Role of Financial Management in Decision Making

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Role of Financial Management in

Decision Making

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(Or Stock split)

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New Investment

Investment Base

VolumePrice

Variable

costs

Fixed costs

InterestOperating

Profits

Dividends

Retained

Earnings

Long Term

DebtEquity

Funding

Potential

Capital Budgeting

Types of investments

Emphasis and deployment

Disinvestments

Operations

Utilisation of assets

Market selection

Competitive position

Pricing strategy

Cost effectiveness

Operating Leverage

Liquidity

Financing

Disposition of earnings

Dividends

Interest

Retention

Capital structure

Types of equity

Types of debt

Financial leverage

Risk reward trade

off 

Present value

Rate of Return

Operating ratios

Contribution

margin

Activity Analysis

Comparative data

Earnings per

share

Cash flow per

share

Payout ratios

Interest coverage

Debt Equity

Debt Service

Cost of capital

Shareholder value

Strategies

Yardsticks

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Liabilities

Current

liabilitiesLong term

liabilitiesOwners Equity

Total liabilities

and Net Worth

Assets

Current AssetsFixed Assets

Other Assets

Total AssetsNet Profit

Or Loss

Financing Operations Investment

Balance Sheet

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Liabilities

CurrentliabilitiesLong term

liabilitiesOwners Equity

Total liabilitiesand Net Worth

Assets

CurrentAssets

Fixed AssetsOther Assets

Total Assets

Financing

Operations Investment

Operating Statement

Revenues

- Cost of sales

= Gross Margin

- Expenses= Net Earnings / loss

- Taxes

= After tax profit / 

Balance Sheet and Operations or Income ExpenditureStatement

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Current liabilities

(Plus or minus)

Long Term Liabilities(Plus or minus)

Owners Equity

(Plus or minus)

Total Liabilities andnet worth

(Plus or minus)

SOURCES or USES

Current assets

(Plus or minus)

Fixed Assets

(Plus or minus)

Other assets

(Plus or minus)

Total assets

(Plus or minus)

USES or SOURCES

Net Profits or loss

(Plus or minus)

(Adjustments

for write offs)

SOURCES or USES

Financing Operations Investment

Funds Flow Statement

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Objectives of Financial Process

Accounting

Financial Information

Activity Economics

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Accounting

Profit Determination

 ± Revenues recognition

 ± Expense recognition

 ±Cost allocation

 ± Profit definition

Value determination

 ± Historical costs

 ±Conservatism

 ± Equity determination

 ± Contingency recognition

Tax Determination Legal data requirement

 Income expense timing

 Tax managementissues

 Statement adjustments

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Financial Analysis

Financial Information

 ± Ad justment process

 ± Trend Analysis

 ±Profit Pro jection

 ± Cash flow pro jection

Comparative data

 ± Industry analysis

 ±Competitor analysis

 ± Economic conditions

 ± Ad justment areas

Market Analysis Share price patterns

 Market trends

 Value drivers Market models

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Managerial Economics

Activity economics

 ± Task analysis

 ± Economic allocation

 ±Contribution analysis

 ± Trade off determination

Resource Effectiveness

 ± Investment base

 ±Capital investments

 ± Capital divestments

 ± Human resources

Shareholder value Cash flow patterns

 Cost of capital

 Investor expectations Risk return trade off

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Financial Performance Measures

Area and Viewpoint

Management

Owners

Lenders

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Management Operational Analysis

 ± Gross Margin

 ± Profit margin

 ± Operating expense analysis

 ±

Contribution analysis ± Operating leverage

Resource Management

 ± Asset turnover

 ± Working capital management

Inventory / AR and AP patterns

 ± Human resource effectiveness

Profitability Return on assets

 Return beforeinterest and taxes

 Return on currentvalue basis

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Owners Profitability

 ± Return on total NW

 ± Return on equity

 ± EPS

 ±

Cash flow per share ± Share price appreciation

 ± Shareholder value analysis

Disposition of earnings ± Dividend per share

 ± Dividend yield ± Payout / retention

 ± Dividend coverage

Market Indicators Price / earnings ratio

 Market to book value

 Relative pricemovements

 Cash flow multiples

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Lenders

Liquidity

 ± Current ratio

 ± Acid test

 ±

Quick sale value ± Cash flow patterns

Financial Leverage

 ± Debt to assets

 ±

Debt to capitalization ± Debt to equity

 ± Risk return trade off 

Debt Service Interest coverage

 Interest and principal

coverage Cash flow analysis

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Thank You