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Financial. Management. Objective. Explain what is Financial Management. Explain what are Financial Statements. Describe the various Sources of Finance –Long Term Sources and Short Term Sources. Explain Leverages. Describe the Types of Leverages. Explain the Types of Shares.

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Financial

Financial

Management


Financial

Objective

  • Explain what is Financial Management

  • Explain what are Financial Statements

  • Describe the various Sources of Finance –Long Term Sources and Short Term Sources

  • Explain Leverages

  • Describe the Types of Leverages

  • Explain the Types of Shares

  • Explain Terms related to Financial Markets

  • Explain what is Accounting

  • Explain what is Budget


Financial

Introduction

Look at the newspaper clipping to see what is making headlines today.


Financial

Introduction

Look at the newspaper clipping to see what is making headlines today.

What do you think is the primary motive of any business?

What can help in the smooth and proper functioning of any business?

So, what do you think helped Helios Inc. decide the value of Jupiter Software?

  • The answer to the above questions lies in the financial position and proper financial management of a business.

  • Let us now learn about financial management in detail.


Financial

What is Financial Management?

Financial management is concerned with the acquisition, financing, and management of assets with some overall goal in mind.

It is the art and science of managing money. Financial management is the most essential requirement of any organized business or activity.

It is the process of procuring and judicious use of resources with a view to maximize the value of the firm. Financial management is interdependent with other areas of management.


Financial

Importance of Financial Statements

Provides arithmetical accuracy to the future plans

Better awareness about the present position of business

Guides the future course of action for businesses

To understand the future of a business

Requirements of lenders

To exercise control


Financial

Parties Interested in Financial Statements

Management

Creditors

Stock Holders

General Public

Chamber of Commerce

Government

Employees

Banks


Financial

Equity Capital

An Equity Share means a share of unit value in the Share Capital of a Company.

Shareholders are theoretically owners of the company, and receive return on investment in the form of dividend which is decided by the board of directors, who themselves are usually major shareholders.

It is a permanent source of capital except in the case of buyback. Payment of dividend is not compulsory, hence the company may choose to retain and plough back earnings if they are required.

Equity Capital

Self-Financing

Equity Capital

Deep Discount Bond

Debentures

Preference Shares


Financial

Degree of Operating Leverage: (DOL)

By using fixed operating cost, a small change in sales revenue that magnified into a larger change in operating income/EBIT.

Operating leverage involves using a large proportion of fixed costs to variable costs in the operations of the firm. The higher the degree of operating leverage the more volatile the EBIT figure will be relative to a given change in sales, all other things remaining the same. It may be determined by the relationship between sales revenue & EBIT.

Percentage change in EBIT

DOL= ------------------------------------

Percentage change in Sales

(Small changes in Sales , Large change in EPS)

Sales---Variable Cost

DOL=-------------------------------------------------

EBIT

where, EBIT=Sales-VC-FC

IF DOL=2, then a 1% increase in sales will result in a 2 % increase in operating income.


Financial

Differences between DOL and DFL

  • Objective

1

Degree of Operating Leverage (DOL)

  • Stage

2

1st stage leverage

3

Degree of Financial Leverage(DFL)

4

2nd stage leverage

5

6


Financial

  • Risk involved in Leverage

  • Operating Leverage

  • Financial Leverage

Risk Involved in Leverage

Affects a firm’s business risk

Affects a firm’s financial risk

Business Risk: The variability or uncertainty of a firm’s operating income (EBIT).

Financial Risk: The variability or uncertainty of a firm’s earnings per share(EPS) and the increased probability of insolvency that arises when a firm uses financial leverage

  • Example:

  • Sales volume variability

  • Competition

  • Growth / Growth Prospects

  • Product Diversification

  • Operating Leverage

  • Size


Financial

Features of Equity Shares

Owners of the company

Right to vote

No fixed rate of dividend

Risk bearing capital


Financial

Advantages of Equity Shares

To the Issuing Company

To the Shareholders

  • Highly profitable shares

  • Owners of the company

  • Limited liability

  • Permanent source of capital

  • No fixed dividend

  • Creditworthiness of the company


Financial

Legal Forms of Business

Corporation

Limited Liability Company

(LLC)

A business owned by a single individual. The owner maintains title to the firm’s assets. Owner has unlimited liability.

Partnership

Sole Proprietorship


Financial

  • Government

Corporation and Financial Markets

Cash

Securities

Reinvest

Corporation

Investors

CashflowDividends, etc

Tax


Financial

Required Documents

Balance Sheet/Statement of Financial Position:

This document is filled out at the end of each period and lists the organization’s assets (current, fixed, and net) and liabilities (current and long-term).

Income Statement/Statement of Activities:

This is a report of the organization’s revenues, expenses, and change in net assets over a fiscal year. It will denote whether the organization realized a profit or incurred a loss for the period.

Statement of Cash Flows:

This report is usually prepared by an auditor at the request of the organization. It provides information on the flow of cash in and out of the organization.

Other documents as required by state:

This can be better understood by consulting a Certified Public Accountant or tax advisor.


Financial

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