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1. Basic Financial
Management

2. What is Finance?
Finance is a field that is concerned
with the allocation (investment) of
assets and liabilities over space and
time, often under conditions of risk
or uncertainty. Finance
Management can be defined as the
art of money management.

3. Why necessary to have Financial Knowledge
Marketing
• Budgets
• Marketing
financial
products/services
• Marketing
research
Accounting
• Dual Accounting
and Finance
function
• Preparation of
Finance statement
Management
• Strategic
thinking
• Job performance
• Profitability
Personal Finance
• Budgeting
• Retirement planning
• College/University
planning
• Day to day Cash
flow issues

4. Areas of Finance
• Corporate Finance
• Investments
• Financial Institutions
• International Finance

5. Corporate Finance
It is the area of finance that deals with
providing money for businesses and the
sources that provide them. These
sources provide capital to corporations
to pay for structural improvements,
expansion, and other value-added
projects and enterprises.
Examples – Micro Finance Banks etc.

6. Investment
• Work with financial assets such as
stocks and bonds
• Value of financial assets, risk versus
return, and asset allocation
• Job opportunities
 Stockbroker or financial advisor
 Portfolio manager
 Security exchange analyst

7. Financial Institutions
• Companies that specialize in financial
matters
 Banks – commercial and investment,
credit unions, savings and loans
 Insurance companies
 Brokerage firms
• Job Opportunities
 Chartered Accountant firms
 Finance Advisors

8. International Finance
• This is an area of specialization within each of
the areas discussed so far
• It may allow you to work or invest in other
countries
• Need to be familiar with international financial
policies, exchange rates, and political risk
• Examples include International Monitory Fund
(IMF), International Stock Exchange etc.
• Job Opportunities – Foreign Investment
companies

9. Forms of Business Organizations
SOLE PROPRIETORSHIP
• Simplest form of business can take
• Business owned and operated by
single person
• Profit generated by this business is
owner benefit alone
• Capital required to generate this
business is owner personal
resources or borrowing the owner
can access
• Owner has unlimited liability
• Limited access to resources
PARTNERSHIP
• Involves two or more people
operating a business
• Easy to form business
• Established on written form of
agreement
• Each partner responsible for all
debts of partnership
• Personal wealth of each partner
can be accessed to satisfy claims
against the partnership
• Limited partnership makes single
or some partner liable for
business issues while rest doesn’t
participate in any activity of
business. General partnership in
which at least one is responsible
for all the liabilities of the
partnership
CORPORATIONS
• Legal entity created by law
• Owner of corporation are issues shares in
that corporation and their liability is
limited to the amount invested in the
company to purchase those shares i.e. they
have personal limited liability
• There is more administration involved
with a corporation as entity must comply
with the regulations of the state
• Owners receive profits from the
corporation when dividends are declared
• Relies profits on the sale of corporation
shares
• Value of corporation share represents
owners profit/loss at the time of sale

10. Advantages and Disadvantages of different forms of Business Organization
SOLE PROPRIETROSHIP PARTNERSHIP CORPORATION
ADVANTAGES Simple to create Simple to create Limited liability of owners
Owner has full control over
operations
Allows for the sharing of skills
among partners
Ease of transfer of ownership
Owner receives all profit Increase access to financing
over sole proprietorship due to
increased number of owners
Increased access to financing
Business information is kept
confidential
Business information is kept
confidential among partners
but not necessary
Can have tax advantages
DISADVANTAGES Unlimited liability of the
owner
Unlimited liability of each
partner
More expensive to create than
other businesses
Ownership difficult to transfer Ownership difficult to transfer More administration and
reporting
Life of business depends upon
life of owner
Partnership ceases upon death
of any of partner
May be subject to higher tax
Limited access to financing May or may not have limited Owner do not control the

11. Important Finance Designations
CHIEF
FINANCIAL
OFFICER
(CFO)
FINANCE
MANAGER
ACCOUNTANT /
TREASURER
CONTROLLER

12. Role of Finance Designations
• Perform financial analysis
• Perform financial functional planning and control
• Working capital management
• Explore opportunities of finance
• Investment decisions
• Accrual basis of financial reporting
• Following financial statements
• Dealing with financial institutions
• Keep an eye on the country economical
environment

13. 10 Basic principals of Financial Management
• Organize your finances
• Spend less than you earn
• Put your money to work
• Limit debt to income producing assets
• Continuously educate yourself
• Understand Risk
• Diversification is not just for investment
• Maximize your employment benefit
• Pay attention to Taxes
• Plan for the Unexpected

14. Goals of Financial Management
Maximizing profit Maximizing market
share
Minimize Cost

15. RelationshipbetweenOrganizationManagement and Share holders
• Management team acts as an agent on behalf of the share holders
• When organization management act in their best interest over the interest of
the owners (shareholders). The conflict of goals is referred to as “Agency
Cost”.
 The management makes the decision that they benefit from but that cost
shareholders with no corresponding increase in share price
 Management makes the decision in the best interest of shareholders
• Shareholders control the organizations through voting at shareholder
meetings and the elections of the board of directors.
• The board of directors of an organization is responsible for ensuring that the
organization is properly managed
• Board of directors can hire or fire management
• Current share holders of an organization can sell their shares to a new
shareholder who will than take over control of the company and replace
existing management team with managers of their choice.

16. Financial Markets
EQUITY
MARKET
DEBT/BOND
MARKET
COMMON
STOCK
PREFERRED
STOCK
MONEY
MARKET
CAPITAL
MARKET
Short term
securities, e.g:
• Bankers
acceptances
• Treasury bills
• Commercial
papers
• Long term
securities e.g:
• Shares
• Bonds of
corporations
• Long term
government
bonds
• Debentures

17. Financial Markets
Primary
Market
Secondary
Market
Market where Securities are initially issued Market where Securities are resold
Company directly issues the share
and receives the net proceed
Investor want to resell their shares
this occurs in the secondary market
Transaction
of
shares
between
selling
share
holders
and
buying
shareholders

18. Financial Markets
Capital
Market
Deal with both Shares and Long term debt
Bonds are issued by both
corporations and government
Over the
Counter
exchange
Organized
exchange
• Deals in Securities and debt instruments
• People who trade in this market are called dealers
• Price of securities traded based upon competitive bids or negotiated price
• Dealer makes money by the difference between the bid and ask price
Both
Primary
and
Secondary
market
• Previously issued securities are sold
• Companies to be listed must apply and meet the
requirements set by each exchange they are attempting
to be listen on
• Member is the one who holds seat on the exchange

19. Financial Assessments
ELEMENT DESCRIPTION
Liquidity The firm’s ability to meet its short term commitments as the become due and payable
Activity Ratios The firm’s ability to put its assets to productive use
Leverage (Debt and other
fixed costs)
The firms reliance on fixed commitments that can help or hurt its profitability, and the
degree to which the firm is financed with borrowed money
Profitability The firm’s ability to generate satisfactory profits
Shareholder value (Market
ratios)
The value investors assigns to the firm. It expresses the desirability of the firm in the
eyes of its owners. This is for public trading corporations. Private limited companies
and unincorporated firms have a value but it is not easy to establish
Above mentioned elements represents companies
Financial Strength and Weaknesses

20. Important Formulas and their relationships
LIQUIDITY RATIO
Current Liquidity ratio =
Current Assets / Current Liabilities
Quick Ratio or Acid Test =
(Current Assets – Inventory) / Current Liabilities
ACTIVITY RATIO
Inventory Turn over = Cost of Goods Sold / Average
Inventory
Days in Inventory =
365 / Inventory turn over
Accounts Receivable Turnover =
Net credit sales / Average accounts Receivable
Average Collection period =
365 / Accounts Receivable turnover
Average Payment period =
Accounts payable / Average daily purchases
Total Asset turnover =
Sales / Total Average Assets
LEVERAGE (DEBT RATIO)
Inventory Turnover =
Cost of goods sold / Average Inventory
Debt Ratio = Total Liabilities / Total Assets
Times Interest Earned =
Earnings before interest and Taxes / Interest Expense

21. Important Formulas and their relationships
MARKET RATIO
Price Earning Ratio =
Market price per share of common shares / Earnings per share
Book Value per Share =
Common stock equity / No# of outstanding common shares
Market Book Ratio =
Market price per shre of common shares / Book value per share
PROFITABILITY RATIO
Gross Profit Margin = (Sales – Cost of Goods sold) / Sales
Operating Profit Margin =
Earnings before interest & Taxes / Sales
Net Profit Margin =
Earnings available for common share holders / Sales
Earnings per share =
Earnings available for common shareholders / Average number of
outstanding common shares
Return on Total Assets =
Earnings available for common shareholders / Total Average Assets
Return on Equity =
Earnings available for common shareholders / Average common stock
equity
RETURN ON EQUITY (ROE)
ROE = (Net Margin) x (Asset
Turnover) x (Financial Leverage
Multiplier)

22. Balance Sheet
A statement of the Assets,
Liabilities, and Capital of a
business or other organization
at a particular point in time,
detailing the balance of
income and expenditure over
the preceding period.

23. Balance Sheet
Current Assets:
• Cash
• Marketable Securities
• Prepayments
• Accounts Receivable
• Inventory
Fixed Assets:
• Investment
• Plant and Machinery
• Land & Buildings
Current Liabilities:
• Accounts Payable
• Accruals
• Short Term Debt
• Taxes payable
Long Term Financing:
• Debt
• Equity

24. Working Capital and Net Working Capital
• Working Capital: It includes firm’s
current Assets which consists of Cash and
Marketable securities in addition to
Accounts Receivable and Inventories. It
also consist of Current Liabilities
including Accounts Payable (Trade
Credit), Notes Payable (Bank Loans), and
Accrued Liabilities.
• Net Working Capital: Total Current Assets
– Total Current Liabilities

25. Trade off between Profitability and Risk
Positive Net Working Capital (Low Return and Low Risk)
Current
Assets Net
Working
Capital > 0
Fixed
Assets
Low
Return
High
Return
Current
Liabilities
Long Term Debt
Equity
Low Cost
High Cost
Highest Cost

26. Trade off between Profitability and Risk
Negative Net Working Capital (High Return and High Risk)
Current
Assets
Fixed
Assets
Low
Return
High
Return
Current
Liabilities Net
Working
Capital > 0
Long Term Debt
Equity
Low Cost
High Cost
Highest Cost

27. Trade off between Profitability and Risk
Effect of Changing Ratios on Profits and Risks
Ratio Change in
Ratio
Effect on
Profit
Effect on Risk
Current Assets Increase Decrease Decrease
Total Assets Decrease Increase Increase
Current Liabilities Increase Increase Increase
Total Assets Decrease Decrease Decrease

28. Operating Cycle andCash Conversion Cycle
• Operating Cycle – Is the time
between ordering materials and the
collecting cash from receivables
• Cash Conversion Cycle – Is the time
when firm pays its suppliers
(payables) for inventory and
collecting cash form the sale of the
finished product

29. Operating Cycle and Cash Conversion Cycle
Operating Cycle and Cash Conversion Cycle can be
computed as below:
• Operating Cycle = Days Inventory
Outstanding + Days Sales Outstanding
– Days Payable Outstanding
• Cash Conversion Cycle = Days
Inventory Outstanding + Days payable
Outstanding (Denoted in negative) +
Sales Outstanding

30. Cash Conversion Cycle
• Permanent Vs Seasonal Funding Needs
 If a firm sales are constant, than its
investment in operating Assets should also be
constant, and the firm will have only a
permanent funding requirement
 If Sales are cyclical, than investment in
operating assets will vary over time leading to
the need for seasonal funding requirements in
addition to the permanent funding
requirements for its minimum investment in
operating assets

31. Some Strategies for Managing Cash Conversion Cycles
• Turn over inventory as quickly as possible
without stock outs that result in lost sales
• Collect account receivable as quickly as
possible without loosing sales from high –
pressure collection techniques
• Managing, Mail, Processing, and Clearing Time
to reduce them when collecting them from
customers and to increase them when paying
suppliers
• Pay Accounts Payable as slowly as possible
without damaging firms credit rating

32. Inventory Management
Raw
Materials
Work in
Progress
Finished
Goods

33. Inventory Management
Raw
Materials
Work in
Progress
Finished
Goods
• Financial Managers – Would like to keep inventory levels low to ensure that funds
are wisely invested
• Marketing Managers – Would like to keep inventory levels high to ensure orders
could be quickly filled
• Manufacturing Managers – Would like to keep raw materials level high to avoid
production delays and to make larger more economical production runs

34. Inventory Management
ECONOMIC
ORDER
QUANTITY
MODEL
Economic Order Quantity Model used to evaluate
the Total Cost of Inventory
EOQ = SQ. ROOT (2 X Usage in Units per period X Order cost per order)
Carrying cost per unit per period

35. Inventory Management
Ordering Cost = Cost order X No# of orders
per year
Carrying Cost = (Carrying Costs per year X
Order Size) / 2
Total Cost = Ordering Cost + Carrying Cost
Reorder Point = Lead Time in Days X Daily
Usage
Daily Usage = Annual Usage / 360

36. 5 C’s of Credit
• Character – The applicants record of keeping
past obligation
• Capacity – Applicants ability to repay the
requested credit
• Capital – Applicants debt relative to equity
• Collateral – Amount of Assets the applicant
has available for use in securing the credit
• Conditions – Current general and Industry
specific economic conditions

37. Credit Scoring
Credit scoring models are statistical
analysis used by credit bureaus that
evaluate your worthiness to
receive credit. Lenders use credit
scores to help determine the risk
involved in making a loan, the
terms of the loan and the interest
rate.

38. Credit Monitoring Policy
The firm’s collection policy is its
procedures for collecting a firm’s
accounts receivable when they are due.
The effectiveness of this policy can be
partly evaluated by evaluating at the
level of bad expenses.
As seen in the previous examples, this
level depends not only on collection
policy but also on the firm’s credit
policy.

39. Management of Receipts and Disbursement floats
Collection float is the delay between the time
when a payer deducts a payment from its
checking account ledger and the time when the
payee actually receives the funds in spendable
form.
Disbursement float is the delay between the
time when a payer deducts a payment from its
checking account ledger and the time when the
funds are actually withdrawn from the account.
Both the collection and disbursement float have
three separate components.

40. Management of Receipts andDisbursement floats
Mail float is the delay between the time when a
payer places payment in the mail and the time
when it is received by the payee.
Processing float is the delay between the receipt
of a check by the payee and the deposit of it in
the firm’s account.
Clearing float is the delay between the deposit
of a check by the payee and the actual
availability of the funds which results from the
time required for a check to clear the banking
system.

41. Management of Receipts andDisbursement floats
Wire transfers is a telecommunications bookkeeping
device that removes funds from the payer’s bank and
deposits them into the payees bank thereby reducing
collections float.
Automated clearing house (ACH) debits are
pre-authorized electronic withdrawals from the payer’s
account that are transferred to the payee’s account via a
settlement among banks by the automated clearinghouse.
ACHs clear in one day, thereby reducing mail,
processing, and clearing float.

42. Management of Receipts andDisbursement floats
Zero-balance accounts are business-oriented
bank accounts that usually has a balance of $0
.The purpose is to eliminate non-earning cash
balances in corporate checking accounts.
Zero balance accounts help companies avoid
having money spread out over several different
bank accounts, which costs the company interest
and creates more bookkeeping work.

43. “A wise person
should have money
in their head, but
not in their heart.”
Jonathan Swift