Advanced Corporate Financial Management
Topic 1: Short Term Financial Management
1. Short intro to Corporate Finance
Corporate Finance: managing the balance sheet
Corporate Finance: overview of the issues
Objective maximize value of the company
Asset/Business Risk + Financing Risk → Cost of equity and cost of debt
Costs of agency conflicts and asymmetric information → Costs reduced by organizing financial
contracts and Corporate Governance
Corporate Finance at different levels
Long term finance → LT Investments, capital structure
Short term finance → Working capital management, net working capital
Liquidity management → “never out of cash”
Cash management → Organization of the payments flow
,Ratio analysis
➔ First understanding of the business by looking at financial ratio’s. Ratio analysis is a first quick
and dirty analysis of a company
Ratio analysis is a first quick and dirty analysis of a company. Ratio’s only tell a story if benchmarked
with sector peers and compared with historical time series. Separate out structural and incidental
developments. Be aware of accounting differences / changes in accounting practice. Risk is (mostly)
measured by deviations from sector averages. Detect inconsistencies!
1. Profitability ratios
2. Efficiency ratios (working capital)
3. Leverage ratios (capital ratio, healthiness financial structure)
4. Liquidity ratio’s (“running out of cash)
5. Coverage ratio’s
6. Growth %
7. Ratio’s with market value information
Business performance
- Profitability, efficiency in use of assets
- Find key drives of sales, cost structure and profitability (time series and cross section, peers)
Financial performance
- Solvency, liquidity, coverage ratios
Profitability analysis by a Dupont analysis: split profitability in efficiency and profit margin
DuPont analysis is the business economic analysis of the profitability of a company by means of a
simple formula. The formula is used to analyze factors of profitability, as a return on equity.
Profitability analysis by looking at cost structure
- Profit margins relative to (net) sales
- Added value → Gross margin ratio = (net sales – COGS)/ net sales
- Fixed versus variable costs → Breakeven analysis
,2. Cash Conversion Cycle & Working Capital Management
The cash conversion cycle provides insight in the financing need for working capital
CCC lowers mainly due to lower inventories
US Europe
Large differences among countries and sector
, Measures for better working capital mgt target is to lower CCC
- Implementation of SCF program
- Inventory ownership
- Leasing programs
- Extension of payment terms
- Make or Buy analysis
A make-or-buy decision is the act of choosing between manufacturing a product in-house or
purchasing it from an external supplier.
EXAM – Short term finance and working capital management
Net working capital is the term given to the difference between current assets and current liabilities.
The level of current assets is a key factor in a company’s liquidity position. A company must have or
be able to generate enough cash to meet its short-term needs if it wants to continue in business.
Therefore, working capital management is a key factor in the company’s long-term success.
Working capital management requires a clear specification of the objectives to be achieved. The two
main objectives of working capital management are to increase the profitability of a company and to
ensure that it has sufficient liquidity to meet short-term obligations as they fall due and so continue
in business. The twin goals of profitability and liquidity will often conflict since liquid assets give the
lowest returns. Cash kept in a safe will not generate a return.
Because working capital management is so important, a company will need to formulate clear
policies concerning the various components of working capital. Key policy areas relate to the level of
investment in working capital for a given level of operations and the extent to which working capital
is financed from short-term funds such as a bank overdraft. A company should have working capital
policies on the management of inventory, trade receivables, cash and short-term investments in
order to minimize the possibility of Working capital policies managers making decisions which are
not in the best interests of the company. Examples of such suboptimal decisions are giving credit to
customers who are unlikely to pay and ordering unnecessary inventories of raw materials. Working
capital policies need to consider the nature of the company’s business since different businesses will
have different working capital requirements.
Topic 1: Short Term Financial Management
1. Short intro to Corporate Finance
Corporate Finance: managing the balance sheet
Corporate Finance: overview of the issues
Objective maximize value of the company
Asset/Business Risk + Financing Risk → Cost of equity and cost of debt
Costs of agency conflicts and asymmetric information → Costs reduced by organizing financial
contracts and Corporate Governance
Corporate Finance at different levels
Long term finance → LT Investments, capital structure
Short term finance → Working capital management, net working capital
Liquidity management → “never out of cash”
Cash management → Organization of the payments flow
,Ratio analysis
➔ First understanding of the business by looking at financial ratio’s. Ratio analysis is a first quick
and dirty analysis of a company
Ratio analysis is a first quick and dirty analysis of a company. Ratio’s only tell a story if benchmarked
with sector peers and compared with historical time series. Separate out structural and incidental
developments. Be aware of accounting differences / changes in accounting practice. Risk is (mostly)
measured by deviations from sector averages. Detect inconsistencies!
1. Profitability ratios
2. Efficiency ratios (working capital)
3. Leverage ratios (capital ratio, healthiness financial structure)
4. Liquidity ratio’s (“running out of cash)
5. Coverage ratio’s
6. Growth %
7. Ratio’s with market value information
Business performance
- Profitability, efficiency in use of assets
- Find key drives of sales, cost structure and profitability (time series and cross section, peers)
Financial performance
- Solvency, liquidity, coverage ratios
Profitability analysis by a Dupont analysis: split profitability in efficiency and profit margin
DuPont analysis is the business economic analysis of the profitability of a company by means of a
simple formula. The formula is used to analyze factors of profitability, as a return on equity.
Profitability analysis by looking at cost structure
- Profit margins relative to (net) sales
- Added value → Gross margin ratio = (net sales – COGS)/ net sales
- Fixed versus variable costs → Breakeven analysis
,2. Cash Conversion Cycle & Working Capital Management
The cash conversion cycle provides insight in the financing need for working capital
CCC lowers mainly due to lower inventories
US Europe
Large differences among countries and sector
, Measures for better working capital mgt target is to lower CCC
- Implementation of SCF program
- Inventory ownership
- Leasing programs
- Extension of payment terms
- Make or Buy analysis
A make-or-buy decision is the act of choosing between manufacturing a product in-house or
purchasing it from an external supplier.
EXAM – Short term finance and working capital management
Net working capital is the term given to the difference between current assets and current liabilities.
The level of current assets is a key factor in a company’s liquidity position. A company must have or
be able to generate enough cash to meet its short-term needs if it wants to continue in business.
Therefore, working capital management is a key factor in the company’s long-term success.
Working capital management requires a clear specification of the objectives to be achieved. The two
main objectives of working capital management are to increase the profitability of a company and to
ensure that it has sufficient liquidity to meet short-term obligations as they fall due and so continue
in business. The twin goals of profitability and liquidity will often conflict since liquid assets give the
lowest returns. Cash kept in a safe will not generate a return.
Because working capital management is so important, a company will need to formulate clear
policies concerning the various components of working capital. Key policy areas relate to the level of
investment in working capital for a given level of operations and the extent to which working capital
is financed from short-term funds such as a bank overdraft. A company should have working capital
policies on the management of inventory, trade receivables, cash and short-term investments in
order to minimize the possibility of Working capital policies managers making decisions which are
not in the best interests of the company. Examples of such suboptimal decisions are giving credit to
customers who are unlikely to pay and ordering unnecessary inventories of raw materials. Working
capital policies need to consider the nature of the company’s business since different businesses will
have different working capital requirements.
