Lecture notes Financial Management 214

Financial Management 214
Chapter 1

How is value created?
 Management creates wealth by the effective utilisation of the enterprise’s resources to generate
income and therefore cash
 To increase wealth, the business activities need to generate an acceptable return on the capital
investment
 The higher the return the higher the share price should be

Decisions of financial manager
 All financial decisions should contribute to wealth maximisation
 Investments in assets – Capital Budgeting (long term)  current and non-current assets the
enterprise requires. Only profitable investments will be considered. Task = identification, evaluation
and implementation. Only create competitive advantage if profitable projects are implemented.
 Financing of assets – Capital Structure  which types of capital (shareholders equity or debt
capital) and forms of capital (shares, loans) should be obtained to provide the capital requirement.
Should implement the optimal capital structure
How to manage working capital (short term)
 What should be done with profits? – distribution/dividend decision
- Pay a dividend
- Buy-back shares
- Re-invest back into the firm as reserves
• Continuous process and the decisions can’t be made in isolation

Role of Financial Manager
 More than managing cash flow and keeping eye on books
 Uses financial tools & principles to solve business problems
 Assist management in making the right decisions :
- Capital Investment Decision
- Financing Decision
- Management of working capital
- Dividend Decision
 Not just to maximise profit but manage risk as well
 Marginal contribution = should focus on, the investment alternative provides to the shareholder
value of the enterprise. Normally = NPV techniques to determine if they meet the required return.
 Agency problem = large number of different shareholders therefore have to manage by board of
directors and managers, however objectives do not always correspond. Managers need to act as if
they are the owners in order to promote shareholder value  economic value added (EVA) where
the managers are only rewarded if they are able to increase shareholder value.

Definitions
 Financial economics
- Macro economy and its impact on the business
- Focus on working of financial markets and institutions
 Financial accounting
- Reporting of financial data according to guidelines (IFRS)
- Focus is different from financial management
- Focus is on profit and historical data
 Financial Management
- Micro economic level i.e. within enterprise
- Focus is on decision making and management of decisions

, - Focus on cash flow and creating value in future

Chapter 2

Objective of Financial Statements
 Financial Position on a given date ----- SFP
- Economic resources available
- Assets, Liabilities & Equity
 Financial Performance for a specified period (Financial Year) ---- SPL
- Ability to generate revenue by utilizing assets
- Profits & Losses
 Change in financial position for a certain period (Financial Year) --- SCF (statement of cash flow)
- Operating, investment and financing activities

Users of financial statements
 Shareholders – existing and potential
 Management
 Providers of debt capital
 Government organisations (SARS – interested in profits)
 Other stakeholders – customers, suppliers, stock brokers, trade unions, etc. (interested in financial
soundness)

Requirements

 Understandable - logical
 Relevant (enable to evaluate historic, current and future changes)
- Significant (if exclusion leads to incorrect decision)
- Timely (during period in which it can have an effect)
 Reliable
- Accurate
- Objective
 Comparable
- Standardised financial statements
- Financial statements according to accounting guidelines (IFRS)
- Different guidelines or interpretations to report same item

,Statement of financial position (SFP):




Asset: Non-current

 Notice the order in which they are reflected
 Capital investment – applied to generate income
 PPE @ Carrying Value
- Cost
- Accumulated depreciation
 Intangible assets (non-physical but used to generate turnover)

, - Goodwill - the difference company A paid for company B (non-identifiable asset – impairment)
- Patent rights
- Manufacturing licenses – asset we apply in order to generate income
- Trademarks - branding
- Computer software – buy a licence but can’t touch (used in process)
- NB: Difference amortization (decreases the value of our intangibles – for identifiable asset) vs
impairment (once off annual payment – decrease of goodwill)
- The rest are identifiable assets
 Financial Assets
 Investments in associates – company A owns shares in company B = the business is an associate
- >20% < 50%
- >50% = subsidiary
 Other share investments – usually where investment income comes from
- <20%
- Cost
 Loans granted (Interest bearing)

Asset: Current

 Used for relatively short period < 1 year
 Can be converted into cash with relative ease
- Inventories (Required for operations) – raw materials and products sold
- Trade Receivables (Credit sales) – all the credit sales that have done aka the money still
outstanding (paid in the next 12 months)
- Other receivables – don’t originate from day to day activities eg government owe you
money
- Cash and cash equivalents – cash physically have on the premises and bank balances,
marketable securities
- Prepayments – pay before due therefore not an expense. Only the money that is relevant is
an expense and everything paid in advance Is a prepayment
- Short term financial assets
o Short term loans and investments

Equity and liabilities

 Forms of capital used to finance assets
- Equity
- Non-Current Liabilities
- Current Liabilities