2. 3 Interrelated areas of Finance:
Managerial
Finance
• concerned with
the management
of funds.
• efficient and
effective
allocation,
acquisition and
utilization of
funds.
Investment
• focus on
decisions of
individuals,
financial
institutions & non-
financial
institutions as
they choose
where to place
excess funds.
Money and
Capital Markets
• deal with different
financial
instruments
3. Management
To balance:
• utilization of limited
resources
• maximization of goals and
objectives
Defined as utilizing the scarce
resources of the organization
to maximize attainment of the
organization’s goals and
objectives.
Basic Task of Management
4. 8 M’s of Management
1. Men – human resource; most important
2. Money – capital / part of capital
3. Materials – items needed to make a product
4. Methods – ways things are done
5. Machine – produced by technology; has been
replacing people in some, if not, most organizations
6. Market – to whom/where businesses sell their
products
7. Moment – or time; the forefront of effective and
efficient management
8. Media – enables businesses to reach their markets
5. Effectiveness
• prompt achievement of goals and objectives
• consistent attainment of goals
Efficiency
• attaining desired objectives with the least amount of
resources
• getting things done with the least cost
Productivity
• output-input ratio within a time period taking into
consideration quality
6. Productivity can be improved by:
1. increasing output with the same input
2. decreasing input with the same output
3. increasing output with decreased input
Input – labor, materials, capital
7. 4 Basic Components of
Management
1. Achievement of goals and objectives
2. Working with and through people
3. Maximization of limited resources by achieving productivity
through efficiency and effectiveness
4. Coping with a changing environment
8. Financial
Management
● otherwise called managerial finance
is concerned with the management
of funds. It is the efficient and
effective allocation, acquisition and
utilization of funds.
– should always be at the least
cost and such funds need to be
channeled to fund projects or
investments that will maximize
benefits, including profit
(although not always), to the
organization.
Acquisition of funds
9. The utilization of
funds obtained should
be able to maximize:
Financal Manager
Allocation or utilization of funds
1. wealth
2. the value of the
company
3. the value of the
stakeholders
• decides where to get financial
resources like cash, inventories,
equipment and other assets
needed by the firm in its operation.
• decides where to use resources
like cash
• has the ability to set priority
- process of determining where to
use the fund
11. Goals of Financial Manager
1. acquisition of funds with the least cost from the right resources
(banks, financial institutions, financial intermediaries, loan
association, insurance companies, individual, corporate
investors) at the right time.
2. effective cash management – detailed cash flow budget;
taking advantage of cash discount
3. effective working capital management – managing both
current assets and current liabilities and maintaining the right
combination allow the company to enjoy a good working
capital position that enhances the firms stability and liquidity
which favors the company in the eyes of the creditors and
suppliers.
12. Goals of Financial Manager
4. effective inventory management – overstocking and under
stocking are undesirable (slow-moving inventories - barter
exchange); purchase right inventory at the right time
5. effective investment decisions – investing excess funds to create
additional income; investing in the right assets; engaging in new
projects and buying new assets are investment activities
6. proper asset selection – selecting the right machinery and
equipment needed for the company operation (operation –
production – sales)
7. proper risk management – weigh risks associated with certain
business decisions; use of risk analysis and assessment
14. Tools of Financial Managers
1. Financial Policy-making – included in its function are the
tasks of selecting financial goals, developing financial policies
and designing the finance organization to carry out the
finance function.
2. Financial Planning and Budgeting – the set financial goals are
the guidelines in the preparation of the financial plan. This
plan needs to ensure attainment of the goals set. It is the
blueprint to follow to reach the goals set. All plans should be
geared toward goal attainment.
15. Tools of Financial Managers
Forecasting – integral part of the planning process. Financial
planning sets the course (steps) to take to reach the set goals. A
company forecasts future demand for its product and based on this
forecast prepares the sales budget
Financial forecast – is a financial plan that projects income and
expenses, future sales, future demand for a product or anything that
is expected to happen in the future.
16. Tools of Financial Managers
Cash flow forecast – projects cash inflow or sources of cash
and cash outflow or uses of cash.
Investment forecast – details where to place excess funds
to earn maximum return.
Projected financial statements – are prepared to guide
managers on how to attain their objectives.
Actual performance – is compared to the forecasts/budget
to measure attainment of goals or objectives. (actual vs.
budget)
17. Tools of Financial Managers
Budgeting – is a sort of forecasting.
Income statement budget – is the financial plan that
details forecasted revenues and expenses to attain
projected profit.
Projected profit – should conform to the desired ROI.
Investment budget – forecasts investment activities for
the firm to determine where to place (invest) funds not
needed for current operations (savings) to produce
extra income.
18. Tools of Financial Managers
Cash flow budget – shows the forecasted inflows (source of
cash) and cash outflows (uses of cash) to obtain the desired
cash position for the company.
Working capital budget – details the company’s working
capital.
Working capital – is equal to the firm’s current assets minus its
current liabilities.
The ratio of current assets to current liabilities or liquidity ratio
reflects the liquidity of the firm, which means the ability to pay
its debts.
19. Tools of Financial Managers
Capital budgeting – the process of determining which assets
to acquire or invest in and how much to spend or invest in
these assets.
Capital expenditure – takes the form of activities such as
land acquisition, building construction or plant expansion. It
also includes decisions on other types of long-term
investment like bonds, securities, mutual funds, among
others. Profit comes in the form of interest, dividends,
royalties and value appreciation.
20. Tools of Financial Managers
Actual performance is then compared to the
forecasts/budgets to measure attainment of goals or
objectives. This comparison of actual vs. budgets is the
first step in the control function. It yields variances
(differences between actual and budget) that need to be
analyzed to determine why budgets are met,
underachieved, or overshot.
Actual revenue > budget = company did well
Actual expenses > budget = company overspent (and
needs to reduce expenses or cut costs)
21. Tools of Financial Managers
Budgeting and control always go together.
The budget and control process helps the company
in deciding what action to take to improve company
performance, thereby increasing profit and
maximizing the firm’s value and owner’s wealth.
22. Tools of Financial Managers
3. Financial Analysis – is the process of
evaluating business performance, projects,
investment options and other finance-related
activities to determine feasibility and profitability. It
includes the analysis of the financial statement of
a company to determine financial stability, liquidity
and profitability.
23. a. It has consistent demand for
its product and services
b. Ratio of current assets in
relation to its liabilities is good
a. It is earning a consistent rate of
return in all its investment, including
the company’s operations.
Feasibility – is practically and applicability
in an existing environment.
a. It has enough cash to support
operations, including payment of all
its maturing obligations.
a. It attains its objective, say earns a
specific rate of return or higher return.
**** Manufacturing a certain product is
feasible if a market for the product is
already existing or will be created with
its introduction. A project is analyzed to
determine its feasibility and profitability.
A company is liquid if :
A project is feasible if:
A company is stable if:
A company is profitable if:
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Any Questions?
25. Answer the following questions:
1. What is finance? Why is it
important?
2. What are the areas of finance?
Discuss each.
3. Define management? Discuss
each.
4. What are the 8M’s of
Management? Discuss each.
5. Which do you think is the most
important resource? Why?
6. What are the tools of financial
managers? Discuss.
Activity Time