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An Overview of Financial Management

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DAVID WONG LEE KANG LEE KANG
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64 views24 pages

An Overview of Financial Management

I don't have quotes of my own. I'm an AI assistant created by Anthropic to be helpful, harmless, and honest.

Uploaded by

DAVID WONG LEE KANG LEE KANG
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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An Overview of Financial Management

Introduction to Basic Entrepreneurship


An Overview of Financial Management
• Financial management focuses on ratios, equity and debt.
• Financial managers are the people who will do research and based on
the research, decide what sort of capital to obtain in order to fund the
company's assets as well as maximizing the value of the firm for all the
stakeholders.
• It also refers to the efficient and effective management of money (funds)
in such a manner as to accomplish the objectives of the organization.
An Overview of Financial Management –
(Cont’d)
• It is the specialised function directly associated with the top management.
• The term typically applies to an organization or company's financial
strategy.
• It includes how to raise the capital and how to allocate capital, i.e. capital
budgeting. Not only for long term budgeting, but also how to allocate the
short term resources like current liabilities.
• It also deals with the dividend policies of the share holders.
Analysis of Financial Statements
• Financial statement analysis – the process of analysing a company's financial statements for
decision-making purposes and to understand the overall health of an organization.

• is an evaluative method of determining the past, current, and projected


performance of a company.

Financial statements record financial data, which must be evaluated through financial
statement analysis to become more useful to investors, shareholders, managers, and other
interested parties.
Analysis of Financial Statements
• Several techniques are commonly used as part of financial statement
analysis including:
1. horizontal analysis, which compares two or more years of financial
data in both dollar and percentage form;
2. vertical analysis, in which each category of accounts on the balance
sheet is shown as a percentage of the total account; and ratio analysis,
which calculates statistical relationships between data.
Analysis of Financial Statements
• Financial statement analysis allows analysts to identify trends by
comparing ratios across multiple periods and statement types.
• These statements allow analysts to measure liquidity, profitability,
company-wide efficiency, and cash flow.
• There are three main types of financial statements: the balance sheet,
income statement and cash flow statement.
Analysis of Financial Statements
• The balance sheet – snapshot of the company's assets, liabilities,
and shareholders' equity at a specific period.
• Analysts use the balance sheet to analyse trends in assets and
debts.
• The income statement begins with sales and ends with net
income.
• It also provides analysts with the gross profit, operating profit, and
net profit.
Analysis of Financial Statements
• Each of these is divided by sales to determine gross profit
margin, operating profit margin, and net profit margin,
respectively.
• The cash flow statement provides an overview of the
company's cash flows from operating activities, investing
activities, and financing activities.
Analysis of Financial Statements
• Each financial statement provides multiple
years of data.
• Used together, analysts track performance
measures across financial statements using
several different methods for financial
statement analysis, including vertical,
horizontal, and ratio analyses.
• An example of vertical analysis is when
each line item on the financial statement is
listed as a percentage of another.
Analysis of Financial Statements
• Horizontal analysis compares line items in each
financial statement against previous time periods.
• In ratio analysis, line items from one financial
statement are compared with line items from another.
• For example, many analysts like to know how many
times a company can pay off debt with current
earnings.
Analysis of Financial Statements
• Analysts do this by dividing debt, which
comes from the balance sheet, by net
income, which comes from the income
statement.
• Likewise, return on assets (ROA) and the
return on equity (ROE) compare company
net income found on the income statement
with assets and stockholders' equity found
on the balance sheet.
Seven signs that your company is
in good financial health.
1.Your Revenue Is Growing. ...

2.Your Expenses Are Staying Flat. ...

3.Your Cash Balance Demonstrates Positive Long-Term Growth. ...

4.Your Debt Ratios Should Be Low. ...

5.Your Profitability Ratio Is on the Healthy Side. ...

6.Your Activity Ratios Are In-Line.

7.You are working with new Clients and Repeat Customers


Effective Financial Statement Analysis

Understanding of three keys :


• The structure of the financial statements
• The economic characteristics of the industry in which the firm operates
• The strategies the firm pursues to differentiate itself from its competitors
How to develop an effective
analysis of Financial Statements :
Identify Identify the industry economic characteristic

Identify Identify company strategies

Assess Assess the quality of the firm’s financial statement

Analyse Analyse current profitability and risks

Prepare Prepare forecasted financial statements

Value Value the firm


Financial environment :Market

A financial market is a place


where individuals and
A market is a venue where
organizations wanting to
goods and services are
borrow funds are brought
exchanged.
together with those having a
surplus of funds.
Financial environment :Market
• Types of financial markets
1. Physical assets vs. Financial assets
2. Money vs. Capital
3. Primary vs. Secondary
4. Spot vs. Futures
5. Public vs. Private
1. Physical vs Financial assets
A financial asset is a tangible liquid asset that gets its value from a
contractual claim.

Cash, stocks, bonds, bank deposits and the like are examples of
financial assets.

Unlike land, property, commodities or other tangible physical assets,


financial assets do not necessarily have inherent physical worth.
2. Money vs Capital markets
 Money Markets  Capital Markets - everything
else
 Short term (< 1 yr.)
 Various maturities
 Debt
 Debt or Equity
 Low Risk, Low Return
 Various risks, returns
 Instruments
 Instruments
 Treasury Bills
 Stocks
 Commercial Paper
 Bonds
3. Primary vs Secondary markets
 Primary  Secondary
 New instruments  “Used” instruments
 New Bonds  Existing Bonds
 Initial Stocks (IPOs, SEOs)  Existing Stocks
 Cash Flow goes from  Cash flow goes from investor
investor to company to investor.
4. Spot vs Futures
Financial environment: Institution
 Include:
◦ Commercial banks
◦ Savings and loan associations
◦ Mutual savings banks
◦ Credit unions
◦ Pension funds
◦ Life insurance companies
◦ Mutual funds
Financial environment: Interest Rate
 What do we call the price, or cost, of debt capital?
The interest rate
 What do we call the price, or cost, of equity capital?

Required Dividend Capital


return = yield + gain
Financial environment: Interest
Rate
• Four factors affect the cost of money :-
1. Production opportunities
2. Time preferences for consumption
3. Risk
4. Expected inflation
Your best quote that reflects your
approach… “It’s one small step for
man, one giant leap for mankind.”

- NEIL ARMSTRONG

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