Chapter 13 Financial management
1. Concept in financial management ............................................................................................ 3
1.1. Balance sheet, asset and financing structure........................................................................ 3
1.2. Capital .................................................................................................................................. 3
1.3. Income ................................................................................................................................. 3
1.4. Costs .................................................................................................................................... 4
1.4.1. Fixed costs ................................................................................................................... 4
1.4.2. Variable costs ............................................................................................................... 4
1.4.3. Variable cost per unit .................................................................................................... 4
1.4.4. Total cost ...................................................................................................................... 4
1.5. Profit..................................................................................................................................... 4
1.6. Income statement ................................................................................................................. 4
2. Objective and fundamental principles of financial management ............................................ 4
2.1. Risk return principle.............................................................................................................. 5
2.2. Cost benefit principle ............................................................................................................ 5
2.3. Time value of money principle .............................................................................................. 5
3. Cost – volume – profit relationships ......................................................................................... 5
4. Time value of money .................................................................................................................. 5
4.1. Future value of single amount............................................................................................... 5
4.2. Present value ....................................................................................................................... 6
4.2.1. Present value of single amount..................................................................................... 6
5. Financial analysis, planning and control .................................................................................. 6
5.1. Financial analysis ................................................................................................................. 6
5.1.1. Flow of funds in business.............................................................................................. 6
5.1.2. Funds flow statement.................................................................................................... 6
5.1.3. Financial ratios.............................................................................................................. 6
5.2. Financial planning and control .............................................................................................. 7
5.3. Focal points of budgets in control system ............................................................................. 7
5.3.1. Integrated system for manufacturer business................................................................ 7
5.3.2. Traditional budgeting .................................................................................................... 8
5.3.3. Zero based budgeting ................................................................................................... 8
5.3.4. Balanced scorecard approach ...................................................................................... 8
6. Assessment management – management of current assets................................................... 8
6.1. Management of cash and marketable securities................................................................... 8
6.1.1. Cash budget ................................................................................................................. 9
6.1.2. Cash cycle .................................................................................................................... 9
Chapter 13 Financial management.doc 1
, 6.2. Management of debtors........................................................................................................ 9
6.3. Management of stock ......................................................................................................... 10
7. Asset management – long term investment decisions and capital budgeting..................... 10
7.1. Evaluation of investment projects ....................................................................................... 10
7.1.1. Cash flow concepts..................................................................................................... 10
7.1.2. Net present value NPV and internal rate of return IRR................................................ 11
7.1.3. Risk and uncertainty ................................................................................................... 11
8. Financing................................................................................................................................... 11
8.1. Financial markets ............................................................................................................... 11
8.2. Primary and secondary markets ......................................................................................... 12
8.2.1. Money and capital markets ......................................................................................... 12
8.2.2. Types of institutions .................................................................................................... 12
8.3. Short term financing ........................................................................................................... 12
8.3.1. Trade credit ................................................................................................................ 12
8.3.2. Accruals...................................................................................................................... 13
8.3.3. Bank overdrafts........................................................................................................... 13
8.3.4. Debtor finance ............................................................................................................ 13
8.3.5. Short term financing decisions .................................................................................... 13
9. Long term financing ................................................................................................................. 14
9.1. Shareholders interest ......................................................................................................... 14
9.1.1. Owners equity............................................................................................................. 14
9.1.2. Ordinary share ............................................................................................................ 14
9.1.3. Preference shareholders capital.................................................................................. 15
10. Long term debt ..................................................................................................................... 15
10.1. Forms of long term debt...................................................................................................... 15
10.1.1. Loans.......................................................................................................................... 15
10.1.2. Financial leasing ......................................................................................................... 16
10.2. Sources of financing for small businesses .......................................................................... 16
11. Cost of capital....................................................................................................................... 17
11.1. Risk .................................................................................................................................... 17
Chapter 13 Financial management.doc 2
, • Business needs funds – capital to obtain required assets
• People or institutions who make funds available loose right to use the funds
• They stand a chance to loose funds
• They expect compensation when organization generate funds
• Financial function concerned with HOW of funds
• Acquisition of funds = financing
• Application of funds for acquisition of assets = investment
• To make highest contribution to objective of organization by:
o Financial analysis, reporting, planning and control
o Management of application of funds
o Management of acquisition of funds
• See fig 13.1 on page 420
1. Concept in financial management
1.1. Balance sheet, asset and financing structure
• Balance sheet- overall grasp of financial position of a business
• Assets:
o Fixed assets – land and buildings
o Current assets – cash in bank
• Liability side – nature and extent of interest in assets
• Shows financing / capital structure of business
• Subdivided in 2:
o Term for which funds were made available
o Source from which funds have been obtained
• Liability side will have the following details:
o Long term funds – non current liabilities, shareholders interest and long term debt
o Shareholders interest
Owners equity
Preference share capital
o Short term funds – current liabilities, debts and credits payable in one year, eg bank
overdrafts and creditors
1.2. Capital
• Accrued power of disposal over the products used by a business to generate monetary return
• Monetary value of its assets at a given time
• Capital needed for investment in fixed assets – need fixed capital
• Capital needed for investment in current assets – need working capital
• Business permanent need for certain minimum portion of working capital
1.3. Income
• Receipts resulting from sales of it’s products
• Income = units sold x price per unit
Chapter 13 Financial management.doc 3
1. Concept in financial management ............................................................................................ 3
1.1. Balance sheet, asset and financing structure........................................................................ 3
1.2. Capital .................................................................................................................................. 3
1.3. Income ................................................................................................................................. 3
1.4. Costs .................................................................................................................................... 4
1.4.1. Fixed costs ................................................................................................................... 4
1.4.2. Variable costs ............................................................................................................... 4
1.4.3. Variable cost per unit .................................................................................................... 4
1.4.4. Total cost ...................................................................................................................... 4
1.5. Profit..................................................................................................................................... 4
1.6. Income statement ................................................................................................................. 4
2. Objective and fundamental principles of financial management ............................................ 4
2.1. Risk return principle.............................................................................................................. 5
2.2. Cost benefit principle ............................................................................................................ 5
2.3. Time value of money principle .............................................................................................. 5
3. Cost – volume – profit relationships ......................................................................................... 5
4. Time value of money .................................................................................................................. 5
4.1. Future value of single amount............................................................................................... 5
4.2. Present value ....................................................................................................................... 6
4.2.1. Present value of single amount..................................................................................... 6
5. Financial analysis, planning and control .................................................................................. 6
5.1. Financial analysis ................................................................................................................. 6
5.1.1. Flow of funds in business.............................................................................................. 6
5.1.2. Funds flow statement.................................................................................................... 6
5.1.3. Financial ratios.............................................................................................................. 6
5.2. Financial planning and control .............................................................................................. 7
5.3. Focal points of budgets in control system ............................................................................. 7
5.3.1. Integrated system for manufacturer business................................................................ 7
5.3.2. Traditional budgeting .................................................................................................... 8
5.3.3. Zero based budgeting ................................................................................................... 8
5.3.4. Balanced scorecard approach ...................................................................................... 8
6. Assessment management – management of current assets................................................... 8
6.1. Management of cash and marketable securities................................................................... 8
6.1.1. Cash budget ................................................................................................................. 9
6.1.2. Cash cycle .................................................................................................................... 9
Chapter 13 Financial management.doc 1
, 6.2. Management of debtors........................................................................................................ 9
6.3. Management of stock ......................................................................................................... 10
7. Asset management – long term investment decisions and capital budgeting..................... 10
7.1. Evaluation of investment projects ....................................................................................... 10
7.1.1. Cash flow concepts..................................................................................................... 10
7.1.2. Net present value NPV and internal rate of return IRR................................................ 11
7.1.3. Risk and uncertainty ................................................................................................... 11
8. Financing................................................................................................................................... 11
8.1. Financial markets ............................................................................................................... 11
8.2. Primary and secondary markets ......................................................................................... 12
8.2.1. Money and capital markets ......................................................................................... 12
8.2.2. Types of institutions .................................................................................................... 12
8.3. Short term financing ........................................................................................................... 12
8.3.1. Trade credit ................................................................................................................ 12
8.3.2. Accruals...................................................................................................................... 13
8.3.3. Bank overdrafts........................................................................................................... 13
8.3.4. Debtor finance ............................................................................................................ 13
8.3.5. Short term financing decisions .................................................................................... 13
9. Long term financing ................................................................................................................. 14
9.1. Shareholders interest ......................................................................................................... 14
9.1.1. Owners equity............................................................................................................. 14
9.1.2. Ordinary share ............................................................................................................ 14
9.1.3. Preference shareholders capital.................................................................................. 15
10. Long term debt ..................................................................................................................... 15
10.1. Forms of long term debt...................................................................................................... 15
10.1.1. Loans.......................................................................................................................... 15
10.1.2. Financial leasing ......................................................................................................... 16
10.2. Sources of financing for small businesses .......................................................................... 16
11. Cost of capital....................................................................................................................... 17
11.1. Risk .................................................................................................................................... 17
Chapter 13 Financial management.doc 2
, • Business needs funds – capital to obtain required assets
• People or institutions who make funds available loose right to use the funds
• They stand a chance to loose funds
• They expect compensation when organization generate funds
• Financial function concerned with HOW of funds
• Acquisition of funds = financing
• Application of funds for acquisition of assets = investment
• To make highest contribution to objective of organization by:
o Financial analysis, reporting, planning and control
o Management of application of funds
o Management of acquisition of funds
• See fig 13.1 on page 420
1. Concept in financial management
1.1. Balance sheet, asset and financing structure
• Balance sheet- overall grasp of financial position of a business
• Assets:
o Fixed assets – land and buildings
o Current assets – cash in bank
• Liability side – nature and extent of interest in assets
• Shows financing / capital structure of business
• Subdivided in 2:
o Term for which funds were made available
o Source from which funds have been obtained
• Liability side will have the following details:
o Long term funds – non current liabilities, shareholders interest and long term debt
o Shareholders interest
Owners equity
Preference share capital
o Short term funds – current liabilities, debts and credits payable in one year, eg bank
overdrafts and creditors
1.2. Capital
• Accrued power of disposal over the products used by a business to generate monetary return
• Monetary value of its assets at a given time
• Capital needed for investment in fixed assets – need fixed capital
• Capital needed for investment in current assets – need working capital
• Business permanent need for certain minimum portion of working capital
1.3. Income
• Receipts resulting from sales of it’s products
• Income = units sold x price per unit
Chapter 13 Financial management.doc 3
