Chapter 9

Chapter 9:

Introduction to financial managementSupporting Function = Enabler

View Point:Am I managing the company

correctly?◦Creating wealth for shareholders◦Effective◦Efficient◦Benefit of all stake holders

IntroductionThe importance of financial

management in the value chain

• Primary Activities add value

• Value = cost

• Allocate

• Trace

• Monitor

• Trade-offs

Figure 9.1: Financial management in the value chain of a representative company Source: Based on the principles of the value chain by Porter

(1985)

Figure 9.2: Integration of financial management with the rest of the

organisation

Functions of budgets• Serves as a planning aid (short term plans)• It is a means of conveying policy to subordinates• It is an instruction to subordinates and delegates the authority they

need in order to act• It provides a means of co-ordination within and among departments• It is a means of control• It can make managers aware of their own responsibilities

Budget planning and control

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Types of budget• Term budget• Project budget• Annual budget• Cash budget• Variable or flexible budgets• Zero-base budgeting• Standard method of budgeting

Budget planning and control

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Control takes place in 4 stages:1. Setting standards2. Collecting figures and compare with standards3. Critically analysing and evaluating the organisation’s performance4. Taking any corrective measures

Budget planning and control

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• Financial statements

• Limitations of financial statements

• External and internal financial reporting

• Management accounting and reporting

• Profit versus cash flow

Financial measurement and reporting

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Figure 9.3 The integrated budget system

• Owner’s equity

• Assets

• Non-current fixed assets

• Current assets

• Liabilities

•Long-term liabilities

• Current liabilities

•Revenue

• Expenditure

Financial terminology for understanding financial statements

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• Balance sheet

• Income statement

• Cash flow statement

• Management income statement

Financial and management statements

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Figure 9.4: The organisation in financial terms

• Current assets of an organisation – stock, debtors and cash resources

• The working capital cycle

• Determination of working capital requirements

• Stock management

• Trade receivables (debtors)

- Credit policy

- Accounts receivable

Management of working capital

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• Nature and scope of financial performance analysis

• 4 principal interest groups that are concerned with the financial “health” in an organisation:

1. Short-term creditors 2. Long-term creditors

3. Shareholders 4. Management

• Criteria for measuring financial performance

Financial performance measurement and analysis

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• Comparative financial statements

• Index analysis

• Common size analysis

• Ratio analysis

• Comparison of ratios with benchmark industry ratios

• Structured ratio analysis

Approaches to the analysis of financial statements

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Figure 9.5: The Du Pont ratio analysis

- Return on equity

- Return on total assets

- Profitability ratio

- Profit margin on sales (gross profit)

- Expense analysis

- Activity ratio (asset management ratios)

- Stock turnover

Financial performance indicators

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Financial performance indicators

- Debtor’s collection period

- Leverage ratio

- Times interest earned

- Liquidity ratio

- Acid test

- Earnings per share (EPS)

- Fixed commitment cover

- Cash flow ratios

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• Monetary expression

• Simplification and summarisation

• Estimation, judgement and accounting policies

• Lagging Indicator

Limitations of accounting data

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