MODULE 4

FINANCIAL MANAGEMENT

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FINANCIAL STATEMENTS
• Financial statements are formal records of the financial activities and
position of a business or entity.
• Relevant financial information is presented in a structured manner
and in a form which is easy to understand and analyze for future
decision making
• The three financial statements are:
• Income Statement
• Balance Sheet, and
• Cash Flow Statement.
• These three core statements are intricately linked to each other and
this guide will explain how they all fit together.

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FINANCIAL STATEMENTS
• Income statement
• Often, the first place an investor or analyst will look is the income statement.
• The income statement shows the performance of the business throughout
each period, displaying sales revenue at the very top.
• The statement then deducts the cost of goods sold (COGS) to find gross profit.
• The gross profit is affected by other operating expenses and income,
depending on the nature of the business, to reach net income at the bottom –
“the bottom line” for the business.
• Key features:
• Shows the revenues and expenses of a business
• Expressed over a period of time (i.e., 1 year, 1 quarter, Year-to-Date, etc.)
• Uses accounting principles such as matching and accruals to represent figures (not
presented on a cash basis)
• Used to assess profitability

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FINANCIAL STATEMENTS
• Balance sheet
• The balance sheet displays the company’s assets, liabilities, and shareholders’
equity at a point in time.
• As commonly known, assets must equal liabilities plus equity. The asset section
begins with cash and equivalents, which should equal the balance found at the end
of the cash flow statement.
• The balance sheet then displays the changes in each major account from period to
period. Net income from the income statement flows into the balance sheet as a
change in retained earnings (adjusted for payment of dividends).
• Key features:
• Shows the financial position of a business
• Expressed as a “snapshot” or financial picture of the company at a specified point in time
(i.e., as of December 31, 2020)
• Has three sections: assets, liabilities, and shareholders equity
• Assets = Liabilities + Shareholders Equity
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FINANCIAL STATEMENTS
• Cash flow statement
• The cash flow statement then takes net income and adjusts it for any non-
cash expenses.
• The cash flow statement displays the change in cash per period, as well as the
beginning balance and ending balance of cash.
• Key features:
• Shows the increases and decreases in cash
• Expressed over a period of time, an accounting period (i.e., 1 year, 1 quarter, Year-to-
Date, etc.)
• Undoes all accounting principles to show pure cash movements
• Has three sections: cash from operations, cash used in investing, and cash from financing
• Shows the net change in the cash balance from start to end of the period

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WHAT ARE FINANCIAL RATIOS?
• Financial ratios are created with the use of numerical values taken
from financial statements to gain meaningful information about a
company. The numbers found on a company’s financial statements –
balance sheet, income statement, and cash flow statement
• Are used to perform quantitative analysis and assess a company’s
liquidity, leverage, growth, margins, profitability, rates of return,
valuation, and more.

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GROUPING OF FINANCIAL RATIOS
• Financial ratios are grouped into the following categories:
• Liquidity ratios
• Leverage ratios
• Efficiency ratios
• Profitability ratios
• Market value ratios

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PURPOSE OF FINANCIAL RATIOS
Analysis of financial ratios serves two main purposes:
1. Track company performance
• Determining individual financial ratios per period and tracking the change in their
values over time is done to spot trends that may be developing in a company. For
example, an increasing debt-to-asset ratio may indicate that a company is
overburdened with debt and may eventually be facing default risk.

2. Make comparative judgments regarding company performance

• Comparing financial ratios with that of major competitors is done to identify whether
a company is performing better or worse than the industry average. For example,
comparing the return on assets between companies helps an analyst or investor to
determine which company is making the most efficient use of its assets.

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USERS OF FINANCIAL RATIOS
Users of financial ratios include parties external and internal to the
company:
• External users:
• Financial analysts, retail investors, creditors, competitors, tax authorities,
regulatory authorities, and industry observers
• Internal users:
• Management team, employees, and owners

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LIQUIDITY RATIOS
• Liquidity ratios are financial ratios that measure a company’s ability to
repay both short- and long-term obligations. Common liquidity ratios
include the following:
• The current ratio measures a company’s ability to pay off short-term liabilities
with current assets:
• Current ratio = Current assets / Current liabilities
• The acid-test ratio measures a company’s ability to pay off short-term
liabilities with quick assets:
• Acid-test ratio = Current assets – Inventories / Current liabilities
• The cash ratio measures a company’s ability to pay off short-term liabilities
with cash and cash equivalents:
• Cash ratio = Cash and Cash equivalents / Current Liabilities

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LIQUIDITY RATIOS
• The operating cash flow ratio is a measure of the number of times a company
can pay off current liabilities with the cash generated in a given period:
• Operating cash flow ratio = Operating cash flow / Current liabilities

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LEVERAGE RATIOS
• Leverage ratios measure the amount of capital that comes from debt.
In other words, leverage financial ratios are used to evaluate a
company’s debt levels. Common leverage ratios include the following:
• The debt ratio measures the relative amount of a company’s assets that are
provided from debt:
• Debt ratio = Total liabilities / Total assets
• The debt to equity ratio calculates the weight of total debt and financial
liabilities against shareholders’ equity:
• Debt to equity ratio = Total liabilities / Shareholder’s equity
• The interest coverage ratio shows how easily a company can pay its interest
expenses:
• Interest coverage ratio = Operating income / Interest expenses

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LEVERAGE RATIOS
• The debt service coverage ratio reveals how easily a company can pay its debt
obligations:
• Debt service coverage ratio = Operating income / Total debt service

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EFFICIENCY RATIOS
• Efficiency ratios, also known as activity financial ratios, are used to
measure how well a company is utilizing its assets and resources.
Common efficiency ratios include:
• The asset turnover ratio measures a company’s ability to generate sales from
assets:
• Asset turnover ratio = Net sales / Average total assets
• The inventory turnover ratio measures how many times a company’s
inventory is sold and replaced over a given period:
• Inventory turnover ratio = Cost of goods sold / Average inventory
• The accounts receivable turnover ratio measures how many times a company
can turn receivables into cash over a given period:
• Receivables turnover ratio = Net credit sales / Average accounts receivable

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EFFICIENCY RATIOS
• The days sales in inventory ratio measures the average number of days that a
company holds on to inventory before selling it to customers:
• Days sales in inventory ratio = 365 days / Inventory turnover ratio

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PROFITABILITY RATIOS
• Profitability ratios measure a company’s ability to generate income
relative to revenue, balance sheet assets, operating costs, and equity.
Common profitability financial ratios include the following:
• The gross margin ratio compares the gross profit of a company to its net sales
to show how much profit a company makes after paying its cost of goods sold:
• Gross margin ratio = Gross profit / Net sales
• The operating margin ratio compares the operating income of a company to
its net sales to determine operating efficiency:
• Operating margin ratio = Operating income / Net sales

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PROFITABILITY CONTRACT
• The return on assets ratio measures how efficiently a company is using its
assets to generate profit:
• Return on assets ratio = Net income / Total assets
• The return on equity ratio measures how efficiently a company is using its
equity to generate profit:
• Return on equity ratio = Net income / Shareholder’s equity

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MARKET VALUE RATIOS
• Market value ratios are used to evaluate the share price of a
company’s stock. Common market value ratios include the following:
• The book value per share ratio calculates the per-share value of a company
based on the equity available to shareholders:
• Book value per share ratio = (Shareholder’s equity – Preferred equity) / Total common
shares outstanding
• The dividend yield ratio measures the amount of dividends attributed to
shareholders relative to the market value per share:
• Dividend yield ratio = Dividend per share / Share price

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MARKET VALUE RATIOS
• The earnings per share ratio measures the amount of net income earned for
each share outstanding:
• Earnings per share ratio = Net earnings / Total shares outstanding
• The price-earnings ratio compares a company’s share price to its earnings per
share:
• Price-earnings ratio = Share price / Earnings per share

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BUDGETING
• Budgeting and cost control includes the detailed estimation of costs, the setting
of agreed budgets, and control of costs against that budget. Its goals are to:
• determine the income and expenditure profiles for the work;
• develop budgets and align with funding;
• implement systems to manage income and expenditure.
• Capital expenditures, or capex, are planned expenses that are expected to yield
benefits in the future, such as purchase of new equipment, facilities or inventory.
• Operating expenditures, or opex, are the current expenses of running your
business.
• Although it seems clear that opex is the priority and capex should come from
extra cash and borrowing, budgeting becomes a contentious activity when you
are dealing with the technology or equipment that forms the backbone of your
business.

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BUDGETING - OPEX
• Expenses that fall under opex include employee wages, the costs of
running an office, such as telephones and lease payments,
maintenance for facilities and equipment, sales and marketing costs,
insurance and professional services.
• If you lease a server, the payments on that lease are part of operating
expenses.
• When budgeting for opex, lease payments are a monthly expense
that is easy to include in a realistic budget.

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BUDGETING - OPEX
Expense Description Proposed Budget
Element 2016/2017

VI339999A101 Admin Sal & Wages 2 958 371

VI339999A102 Admin Overtime 59 159
VI339999A103 Admin Allowances -
VI339999A104 Admin Travel & Subsistence 2 013 900
VI339999A105 Admin Staff Electricity -
VI339999A106 Admin Staff Water -
VI339999A107 Admin Comp Stationery 4 725
VI339999A108 Admin Printing & Stat 8 505
VI339999A109 Admin Communic 150 480
VI339999A110 Admin Depreciation 43 887 738
VI339999A111 Transport Allowance

VI339999T411 Transport Re-embursement

567 000
Total 49 649 877

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BUDGETING - CAPEX
• Budgeting for capital expenditures involves setting aside money for a
purchase or electing to add debt to your balance sheet for the
purchase of the capital asset.
• Saving money for a future purchase delays the benefits that purchase
is intended to provide, and borrowing the money to purchase it now
increases your debt, so it might cause a problem for future borrowing
ability.
• The money you pay to buy a capital asset is spent when the asset is
purchased but is deductible from your tax liability via depreciation
over as long as 10 years.

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BUDGETING - CAPEX
1 INSTALLATION OF COMBO UNITS 15VIL01 200 000
2 INSTALLATION OF FIREWALL 15VIL02 50 000
3 PURCHASE OF VIRO & UNION PADLOCKS 15VIL03 50 000
4 CHANGE OF FUSE TO GANG LINK ISOLATOR LNS 15VIL04 60 000
DEPOT 5 ABC INSTALLATION 15VIL05 200 000
6 REMOTE CONTROLLED RECLOSERS & SECTIONALI 15VIL06 300 000
7 DEPOT 1 FEEDERS 15VIL07 250 000
8 DEPOT UNDERGROUND CABLING X120mmXLPE 15VIL08 1 500 000
Total DEPOT 2 610 000

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