||
| Dividends | |||
| Total departures | |||
| Excess or insufficient cash on hand | |||
| Bank loans | |||
| Cash balances at the end of the month. |
Cash forecast by the net profit method
| Beginning cash balance at the beginning of the month | |||
| Cash received from | |||
| Earnings before depreciation tax | |||
| Decrease in | |||
| Accounts receivable | |||
| Inventories | |||
| Other asset accounts | |||
| Increases in | |||
| Accounts receivable | |||
| Expenses | |||
| Total received | |||
| Total available | |||
| Effective for | |||
| Taxes | |||
| Acquisition of fixed assets | |||
| Payment of long-term debts | |||
| It increased in | |||
| Accounts receivable | |||
| Inventories | |||
| Other asset accounts for the year. | |||
| Dividends | |||
| Total cash at the end of the month |
Long-term cash forecast.
| Cash generated by operations | |||
| Net profit | |||
| Investment return | |||
| Charges made to net income without involving cash. | |||
| Total funds generated | |||
| Cash required for operations | |||
| Investments | |||
| Fixed asset | |||
| Values | |||
| Total cash required | |||
| Net surplus before financing | |||
| Changes in financing | |||
| Increase in capital | |||
| Sale of shares | |||
| We pay | |||
| Total changes in financing | |||
| Increase or decrease in company cash | |||
| Beginning cash balance | |||
| Ending cash balance |
Management of cash flows:
Centralization in the management of funds is recommended for the following advantages:
Adequate balances are maintained in bank accounts and therefore borrowing is facilitated.
Better control and delimitation of responsibilities.
Normal trading volume is easily maintained.
Optimal Fund Raising:
To carry it out, the following measures can be taken:
Improve and maintain a proper organization for billing.
Monitor the establishment of procedures and methods that reduce errors in billing.
Review and implementation of procedures in the credit and collections department. Considering the following: close contact with customers. Advise the client of the convenience of taking advantage of discounts for prompt payment.
Keep the account statements up to date and in an analytical way.
Adequate application in tax matters.
Absolute programming of each cash movement.
Applications:
Investment and securities analysis.
Financial statistics and reports.
Elaboration of cash flow.
Designation of money.
Fund forecast.
Warehouses and inventories.
Conclusion:
The cash flow technique is enormously helpful to cash budgets and represents a huge percentage of any budget mentioned.
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