Introduction to Financial Statements.

1. Maiwand University
Financial Management
Eco. BBA -3334
BBA 6th semester

2. Course Objectives:
• The aim of this module is to build on the basic knowledge of how
businesses are financed by looking at how firms organize and report
financial information. This understanding of FSs relates to economic
development finance in several ways. First, it is critical for assisting
individual businesses to secure financing. Second, FSs analysis is
central to evaluating a firm’s capacity to repay debt or generate the
return required by the equity investors.

3. Chapter 1
• Definition of Finance
• What is Financial Management
• Nature and Purpose of Financial Management
• Elements of Financial Management
• Financial Planning
• Financial Control
• Financial Decision Making
• Three Area of Finance
• Capital Budgeting
• Capital Structure
• Working Capital Management
• Exercise
• Assignment

4. Definition of Finance
• Finance is defined as the management of money and includes activities
such as investing, borrowing, lending, budgeting, saving, and
forecasting.
• Basically, finance represents money management and the process of
acquiring needed funds. Finance also encompasses the oversight,
creation, and study of money, banking, credit, investments, assets, and
liabilities that make up financial systems.

5. • Investing personal money in stocks, bonds or other security related
investments.
• Borrowing money from institutional investors by issuing bonds on
behalf of a public company
• Lending money to people by providing them a mortgage to buy a
house with
• Using Excel spreadsheets to build a budget and financial model for a
corporation
• Saving personal money in a high-interest savings account
• Developing a forecast for government spending and revenue collection

6. Types of Finance
• Personal finance
• Corporate finance
• Public (government) finance

7. DeFi
• Decentralized finance, or DeFi for short, is a system in which
customers can access financial products directly on a decentralized
blockchain network, without the need for middlemen such as banks
and brokerages. Evolution is the answer to everything that exists, and
finance is no exception.

8. Financial Management

9. Financial Management
• Financial management is concerned with the acquisition, financing,
and management of assets with some overall goal in mind. Financial
management is the effective handling of money through planning,
organizing, directing and controlling funds in a corporation or for an
individual. Thus the decision function of financial management can be
broken down into three major areas:
1. the investment,
2. financing,
3. and asset management decisions.

10. Purpose of Financial Management
• Financial management involves analyzing money and investments to
make the right decisions for the long and short term. The goals differ
depending on whether you are working with a business or an
individual:
1. Corporate financial management
2. Individual financial management

11. 1. Corporate Financial Management
• Effective financial management in a corporation allows the business to use
cash and credit in a way that helps it reach its objectives. Here are some
goals of financial management in a company:
1. Profit maximization
2. Wealth maximization
3. Company survival
4. Cash flow maintenance
5. Capital cost minimization
6. Funds estimation
7. Capital structure determination

12. 2. Individual Financial Management
• Professionals who work with individuals rather than corporations are
called financial planners, financial advisors or personal financial
planners. They help people prepare financially for their future. A good
financial plan for an individual includes some same elements as a
financial management plan for a corporation.

13. Financial management functions
• The two most critical functions of financial management are establishing financial
controls and making capital decisions.
1. financial controls:
Monitoring all of the company's assets, their security and how they are used
Evaluating the performance of the management team as it relates to the best
financial interests of the company and its shareholders
Making appropriate decisions about investing and financing, distributing profits
or selling new shares.
2. making capital decisions:
Forming capital structures using debt-equity analysis for the immediate and long-
term future
Investing capital in safe but profitable ways
Allocating profits and determining what goes out to shareholders through
dividends and what is retained
Managing cash on hand to cover expenses and liabilities

14. Financial management functions
• Estimating costs and sales
• Monitoring the fixed (plant, property and equipment) and current
(cash or cash equivalent) sides of the balance sheet
• Observing the performance of investments such as shares and bonds
• Drafting and providing input into financial policies
• Advising on matters of compliance with financial regulations
• Producing accurate financial reporting for the company's management
team
• Planning appropriately for taxes to ensure that the company doesn't
pay any more than necessary

15. Key Elements Of Financial Management
1. Financial Reporting
2. Financial Planning
3. Financial Controls
4. Financial Decisions

16. Financial Reporting
• This is the main component of financial management. It is not enough for
them to source and utilize funds for the organization. They must also share
the information with others. There are various stakeholders like investors,
creditors, lenders, and the government. In some cases, the public must also
know how the funds have been used and how they have performed.
Financial reporting is a result of accounting. These reports can show the
concerned people whether the organization has benefited from the money it
holds. The financial statements include balance sheets, profit & loss
accounts, cash flow statements, and a statement of change in shareholders’
equity. The report will also include notes on the financial information. In the
case of listed companies, financial departments must prepare both quarterly
and annual reports. The government provides guidelines following which
such reports must be prepared.

17. Financial Planning
• This is another key element of financial management. Financial
planning reflects the cash needs of a company in line with its business
planning. This activity helps an organization know how much funds it
will require to achieve its goals. Planning is done even before a
company has been set up. It is on that basis that the firm will go for
sourcing of funds. But planning doesn’t stop at that stage. It is a
continuous process as every commercial organization needs money
continuously, and without proper planning, it can be sourced
expensively and spent without any returns.

18. Financial Control
• Every organization must make sure that the money it has is being utilized
correctly and in the best interests of the shareholders. This is where
financial controls are necessary. It includes the policies put in place by the
organization to manage, document, assess, and report financial transactions.
Such controls help in optimum utilization of funds. This will prevent funds
from leaking. The result will be the realization of desired returns on the
investments made. There will also be sufficient cash flow with the plugging
of leaks. When there is proper control over finances, there will be better
operational efficiency. The processes and procedures that affect efficiency
are removed or optimized. This results in better profitability. This exercise
is performed in every department, adding greatly to the earnings of the
company. Another significant benefit of financial controls is the prevention
of theft.

19. Financial Decision
• Financial decisions are necessary elements of financial management
that help to ensure that the available resources are used most
beneficially. They also help in achieving a minimum financial
performance that will enable the company to survive. Decisions can be
of two types – long-term and short-term. Financial management
provides the framework within which these decisions are taken. There
are mainly three types of decision-making which are:
1. investment decisions,
2. financing decisions,
3. and dividend decisions.

20. Investment Decisions
• As the name suggests, these are made about how the organization’s
funds are invested to its best benefits. There are both long-term and
short-term investment decisions. The long-term decisions involve
large amounts and are most irreversible except by incurring huge
costs. Short-term investments are made for the daily work of a
company. This can include decisions on cash, inventory, and
receivables.

21. Financing Decisions
• These decisions affect the amount of finance raised and the methods
used for it. These decisions are on the capital structure of a company
which is made up of owner’s and borrowed funds. Companies could
use sources like equity shares, preference shares, debentures, and bank
loans to raise funds. Cost and cash flow position are the main factors
that affect these decisions. The financial risk management course says
that risk of repayment is also considered when making these
decisions.

22. Dividend Decisions
• Financial managers consider various factors before deciding how
much of the profit earned must be paid to shareholders as dividend. All
companies retain a portion of the earnings for development activities
and emergencies. These decisions are taken with the objective of
increasing shareholder wealth. Companies with stable and high
earnings can pay more dividends to their shareholders. The dividends
don’t change with small or temporary fluctuations in earnings.

23. Three Area of Financial Management
1. Capital Budgeting
2. Capital Structure
3. Working Capital Management

24. 1. Capital Budgeting
• Capital budgeting is the process a business undertakes to evaluate
potential major projects or investments. Construction of a new plant or
a big investment in an outside venture are examples of projects that
would require capital budgeting before they are approved or rejected.
• As part of capital budgeting, a company might assess a prospective
project's lifetime cash inflows and outflows to determine whether the
potential returns that would be generated meet a sufficient target
benchmark. The capital budgeting process is also known as investment
appraisal.

25. Capital Budgeting Methods
• Although there are numerous capital budgeting methods, below are a
few that companies can use to determine which projects to pursue.
1. Discounted Cash Flow Analysis
2. Present Value
3. Cost of Capital
4. Payback Analysis
5. Throughput Analysis

26. DCF Discounted Cash Flow
Discounted cash flow (DCF) is a valuation method used to estimate the value of an investment based on its
expected future cash flows. DCF analysis attempts to figure out the value of an investment today, based on
projections of how much money it will generate in the future. This applies to the decisions of investors in
companies or securities, such as acquiring a company or buying a stock, and for business owners and managers
looking to make capital budgeting or operating expenditures decisions.

27. Present Value
Present value (PV) is the current value of a future sum of money or stream of cash flows given a specified rate of
return. Future cash flows are discounted at the discount rate, and the higher the discount rate, the lower the present
value of the future cash flows. Determining the appropriate discount rate is the key to properly valuing future cash
flows, whether they be earnings or debt obligations.

28. 3. Cost of Capital
• Cost of capital is a company's calculation of the minimum return that
would be necessary in order to justify undertaking a capital
budgeting project, such as building a new factory.
• The term cost of capital is used by analysts and investors, but it is
always an evaluation of whether a projected decision can be justified
by its cost. Investors may also use the term to refer to an evaluation of
an investment's potential return in relation to its cost and its risks.

29. 4. Payback Analysis
• Payback analysis is a mathematical methodology to determine the
payback period for an investment. The payback period is how long it
will take to pay off the investment with the cash flow derived from the
asset or project. In colloquial terms, it calculates the 'break even point.'
The payback period is usually measured in fractions of years.
• Formula:
Payback Period = Initial Investment / Annual Net Cash Flow

30. *Break Even Point
• The break-even point is the point at which total cost and total
revenue are equal, meaning there is no loss or gain for your small
business. In other words, you've reached the level of production at
which the costs of production equals the revenues for a product.

31. 5. Throughput Analysis
• The primary concept underpinning throughput analysis is that you
should look at investment decisions in terms of their impact on the
entire system, rather than on the specific area in which an investment
is contemplated. The system view is based on the fact that most
production costs do not vary at the level of the individual unit
produced. When a unit is manufactured, only the associated cost of
materials is incurred. All other costs are associated with the production
process, and so will be incurred even in the absence of any unit-level
production.

32. 2. Capital Structure
• Capital structure is the particular combination of debt and equity used
by a company to finance its overall operations and growth.

33. • When analysts refer to capital structure, they are most likely referring
to a firm's debt-to-equity (D/E) ratio, which provides insight into how
risky a company's borrowing practices are.

34. 3. Working Capital Management
• Working capital management is a business strategy designed to ensure
that a company operates efficiently by monitoring and using its current
assets and liabilities to their most effective use. The efficiency of
working capital management can be quantified using ratio analysis.
• *Ratio analysis is a quantitative method of gaining insight into a
company's liquidity, operational efficiency, and profitability by
studying its financial statements such as the balance sheet and income
statement.

35. Purpose of Working Capital Management
• The primary purpose of working capital management is to enable the
company to maintain sufficient cash flow to meet its short-term operating
costs and short-term debt obligations.
• Working capital management helps maintain the smooth operation of the net
operating cycle, also known as the cash conversion cycle (CCC)—the
minimum amount o
• f time required to convert net current assets and liabilities into cash.
• Working capital management can improve a company's cash flow
management and earnings quality through the efficient use of its resources.
Management of working capital includes inventory management as well as
management of accounts receivable and accounts payable.

36. End of First Session)