Financial Management

Study Guide

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Introduction
The world has become a global village, with the attendant access to knowledge at the touch of a button.
This same phenomenon characterizes employment with skilled labour competing for jobs globally.
Geographical barriers is tearing down, increasingly. Thanks to information technology, computerization and
digitalization. MBA is one of the most visible programmes that a lot of graduates wish to have on top of their
professional qualifications to position them in the current and future space of work and entrepreneurship.

Financial Management is an important module in MBA degree all over the world. The importance attached
to this course is not misplaced. At the heart of any organization or entity – private and public companies,
public sector, for profit and not-for-profit – is finance, because they all have to use and account for resources
at their disposal. The knowledge of finance becomes so important for entrepreneurs to assist in mobilizing
financial resources and measuring performance and for employees as they move up the ladder to the
executive level. The knowledge is so important such that hardly can anyone truly succeed as an executive
without an average knowledge of basic finance.

As an executive, finance is one of the three ‘must–have’ knowledge to succeed, the other two being
technical and communication skills. Karen Berman beautifully summed it up this way: “Financial illiteracy in
the managerial ranks can be a crippling weakness for the organization… if you don’t understand what goes
into a number; you can hardly know how to improve it… Those who can’t speak the language of business
can’t contribute much to a discussion of performance and are unlikely to advance in the hierarchy”.

Unfortunately, for most non–finance managers, the language of Accounting and Financial Management are
so technical and are difficult to comprehend, digest and apply. However, unlike issues relating to production,
human resource and law that can be referred to specialists and wait for their opinion, issues relating to
finance comes up all the time at various levels and forums; some at organized and scheduled meetings
and others at informal discussions. Sometimes, decisions must be made on the spot and at other times,
preparing for meetings and projects require that you be on top of some financial information and resources.

For non–finance managers, some issues are just difficult to comprehend. Some of the puzzles could be,
for example:

 How can a company or business be making profit and at the same time short of cash?
 Why do successful companies still borrow?
 Why is it that management commits frauds and yet, the auditors are unable to discover it in the
cause of their audit?
 It is always said that the most critical thing is to look after the top line as the bottom line would look
after itself? How far is this true?
 Why do organizations opt for leasing even when they are not faced with financing constraints?

Nowadays, a lot of small business owners and managers of not–for–profit organizations have realized the
importance of acquiring an MBA. In fact, MBA students are from different backgrounds, experience,
industries, etc. But they all need and desire knowledge of finance to enable them confront financial issues
on their jobs. Financial Management should not be only for those in large companies who are overseeing
business with turnover in billions of dollars. The Financial Management module of the program should
therefore also be useful to NGOs, foundations, public sector staff and SME operators. This workshop is
designed to help MBA students of all backgrounds and sectors attain and acquire a sufficient level of
knowledge of finance to operate efficiently in their roles.

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In fact, to the extent that most of the companies in most countries are Small and Medium Enterprises
(SMEs), quite a lot of MBA students work in SMEs. And as the world move increasingly towards free
enterprise, a number of our MBA students desire financial management knowledge to equip them as
entrepreneurs.

Course objectives

This Financial Management for MBA students is designed to help typical students appreciate and
comprehend basic concepts in Financial Management so that they can make intelligent contributions to
critical decision making that impact the management of their enterprises.

In specific, the objectives of the FM program include:

 To introduce students to the basics of finance and financial management

 To increase confidence in the application of financial management techniques
 To equip students with the necessary information about and demonstrate the use of various FM
techniques
 To deepen students knowledge of the language and vocabulary of business and business
transactions.

Prescribed & recommended main textbooks

Prescribed: Gitman, Lawrence J.and Zutter, Chad J. (2012). “Principles of Managerial Finance”. 13 th Edition
(Global Edition); Pearson Education Limited.

Recommended: Atkinson, A. A., Kaplan, R. S., Matsumura, E. M. and Young, S. M. (2012). “Management
Accounting: Information for Decision Making and Strategy Execution”. Sixth Edition; Pearson Education
Limited.

Course Structure

Financial Management is a wide subject. We have deliberately focused on the areas that are of practical
application in enterprise in line with the objectives of Action Learning MBA program. It has avoided highly
theoretical areas of finance that would ordinarily require deep knowledge of mathematics and which may
not ordinarily be of practical use.

We have also not assumed a sound knowledge of accounting in this course. However, we observe that
most Financial Management textbooks are written for core Finance and Accounting students and
practitioners whereas a lot of MBA students come face to face with Finance for the first time. Course
facilitators would have to adapt these hard core texts for their students by focusing on the core principles
of each topic while examples are drawn from the local environment.

The following are the major topics covered in the Financial Management module:

Workshop 1 Overview of Financial Management and Performance

Workshop 2 Costing Structures and Management

Workshop 3 Financial Planning and Control

Workshop 4 Working Capital Management

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Workshop 5 Investment Policy and Financing Decisions

Workshop 6 Mergers, Acquisitions and Divestitures

Workshop 7 Special Topics in Finance

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Workshop 1: Overview of financial management and
performance
Introduction

Finance is at the heart of an enterprise. Financial Management is an indispensable tool for tracking
performance of an enterprise. Without financial information, an enterprise operates without a barometer to
measure its performance and sustainability. But finance at the enterprise level, more often than not, requires
accounting information. To appreciate and comprehend financial information, it becomes imperative to
understand basic concepts like revenue, cost, balance sheet, cash flow, stocks, receivables, etc and their
interconnectedness. An appreciation of the components of a typical financial statement is important.

The field of finance is wide and the finance function in an enterprise is also large. Often, stakeholders in an
enterprise are unable to draw a distinction between the functions and roles of an accountant, finance
controller, finance director, treasurer, etc. In the same manner, executives sometimes feel uneasy by the
strategic importance attached to the role of the Chief Finance Officer, sometimes creating ill feelings among
peer top executives.

Furthermore, as in individuals, there are various stakeholders in the life of a firm, for example, shareholders,
lenders, government (regulators, tax authorities, etc.), the community, funds providers, management and
staff. Each of these stakeholders has interest and measures the performance of an enterprise using its
own lenses. For example, while shareholders are interested in the profitability and the dividend policy of
the firm, lenders are interested in the working capital, cash flow and liquidity and solvency status of the
enterprise and the demonstrable capacity to repay loans.

Stakeholders can also be internal or external. Internal stakeholders include management and employees
while external stakeholders are shareholders, lenders, government, analysts, etc. Internal stakeholders rely
on management accounts while external stakeholders have access to only financial accounts or
statements. For both though, proper book keeping and accounting records are important as the starting
point to measure the performance of the firm. Consequently, without a sound MIS, purposeful transfer
pricing policy and a robust budgetary system, it becomes difficult to prepare a fair MIS that can motivate
internal stakeholders to great performance.

Financial performance of an enterprise can be analyzed from various angles including profitability,
ownership value and net worth, gearing or leveraging and productivity and the efficient utilization of assets
and resources. Yet, these financial measures can be achieved through absolute figures analysis or ratio
analysis. In both cases, such an analysis can be done by the enterprise comparing itself with itself over a
given or chosen period or with the industry or the competition. It has been established that ratio analysis
method represents a better performance measurement method than the absolute figures analysis.

This introductory workshop to the course focuses on the objectives of an enterprise and how financial
management assists in achieving them. A rudimentary appreciation of the knowledge of accounting is
undertaken to give meaning to deep topics that are treated in the workshop. The chapter also examines
the various ways to analyse the financial performance of an enterprise by external stakeholders.

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Learning Outcomes:

At the end of this workshop, student is expected:

 To understand the concepts of Finance, Financial Management, different fields of finance, role of
finance manager and the relationship and interconnectedness between finance and accounting
 To understand the process of construction of accounting information up to Statement of Affairs,
Comprehensive Income Statement and Cash flow
 To appreciate the financial statement and their interrelationships
 To understand and be able to apply the tools of measuring financial performance
 To conduct basic analysis of business with the use of financial statements.

Coverage:

Objectives of the firm

Definitions of Finance and Financial Management; role of finance and finance function; importance of the
knowledge of financial management for personal and enterprise development

Goals of Financial Management

Difference and relationship between Accounting and Financial Management

A Review of Financial Accounting

Financial Statements and their interrelationships

Management performance system for internal analysis and performance review

Measuring financial performance of a firm using ratio analysis including Du Pont analysis

Financial performance – beyond financial measures

Impact of Information Technology on the preparation of financial information

The financial markets and the financial system.

Literature:

Gitman, Lawrence J. and Zutter, Chad J. (2012). “Principles of Managerial Finance”, Thirteenth Edition
(Global Edition); Pearson Education Limited; Chapters 1, 2 and 3.

Chiuhureanu, A. T., Baltes, N. & Brezai, L. ‘The Financial Management’s Role in Modern Organizations,
Interferences and Differences Between the Management of the Accounting Activity and the Financial
Management’. The Roumania-German University of Sibiu, The Lucian Blaga University of Sibiu.

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Workshop 2: Cost structures and management
Introduction

A typical firm aims at meeting shareholder’s objectives which requires running profitably on a sustainable
manner. But profitability is possible when appropriate pricing is charged for products and services to earn
commensurate revenues after considering costs of production.

Every enterprise must understand its cost structure; it must also understand and manage its gross profit as
gross profit pays for all the other costs of running a firm. Hence, underlying the idea of cost accounting is
the need for every business to protect and grow its gross profit, while maintaining the quality of its product
or service at acceptable levels. Amazingly, many companies find it difficult to really know whether or not
they are making a gross profit on many of the products they sell.

Cost accounting does more than assisting in arriving at a selling price, it also helps to identify areas where
profit is possible.

This chapter examines the concept of cost in management. It also looks at the various types of cost and
their suitability for various industries and sectors because applying wrong costs or costing methods may
produce misleading results for management decision-making.

Learning Outcomes

At the end of the workshop, the student is expected to:

 Understand the concept of costing, types and relevance of costs

 Understand how to use costs in decision making
 Know how to apply different costing techniques and their limitations
 Be able to determine simple cost-volume-profit and break-even analysis.

Coverage

 Concept and significance of costing.

 Types of costing especially Fixed and Variable costs, Direct and Indirect Costs, Marginal Costing,
CVP Analysis, Activity-Based Costing, etc
 Measuring customer and product profitability.

Literature

Atkinson, A. A., Kaplan, R. S., Matsumura, E. M. and Young, S. M. (2012). “Management Accounting:
Information for Decision Making and Strategy Execution”. Sixth Edition; Pearson Education Limited.

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Workshop 3: Financial planning and control
Introduction

There is a popular maxim that “one who fails to plan, plans to fail”. This is very true in business
management. This is why planning is a very important management function. Its importance is underscored
by the fact that, without it, an enterprise wallows in darkness and managers act as “the spirit and
circumstances direct”. A critical tool of planning – whether operational or strategic – is the knowledge of
accounting and finance. Planning in an organization makes sense only if it dovetails into resource allocation
and monitoring. Planning can be operational or strategic.

Budget has become an essential operational tool of an enterprise; Business Plan is the strategic plan.
Without a budget and business plan, goal setting, goal measurement, resource allocation, stakeholders
rewards, all become difficult to execute scientifically.

Very critical to budgeting and budgetary control is the concept of Profit Planning. A clear appreciation of an
enterprise business model, especially revenue streams and cost structures are important. This workshop
is limited to short term operational planning and does not include the treatment of strategic or business
plan.

Learning Outcomes

At the end of this workshop, student is expected to:

 Understand the concepts of strategic and operational planning

 The basics of budgeting and budgetary control
 Understand basic knowledge of profit planning
 Appreciates the concept of cash flow planning; pro forma income statement and statement of
affairs.

Coverage:

 Strategic and Operational Planning – concepts, similarities and differences

 Profit Planning: pro forma statements
 Fundamentals of and issues in budgeting
 Financial Planning – budget and its components including forecasting and cash flow planning
 Budgetary control – principles and methods and measuring internal performance (Management
Information Systems-MIS)
 Transfer Pricing principles, types and methodology.

Literature:

 Gitman, Lawrence J. and Zutter, Chad J. (2012). “Principles of Managerial Finance”, Thirteenth
Edition (Global Edition); Pearson Education Limited; Chapter 4.
 Atkinson, A. A., Kaplan, R. S., Matsumura, E. M. and Young, S. M. (2012). “Management
Accounting: Information for Decision Making and Strategy Execution”. Sixth Edition; Pearson
Education Limited; Chapter 10.

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Workshop 4: Working capital management
Introduction

Financial Management performs two broad functions – functions relating to liquidity and functions relating
to profitability. While a company needs to focus on its liquidity position in the short run to avoid financial
embarrassment, it will become bankrupt and go into liquidation if it does not make profit over time.

To achieve consistent liquidity, the management of a firm’s working capital becomes imperative. Every
enterprise must therefore master strategies to manage its current assets and current liabilities. Optimizing
current assets such as cash and near cash assets, various types of inventories, receivable and debtors are
crucial. Similarly, managing a firm’s payables such as short term loans and other pressing obligations are
crucial to avoid excessive debt and financial embarrassment.

Learning Outcomes

At the end of the workshop, student is expected to:

 Appreciate the importance of managing working capital for the survival of the enterprise
 Understand the various aspects of working capital and their interrelationships
 Develop the skills to managing each of the components of working capital
 Understand the concept of net working capital and the related trade –off between
profitability and risk.

Coverage:

 Meaning and goals of working capital

 Determining Working Capital requirements
 Management of receivables
 Management of inventory
 Management of cash, near-cash/liquid assets, receipts and disbursements
 Spontaneous liabilities
 Sources of short term funding - types, costs and constraints.

Literature:

Gitman, Lawrence J. and Zutter, Chad J. (2012). “Principles of Managerial Finance”, Thirteenth Edition
(Global Edition); Pearson Education Limited; Chapters 15 and 16.

Afza, T. and Nasir, M. S., 2007; ‘Is it Better to be Aggressive or Conservative in Managing Working Capital’;
Journal of Quality and Technology Management; Vol. 3(2): 11-21.

Eljelly, A. MA. A., 2004; ‘Liquidity-Profitability Tradeoff: An Empirical Investigation in an Emerging Market’;
International Journal of Commerce and Management; Vol. 14(2): 48-61.

Sharma, A. K. and Kumar, S.; 2011; ‘Effect of Working Capital Management on Firm Profitability: Empirical
Evidence from India’; Global Business Review; 2011; 12:159.

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Workshop 5: Investment policy and financing decisions
Introduction

This workshop focuses on capital budgeting and long term investment decisions of the firm and how to fund
them. From time to time, a firm is faced with the need to commit to capital projects, analyse the cashflows
of a proposed projects, review with a view to choosing among competing projects and limited
cash/resources. In taking decision on investment, time value of money is a key issue to deal with for a
rational investor.

But among the issues that face a firm would normally include the need to finance their investments, projects
and resources. A firm may require funds to meet short, medium and/or long term obligations. Sources of
funds can be influenced by a number of factors such as the ownership structure, the ease with which credits
can be accessed, the existing capital structure, cost of raising funds, the level of development of money
and capital markets, etc.

Firms are also faced with the appropriation of their profits. Here, consideration would have to be given to
the firm’s dividend policy, the future capital project’s finance needs and the legal and regulatory constraints.
A company is also always confronted with choices of capital assets acquisition models and strategies
including buy or lease decisions.

Learning Outcomes

At the end of the workshop, student is expected to:

 Appreciate some basic concepts such as the time value of money, cost of capital and risk/return,
gearing/leverage.
 Understand the various factors that drive capital investment decisions
 Equip with the tools to make informed decisions in competing projects and equipment/resources.
 Understand issues in firm’s financing decisions
 Appreciate the various sources of funds to an enterprise and the benefits and limitations/challenges
with them
 Understand the processes, costs and challenges of raising long term funds
 Know factors that influence dividend policy.

Coverage:

 Nature and overview of capital budgeting

 Time value of money
 Cost of capital – basic concepts, cost of debt, cost of preferred and common stock, WACC
 Risk and required return – definitions, assessment and measurements; introduction to Portfolio
Theory and the Capital Asset Pricing Model and their practical use
 Capital budgeting cash flows and techniques – Payback period, NPV, IRR – advantages and
limitations
 Sources of finance for a firm – short, medium and long terms – sources and determinants
 Basics of capital structure – is there an ideal/optimal capital structure?
 Lease-Buy decisions
 Public quotations – IPO, Rights Issues, primary and secondary market activities
 Payout policy – elements of dividend policy and factors affecting dividend policy

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Literature:

Gitman, Lawrence J. and Zutter, Chad J. (2012). “Principles of Managerial Finance”, Thirteenth Edition
(Global Edition); Pearson Education Limited; Chapters 5, 8, 9 and 10, 14 and 17.

Mackie-Mason, Jeffrey K.; ‘Do Firms care Who Provides Their Financing?’.

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Workshop 6: Mergers, acquisitions and divestitures
Introduction

An interesting phenomenon in free enterprise is business combination and liquidation. Enterprises are
acquired, merged or sold; firms also go into forced or voluntary liquidation or bankruptcy. For a business
combination, it is important to understand the forms that they take and the factors that drive mergers and
acquisition. In the same manner, it is valuable to appreciate the challenges that are involved before, during
and post-merger. This knowledge helps in taking strategic decisions on mergers and how to fence off hostile
takeover. As part of the experience we encounter or read about, we see business failures and bankruptcies.
It is helpful to be equipped with factors that drive business into failure and how to avoid them.

Learning Outcomes

At the end of the workshop, student is expected to:

 Understand the concepts and motivations for merger, acquisition or divestiture

 Know the various methods for valuation of business for business combination or sale
 Appreciate the causes of business failure.

Coverage:

 Measures of corporate growth and decline

 Forms of business combinations – meaning, similarities and differences
 Issues in business combination – opportunities, challenges
 Business valuation
 Divestitures
 Business failure and bankruptcy – why businesses fail and how to overcome them.

Literature:

Gitman, Lawrence J. and Zutter, Chad J. (2012). “Principles of Managerial Finance”, Thirteenth Edition
(Global Edition); Pearson Education Limited; Chapter 18.

GlaxoSmithKline (2011). “Through Mergers and Acquisitions to Success: A Marketline Case Study”

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Workshop 7: Special topics in finance
Introduction

With the collapse of Enron and other high profile companies, on account of creative and fraudulent
accounting system and the failure and/or bailout of many financial institutions in the decade in various
countries, business students have been made to discuss issues of ethics, governance, executive
compensation and profiteering much more seriously. A search light has been beamed on trying to unravel
the factors responsible for fraudulent accounting practices, declaring profit at all costs and other unethical
practices. Business practices globally are now being made to be more accountable, more responsible and
more transparent and more ethical in their dealings.

As business managers and owners, we are confronted with what increases ‘profit’ and what is unethical, in
the course of earning a profit. In the same manner, the world is confronted with the menace of environmental
degradation and climate change, mostly attributable to businesses’ unbridled quest for revenue and profit.
In the process, we put the environment at risk and make living more precarious for all. Managers and
employees are faced with critical dilemmas on how to act should they be encountered with unethical
conduct by their employees and customers.

Furthermore, how a company applies its resources, the processes it adopts to produce and the products
and services it delivers to its customers have all become of intense interest to regulators, customers and
the general public. It has become imperative to bring these as serious issues to discuss in management
schools.

It has also been observed that, all over the world, the majority of businesses are actually Small and Medium
Enterprises (SMEs). To this extent, a lot of MBA students either work for or own SMEs. Of all challenges
facing SMEs, financing constraints occupy a top position in most economies. Having a discussion around
issues affecting SMEs has therefore become imperative. In an FM class, understanding the financing and
structure of SMEs should be accord a study. Furthermore, majority of small businesses fail at infancy. MBA
students should show interest in the various factors that lead to small business sustainability and failures.

Learning Outcomes

At the end of the workshop, student is expected to:

 Appreciate the issues surrounding creative and fraudulent accounting practices

 Appreciate and understand the concept of Sustainable Finance
 Understand the roles of ethical business dealings and environmental impact in the process of
profitability
 Appreciate the benefits of a transparent accounting system and overall sound governance structure
to an enterprise’s sustainability
 Understand the peculiar characteristics and challenges of SMEs especially relating to financial
structure and raising of funds.

Coverage:

 Profitability and ethical dilemma

 Environmental impact of business operations and implications for ethics and revenues
 Sustainability finance

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  Finance for SMEs – sources and challenges.

Literature

Bradley III, Don B.; “Causes of Bankruptcy”

Caliyurt, K. T. (2011). “Importance of Financial Management Knowledge in Small and Medium Enterprises
(SMEs) Managing by Women” Trakya Universitesi Sosyal Bilimler Dergisi; Aralik 2011 Cilt 13 Sayi 2 (327
– 354).

Okpo, Odumaya (2013). “The Conflict between Profit and Ethics in the Business of Journalism in Nigeria”,
European Journal of Business and Management, Vol. 5(10): 155-.

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