Chapter 14 - Financial management
Obtaining enough finance for a business at the lowest cost, investing in assets earning a return
greater than the cost of capital, and managing the profitability, liquidity and solvency of the business.
Decisions are around:
Capital budgeting
Business’s long-term investment
Process of planning and managing a business’s long-term investments
Investment opportunities that exist for the business.
The size, timing and risk of future cash flows
Capital structure
Ways business obtains and manages long term financing to support its long-term investments.
Where and how to get the financing, and the expenses associated with raising long-term
financing.
Choosing lenders and different types of debt financing
Working capital management
Short-term assets of business
Cash and inventory to keep on hand, credit & terms, how to obtain short-term financing,
purchase on credit, identify sources of funding short-term expenses, and so on.
How to return the proceeds from the business’s investments to shareholders.
Questions are related to: (a) paying dividends (note that this increases the need for external
capital) and (b) retaining earnings to invest in new projects.
This demonstrates to shareholders that the company cares for its welfare and maximises the
market value of the business.
The financial function and financial management
Business needs funds – capital to obtain required assets
Financial function concerned with flow of funds
Acquisition of funds = financing
Application of funds for acquisition of assets = investment
Administration of and reporting on financial matters = accounting
Make contribution to organization objective by:
Financial analysis, reporting, planning and control
Management of application of funds (management of the asset structure)
Management of acquisition of funds (management of the financing or capital structure.)
, Actions management could consider for improving a firm’s profitability
Gross profit margin
Net profit margin
Return on assets
Return on equity
Earnings per share
Increase Sales = more effective marketing or by increasing sales
Concepts in financial management
The statement of Financial Position, Asset & Financing Structure
Allows the viewer to have an overall grasp of the financial position of a business
Assets (all possessions of business)
Non-Current Assets – E.g. land and buildings (Fixed Assets)
Current assets – will be converted into cash within one year during the normal course of
business
Liabilities – nature and extent of interest in assets - shows financing structure of business:
Term for which funds were made available
Source from which funds have been obtained
Owners’ Equity & Liability side will have the following details:
Long term funds (non-current liabilities) –
– shareholders interest and long-term debt
Shareholders interest
– Owners’ equity - ordinary share capital, reserves, undistributed or retained profits &
preference share capital
– Long-term debt - debentures, mortgage bonds, secured loans and long-term credit.
Short-term funds (current liabilities) –
– debts & credits payable in one year - bank overdrafts, creditors
Obtaining enough finance for a business at the lowest cost, investing in assets earning a return
greater than the cost of capital, and managing the profitability, liquidity and solvency of the business.
Decisions are around:
Capital budgeting
Business’s long-term investment
Process of planning and managing a business’s long-term investments
Investment opportunities that exist for the business.
The size, timing and risk of future cash flows
Capital structure
Ways business obtains and manages long term financing to support its long-term investments.
Where and how to get the financing, and the expenses associated with raising long-term
financing.
Choosing lenders and different types of debt financing
Working capital management
Short-term assets of business
Cash and inventory to keep on hand, credit & terms, how to obtain short-term financing,
purchase on credit, identify sources of funding short-term expenses, and so on.
How to return the proceeds from the business’s investments to shareholders.
Questions are related to: (a) paying dividends (note that this increases the need for external
capital) and (b) retaining earnings to invest in new projects.
This demonstrates to shareholders that the company cares for its welfare and maximises the
market value of the business.
The financial function and financial management
Business needs funds – capital to obtain required assets
Financial function concerned with flow of funds
Acquisition of funds = financing
Application of funds for acquisition of assets = investment
Administration of and reporting on financial matters = accounting
Make contribution to organization objective by:
Financial analysis, reporting, planning and control
Management of application of funds (management of the asset structure)
Management of acquisition of funds (management of the financing or capital structure.)
, Actions management could consider for improving a firm’s profitability
Gross profit margin
Net profit margin
Return on assets
Return on equity
Earnings per share
Increase Sales = more effective marketing or by increasing sales
Concepts in financial management
The statement of Financial Position, Asset & Financing Structure
Allows the viewer to have an overall grasp of the financial position of a business
Assets (all possessions of business)
Non-Current Assets – E.g. land and buildings (Fixed Assets)
Current assets – will be converted into cash within one year during the normal course of
business
Liabilities – nature and extent of interest in assets - shows financing structure of business:
Term for which funds were made available
Source from which funds have been obtained
Owners’ Equity & Liability side will have the following details:
Long term funds (non-current liabilities) –
– shareholders interest and long-term debt
Shareholders interest
– Owners’ equity - ordinary share capital, reserves, undistributed or retained profits &
preference share capital
– Long-term debt - debentures, mortgage bonds, secured loans and long-term credit.
Short-term funds (current liabilities) –
– debts & credits payable in one year - bank overdrafts, creditors
