Financial Management Flashcards
If financial management is not manage well, what will happen?
Bankruptcy
The art and science of managing money
Finance
Allocation, Procurement and Efficient utilization of financial resources to enable a business concern to attain it’s predetermined objectives
Finance
Interrelated sub-areas of finance
- Money and capital market
- Investments
- Financial management
Area or set of administrative function in an organization which are related with arrangement of CASH AND CREDIT so that the organization may have the means to carry out its objective as satisfactorily as possible
Financial Management
Involves planning, directing, monitoring, organizing and controlling of the MONETARY RESOURCES OF THE ORGANIZATION
Financial Management
Pre-Determined Objectives
- stockholder wealth maximization
- Increasing its value as an economic entity
- To improve the quality of life of the community (Social Responsibility)
Two groups under Organizational Goals
- Profitability
- Risk Control
Organizational Goals
- Survive
- Avoid distress and bankruptcy
- Beat the competition
- Maximize sales or market share
- minimize cost
- increase profit
- maintain steady earnings growth
Scope of Financial Management
- Anticipation
- Acquisition
- Allocation
- Appropriation
- Assessment
Assessing the financial requirements of an organization
Anticipation
Estimate the financial needs of the company
Anticipation
collects finance for the company from different sources
Acquisition
Share capital, term loans, bonds
Acquisition
Uses this collected finance to purchase fixed and current assets for the company
Allocation
2 Types of Asses based on Allocation
- Fixed asset - permanent
2 . Current assets - on hand, not permanent
Divides the company profit among the shareholders
Appropriation
It keeps a part of the profits as reserve
Appropriation
Controls all the financial activities of the company
Assessment
Important function of Management
Financial Forecasting/Planning
It means to establish the long term and short term financial needs of the company
Financial forecasting/planning
Refers to the cash which comes in and out of the business
Cash flow
The cash comes in mostly from?
Sales
The cash goes out for?
Business expenses
Sales forecasting and forecast the future operational expenses
Estimating and controlling cash flows
Function of Financial Management
- Financial Forecasting/Planning
- Estimating and Controlling Cash flow
- Investment Decision and Financial decision
Also referred as the CAPITAL BUDGET DECISION, simply means the decisions to acquire assets or to invest in a project
Investment Decision
Which yield a return over a period of time in future
Long Term Assets
Popularly known in financial literature as CAPITAL BUDGETING
Long Term Assets
Defined as those assets which in the normal course of business are convertible into without diminution in value, usually within a year
Short Term Asset (Current Asset)
The aspect of financial decision making with reference to current assets or short term assets is popularly termed as?
WORKING CAPITAL
Selection of an asset or investment proposal that would yield benefit in future
Capital Budgeting (Long Term Asset)
A capital expenditure normally requires a huge cash outlay for a project that is supposed to produce a cash inflow over a period of time exceeding one year
Capital Budgeting
Example of Capital Budgeting
Acquisition of a new CT-Scan machine
Expansion or setting up a Medical Arts Building
Land acquisition
Determine the viability and profitability of capital budget and investment decision
Tools for Capital Budgeting
Tools for Capital Budgeting
- Net present value
- Internal Rate of Return
- Profitability Index
- Payback Period
- Return on Book Value
is concerned with management of current assets
Working Capital Management
It is an important and integral part of financial management as short-term survival is prerequisite for long term success
Working Capital Budgeting
Goal of Working Capital Budgeting
- Ensure that a firm is able to continue its operations
- it has sufficient ability to satisfy both maturing short-term debt and upcoming operational expenses
The management of working capital involves
Efficient Management of Inventories, Accounts receivable and payable, and Cash
Assets which can be converted into cash within one year or less than one year
Current Assets
Examples of this assets are cash, bills receivables, outstanding incomes
Current Assets
Are those liabilities which can be paid to respective parties within one year or less than one year at their maturity
Current Liabilities
It includes creditors, outstanding bills, bank overdraft, bills payable and short term loans, outstanding expenses
Current Liabilities
It is concerned with financing mix or capital structure
Financing Decision
Refers to the proportion of debt or fixed-debt sources of financing and equity capital employed by a firm to fund business operation, capital expenses and investments
Capital structure
Funds paid by investors in exchange of stock
Equity Capital
Loans from various sources like banks, financial institutions
Debt
Capital put in by the investors who are also known as owners/shareholders
Equity
The ownership rights in the company is based on?
Equity
Example of this are common stock, preferred stock and retained earnings
Equity
It addresses these questions:
- how much capital should be raised to fund the firms operation?
- what is the best mix of financing these assets?
Financing Decision
Organization’s Financial Status is Expressed in Four Standard Reports:
- Balance Sheet
- Revenue and Expenses Statement
3 Change in Fund Balance/net worth
4 Cash Flows
(Components of SALN)
The declaration of the organizational assets and Liabilities
Balance Sheet
Covers na time period (a year)
Shows the summary of revenues generated vs expenses incurred
Revenue and Expenses Statement
Reflects whether an organization is moving in a particular direction via its vakue appreciation or in a negative way through its decline value
Change in Fund Balance/Net Worth
Translate a variety of accounting element, where cash has yet to be received along with depreciation of appropriate assets and converts them in a cash flow for designated period
Cash Flow
Two groups that composed an institution
- Revenue Center
- Cost Center
Is the intake of funds received by an organization for service rendered
Revenue
Responsible for generating a percentage of the total revenues expected by the organization
Revenue
Are expenditures incurred by the organization in the course of providing a service
Costs
Is the supply, labor, and overhead money spent on a product or service
Expense
Importance of Understanding Cost
- to accurately price test and other services
- to determine when and how to offer new tests
- to determine whether to acquire new outreach client business or a manage care contact
Expenses that can easily be traced directly to an end product and associated with a particular service or process
Direct Cost
Example of this are Reagents and Consumables
Direct Cost
Not directly related to a billable test but necessary for it a production
Associated with services or process ans must be paid even when a particular service is discontinued
Indirect Cost
Example of this are clerical staff, inspection cost and utility expenses or hospital overhead
Indirect Cost
Are cost that vary in proportion to the volume of goods or services that business produces
Variable Cost
Example of this is reagent cost
Variable Cost
Are cost that do not change with volume of tests performed
Fixed Cost
Example of this is Laboratory Building Rental
Fixed Cost
Are 50-70% of the laboratory budget
Generally fixed
Hourly pay plus benefits
Salary Cost
How TOTAL COST OF EMPLOYMENT computed?
Salary + Benefits + Cost Recruitment + interview and selection process+ orientation, training, ongoing growth, and development cost
Expenses incurred to produce a product or service
Operating Cost
Example of this are reagents, electricity, disposable pipets, and the salary expense in production of a test
Operating Cost
Have a useful life greater than one production cycle
Capital item
Example of this are analytical equipment, computers, and physical plant
Capital Items
Three Criteria of Capital Items
- time - must have useful life > 1
- Price - Reasonable
- Purpose
Ways to derive cost of producing a test
- Microcosting
- Cost Per Reportable Result
Determines the total direct labor and supply costs of producing a test,
and is the starting point to determine the fully loaded cost and ultimately the price for tests. (simplified level)
Microcosting
Distributes the total direct costs of a run over the patient (nagastos lahat lahat)
Cost Per Reportable Result
Cost per Test
Importance
• It can be used to compare analyzers being considered for use in the laboratory,
• to compare costs in central versus satellite laboratories.
• to evaluate the benefits of changing a batch size,
• or to decide whether to continue to perform the test in house or refer it out for testing.
How to compute for Total Costs
Direct + indirect + salaries + administrative expenses+ equipment or maintenance equipment
Cost Per Test
Total cost/number of Reportable test
Achieved when the total costs for a test are equal to the total revenue received for performing the test
Break-Even Point
Profit
Revenue Received>break event point
Loss
Revenue<break-Even point
Break Even Point formula
X = (F/C) / (R-V)
