Business Studies

1. Book Cover Here
Business
Management
A contemporary approach
3rd Edition
Editors: Jessica Nell & Andreas de Beer
ISBN 978-1-48512-513-6

2. Chapter 3: Financial Management
• Introduction
– Financial management involves the planning and
budgeting of short- and long-term funds for current
and future needs
– Tracking past financial transactions, controlling
current revenues and expenses, and planning for the
future financial needs of the organisation are the key
activities of financial management
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3. The core principles of financial
management
1. Cost-benefit principle – benefits should be
greater than the costs
2. Risk-return principle – trade-off between risk
and return
3. Time value of money principle – money has
value over time
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4. Value-chain analysis for growth and
profitability
• What role does management play?
• Analysis of the organisation to determine
value adding
• Financial planning (long- and short-term
financing)
• Budgets
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5. What role does financial management
play?
• Determining long-term investments
• Obtaining long-term financing (equity or
borrowings)
• Managing working capital (debtor
collection and creditor payments)
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6. Analysis of the organization to
determine value adding
• Analysing statement of comprehensive income
(income statement)
– Gross profit margin
– Operating profit margin
– Earnings per share (EPS)
• Analysing the statement of financial position
– Working capital
– Current ratio
– Debt-to-equity ratio
• Economic value adding (EVA)
• Future cash flows – market value added (MVA)
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7. Gross profit margin
• The gross profit margin determines an
organisation’s profitability of production
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8. Operating profit margin
• The operating profit margin determines an
organisation’s profitability of operations
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9. Earnings per share
• The portion of an organisation’s profit
allocated to the shareholders on a per-share
basis is determined by calculating earnings per
share
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10. Working capital
• Working capital tells us what is left after the
organisation pays off its current liabilities
using current assets
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11. Current ratio
• The current ratio (sometimes called liquidity
ratio) is a measurement used to determine
the extent to which an organisation can meet
its current financial obligations
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12. Debt-to-equity ratio
• The debt-to-equity ratiomeasures how
much debt an organisation has relative to
its assets by comparing its total liabilities
to its total owners’ (or shareholders’)
equity
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13. Financial planning
• Forecasting financial needs for organisations
• Capital budgeting
– Net present value (NPV)
– Payback rule
– The profitability index
• The time value of money
– The future value of a single amount
– The present value of a single amount
• Capital structure
• Working capital management
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14. Working capital management
• Working capital management (short-term
financial management) refers to the
management of current assets (cash, accounts
receivable and stock) and current liabilities
(accounts payable, creditors and overdrafts)
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15. Budgets
• Step 1: Setting standards
• Step 2: Comparing the actual performance
with the standards
• Step 3: Evaluating and analysing the
actual performance
• Step 4: Taking corrective and preventative
action
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16. Financial statements
• The statement of the financial position
– Assets
– Liabilities
– Owner’s equity
• Statement of comprehensive income
– Revenue
– Cost of goods sold
– Operating expenses
• Statement of cash flows
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17. The statement of the financial
position
• Assets
– Current (can be turned into cash within a year)
– Fixed (long-term use, real estate)
– Intangible (no physical characteristics, trademarks)
• Liabilities
– Current (short-term, payable within a year)
– Non-current (long-term, payable over a year)
• Owner’s equity
– Left over after assets and liabilities
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18. Financing organisation needs
• Financing short-term organisation needs
• Long-term financing
– Shareholders’ interest (owner’s equity,
preference shareholders’ capital)
• Long-term debt
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19. Financial decisions
• Organisation risk
• Financial risk
• Investment risk
• Measurement of non-diversifiable risk –
beta coefficient
• Demand risk, competitive risk and
capability risk
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20. Financial management and other
organisation functions
• Internal integration recognises that different
departments and functional areas within an
organisation should operate as part of the
integrated process
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