Financial Management Flashcards
Financial Management
- PCOD (Planning, Coordinating, Organising and Directing) activities
- Acquisition and application of an Entity’s finance resources
- To achieve specified financial goals
Aspects of Financial Management
- Procurement of funds (B/S liabilities), Capital Structure, Financing Decisions
- Utilisation of funds (B/S Assets), Investment Decisions
Types of Funds
Long term and short term sources, differently sourced funds have different risk, cost and control, objective is to minimise cost of funds
Long term sources of Funds
Equity, Preference Capital, Debentures, Term Loans (DEPreCaT)
Short term sources of funds
Trade Credit, Short-term advances, bank finance for working capital, etc (BAT)
Procurement activities
- Identification of Sources of Finance
- Determination of Finance Mix
- Fundraising
- Division of profits between dividends and profit retention
- Balancing risk, cost and control factors
Utilisation of Funds
Funds invested in different assets have different yields, goal is to maximise return, fixed and current assets
Fixed Assets
Capital projects and other long term investments
Current Assets
Stock, Debtors
Utilisation activities
- Identification of different investment and business opportunities.
- Evaluation fo different projects
- Balancing Fixed Assets and Working Capital needs
Major Considerations in procurement of fund
Risk, Cost, Control
Risk fund types
Low risk: own funds (equity), High risk: loan funds (debt)
Cost types
Equity- Most expensive, dividends not tax deductible, dividend rates> interest rates
Loan- Cheaper, interest is tax deductible
Control types
Equity- dilution of control
Loan- no voting power
Evolution of FM
- Traditional Phase: only for special, significant and occasional events: mergers, acquisitions, liquidation; focus towards shareholders and lenders
- Transitional Phase: FM required for the day-to-day decision making of top-level managers; focus: fund analysis, financial planning and control
- Modern phase: Supportive and facilitative for everyone; focus: from corporate strategies to regular and procedural aspects
Role of CFO
- Budgeting, Strategic Planning and Forecasting
- Profitability and Pricing Analysis
- Outsourcing vs In-House
- Evaluation of IT and HR
- Risk management
- Merger and acquisition management
- Statutory Compliance
PROBEMS
Why has CFO’s profile changed?
- Reporting: Financial reporting needed to be more rigourous
- Regulations: Increase in Statutory/ Regulation Requirements
- Talent and Capability: Focus on functional area talent, managing and organisation capability
- Globalisation: Maximise profits in a global market
- Risk Management: Nature of risk changed, requires more effectiveness
- Technology: Increase in tools and technology, need to be proficient
- Stakeholder Management: Managing stakeholder relationships
- Strategy: Auditor for strategy validation and execution
- Service Function: Best service at least cost
3RGT3S
Primary Objectives of FM
- Profit Maximisation
- Wealth or Value Maximisation
Other Objectives of FM
- Customer Satisfaction
- Employee Welfare
- Maintaining and improving Market Share
- Market leadership in terms of products, technology, services
- Good corporate citizenship in terms of tax remittance, ecological balance.
Profit Maximisation
- Main focus: short run
- essential but not sufficient
- Advantages: Imp for survival, Growth and Development, Impact on society via factor payments, only profit making firms can pursue social obligations, easy for ME
- Disadvantages: profit is vague, higher profits higher risk, Ignores time patterns of return, ignores business’ social and moral obligations, emphasises short term gains
Wealth Maximisation
- represented by market price of capital (shares and debentures) dependent on EBIT Earnings Before Interest & Taxes (EBIT), and Capitalisation rate.
- Earnings take into account present and prospective earnings, timings and risk of these earnings, dividend policies of firm, other revenue factors
- capitalisation rate is the cumulative result of the various stock holders regarding risk and other qualitative aspects of a company.
- Value of form: earnings/ capitalisation rate. better objective as it represents risk and returns,
Superiority & Limitations of Wealth Maximisation, Comparison
Read notes
Ezra Solomon Theory FM
- Determining size and growth rate of entity
- Composition of its assets
- Determining its capital structure
- Managing Financial Affairs of Entity
Wealth computation
E (earnings)= G - (M + T + I)
G: Average future flow of gross annual earnings
M: Maintainence charges, average annual re-investment required to maintain G at projected level
T: Expected Annual Outflow due to taxes
I: Expected annual otflow due to interest, preference dividend, etc
V= E/K
K= Capitalisation rate/ discount rate
Net wealth (W)= V
