Transcript Scope of Financial Management Financial Management involves the application of general management principles to particular financial operation Objectives of Financial Management  Maximization of shareholders wealth.

Scope of Financial Management
Financial Management involves
the
application
of
general
management
principles
to
particular financial operation
Objectives of Financial Management
 Maximization of shareholders wealth
Financial Management
Decisions
 Financing
 Investment
 Dividend
 Working capital management
Difficulties
 Measurement problems
 Uncertainty
 Temporal spread
Investment decisions-Capital
Expenditure decisions
Importance
 Long term effects
 Irreversibility
 Substantial outlays
Investment decisions-Capital
Expenditure decisions
Difficulties
 Measurement problems
 Uncertainty
 Temporal spread
Phases of capital budgeting
 Planning
 Analysis
 Selection
 Implementation
 Review
SELECTION
Criterion
Accept when
Pay back period (PBP)
PBP < target period
Accounting
rate
of ARR > target rate
return(ARR)
Net present value (NPV) NPV > 0
Internal
Rate
of IRR > cost of capital
Return(IRR)
Benefit cost ratio (BCR) BCR > 1
/Profitability Index
Various facets of project
Analysis
 Market analysis
 Technical analysis
 Financial analysis
 Economic analysis
 Ecological analysis
Sources of finance
Permanent sources
 Share capital
 Retained profits
Long term sources
 Redeemable preference shares
 Debentures
 Long term loans
 Seed capital / venture capital
Sources of finance
Medium term sources
 Medium term loans
 Deferred credit
 Public deposits
 Working capital term loans
Sources of finance
Short term sources
 Cash credit
 Overdraft
 Bills discounting
 Commercial paper
 Trade credit
Study of financial Statements:
Financial
Statements
means
Balance Sheet, P & L A/c and
sources and uses of funds statement
Basic concepts underlying financial
Accounting
 Entity concept
 Money measurement concept
 Stable monetary unit concept
 Going concern concept
 Cost concept
 Conservatism concept
 Dual aspect concept
Finance topics- Balance Sheet
Share capital
Equity/preference
Reserves & Surplus
Secured Loans
Debentures
Capital Structure
Cost of capital
Loans & Advances
Unsecured loans
Current Lia/provisions
Trade creditors
Provisions
Working capital financial
policy
Finance topics- Balance Sheet
Fixed Assets (Net)
Investments
Capital budgeting
decisions
Security Analysis
Cash & Bank
Cash Management
Receivables
Credit Management
Inventories
Inventory Management
Basics of Financial Statement analysis
 Horizontal analysis- analysis involves the
computation of amount changes and
percentage changes
 Vertical Analysis- uses percentages to show
the relationship of the different items to the
total in a single statement. Sets a total figure
equal to 100 % and compute the percentage
of each component of that figure
Basics of Financial Statement analysis
 Trend Analysis :Percentage changes are
calculated for several successive years
instead of between two years.
 Ratio Analysis: Represent meaningful
relationship between two numbers
Common size statements
 The numbers are brought to common base
i.e. per cent.
 Make comparisons of business enterprises of
different sizes more meaningful
 It can be prepared in vertical analysis format
or horizontal analysis format
FUND FLOW STATEMENT, CASH
FLOW STATEMENT
The fund flow and cash
flow statement potrays the
flow of funds through the
business during the given
accounting period.
Funds are defined
as working capital
or as cash.
The sources and uses of
funds statement, on
working capital basis,
present I). Sources of
working capital ii). Uses of
working capital and iii) net
changes in working
capital.
Here working capital is
defined as the net working
capital which is simply the
difference between the
current assets and current
liabilities.
The sources of working
capital and uses of
working capital are as
under:
SOURCES
Operations(
net profit +
Depreciation)
Issue
of Working
share capital capital Pool
Long
term
borrowing
Sale of non
current
assets
USES
Dividend
payment
Repayment
of long term
borrowings
Purchase of
non current
assets
The sources and uses of funds
statement: cash basis
The sources and uses of fund
statement, on cash basis shows, I
) the sources of cash ii) the uses
of cash and iii) the net change in
cash.
The sources and uses of
cash are listed below:
SOURCES
Operations(
net
profit
+
Depreciation)
Issue
of
share
capital
Long
term
borrowing
Sale of non current
assets
Increase in current
liabilities
Decrease in current
assets other than
cash
USES
Dividend payment
Repayment of long
term borrowings
Purchase of non
current assets
Decrease in current
liabilities
Increase in current
assets other than
cash
RATIO ANALYSIS:
A Ratio is an arithmetical relationship
between two figures. Financial ratios
have been classified into five
categories as follows:
LIQUIDITY RATIO
Current Ratio= CA /CL
Quick ratio = Quick assets*
/ current Liabilities
* excl. inventories
LEVERAGE RATIO
DER = Debt /Equity
Int.coverage.ratio
=
PBIT+Depreciation / Int. on debt.
DSCR = PAT+Dep+Int. on debt /Int.
on debt + installment of debt
TURNOVER RATIO
Inventory turnover ratio = cost
of goods sold / Av. Inventory
Fixed assets turnover ratio =
Net sales /Av. Net fixed
assets.
Total asset turnover ratio =
Net sales / Av. Total assets
PROFITABILITY RATIO
GP margin = Gross profit / Net
sales
Net profit margin = Net profit / sales
Return on total assets = PAT / Av.
Total assets
VALUATION RATIO
EPS = Equity earnings / Number of
shares
Price Earning Ratio = Market price
per share/ EPS
Yield = Dividend + price change
/Initial price.
A CASH FLOW EXAMPLE
The timing of the cash flows is critical for
determining the Project's value.
below the line for cash investments or
above the line for returns.
Rs.102 lakh
Year 0
Rs.51 Lakh
Rs.51 Lakh
Rs.61 Lakh
Year 1
Year 2
Year 3
Net Present Value
Year Cash Flow Dis. Factor
@10%
0
-102
1
1
51
0.90909
2
51
0.82645
3
61
0.75131
NPV
Present
Value
-102
46.36359
42.14895
45.82991
32.34245
The evaluation of any project
depends on the magnitude of the
cash flows, the timing and the
discount rate.
The discount rate is highly
subjective. The higher the rate , the
less a rupee in the future would be
worth today.
The risk of the project should
determine the discount rate.
Internal Rate of Return
(IRR)
IRR is the rate at which
the discounted cash flows
in the future equal the
value of the investment
today. To find the IRR one
must try different rates
until the NPV equals zero.
@27%
0
1
2
3
NPV
-102
51
51
61
1
0.78740
0.62000
0.48818
Value
-102
40
32
30
0