LU4 Chapter 14: Financial management
Theme 1: Concepts and Principles of Financial Management
LO1: Discuss financial management concepts
LO2: Describe the fundamental principles of financial management
Theme 2: Financial calculations
LO3: Determine the break-even point of a business organisation
LO4: Distinguish between different
4.1) Financial analysis methods
4.2) Financial markets
4.3) Short-term financing methods
4.4) Long-term financing methods
Theme 3: Financial management and control
LO5: Distinguish between and apply different
5.1) Financial planning and control methods and principles
5.2) Methods to manage and control current assets
5.3) Control long term investments and capital budgets
LO6: Discuss the sources of finance for small businesses
LO7: Explain what is meant by the cost of capital and the management of risk
1
,Theme 1: Concepts and Principles of Financial Management
LO1: Discuss financial management concepts
The statement of financial position
an overview of the financial position of the business
Asset side reflects all the possessions of the business and these assets represent the
asset structure:
o Non-current assets – land, buildings and machinery
o Current assets – cash in bank etc., will be converted into cash within one year
during the normal course of business
Liabilities side reflects the nature and extent of interests in assets:
o Long-term funds (NC liabilities)
Shareholders’ interest
Long-term debt
o Short-term funds (C liabilities)
Repayable within one year
Capital
The accrued power of disposal over products and services used by a business to
generate a monetary return or profit
Capital for investing in non-current assets – the need for fixed capital
Capital for investing in current assets – the need for working capital
Income
Receipts resulting from the sale of products and/or services
Income = Units sold x Price per unit
Can also be obtained from other sources such as interest on investments
2
, Costs
Monetary value sacrificed in the
production of goods and/or services
produced for the purpose of resale
Costs can be subdivided:
o Direct cost
o Indirect cost
o Overhead expenses
o Fixed costs
o Variable costs
o Semi-variable costs
o Variable cost per unit
o Total costs
Fixed cost:
o That portion of total cost that
remains unchanged regardless of an
increase/decrease in the quantity of
prod and/or services produced
o Total fixed costs are constant,
irrespective of the volume
produced
o The fixed cost per unit produced
will decrease when there is an
increase in the quantity prod
Variable cost:
o That portion of the total cost that
chgs according to a chg in the
volume produced
o The variable cost per unit produced
remains more or less constant
irrespective of the quantity
produced
Total costs involved in the production of a
specific number of prod produced in a
particular period consists of total fixed cost
and total variable cost
3
Theme 1: Concepts and Principles of Financial Management
LO1: Discuss financial management concepts
LO2: Describe the fundamental principles of financial management
Theme 2: Financial calculations
LO3: Determine the break-even point of a business organisation
LO4: Distinguish between different
4.1) Financial analysis methods
4.2) Financial markets
4.3) Short-term financing methods
4.4) Long-term financing methods
Theme 3: Financial management and control
LO5: Distinguish between and apply different
5.1) Financial planning and control methods and principles
5.2) Methods to manage and control current assets
5.3) Control long term investments and capital budgets
LO6: Discuss the sources of finance for small businesses
LO7: Explain what is meant by the cost of capital and the management of risk
1
,Theme 1: Concepts and Principles of Financial Management
LO1: Discuss financial management concepts
The statement of financial position
an overview of the financial position of the business
Asset side reflects all the possessions of the business and these assets represent the
asset structure:
o Non-current assets – land, buildings and machinery
o Current assets – cash in bank etc., will be converted into cash within one year
during the normal course of business
Liabilities side reflects the nature and extent of interests in assets:
o Long-term funds (NC liabilities)
Shareholders’ interest
Long-term debt
o Short-term funds (C liabilities)
Repayable within one year
Capital
The accrued power of disposal over products and services used by a business to
generate a monetary return or profit
Capital for investing in non-current assets – the need for fixed capital
Capital for investing in current assets – the need for working capital
Income
Receipts resulting from the sale of products and/or services
Income = Units sold x Price per unit
Can also be obtained from other sources such as interest on investments
2
, Costs
Monetary value sacrificed in the
production of goods and/or services
produced for the purpose of resale
Costs can be subdivided:
o Direct cost
o Indirect cost
o Overhead expenses
o Fixed costs
o Variable costs
o Semi-variable costs
o Variable cost per unit
o Total costs
Fixed cost:
o That portion of total cost that
remains unchanged regardless of an
increase/decrease in the quantity of
prod and/or services produced
o Total fixed costs are constant,
irrespective of the volume
produced
o The fixed cost per unit produced
will decrease when there is an
increase in the quantity prod
Variable cost:
o That portion of the total cost that
chgs according to a chg in the
volume produced
o The variable cost per unit produced
remains more or less constant
irrespective of the quantity
produced
Total costs involved in the production of a
specific number of prod produced in a
particular period consists of total fixed cost
and total variable cost
3
