BUSINESS FINANCE

WEEK LESSON #: 5
MS. JANE M. CARANGUIAN
 REVIEW OF THE
PREVIOUS LESSON:
SOURCES AND USES OF
FUNDS
WEEK LESSON #: 5
INTRODUCTION TO
INVESTMENT
 INVESTMENT
• IS AN ASSET OR ITEM THAT IS PURCHASED WITH THE
HOPE THAT IT WILL APPRECIATE IN THE FUTURE.
• IS THE PURCHASE OF GOODS THAT ARE NOT
CONSUMED TODAY BUT ARE USED IN THE FUTURE
TO CREATE WEALTH.
• IS A MONETARY ASSET PURCHASED WITH THE IDEA
THAT THE ASSET WILL PROVIDE INCOME IN THE
FUTURE OR WILL BE SOLD AT A HIGHER PRICE FOR A
PROFIT .
 ILLUSTRATIVE FINANCIAL PLANNING
PROCESS
INVESTING
Means putting your
money to work for you.
 DIFFERENT
STEP 1: CALCULATE TYPES OFCOST
SET-UP INVESTMENTS
The most
Comparing yourcommon terms
set-up costs that start-up
or your are related
equityto
investment.different types of investments:
Set-up
• BOND-costsA for another
debt operating
instruments, period
a bond will include:
is essentially a
• Accounting
loan that youfees
are giving to the government or an
• Registrations and licenses
institution in exchange for or renewal
a pre- set interest rate
• paid regularly
Equipment andfor
fitaout
specified term.
• STOCK-working
Initial A type capital
of investment that gives you partial
ownership of a publicly
• rated company.
 DIFFERENT TYPES OF INVESTMENTS
STEP 3: CASH-FLOW FORECAST
YOU NEED TO BE AWARE THAT:
• MUTUAL FUND- An investment vehicle that allows
• New business and another operating period
you to invest your money in a professionally-
often
managed need cash to
portfolio build the capacity
of assets.
• necessary to service customers.
MONEY MARKET ACCOUNT- A type of savings
• Customers
account that maybe
offers a slow to payrate of interest
competitive
(real resulting
• The rate) in exchange
cash-flowfor larger- than- leave
gap could normalyou
deposits.
vulnerable if you’re not prepared
 STEP 5:DIFFERENT
BREAK-EVEN TYPES OF INVESTMENTS
ANALYSIS
Commonly used approaches to predict what those
•sales will be included:
EXCHANGE- TRADED FUND (ETF)- ETFs are
• For a Service
funds- Business
sometimes – set
referred to benchmark
as baskets orbased on
portfolios
the average numbers
of securities- that tradeoflike
hours worked
stocks per week.
on an exchange.
• For Other Business – score the size of your market
• Prepare several forecast based on the best-case
and average scenarios.
• Document your assumptions and the reasons
behind them.
 INVESTMENT
BUDGET STRATEGIES
AND BUDGET PREPARATION
• Allocation of investments: Also known as asset
BUDGET – the process of
allocation, this term refers to the types of
investments/asset categories you own.
creating a plan to spend
• Diversification: This is a risk management technique
that mixes a wide variety of investments to
your name
potentially minimize your investment risk.
• Dollar/Peso cost averaging:An investment strategy
used whereby an investor purchases fixed
investment amounts at predetermined times,
regardless of the price of the investment.
Continuation:
INVESTMENT TERMINOLOGY
• Capital
CASH FLOW-
Asset: A is a means
long- of projecting
term asset how
such as land or a and
building that iscomes
when cash not purchased
in andorflows
sold inout
the od
normal
a
course of business.
business within a specified time period.
• Capital gain/ loss: Profit or loss from the sale of an asset.
•• SALES OF EXPECTED CASH COLLECTIONS –
Capital appreciation/ depreciation: The amount by
from the
which thevalue
customers shows
of an asset theorbudgeted
increases decreases cash
collections
compared onamount
to the sales during
you paidaforperiod.
it.
•• Dividends:
SALES BUDGETA distribution of afirst
– is the portion
andofbasic
a company’s
earnings, decided by the board of directors, to a class of
component of master budget and it shows the
its stakeholders.
expected number of sales units of a period
and the expected price per unit.
continuation
INVESTMENT TERMINOLOGY
• Index: A portfolio
• PRODUCTION of securities representing a
BUDGET – is a schedule
particular market or industry or a portion of it.
showing planned production in units which
• must
Margin account: An account that allows
be made by a manufacturer during a you to
borrow money from your brokerage account in order
specific period to meet
to purchase securities.
the expected demand
for sales and planned finished goods
• Prospectus: A document filed with the SEC that
inventory.
describes an offering of securities for sale to the
public.
• Yield: The income return on an investments.
 Types of INVESTMENT RISK
Budgeted Income Statement Definition
1. Market Risk: The risk of investments declining in
value because of economic developments or other
Budgeted Income Statement – contains
events that affect the entire market.
the line
items found in the normal income statement,
The main types of market risk are:
except that it is a projection of what is the
• Equity risk- applies to an investment in shares.
income statement will look like during future
• Interest rate risk- applies to debt investments such
budget periods.
as bonds.
• Currency risk- applies when you own foreign
investments.
 Types of INVESTMENT RISK
2. Liquidity risk- The risk of being unable to sell your
investment at a fair price and get your money out when you
want to.
3. Concentration risk- The risk of loss because your money is
concentrated in 1 investment or type of investments.
4. Credit risk- The risk that the government entity or company
that issue the bond will run into financial difficulties and won’t
be able to pay the interest or repay the principal at maturity.
5. Reinvestment risk- The risk of loss from reinvesting
principal or income at a lower interest rate.
 Types of INVESTMENT RISK
6. Inflation risk- The risk of a loss in your purchasing
power because the value of your investments does not
keep up with inflation.

7. Horizon risk- The risk that your investment horizon

8. Longevity risk- The risk of outliving your savings.

9. Foreign investment risk- The risk of loss when investing

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