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Scope of Financial Management

Financial management involves applying general management principles to financial operations and decisions. The objectives of financial management include maximizing shareholder wealth. Financial decisions include financing, investment, dividends, and working capital management. Capital expenditure decisions are important with long-term effects, irreversibility, and substantial outlays. Capital budgeting involves planning, analysis, selection, implementation, and review of projects using criteria like NPV, IRR, payback period, and accounting rate of return. Financial statements and ratio analysis are important tools used in financial management.

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89 views41 pages

Scope of Financial Management

Financial management involves applying general management principles to financial operations and decisions. The objectives of financial management include maximizing shareholder wealth. Financial decisions include financing, investment, dividends, and working capital management. Capital expenditure decisions are important with long-term effects, irreversibility, and substantial outlays. Capital budgeting involves planning, analysis, selection, implementation, and review of projects using criteria like NPV, IRR, payback period, and accounting rate of return. Financial statements and ratio analysis are important tools used in financial management.

Uploaded by

bmsoni
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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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 > 0
(NPV)
Internal Rate of IRR > cost of capital
Return(IRR)
Benefit cost ratio BCR > 1
(BCR) /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 Capital Structure
Equity/preference Cost of capital
Reserves & Surplus
Secured Loans
Debentures
Loans & Advances Working capital
Unsecured loans financial policy
Current Lia/provisions
Trade creditors
Provisions
Finance topics- Balance Sheet

Fixed Assets (Net) Capital budgeting


decisions
Investments 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 USES
Operations( Dividend
net profit + payment
Depreciation)
Issue of Working Repayment
share capital capital Pool of long term
borrowings
Long term Purchase of
borrowing non current
assets
Sale 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 USES
Operations( net Dividend payment
profit + Repayment of long
Depreciation) term borrowings
Issue of share Purchase of non
capital current assets
Long term Decrease in current
borrowing liabilities
Sale of non current Increase in current
assets assets other than
Increase in current cash
liabilities
Decrease 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.51 Lakh Rs.51 Lakh Rs.61 Lakh

Year 1 Year 2 Year 3


Rs.102 lakh

Year 0
Net Present Value
Year Cash Flow Dis. Factor Present
@10% Value
0 -102 1 -102
1 51 0.90909 46.36359
2 51 0.82645 42.14895
3 61 0.75131 45.82991
NPV 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% Value
0 -102 1 -102
1 51 0.78740 40
2 51 0.62000 32
3 61 0.48818 30
NPV 0

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