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PREMIUM COLLEGE
Master of Business Administration
FINANCIAL MANAGEMENT
TADELE TESFAY (ASST. PROF.)

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THE INSTRUCTOR
 Assistance Professor of Accounting and Finance

 Experience: More than 13 Years Experiences teaching at Hager

Institutions
 Other courses taught:
 All Course to Accounting graduate students
 To MBA and Project: Managerial Accounting, Financial
Management and project Management

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COURSE OBJECTIVE
 The objective of the course is to provide reasonably
sufficient exposure to the present-day issues of
financial management. It will deliver the skills
necessary that will help candidates efficiently
manage the financial resources of a corporate
entity.

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COURSE CONTENTS
1 2 3 4 5 6

RISK AND VALUATION OF

TIME VALUE OF FINANCIAL CAPITAL BUDGET/
RETURN
FUNDAMENTA MONEY (TVM) INSTRUMENT AND INVESTMENT
LS OF FINANCIAL COST OF CAPITAL DECISION
FINANCIAL ANALYISIS
MANAGEMEN
T

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REFERENCE BOOKS
 Euregene F. Brighman and Joel F. Houston (2006), Fundamentals of
Financial Management, Harcourt Brace College Publishers. 10th -14th
edition .
 Ross, Westerfield&Jordan.(2008) Fundamentals of corporate
finance. 8th -10th .edition McGraw-Hill Companie
 Jae K. Shim& Joel G. Siegel (1998). Financial Management;
Schaum's Outline of Theory and Problems of Financial
Management, 2nd edition. McGraw-Hill Companie
 Any other related materials

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ASSESSMENT
METHODS
Individual  
20%
Assignments
Group Assignments   30%
 
Final Examination
50%
 
Total 100
%
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CHAPTER ONE: FUNDAMENTAL
OF FINANCIAL MANAGEMENT

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 Accounting
• Is a financial information system, is a process of
identifying, recording, and communicating the
economic events of an organization (business or non-
business) that preparing financial statements to
interested users for decision making

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 The Accounting
Process: Accomplished by
storage & preparation of data

Accounting “links”
decision makers with
Communication:
Economic economic activities ¾ Accomplished by Reporting
Activities: and with the results of
their decisions.

Actions
(decisions)
Decision makers
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FINANCIAL MANAGEMENT AND ITS
ROLES
Financial Management is the study of methods
which help us plan, raise and use firms’ financial
resources of an organization in an efficient and
effective manner to achieve corporate objectives.

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CON’T..
Financial management can be defined as the
management of capital sources and their uses
so as to attain the desired goal of the firm (i.e.
maximization of share holders’ wealth).

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 Central Role of Financial Management

Customers mgt Marketing mgt

Purchasing mgt Quality mgt

Financial
Management
Human Production mgt
Resource mgt

R&D Technology

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 GOALS OF FINANCIAL
MANAGEMENT
 Possible goals
 Maximize Profit
 Maximize sales or market share
 Minimize cost
 Maintain Growth
 Survival
 Avoid financial distress and Bankruptcy
 Shareholders Wealth Maximization

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BUSINESS GOALS, ACTIVITIES, & PERFORMANCE MEASURES

A business is an economic unit that aims to sell

goods and services to customers at prices that will
provide an adequate return to its owners.
Businesses, though diverse, have similar goals and
engage in similar activities.

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(BUSINESS GOALS, ACTIVITIES CONT’D)

Business Goals

1. Profitability
A business must take in enough money to pay all the costs of doing
business, with enough left over as profit for the owners to want to stay
in business.
2. Liquidity
A business must have enough funds available to pay debts when they
are due.

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 (BUSINESS GOALS, ACTIVITIES CONT’D)

Business Business
Goals Activities

Financing Operating
Profitability

Liquidity Investing

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 (BUSINESS GOALS, ACTIVITIES CONT’D)
Business Activities
1) Financing Activities:
 Obtaining capital from owners and creditors
 Repaying creditors and a return to owners.

2) Investing Activities:
 Spending the capital it receives in ways that are productive and will help the
business achieve its objectives.
 Buying and selling long-term assets to be used in the business.

3) Operating Activities:
 Selling of goods and services to customers.
 Employing managers and workers, buying and producing goods and services, and
paying taxes.
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 GOALS OF FINANCIAL MANAGEMENT

There are two basic goals of financial management

 Profit maximization and
 Wealth Maximization
1. Profit maximization
 maximizing the birr or any other currency such as dollar income of firm.
 According to this approach, actions that increase profits should be undertaken and
actions that decrease profits are avoided.
 To maximize profit , a firm either produces maximum out puts for a given level of
input or use of minimum input for producing a given out put.
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LIMITATIONS OF PROFIT MAXIMIZATION
1. Ambiguity:
It is ambiguous and vague, which profit should be maximized
2. Timing of benefits:
 It does not consider time value of money.
 It ignores that the difference in time pattern of the benefits
3. Quality of benefits
• It does not consider the quality of benefits.
• The term quality here refers the degree of certainty with which benefits can be
expected.
• As a result the more certain the expected return, the higher the quality of benefits
and vice versa

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 WEALTH(VALUE)
MAXIMIZATION
This is also known as value maximization or net present worth
maximization
The modern financial management theory operates on the
assumption that the primary goal of a firm to maximize wealth of
share holders
It is concerned with the maximization of the price of the firms
common stock.
With in this assumption all the technical limitations of profit
maximization removes.

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 FINANCE
 Virtually all individuals and organizations earn or raise money and
spend or invest money.
 Finance is concerned with the process, institutions, markets, and
instruments involved in the transfer of money among individuals,
businesses and governments.
 The general areas of finance are business, personal and public finance.
 Finance is important to individuals, business and government to achieve
their economic objectives.

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CONT’D
 Finance plays a pivotal role to every general person to earn and invest money; for

business to raise and invest funds; and to the government to plan expenses and
incomes, to execute goals of government and to achieve development of a country.

 FINANCE uses accounting information as inputs to decision-making.

 The study of how to raise money and invest it productively.

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CONT’D
Financial management defined:
 It is an integral part of overall management. concerned with the
efficient use of an important economic resource namely, capital
funds”

 “Financial Management deals with procurement of funds and

their effective utilization in the business”

 In simple words, Financial Management as practiced by business

firms can be called as corporation Finance or business Finance.

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SCOPE OF FINANCIAL MANAGEMENT/
FINANCIAL DECISIONS IN A FIRM/
There are five broad areas of financial decision making in a firm. These are:
1. Investment decisions (Capital budgeting)
2. Financing decisions (capital structure)
3. Asset management( resources allocation )
4. Liquidity decisions (working capital management/short term asset
mix decision)
5. Dividend decisions

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 1. INVESTMENT DECISIONS:
 A firm’s investment decisions involve capital expenditures.
 They are, therefore, referred as capital budgeting decision.
 Capital investment is the allocation of capital to investment proposals
 Involves commitment of funds to long term assets that would yield long
term benefits
 Two important aspects of investment decision are:
1. The evaluation of the prospective profitability of new investment, and
2. The measurement of a cut-off rate against that the prospective return of new
investments could be compared.
 Investment proposal should be evaluated in terms of both expected return and
risk.
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2. FINANCING DECISIONS:
 Once a firm has decided the investment projects it wants to
undertake, it has to figure out ways and means of financing them.
 This is the function of raising funds.
 The central issue here is to determine the appropriate proportion
of equity and debt; the mix of debt and equity is called capital
structure.
 The financial manager must strive to obtain the best financing mix
or the optimum capital structure.
 The use of debt affects the return and risk of shareholders; it may
increase the return on equity funds, but it always increases risk as
well.
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3. ASSET MANAGEMENT DECISIONS:
 Once a firm has get the required finance it wants to
undertake, it has to figure out ways and means of
allocating the finance in to current and long term asset
as well as efficient utilization of the finance to achieved
its stated objective or goal f the business .
 This is the function of classified in to current and long
term/plan asset assets .
 The financial manager must strive to obtain the best assets
mix
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 CON’T
 levels of risk and return expected based on the
requirements of the organisation will ensure that
issues such a gearing are well within control
 continually monitored to ensure that the various
activities undertaken by the organisation continue
to make maximum contribution to the achievement
of the organisational objectives

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4. CAPITAL MANAGEMENT (LIQUIDITY) DECISION:
Also referred as short term financial management that deals with current assets
and current liabilities.
 Investment in current assets affect the firm’s profitability and liquidity.
 Current assets should be managed efficiently for safeguarding the firm against
the risk of illiquidity.
 If the firm does not invest sufficient funds in current assets, it may become
illiquid and therefore, risky; but it would lose profitability, as idle current
assets would not earn anything.
 Conflict exists between profitability and liquidity while managing current
assets and hence it deals with proper trade-off between liquidity and
profitability.
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5. DIVIDEND DECISION
 The financial manager must decide whether the firm should distribute all
profits, or retain them or distribute a portion and retain the balance.
 The proportion of profits distributed as dividends is called the dividend
payout ratio and the retained portion of profit is known as the retention
ratio.
 The optimum dividend policy is that one maximizes the market value of
the firm’s shares

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 THE NATURE OF BUSINESS
Business is an organization in which basic
resources (inputs), such as materials and labor are
assembled and processed to provide goods or
services (outputs) to customers.
A business’s customers are individuals or other
businesses who purchase goods or services in
exchange for money or other items of value.
TYPES OF BUSINESSES
1. Manufacturing businesses change basic inputs into
products that are sold to individual customers
2. Merchandising businesses also sell products to
customers. However, rather than making the products,
they purchase them from other businesses (such as
manufacturers).
3. Service businesses provide services rather than products
to customers.
BUSINESS ORGANIZATIONS IN ETHIOPIA
1. Sole proprietorship
Generally owned by one person.
Often small service-type businesses
Owner receives any profits, suffers any losses, and is personally liable for all
debts.
2. Partnerships
Owned by two or more persons.
Often retail and service-type businesses
Generally unlimited personal liability
Partnership agreement
BUSINESS ORGANIZATIONS IN ETHIOPIA
Types of Partnerships
 - Ordinary Partnership
 - Joint Venture
 - General partnership
 - Limited partnership
3. Companies
 Ownership divided into shares of stock
 Separate legal entity organized under state corporation law
 Limited liability
 - Private Limited Companies
 - Share Companies
4. Cooperatives (Unions)
5. Public enterprises
AGENCY PROBLEM
• The relationships between the various interested parties
in the firm are often described in terms of agency theory
• Agency theory examines the duties and conflicts that
occur between parties who have an agency relationship
• Agency relationships occur when one party, the principal,
employs another party, the agent, to perform a task on
their behalf

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AGENCY PROBLEM
•Managers can be seen as the agents of shareholders, employees
as the agents of managers, managers and shareholders as the
agents of long- and short-term creditors, etc. In most of these
principal-agent relationships conflicts of interest will exist
Is the potential conflict between the manager and owners of the
firm. one of the characteristics of a corporation is that there is a
separation owners and the management
The pre assumption on the agency relationship is that the
management will act in the best interest of owners. However, the
managers follow their personal goals as the expense of others is
called Agency problem
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 MECHANISMS TO SOLVE AGENCY PROBLEM

There are some mechanisms to solve agency problem.

1.Giving appropriate incentives to the management
personnel
2. monitoring and controlling the activities of the
business
3.Managerial compensation

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 FINANCIAL PLANNING, REPORTING AND
ANALYSIS
Financial planning starts with Forecasting
a) Quantitative forecasting techniques
1. Regression
2. Time series analysis
3. Weighted average
b) Qualitative Forecasting techniques
4. Expert opinion
5. Delphi technique
6. Sales personnel estimate
c) Percent of sales method
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CLASSIFICATION OF BUDGETS:
a) Operating Budgets
1. Sales budget
2. Production budget
3. Raw material budget
4. Labor Budget
5. Manufacturing overhead Budget
6. Operating expense Budget
7. Budgeted Income statement
b) Financial Budget
8. Capital Budget
9. Cash Budget
10. Budgeted balance sheet
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 FINANCIAL REPORT
Interim Report Vs Annual Financial report
1. Income statement/profit and loss
2. Statement of change in retained earning
3. Balance sheet/ financial position
4. Cash flow statement
5. Statement of owners equity

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FINANCIAL ANALYSIS
Trend analysis (Horizontal analysis)
Vertical analysis
Industry analysis
Ratio Analysis
1. Liquidity ratios
2. Activity ratios
3. Leverage ratios
4. Profitability ratios
5. Market Value ratios
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 TIME VALUE OF MONEY
Time value of money formulas:
1. Future value of a sing sum
2. Present value of a single sum
3. Future value of ordinary annuity
4. Present value of ordinary annuity
5. Future value of annuity due
6. Present value of annuity due
7. Deferred annuity
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 WORKING CAPITAL
MANAGEMENT
a) Current Assets
1. Cash management
2. Receivable Management
3. Inventory management
4. Other current assets
b) Current Liabilities
5. Accounts payable
6. Short term notes payable
7. Accrued liabilities
8. Other current liabilities
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CAPITAL BUDGETING
Pandey (2005) defined capital budgeting as the firm’s decision to invest
its current funds most efficiently in long term assets in anticipation of an
expected flow of benefits over a series of years
 Maintenance projects
 Replacement projects
 Expansion of existing projects
 Expansion of new projects
 Soft Projects (R & D, ICT Projects etc)

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CAPITAL BUDGETING
PROCESS
Capital Budgeting involves the following steps:
1. Strategic planning
2. Searching viable Investment Opportunities
3. Initial screening of projects
4. Forecasting net cash flow
5. Quantitative financial appraisal
6. Other qualitative appraisal
7. Accept /reject decision
8. Implementation
9. Monitoring and control
10. Post Implementation audit

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End of chapter one
Next…
CHAPTER 2: RISK AND RETURN

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