f658 122 01 overview of fm fa

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MOHD SABRI MOHD AMINProfesor Madya

Dedicated to Excellence

Fakulti Pengurusan PerniagaanUniversiti Teknologi MARA A06010/0 6035444736 [email protected]

Introduction to FSA F658 01

F658PPT01

mailto:[email protected]

mailto:[email protected]



Mohd Sabri Mohd Amin, Fakulti Pengurusan Perniagaan, UiTM 2

Overview of FM

What is Finance? art and science of managing money and other assets.

What is financial management? A process - An attempt - To obtain - To allocate -

Financial resources – Effectively – Efficiently - Firm's

goal Financial Management can also be defined as:

The management of the finances of a business / organization in order to achieve financial objectives




Overview of FM What is the goal of a Firm?

to make and execute decisions that provide maximumbenefits to the owners/shareholders by maximizingowners’ wealth through share price maximization.

Taking a commercial business as the most

common organizational structure, the keyobjectives of financial management would be to:

Create wealth for the business

Generate cash, and

Provide an adequate return on investment bearing inmind the risks that the business is taking and theresources invested




Financial Management Framework

ExternalEnvironment

InternalEnvironment

Financial

Consideration& Decisions

InvestmentDecision

FinancingDecision

Financial

Structure

AssetStructure BusinessRisk

Financial

Risk

Total

Risk

Share

Price

Total

Returns

Feedback



Mohd Sabri Mohd Amin, UiTM 5

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 informationtaken from financial statements and other reports.

These reports are usually presented to topmanagement as one of their bases in making

business decisions.

http://en.wikipedia.org/wiki/Business

http://en.wikipedia.org/wiki/Project

http://en.wikipedia.org/wiki/Financial_statements

http://en.wikipedia.org/wiki/Financial_statements

http://en.wikipedia.org/wiki/Project

http://en.wikipedia.org/wiki/Business




Financial Analysis

Based on these reports, management may:

Continue or discontinue its main operation or part of itsbusiness;

Make or purchase certain materials in the manufactureof its product;

Acquire or rent/lease certain machineries andequipments in the production of its goods;

Issue stocks or negotiate for a bank loan to increase itsworking capital.

other decisions that allow management to make aninformed selection on various alternatives in theconduct of its business.

http://en.wikipedia.org/wiki/Stocks

http://en.wikipedia.org/wiki/Loan

http://en.wikipedia.org/wiki/Working_capital

http://en.wikipedia.org/wiki/Working_capital

http://en.wikipedia.org/wiki/Loan

http://en.wikipedia.org/wiki/Stocks




FA: Goals – Assess the firm’s

Profitability

its ability to earn income and sustain growth in bothshort-term and long-term

A company's degree of profitability is usually based onthe income statement, which reports on the company's

results of operations

Solvency

its ability to pay its obligation to creditors and other thirdparties in the long-term

Liquidity

its ability to maintain positive cash flow, while satisfyingimmediate obligations

http://en.wikipedia.org/wiki/Income_statement

http://en.wikipedia.org/wiki/Cash_flow

http://en.wikipedia.org/wiki/Cash_flow

http://en.wikipedia.org/wiki/Income_statement




FA: Goals – Assess the firm’s

Both liquidity and solvency

are based on the company's balance sheet, whichindicates the financial condition of a business as of agiven point in time.

Stability

the firm's ability to remain in business in the long run,without having to sustain significant losses in theconduct of its business.

Assessing a company's stability requires the use ofboth the income statement and the balance sheet, aswell as other financial and non-financial indicators.

http://en.wikipedia.org/wiki/Balance_sheet

http://en.wikipedia.org/wiki/Balance_sheet



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 moneyfrom … ?

Cash Disbursements: The company spendmoney on … ?

Mohd Sabri Mohd Amin 9



Summary of Cash Flows 1st Year CASH RECEIPTS

From customers for products sold to them

From stockholdersFrom borrowing on interest-bearing notesTotal cash receipts during year

3,807,000

766,030825,000

5,398,030


CASH DISBURSEMENTSFor purchases of products

For expenses of operating the businessFor interest on notes payableFor income tax based on taxable incomeFor land, building, machinery, etcTotal cash disbursements during year

3,162,000

913,68068,75091,800

918,8005,155,030

Increase in Cash during year Tax rate 30%; How much is taxable income, EAT &

Costs off goods sold?

243,000



Summary of Cash Flows 1st Year

What does the summary of cash flows tell you?

What does the summary of cash flows NOT tellyou?

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 atthe end of the year.

Two basic Types of Cash Flows Cash Flows of Raising and Investing Capital

Cash Flows of Profit Making Operations




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


Profit Making Operations

Received from sales

Spent for expenses:

Purchases of Products

Operating ExpensesInterest Expense

Income Tax Expense

Net decrease of cash

3,162,000

913,69068,750

91,800

3,807,000

4,236,230429,230

What is thenet cashincrease forthe year?

243,000



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, andother assets the company has.

Manager needs to know the amounts of the company's

liabilities.

Manager has to know whether the assets are toolarge/small relative to the sales volume of the company.




Financial Statement Analysis? Part of Business analysis:

Analyzing firm’s 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 deriveestimates and inferences useful in businessanalysis.

Reduces reliance on hunches, guesses and intuition.

Decrease uncertainty in business analysis

Provides systematic and effective basis for businessanalysis




Profit Isn’t 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 andproportions relative to:

Each other

Sales and expenses

Threefold task of business manager Earning profits

Controlling the financial condition

Controlling cash flow, preventing “cashouts”




FOCUS Understanding the cause and effect relationship

between accounts based on the linkages infinancial statements

Analysis directed towards the analysis ofperformance and financial position of the

company based on the financial statements

In other words looking at the prospects and risksof the company




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 of20% a year for the coming years. However, the

firm is in constant problems in meeting itsfinancial obligations. What are possible reasonsfor the problems?

Sales increase by 20%. Profit decrease by 5%.What really happens?




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 theimplications of the ratio in term of the firms

financing-investment decisions, liquidity and risk-return tradeoffs?

CFAT (NI + Non Cash Expenses) is the key in

financial analysis. WHY NCE is considered aspart of the firms OCF or CFAT?




Sample Point of Discussions Liquidity of the firms is an utmost important to

maintain the firm’s operations. What are themeasure of the firm’s liquidity and factors affecting

the firm’s liquidity?

The company is doing well and able to increase

net profit by 20% for the total of RM 4 mill for theyear. However is company is having problems tofinance its new investment project 0f RM 2 mill.WHY?





THE END

THANK YOU

f658 122 01 overview of fm fa

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