Financial Management
Chapter 1
Financial management: Micro economic level (within the enterprise) decision making and
focus on cash flow and creating future value
Financial economics: Macro economy and its impacts on the business, focusing on
working financial markets and institutions
Financial accounting: Reporting financial data, focusing on profit and historical data
Shareholder value / wealth
Goal: Profit maximisation
- share price * no. of shares = wealth
- Managements goal is to increase the value of shares
How value is created
- Management creates wealth by the effective utilisation of the businesses resources to
generate income and therefore cash
- To increase wealth the businesses activities need to generate acceptable return on the
capital investment
- The higher the return, the higher the share price should be
Decisions
All financial decisions should contribute to wealth maximisation
- Investments in assets = budgeting capital (long term)
- Managing working capital (short term)
- Financing assets = Capital structure
What is done with profits
- Pay dividends
- Buy back shares
- Re-invest into the firm
Role of the financial manager
- Managing cash flow and keeping an eye on the books
- Use financial tools & principles to solve business problems
- Maximise profit and manage risk
- Assist management in decision making:
Capital investment
Financing decisions
Managing working capital
Dividend decisions
,Chapter 2 - Financial Statements
Objectives of the financial statements
1. SFP: Financial position on a given date
- Economic resources available
- Assets, Equity and Liabilities
2. SPL: Financial performance for a period (financial year)
- Ability to generate revenue by utilising assets
- Profits and losses
3. SCF: Change in financial position for a period (financial year)
- Operating, investment and financing activities
Users of financial statements
- Shareholders (potential and existing), Management, Debt providers, Government
organisations e.g. SARS
Statements requirements
- Understandable (logical)
- Comparable: IFRS guidelines, Standardised
- Relevant: Significant and Timely
- Reliable: Accurate and Objective
STATEMENT OF FINANCIAL POSITION
,Assets: Non-current
- Capital investment (used to generate income)
- PPE @ carrying amount: cost - accumulated depreciation
- Intangible assets: Patents, Licenses, Trademarks, Computer software = identifiable
Goodwill = non-identifiable
Identifiable decrease = Amortisation, Non-identifiable = Impairment
- Financial assets: Associates 20% to 50% ownership
Other share investments <20%
Loans granted (interest bearing)
Assets: Current
(Used for less than a year, easily converted into cash)
- Inventories
- Trade receivables (debtors from credit sales)
- Other receivables
- Cash and cash equivalents e.g. marketable securities
- Prepayments
- Short term financial assets = short term loans and investments
Equity and liabilities
(Forms of capital used to finance assets)
1. Equity
(Shareholders equity = Ordinary shareholders equity + Preference share capital)
- Ordinary shareholders equity
Ordinary share capital: no. issued shares * average issue price, shareholders portion of
ownership that decreases in a buy back
Distributable reserves: Paid to ordinary shareholders via dividends
Retained earnings and General reserve
Non-distributable reserves: Can’t be distributed as a dividend
Revaluation reserve and Capital redemption reserve
- Preference share capital
Preferential right to divided above ordinary shareholders - paid first
Types: Redeemable / Non-redeemable, Cumulative, Participating, Convertible
Referred to as semi-debt capital (characteristics of debt and ordinary shares)
Redeemable preference shares treated as debt
- Non-controlling interest
Subsidiary >50% ownership
, 2. Liabilities
Current liabilities: short term debt =< 1 year
- Trade payables - credit purchases from 30 to 90 days
- Other payables - obligations that don’t arise from normal operations
- Short term borrowings
- Bank overdraft
- Current tax liabilities
- Dividends payable
- Current portion of interest-bearing borrowings (payable within 12 months)
e.g. R100 000 loan with R20 000 payable in 12 months
LT portion R80 000, ST portion R20 000
Non-current Liabilities: Debt > 1 year
- Interest-bearing borrowings:
Long term loans
Mortgage Loans
Debentures
- Deferred tax: difference in treatment of items for tax and accounting purposes
(not considered debt capital in ratio analysis)
Chapter 1
Financial management: Micro economic level (within the enterprise) decision making and
focus on cash flow and creating future value
Financial economics: Macro economy and its impacts on the business, focusing on
working financial markets and institutions
Financial accounting: Reporting financial data, focusing on profit and historical data
Shareholder value / wealth
Goal: Profit maximisation
- share price * no. of shares = wealth
- Managements goal is to increase the value of shares
How value is created
- Management creates wealth by the effective utilisation of the businesses resources to
generate income and therefore cash
- To increase wealth the businesses activities need to generate acceptable return on the
capital investment
- The higher the return, the higher the share price should be
Decisions
All financial decisions should contribute to wealth maximisation
- Investments in assets = budgeting capital (long term)
- Managing working capital (short term)
- Financing assets = Capital structure
What is done with profits
- Pay dividends
- Buy back shares
- Re-invest into the firm
Role of the financial manager
- Managing cash flow and keeping an eye on the books
- Use financial tools & principles to solve business problems
- Maximise profit and manage risk
- Assist management in decision making:
Capital investment
Financing decisions
Managing working capital
Dividend decisions
,Chapter 2 - Financial Statements
Objectives of the financial statements
1. SFP: Financial position on a given date
- Economic resources available
- Assets, Equity and Liabilities
2. SPL: Financial performance for a period (financial year)
- Ability to generate revenue by utilising assets
- Profits and losses
3. SCF: Change in financial position for a period (financial year)
- Operating, investment and financing activities
Users of financial statements
- Shareholders (potential and existing), Management, Debt providers, Government
organisations e.g. SARS
Statements requirements
- Understandable (logical)
- Comparable: IFRS guidelines, Standardised
- Relevant: Significant and Timely
- Reliable: Accurate and Objective
STATEMENT OF FINANCIAL POSITION
,Assets: Non-current
- Capital investment (used to generate income)
- PPE @ carrying amount: cost - accumulated depreciation
- Intangible assets: Patents, Licenses, Trademarks, Computer software = identifiable
Goodwill = non-identifiable
Identifiable decrease = Amortisation, Non-identifiable = Impairment
- Financial assets: Associates 20% to 50% ownership
Other share investments <20%
Loans granted (interest bearing)
Assets: Current
(Used for less than a year, easily converted into cash)
- Inventories
- Trade receivables (debtors from credit sales)
- Other receivables
- Cash and cash equivalents e.g. marketable securities
- Prepayments
- Short term financial assets = short term loans and investments
Equity and liabilities
(Forms of capital used to finance assets)
1. Equity
(Shareholders equity = Ordinary shareholders equity + Preference share capital)
- Ordinary shareholders equity
Ordinary share capital: no. issued shares * average issue price, shareholders portion of
ownership that decreases in a buy back
Distributable reserves: Paid to ordinary shareholders via dividends
Retained earnings and General reserve
Non-distributable reserves: Can’t be distributed as a dividend
Revaluation reserve and Capital redemption reserve
- Preference share capital
Preferential right to divided above ordinary shareholders - paid first
Types: Redeemable / Non-redeemable, Cumulative, Participating, Convertible
Referred to as semi-debt capital (characteristics of debt and ordinary shares)
Redeemable preference shares treated as debt
- Non-controlling interest
Subsidiary >50% ownership
, 2. Liabilities
Current liabilities: short term debt =< 1 year
- Trade payables - credit purchases from 30 to 90 days
- Other payables - obligations that don’t arise from normal operations
- Short term borrowings
- Bank overdraft
- Current tax liabilities
- Dividends payable
- Current portion of interest-bearing borrowings (payable within 12 months)
e.g. R100 000 loan with R20 000 payable in 12 months
LT portion R80 000, ST portion R20 000
Non-current Liabilities: Debt > 1 year
- Interest-bearing borrowings:
Long term loans
Mortgage Loans
Debentures
- Deferred tax: difference in treatment of items for tax and accounting purposes
(not considered debt capital in ratio analysis)
