ES 010 - 1ST SEMESTER, TERM 2

FINANCIAL
MANAGEMENT,
FORECASTING AND
VALUATION
Lecture 07
 #1
Objectives To define what is financial management
and the process behind it

#2
To describe what is a financial plan and how
it is prepared

#3
To describe how forecasting is done by
preparing a projected financial statement

#4
To know how to value a company and
what factors affect them
 Definition

ES 010 - LECTURE 7-1

Financial management
DEFINITION
The process of planning funds, organizing available
funds and controlling financial activities to achieve
the goal of an organization.
Planning, organizing, directing and controlling the
financial activities such as procurement and
utilization of funds of the enterprise.
Financial management
ITS NATURE
Financial management is mainly concerned with
the proper management of funds.
The financial manager must see that the funds are
procured in a manner that there is risk, cost and
control considerations are properly balanced in a
given situation and there is optimum utilization of
funds.
Financial management
PROCESS
Assess current financial position
Investors value a company by examining its
financial position based on its financial
statements and calculating certain ratios.
Define and Prioritizing Goals
Identify all of your possible financial goals
Clearly define your goals.
Rank order your goals in order of importance.
Calculate required savings of each goal
Waterfall your way down
Adjust your goals as necessary
Financial management
PROCESS
Financial and investment plan
A financial plan acts as a guide as you go
through life’s journey. Essentially, it helps you be
in control of your income, expenses and
investments such that you can manage your
money and achieve your goals.
Implementation of the plan
Monitor, evaluate, and adjust performance
Financial management
IMPORTANCE
Financial planning
Financial management helps to determine the
financial requirement of the business concern
and leads to take financial planning of the
concern.
Financial planning is an important part of the
business concern, which helps to promotion of
an enterprise.
Financial management
IMPORTANCE
Acquisition of funds
Financial management involves the acquisition
of required finance to the business concern.
Acquiring needed funds play a major part of the
financial management, which involve possible
source of finance at minimum cost.
Financial management
IMPORTANCE
Proper use of funds
Proper use and allocation of funds leads to
improve the operational efficiency of the
business concern.
When the finance manager uses the funds
properly, they can reduce the cost of capital and
increase the value of the firm.
Financial management
IMPORTANCE
Financial decision
Financial management helps to take sound
financial decision in the business concern.
Financial decision will affect the entire business
operation of the concern. Because there is a
direct relationship with various department
functions such as marketing, production
personnel, etc.
Financial management
IMPORTANCE
Improve profitability
Profitability of the concern purely depends on
the effectiveness and proper utilization of funds
by the business concern.
Financial management helps to improve the
profitability position of the concern with the
help of strong financial control devices such as
budgetary control, ratio analysis and cost
volume profit analysis.
Financial management
IMPORTANCE
Increase the value of the firm
Financial management is very important in the
field of increasing the wealth of the investors
and the business concern.
Ultimate aim of any business concern will
achieve the maximum profit and higher
profitability leads to maximize the wealth of the
investors as well as the nation.
Financial management
IMPORTANCE
Promoting savings
Savings are possible only when the business
concern earns higher profitability and
maximizing wealth.
Effective financial management helps to
promoting and mobilizing individual and
corporate savings.
Financial plan

ES 010 - LECTURE 7-2

Financial plan
DEFINITION
A financial plan documents an individual’s long-
term financial goals and creates a strategy for
achieving them.
A financial plan begins with a thorough evaluation
of the person’s current financial state and future
expectations and may be created independently or
with the help of a certified financial planner.
Basic financial
statements
DEFINITION
Financial statements are written records that
convey the business activities and the financial
performance of a company.
Financial statements are often audited by
government agencies, accountants, firms, etc. to
ensure accuracy and for tax, financing, or investing
purposes.
Basic financial
statements
COMPONENTS
Balance sheet
Income statement
Cash flow statement
Balance sheet
DEFINITION
A financial statement that provides a snapshot of a
business’s financial position, estimating its worth on
a given date; it is built on the fundamental
accounting equation: Assets = Liabilities + Owner’s
equity.
Balance sheet
EXAMPLE
Balance sheet
EXAMPLE
Balance sheet
COMPONENTS
Current assets - assets such as cash and other items
to be converted into cash within one year or within
the company’s normal operating cycle.
Fixed assets - assets acquired for long-term use in a
business.
Liabilities - creditors’ claims against a company’s
assets.
Current liabilities - those debts that must be paid
within one year or within the normal operating
cycle of a company.
Balance sheet
COMPONENTS
Long-term liabilities - liabilities that come due after
one year.
Owner's equity - the value of the owner’s
investment in the business
Income statement
DEFINITION
A financial statement that represents a moving
picture of a business, comparing its expenses
against its revenue over a period of time to show its
net income (or loss).
Income statement
EXAMPLE
Income statement
EXAMPLE
Income statement
EXAMPLE
Income statement
COMPONENTS
Cost of goods sold - the total cost, including
shipping, of the merchandise sold during the
accounting period.
Gross profit margin - gross profit divided by net
sales revenue.
Operating expenses - those costs that contribute
directly to the manufacture and distribution of
goods.
Statement of cash flows
DEFINITION
A financial statement showing the changes in a
company’s working capital from the beginning of
the year by listing both the sources and the uses of
those funds.
Statement of cash flows
PREPARATION
Assemble the balance sheet and the income
statement summarizing the present year’s
operations.
Net income for the period
Add the sources of company funds: borrowed
funds, owner contributions, decreases in
accounts receivable, increases in accounts
payable, decreases in inventory, depreciation,
etc.
Statement of cash flows
PREPARATION
Subtract the uses of those funds: plant and
equipment purchases, dividends to owners,
repayment of debt, increases in accounts
receivable, decreases in accounts payable, increases
in inventory, and so on.
The difference between the total sources and the
total uses is the increase or decrease in working
capital.
Statement of cash flows
PREPARATION
Assemble the balance sheet and the income
statement summarizing the present year’s
operations.
Net income for the period
Add the sources of company funds: borrowed
funds, owner contributions, decreases in
accounts receivable, increases in accounts
payable, decreases in inventory, depreciation,
etc.
Forecasting

ES 010 - LECTURE 7-3

Forecasting
DEFINITION
A technique that uses historical data as inputs to
make informed estimates that are predictive in
determining the direction of future trends.
Businesses utilize forecasting to determine how to
allocate their budgets or plan for anticipated
expenses for an upcoming period of time. This is
typically based on the projected demand for the
goods and services offered.
Projected financial
statement
DEFINITION
This incorporate current trends and expectations to
arrive at a financial picture that management
believes it can attain as of a future date.
Operating and capital
budgets
EXAMPLE
A sample manufacturing budget for the first three
months
Forecasting
EXAMPLE
A sample operating budget for the first three
months ($000s)
Pro forma income
statements
DEFINITION
Pro forma income - projected net profit calculated
from projected revenue minus projected costs and
expenses.
Example
MPP Plastics Inc., pro forma income statement, first
year by month ($000s)
Example
MPP Plastics Inc., pro forma income statement,
three-year summary ($000s)
Pro forma cash flow
DEFINITION
Projected cash available calculated from projected
cash accumulations minus projected cash
disbursements.
Pro forma cash flow
Statement of cash flows, indirect method
Example
MPP Plastics, Inc., pro forma cash flow, first year by
month ($000s)
Pro forma balance sheet
DEFINITION
Summarizes the projected assets, liabilities, and net
worth of the new venture.
Example
MPP Plastics, Inc., pro forma balance sheet, end of
first year ($000s)
Breakeven analysis
DEFINITION
Breakeven - volume of sales where the venture
neither makes a profit nor incurs a loss.
Formula:
Breakeven analysis
EXAMPLE
From the pro forma income statement,
Breakeven analysis
GRAPHIC ILLUSTRATION
Pro forma analysis and
applications of funds
DEFINITION
Summarizes all the projected sources of funds
available to the venture and how these funds will
be disbursed.
Example
MPP Plastics, Inc., pro forma sources and
applications of funds, end of first year
Software Packages
KNOWN SOFTWARE APPLICATIONS
Intuit’s Quickbooks. You have the option of online
use or purchase for your desktop. Prices for online
use start at $12.95/month for just invoicing and
tracking bank statements to $39.95/month that
does payroll, invoicing, bill paying, and inventory
control.
The desktop premier version includes all
accounting functions as well as modules for a
variety of industries and is $299.95 per year.
Software Packages
KNOWN SOFTWARE APPLICATIONS
Sage50 is also well regarded by experts and offers a
variety of versions depending on your needs. The
premium version is $379.00.
Other software offering similar services but rated
somewhat lower by users are Acclivity and Cougar
Mountain.
Xero and NolaPro are much simpler and generally
less expensive software offering invoicing, paying
bills, and payroll for $9.00/month.
Software Packages
KNOWN SOFTWARE APPLICATIONS
Nola Pro and Wave Accounting offer simple free
versions that might be appropriate for very
smallbusinesses or sole proprietorships.