BUSINESS

4
Financial
1. Management
Financing
2. Financial Plan
1 Financing
What’s the financial activity?
FINANCIAL MANAGEMENT
Are activities to manage efficiently and
effectively both raising and allocating
funds within the firm to maximize the
wealth of its present owners.
FINANCIAL MANAGEMENT
Financial Wealth

Raising funds Allocating funds

The best mix The best mix of
of financing sources allocating assets and
business operation
THE FINANCIAL STAFF’S RESPONSIBILITIES

• Forecasting and planning

• Major investment and financing decisions
• Coordination and control
• Dealing with financial markets
• Risk management
Financial Statement
Description of the financial
organization in term of its
assets (current and fixed), liabilities
(current and long terms), capital
(operating and long term), and net
• Balance-sheet worth (stock and earnings)

The company’s financial

• Income statement performance over a given
interval of time. A report
performs sales, costs involving
• Cash flow statement realizing those sales, and
income.

The company’s report of cash

and funds in and out during the
period of time
 BALANCE SHEET
ASSETS LIABILITIES & EQUITIES

Current Asset Liabilities

Fixed Asset Debts

Equity

Retained
Earnings
 BALANCE SHEET

ASSETS LIABILITIES & EQUITIES

Allocating funds Raising funds

The best mix of The best mix

allocating assets and of financing sources
business operation
BALANCE OF PAYMENT CONCEPT

Raising funds

Current Asset Liabilities

Fixed Asset Debts

Equity
Allocating funds
Retained
Earnings
ABC: Dec 31 Balance Sheets
ASSETS 19B 19A LIABILITIES & EQUITY 19B 19A
Cash & Marketable securities 10 80 Accounts Payble 60 30
Accounts Receivable 375 315 Notes Payble 110 60
Inventories 615 415 Accruals 140 130
Total Current Assets 1000 810 Total Current Liabilities 310 220
Net Plant & Equipment 1000 870 Long term bonds 754 580
Total debt 1064 800
Preff Stock (400000 sh) 40 40
Comm Stock (50000000sh) 130 130
Retained Earnins 766 710
Total Common Equity 936 880
Total Assets 2000 1680 Total Liabilities & Equity 2000 1680
 Sales
INCOME STATEMENT CONCEPT

Costs

Earnings Before
Interest & Taxes Managing Company Financial

Interest

Earnings Before Net Income Before Net Income Before

Taxes Pref Dividents Comm Dividents
Addition to
Retained Earnings
Taxes Pref Dividents Comm Dividents
ABC: Income Statement for Year Ending Dec 31
19B 19A
Net Sales 3000.0 2850.0
Costs excluding depreciation 2616.2 2497.0
Depreciation 100.0 90.0
Total Operating costs 2716.2 2587.0
Earning Before Interest & Taxes (EBIT)283.8 263.0
Less Interest 88.0 60.0
Earning BeforeTaxes (EBT) 195.8 203.0
Taxes (40%) 78.3 81.2
Net Income before pref dividents 117.5 121.8
Preff Dividents 4.0 4.0
Net income Available to Comm Stock113.5 117.8
Common Dividents 57.5 53.0
Addition to Retained Earnings 56.0 64.8

Per-share data: ABC

Comm Stock Price 23.0 24.0
Earning Per Share (EPS) 2.3 2.4
Divident Per Share (DPS) 1.2 1.1
Book Value Per Share (BVPS) 18.7 17.6
CASHFLOW CONCEPT

Beginning Beginning Beginning Beginning

cash cash cash cash

Cash-in Cash-in Cash-in Cash-in

Cash-out Cash-out Cash-out Cash-out

Ending Ending Ending Ending

cash cash cash cash

Year 20A Year 20B Year 20C Year 20D

ABC:Statement of Cashflow 20B
Operating activities
Net Income 117.5
Addition (source of Cash)
Depreciation 100
Increase in account payble 30
Increase in accruals 10
Subtraction (Uses of Cash)
Increase in account receivable -60
Increase in inventories -200
Net Cash provided by Op.Activities -2.5
Long term Investing Activities
Cash used to acquire fixed assets -230
Financing Activities
Increase in notes payble 50
Increase in bond 174
Payment of comm& pref dividents -61.5
Net Cash provided by financing activities 162.5
Net Decrease in cash and marketable securities -70
Cash and securities at beginning 80
Cash and securities at end 10
FINANCIAL RATIOS
• comparison over time
Ratio analysis
• comparison with the others
(average industry or competitors)
CATEGORY TYPICAL RATIO CALCULATION MEASURES

Profitability Return on Investment Profit / total assests The productivity

of assets
Liquidity Current ratio CA/CL Short term
solvency
Activity Inventory turnover Sales / Inventory The efficeiency
of inventory mgt
Leverage Debt ratio Total debts / T A The proportion
of financing mgt
 LIQUIDITY (SOLVENCY) RATIOS
Ratio that shows the relationship of a firm’s cash
and other current assets to its current liabilities

BALANCE SHEET
CURRENT RATIO
ASSETS LIABILITIES & EQUITIES
It indicates the extent to
which current liabilities are
covered by those assets Current Asset Current Liabilities
expected to be converted
to cash in the near future Fixed Asset Debts

Equity

Retained
Earnings
QUICK (ACID) RATIO
It indicates the firm’s ability to
pay off short-term obligation
without relying on the sale of
BALANCE SHEET
inventories
ASSETS LIABILITIES & EQUITIES

Current Asset –
Current Liabilities
inventories

Fixed Asset Debts

Equity

Retained
Earnings
ACTIVITY (ASSET MANAGEMENT) RATIOS
A set of ratios which measure how effectively a firm is managing its assets

INVENTORY TURNOVER RATIO

It indicates how many the firm’s inventory is sold
out and restocked per year.
BALANCE SHEET

ASSETS LIABILITIES & EQUITIES

Cash Current Liabilities

INCOME STATEMENT Note Receivable Debts

Sales Inventory Equity

Costs Retained
Fixed Asset Earnings
THE DAYS SALES OUTSTANDINGS
It indicates the average length of time the firm must
wait after making a sale before receiving cash

BALANCE SHEET

ASSETS LIABILITIES & EQUITIES

INCOME STATEMENT Cash Current Liabilities

Sales/360 day Receivable Debts

Costs Inventory Equity

Retained
Fixed Asset Earnings
THE FIXED ASSETS TURNOVER RATIO
It indicates how effectively the firm uses its plant and
equipment

BALANCE SHEET

ASSETS LIABILITIES & EQUITIES

Cash Current Liabilities

Receivable Debts

INCOME STATEMENT Inventory Equity

Retained
Sales Net Fixed Asset Earnings

Costs
THE TOTAL ASSETS TURNOVER RATIO
It indicates how effectively the firm uses all of the firm’s assets

BALANCE SHEET

ASSETS LIABILITIES & EQUITIES

Current Assets Current Liabilities

Fixed Assets Debts

INCOME STATEMENT

Equity
Sales Total Asset
Retained
Costs Earnings
LEVERAGE (DEBT) RATIO
It indicates the the percentage of funds provided by creditors

BALANCE SHEET

ASSETS LIABILITIES & EQUITIES

Current Asset Current Liabilities

Fixed Asset Total Debts

Total Assets Equity

Retained
Earnings
FINANCIAL LEVERAGE
It indicates the use of debt financing

FIRM U (Unleverage)
Cuurent Assets 50
Fixed Assets 50
Total Assets 100
Debt 0
Common Equity 100
100

Expected Bad Conditions

Sales 100.00 82.50
Operating costs -70.00 -80.00
Operating Income (EBIT) 30.00 2.50
Interest 0.00 0.00
Earning Before Taxes (EBT) 30.00 2.50
Taxes (40%) -12.00 -1.00
Net Income (NI) 18.00 1.50
ROE=NI/Comm Equity 18% 1.50%
FIRM L (Leverage)
Cuurent Assets 50
Fixed Assets 50
Total Assets 100
Debt 50
Common Equity 50
100

Expected Bad Conditions

Sales 100.00 82.50
Operating costs -70.00 -80.00
Operating Income (EBIT) 30.00 2.50
Interest (15%) -7.50 -7.50
Earning Before Taxes (EBT) 22.50 -5.00
Taxes (40%) -9.00 2.00
Net Income (NI) 13.50 -3.00
ROE=NI/Comm Equity 27% -6%
 Sales PROFITABILITY RATIOS
Ratios that show the combined effects of liquidity,
Costs
assets management, and debt on operating result.

PROFIT MARGIN on
Earnings Before
SALES
Interest & Taxes It indicates income per
dollar of sales; it is
Interest calculated by dividing net
income by sales

Earnings Before Net Income Before Net Income Before

Taxes Pref Dividents Comm Dividents
Addition to
Retained Earnings
Taxes Pref Dividents Comm Dividents
 BASIC EARNING POWER
Sales It indicates the ability of the firm’s
assets to generate operating income
Costs BALANCE SHEET

ASSETS LIABILITIES & EQUITIES

Earnings Before Current Assets Current Liabilities

Interest & Taxes
Fixed Assets Debts
Interest

Equity
Total Asset
Earnings Before Net Income Before Net Income Before
Retained
Taxes Pref Dividents Comm Dividents
EarningsAddition to
Retained Earnings
Taxes Pref Dividents Comm Dividents
 BALANCE SHEET

Sales ASSETS LIABILITIES & EQUITIES

Current Assets Current Liabilities

Costs

Fixed Assets Debts

Earnings Before
Equity
Interest & Taxes Total Asset
Retained
Interest
Earnings

Earnings Before Net Income Before Net Income Before

Taxes Pref Dividents Comm Dividents
Addition to
Retained Earnings
Taxes Pref Dividents Comm Dividents

RETURN ON TOTAL ASSETS

It indicates the return on total assets after interest and taxes
 BALANCE SHEET
Sales
ASSETS LIABILITIES & EQUITIES

Costs Current Assets Current Liabilities

Fixed Assets Debts

Earnings Before
Interest & Taxes Equity
Total Asset
Interest Retained
Earnings

Earnings Before Net Income Before Net Income Before

Taxes Pref Dividents Comm Dividents
Addition to
Retained Earnings
Taxes Pref Dividents Comm Dividents

RETURN ON COMMON EQUITY

It indicates the return on common equity (ROE) or the return on stock holders’ investment
 MARKET VALUE RATIO
It indicates of what investor think of company/s past
performance and future prospects
Price
per share
P/E ratio

Earnings
per share

MARKET BOOK RATIO

It indicates of how investors regard the company

Common
equity Market price
Book Value Per share
Per share M/B ratio
Shares
outstanding Book Value
Per share
TREND ANALYSIS
An anlysis of a firm’s financial ratios over time; used to estimate the like hood
of improvement or deterioration in its financial situation

RATE OF RETURN ON COMMON EQUITY, 19A-19E

19A 19B 19C 19D 19E
ABC Company 14 16.2 15.7 15.5 13.9
Average Industry 13.8 14.2 16 16.2 15.9

16.5
16
15.5
15
ROE(%)

ABC Company
14.5
14 Average Industry
13.5
13
12.5
19A 19B 19C 19D 19E
Year
MODIFIED DU PONT CHART for ABC Comp.

Return on
Equity 12.7%

Return on
Assets 5.7%
X Assets/Equity
2.23

Profit Margin Total Assets

3.8% X Turnover 1.5

Sales
3000
: Net Income
113.5
Sales
3000
: Total Assets
2000

Total Costs
2886.5
- Sales
3000
Fixed Assets
1000
+ Current Assets
1000

Other Op.Costs Intrst+Pref. Div Cash & MS

2616.2 92 10

Depreciation Taxes Acc.Receivable Inventories

100 78.3 375 615
FINANCIAL INDICATORS CHART

Return on
Equity (%)

Return on
Assets (%)
X Assets/Equity
(Rp)

Profit Margin Total Assets

(%) X Turnover (x)

Sales
(Rp)
: Net Income
(Rp)
Sales
(Rp)
: Total Assets
(Rp)

Total Costs
(Rp)
- Sales
(Rp)
Fixed Assets
(Rp)
+ Current Assets
(Rp)

Other Op.Costs Intrst+Pref. Div Cash & MS

(Rp) (Rp) (Rp)

Depreciation Taxes Acc.Receivable Inventories

(Rp) (Rp) (Rp) (Rp)
PERENCANAAN KEUANGAN
• Start-up cost
• Equipment and facilities
• Beginning inventories
• Working capital
New
Venture
Financial sources • cost of capital
• maturity
• availability,etc
PROYEKSI KEUANGAN
Sales plan Income &
Break-even
expense analysis
Operations plan plan

Balance-sheet
projection

Cashflow Financial
Financial-plan
ratio analysis
projection projection
ANGGARAN
Budget is formal quantitative statement
of the resources set aside for carrying
out planned activities over given periods
of time. Use for planning (established
standards of performance) and
controlling (also coordinating) activities
at every level of an organization.
 Budget

Operating budget Financial budget

• Expenses budget • Capital-

Engineered budget expenditure budget
Discretionary budget • Cash budget
• Revenue budget • Financing budget
• Profit budget • Proforma budget
Capital budgeting

1 Generation of investment proposal

2 Estimate of cashflow
3 Evaluation of cashflow
4 Selection or accepted project
5 Continual reevaluation
• Average Rate of Return
Evaluating project
• Payback Period
• Profitablity Index
• Internal Rate of Return
• Net Present Value
EXERCISES

1. Central City Company, which is just being formed, needs $1 million of

assets, and it expects to have a basic earning power ratio of 20%.
Central City will own no securirties, so all of its income will be
operating income. If it chooses to, Central City can finance up to 50%
of its assets with debt, which will have an 8% interest rate. Assuming
a 40% tax rate on all taxable income, what is the difference between
its expected ROE if Central City finances with 50% debt versus its
expected ROE if it finances entirely with common stock?
2. Data for Barry Computer and its industry averages follow:
a) Calculate the indicate ratios for Barry
b) Construct the extended Du Pont equation for both Barry and the industry
c) Outline Barry’s strengths and weaknesses as revealed by your analysis
d) Suppose Barry had doubled its sales as a its inventories, accounts
receivable, and common equity during 1999. How would that information
affect the validity of your ratio analysis? (Hints: Think about averages and
the effects of rapid growth on ratios if averages are not used. No
calculations are needed)

BARRY COMPUTER: BALANCE SHEET AS DECEMBER 31, 1999 (in thousand)

Cash 77,500 Accounts Payble 129,000

Receivables 336,000 Notes Payble 84,000
Inventories 241,500 Other Current Liabilities 117,000
Total Current Assets 655,000 Total Current Liabilities 330,000
Net Fixed Assets 292,500 Long-term Debt 256,500
Common Equity 361,000
Total Assets 947,500 Total Liabilities & Equity 947,500
3. Complete the balance sheet and sales information in the table that
follows for Homer Industries using the following financial data:

Debt ratio: 50%

Quick ratio: 0.80x
Total Assets Turnover: 1.5x
Days Sales Outstanding: 36 days
Gross Profit Margin on Sales (Sales-Cost of goods sold)/sales= 25%
Inventory Turnover ratio: 5x
HOMER INDUSTRIES: BALANCE SHEET

Cash Accounts Payble

Receivables Long-term Debt 60,000
Inventories Common Stock
Net Fixed Assets Retained Earnings 97,500
Total Assets 300,000 Total Liabilities & Equity

Sales Cost of goods sold

4. The Corrigan Corp’s forecasted 2000 financial statements follows, along
with some industry average ratios.
a. Calculate Corrigan’s 2000 forecast ratios, compare them with the industry
average data, and comment briefly on Corrigan’s projected strengths and
weaknesses.
b. What do you think would happen to Corrigan’s ratios if the company
initiated cost-cutting measures that allowed it to hold lower levels of
inventory and substiantially decreased the cost of goods sold? No
calculation are necessary. Think about which ratios would be affected by
changes in these two accounts.

COORIGAN: FORECASTED BALANCE SHEET as of DECEMBER 31, 2000

Cash 72,000 Accounts & Notes Payble 432,000
Receivables 439,000 Accruals 170,000
Inventories 894,000 Total Current Liabilities 602,000
Total Current Assets 1,405,000 Long-term Debt 404,290
Land and building 238,000 Common Equity 575,000
Machinery 132,000 Retained Earnings 254,710
Other Fixed Asstes 61,000
Total Assets 1,836,000 Total Liabilities & Equity 1,836,000
FORECASTED INCOME STATEMENT for 2000 INDUSTRY FINANCIAL RATIOS 2000*
Sales 4,290,000 Quick ratio 1.0x
Cost of Goods Sold 3,580,000 Current ratio 2.7x
Gross Operating profit 710,000 Inventory turnover 7.0x
Gen Adm & Sell Exp. 236,320 Days sales outstanding 32 days
Depriciation 159,000 Fixed assets turnover 13.0x
Miscellaneous 134,000 Total Assets Turnover 2.6x
EBT 180,680 Return on Assets 9.10%
Taxes(40%) 72,272 Return on Equity 18.20%
Net Income 108,408 Debt ratio 50.00%
Per-Share data: Profit margin on sales 3.50%
EPS 4.71 P/E ratio 6.0x
Cash Dividents 0.95
P/E ratio 5x * Industry average ratios have been constant for the past 4 years
Market price (average) 23.57
Number of shares 23,000