MOHD SABRI MOHD AMIN

Profesor Madya

Dedicated to Excellence

Introduction to FSA F658 01

Fakulti Pengurusan Perniagaan Universiti Teknologi MARA A06010/0 6035444736 0137756532 irbasanilza@gmail.com
F658 PPT01

Overview of FM

What is Finance?

art and science of managing money and other assets. A process - An attempt - To obtain - To allocate Financial resources Effectively Efficiently - Firm's goal The management of the finances of a business / organization in order to achieve financial objectives

What is financial management?

Financial Management can also be defined as:

Mohd Sabri Mohd Amin, Fakulti Pengurusan Perniagaan, UiTM

Overview of FM

What is the goal of a Firm?

to make and execute decisions that provide maximum benefits to the owners/shareholders by maximizing owners wealth through share price maximization.

Taking a commercial business as the most common organizational structure, the key objectives of financial management would be to:

Create wealth for the business Generate cash, and Provide an adequate return on investment bearing in mind the risks that the business is taking and the resources invested 3

Mohd Sabri Mohd Amin, Fakulti Pengurusan Perniagaan, UiTM

Financial Management Framework

External Environment
Financial Consideration & Decisions Internal Environment Asset Structure Investment Decision Financing Decision Financial Structure Financial Risk Business Risk

Total Risk

Share Price

Total Returns

Feedback

Mohd Sabri Mohd Amin, Fakulti Pengurusan Perniagaan, UiTM

Financial Analysis

Financial analysis refers to an assessment of the viability, stability and profitability of a business, sub-business or project. It is performed by professionals who prepare reports using ratios that make use of information taken from financial statements and other reports. These reports are usually presented to top management as one of their bases in making business decisions.

Mohd Sabri Mohd Amin, UiTM

Financial Analysis

Based on these reports, management may:

Continue or discontinue its main operation or part of its business; Make or purchase certain materials in the manufacture of its product; Acquire or rent/lease certain machineries and equipments in the production of its goods; Issue stocks or negotiate for a bank loan to increase its working capital. other decisions that allow management to make an informed selection on various alternatives in the conduct of its business. 6

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FA: Goals Assess the firms

Profitability

its ability to earn income and sustain growth in both short-term and long-term A company's degree of profitability is usually based on the income statement, which reports on the company's results of operations its ability to pay its obligation to creditors and other third parties in the long-term its ability to maintain positive cash flow, while satisfying immediate obligations 7

Solvency

Liquidity

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FA: Goals Assess the firms

Both liquidity and solvency

are based on the company's balance sheet, which indicates the financial condition of a business as of a given point in time. the firm's ability to remain in business in the long run, without having to sustain significant losses in the conduct of its business. Assessing a company's stability requires the use of both the income statement and the balance sheet, as well as other financial and non-financial indicators.

Stability

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Cash Flows

Cash inflows and outflows are the heartbeat of any business. Example: A middle-size business that has just completed its first year of operations. Cash Receipts: The Company received money from ? Cash Disbursements: The company spend money on ?

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Summary of Cash Flows 1st Year

CASH RECEIPTS From customers for products sold to them From stockholders From borrowing on interest-bearing notes Total cash receipts during year CASH DISBURSEMENTS For purchases of products For expenses of operating the business For interest on notes payable For income tax based on taxable income For land, building, machinery, etc Total cash disbursements during year Increase in Cash during year

3,807,000 766,030 825,000 5,398,030 3,162,000 913,680 68,750 91,800 918,800 5,155,030 243,000

Tax rate 30%; How much is taxable income, EAT & Costs off goods sold?

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Summary of Cash Flows 1st Year

What does the summary of cash flows tell you? What does the summary of cash flows NOT tell you? The two most important things that the cash summary does not tell you are:

The profit for the year. The financial condition or position of the business at the end of the year. Cash Flows of Raising and Investing Capital Cash Flows of Profit Making Operations 11

Two basic Types of Cash Flows

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2 Basic Types of Cash Flows

Raising and Investing Capital Received from borrowing Received from stockholders Total Spent for long-term assets Net increase of cash

825,000 766,030 1,591,030 918,800 672,230

What is the net cash increase for the year?

Profit Making Operations 3,807,000 Received from sales Spent for expenses: Purchases of Products 3,162,000 Operating Expenses 913,690 Interest Expense 68,750 Income Tax Expense 91,800 4,236,230 429,230 Net decrease of cash
Mohd Sabri Mohd Amin

243,000

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What cash summary does not tell you?

Profits Cannot Be Measured by Cash Flows

Businesses sells its products on credit Cash disbursements are not the correct amounts for measuring expenses The company also has liabilities at the end of the year

Cash Flows Do Not Reveal Financial Condition.

Managers needs to know the asset situation of the company such as how much receivables, inventory, and other assets the company has. Manager needs to know the amounts of the company's liabilities. Manager has to know whether the assets are too large/small relative to the sales volume of the company. 13 Mohd Sabri Mohd Amin

Financial Statement Analysis?

Part of Business analysis:

Analyzing firms business environment and strategies, and its financial position and performance To improve business decisions

Application of analytical tools and techniques to general purpose financial statements to derive estimates and inferences useful in business analysis.

Reduces reliance on hunches, guesses and intuition. Decrease uncertainty in business analysis Provides systematic and effective basis for business analysis 14

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Profit Isnt Everything

Income Statement reports the profit performance of the firm.

Ability to make sales Control expenses Earns profit

Managers must also control the financial condition of the firm. Keeping assets and liabilities within limits and proportions relative to:

Each other Sales and expenses Earning profits Controlling the financial condition Controlling cash flow, preventing cashouts

Threefold task of business manager

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FOCUS

Understanding the cause and effect relationship between accounts based on the linkages in financial statements Analysis directed towards the analysis of performance and financial position of the company based on the financial statements In other words looking at the prospects and risks of the company

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Sample Point of Discussions

Which is the best choice?

Profit but cash flows Cash flows but profit

The firm expects to maintain its sales growth of 20% a year for the coming years. However, the firm is in constant problems in meeting its financial obligations. What are possible reasons for the problems? Sales increase by 20%. Profit decrease by 5%. What really happens?

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Sample Point of Discussions

Net profit increased by 10% for the year, BUT the EPS declined from RM0.14 to RM0.10 per share. What are probably reasons for that? The net working capital is negative. What is the implications of the ratio in term of the firms financing-investment decisions, liquidity and riskreturn tradeoffs? CFAT (NI + Non Cash Expenses) is the key in financial analysis. WHY NCE is considered as part of the firms OCF or CFAT?

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Sample Point of Discussions

Liquidity of the firms is an utmost important to maintain the firms operations. What are the measure of the firms liquidity and factors affecting the firms liquidity? The company is doing well and able to increase net profit by 20% for the total of RM 4 mill for the year. However is company is having problems to finance its new investment project 0f RM 2 mill. WHY?

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THE END

THANK YOU
Mohd Sabri Mohd Amin, UiTM

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