FINANCIAL MANAGEMENT

Course Outline
  

What is financial management? Functions of the financial manager Finance in the organizational structure of the company

Course Outline ( Cont)

  

The three basic financial statements Analyzing financial statements Financial planning/forecasts: Projected financial statements Capital budgeting

Course Outline ( Cont)



Short-term financial decisions Cash management Credit management Inventory management

Course Outline ( Cont)



Long-term financing Long-term financing decisions Bond financing costs Using swaps to hedge financing costs Investing in securities markets

THE GOALS AND FUNCTIONS OF FINANCIAL MANAGEMENT

Is profit maximization the most important goal of financial management?

Some possible drawbacks to profit maximization as the primary goal of the firm: 1. A Change in profit targets may also represent a change in risk. 2. It is almost impossible to measure the key variable profit.

Valuation approach the ultimate measure of performance is not what a company earns but how the earnings are valued by the investor.

Factors considered by the investor:

 

the risk inherent in the firms operation the quality and reliability of reported earnings the trend or time pattern over which the firms earnings increase or decrease

The financial manager, in turn, must be sensitive to all these considerations. He must question the impact of each decision on the firms overall valuation:


If a decision maintains or increases the firms overall value, it is acceptable from a financial viewpoint; otherwise it should be rejected.

Social responsibility and ethical behavior



Is the goal of shareholder wealth maximization consistent with a concern for social responsibility for the firm?

By adopting policies that maximize values in the market, the firm can attract capital, provide employment, and offer benefits to its community.

Nevertheless, certain socially desirable actions such as pollution control, equitable hiring practices, and fair pricing standards may at times be inconsistent with earning the highest possible profit or achieving maximum valuation in the market.

WHY FINANCE MATTERS

Sound planning of finances and the proper utilization of funds are critical to business success.

Why finance matters ( cont)



Organizations make important financial decisions. The financial manager faces two basic problems: 1. How much should the company invest, and what specific assets should the company invest in?
(investment or capital budgeting decision)

Why finance matters ( cont)

2. How should the cash required for investment be raised? ( financing decision)

(2)
Firms operations (a bundle of real assets)

(1)
Capital markets (investors holding financial assets)

Financial manager

(4a)

(3)

(4b)

What is financial management?



Gathering, organizing, coordinating and recording the money or financial resources of an enterprise or an organization. Involves decisions such as which investments the organization should make, how these projects should be financed, and how the company can most effectively manage its existing resources.

The Financial Managers Responsibilities



The financial managers primary task is to plan for the acquisition and use of funds so as to maximize the value of the organization. He or she makes decisions about alternative sources and uses of funds.

Specific activities: 1. Forecasting and planning- the financial manager must interact with other executives as they jointly look ahead and lay the plans which will shape the organizations future position.

Specific activities: 2. Major investment and financing decisions - on the basis of long- run plans, the financial manager must raise the capital needed to support growth.

Specific activities ( cont) 3. Coordination and control must interact with executives in other parts of the business if the organization is to operate as efficiently as possible.

Specific activities ( cont) 4. Interaction with capital markets must deal with the money and capital markets.

Daily

Occasional

Profitability

Goal:

Credit management Inventory control Receipt and disbursement of funds

Stock issue Bond issue Capital budgeting Dividend decision

Trade-off

Maximize shareholder wealth

The Role of the Financial Manager in the Organization

Board of Directors Chief Executive Officer (CEO) Vice-President-Marketing Vice-President-Finance or Chief Financial Officer (CFO) Vice-President-Production and Operations

Duties: Oversee financial planning Corporate strategic planning Control corporate cash flow
Treasurer Duties: Cash management Credit management Capital expenditures Raising capital Financial planning Management of foreign currencies Controller Duties: Taxes Financial Statements Cost accounting Data processing

Who is the financial manager?



Treasurer
Banking relationships Cash management Obtaining financing Credit management Credit disbursement Insurance Pensions management

Controller Accounting Preparation of financial statements Internal auditing Payroll Custody of records Preparing budgets Taxes

FINANCIAL ANALYSIS AND PLANNING

FINANCIAL STATEMENTS


Income Statement It is like a moving picture of how well the organization is doing in terms of sales, costs, and profitability, usually prepared on a monthly basis but covering an accounting period of one year.

Sales
Less: Cost of producing or acquiring our product or service

Operating activities

= Gross Profit
Less: Operating expenses: Marketing and selling expenses, general and administrative expenses, and depreciation expense

= Operating Income (Earnings before interest and taxes)

Less: Interest expense

= Earnings before taxes

Financing activities

Less: Corporate taxes

=Earnings before preferred dividends

Less: Preferred stock dividend

= Net income available to common stockholders

Balance Sheet It is a snopshot which shows where the money came from to fund the organization and where it was spent at a fixed point in time, usually at yearly intervals.

ASSETS
Current Assets: Cash Marketable securities Accounts receivable Inventories Prepaid expenses Total current assets

LIABILITIES (DEBT) AND EQUITY

Current liabilities (debt): Accounts payable Accrued expenses Short-term notes Total current debt

+
Long-term liabilities (debt): Long-term notes Mortgages Total long-term debt

+
Fixed Assets: Machinery and equipment Buildings Land Total fixed assets

+
Equity: Preferred stock Common stock Par value Paid-in capital Retained earnings Total stockholders equity

+
Other Assets: Investments Patents Total other assets

=
TOTAL ASSETS

=
TOTAL DEBT AND EQUITY

Cash Flow Statement It is another moving picture of how well the organization is doing, but this time in terms of cash flow generation.

Cash inflows
Generation of funds in normal operations

(1)
Cash flows from operating activities

Cash outflows
Expenditure of funds in normal operations

+
Sale of plant and equipment Liquidation of long-term investment

(2)
Purchase of plant and equipment Long-term investment

Cash flows from investing activities

+
Sale of bonds, common stock, preferred stock, and other securities

(3)
Retirement or repurchase of bonds, common stock, preferred stock, and other securities Payment of cash dividends

Cash flows from financing activities

equals

Add items 1, 2 and 3 together to arrive at net increase (decrease) in cash

Financial Ratios
   

Profitability Asset Utilization Liquidity Debt Utilization

Financial Ratios.

Profitability ratios measure the ability of the organization to earn an adequate return on revenues, total assets, and invested capital.

Financial Ratios


Profitability ratios:
1. Profit margin = Net income/revenues 2. Return on assets (investment) = Net income/total assets 3. Return on equity = Net income/total organization equity*
*Organization equity = Initial capital investments plus accumulated earnings

Financial Ratios


Asset utilization ratios measure the speed at which the organization is turning over accounts receivable, inventory, and longer-term assets. These ratios measure how many times per year a company sells its inventory or collects its entire accounts receivable. In terms of long-term assets, the ratio tells us how productive the fixed assets are in terms of generating revenues.

Financial Ratios


Asset utilization ratios: 1. Receivable turn-over = Credit sales/receivables 2. Average collection period = Accounts receivable/average daily credit sales 3. Inventory turnover = Sales/inventory

Financial Ratios


Asset utilization ratios 4. Fixed asset turnover = Sales/fixed assets 5. Total asset turnover = Sales/total assets

Financial Ratios
Liquidity ratios measure the ability of the organization to pay off short-term obligations as they come due.

Financial Ratios


Liquidity ratios: 1. Current ratio = Current assets/current liabilities 2. Quick ratio = (Current assets inventory) Current liabilities

Financial Ratios


Debt utilization ratios measure the prudence of `the debt management policies of the organization; the overall debt position of the organization is evaluated in light of its asset base and earning power.

Financial Ratios


Debt utilization ratio: 1. Debt to total assets = Total debt/total assets

FINANCIAL FORECASTS


Budget a detailed plan outlining the acquisition and use of financial and other resources over some given time period; it represents a plan for the future expressed in quantitative terms.

Financial Forecasts


Factors considered: 1. Past experience 2. Prospective pricing policy 3. Market research studies 4. General economic conditions 5. Industry economic conditions

Financial Forecasts


Factors considered 6. Movements of economic indicators such as GNB, employment, prices, and personal income, etc. 7. Competition 8. Market share

Financial Forecasts


Preparing the master budget: 1. Sales budget, including a computation of expected cash receipts 2. Production budget 3. Selling and administrative expense budget 4. Cash budget 5. Budgeted income statement 6. Budgeted balance sheet

Financial Forecasts


Budgets covering acquisition of land, buildings and other items of capital equipment (often called capital budgets) generally have quite long time horizons. Operational budgets are ordinarily set to cover a one-year period, which should correspond to whatever fiscal year the company is following, so that the budget figures can be compared with the actual results.

Financial Forecasts


The cash budget is composed of four major sections: 1. The receipts section 2. The disbursements section 3. The cash excess or deficiency section 4. The financing section

Financial Forecasts


The cash budget is composed of four major sections: 1. The receipts section 2. The disbursements section 3. The cash excess or deficiency section 4. The financing section

Financial Forecasts


The budgeted income statement is the document that tells how profitable operations are anticipated to be in forthcoming period. After it has been developed, it serves as the benchmark against which subsequent company performance can be measured.

Financial Forecasts

 The

budgeted balance sheet shows a picture of what the organization would want its financial position to be as of a given point in time.

Financial Forecasts
 Three

widely used methods for evaluating capital expenditures: 1. Payback method 2. Internal rate of return 3. Net present value

Financial Forecasts


Payback method given alternatives, the quicker payout, the better the investment would be. IRR the higher the yield (%) the better the investment would be. Net present value (present value of inflows less present value of outflows) the higher the net present value, the better the investment would be.

Thank you!