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Financial management
Financial management refers to
the efficient and effective
management of money (funds) in
such a manner as to accomplish
the objectives of the organization
Suppliers
FINANCIAL
MARKET
Customers
MARKET
PATICIPANTS
Creditors
Debtors
Governme
nt
Financial relations
Monthly expenses
New-product
development
Speculative production
Lon-term marketing
activities
Short-term promotional
needs
Expansion of facilities
Cash-flow problem
Replacement of capital
assets
Short-term
banking loans
Banking
loans repaid
interest
Taxes
Repaid
dividends
Financing of
nonproductive
sphere
Owned
capital
Long-term
banking loans
FINANCIAL
TR/profit
RESOURCE
S
OF A FIRM
Investments
Financing of
current
activity
Repaid
dividends
FINANCIAL
ACTIVITY=
(financial
statements/
information/calculati
ons)
Investment
activity
Credit
operations
Stock
market
transactions
Repaid
Dividends
of
the
firm
at
particular time.
Its income statement summarizes
its
operations
during
one
to
answer
variety
of
do
business
and
stay
in
Balance sheet
(December 31, 1998)
Northeast Art
supply, inc.
ASSETS
Current assets
Current liabilities
cash
59.000
Accounts payable
35.000
marketable
10.000
securities
Notes payable
25.000
accounts
40.000
receivable
Salaries payable
4.000
() allowance for
2.000
debtful accounts
Taxes payable
6.000
notes receivable
32.000
merchandise
Fixed assets
Long-term liabilities
Delivery
equipment
110.000
mortgage payable on
store equipment
40.000
() accumulated
depreciation
20.000
Owners equity
Common stock,
10.000 shares at $15,
Par value
150.000
() accumulated
depreciation
15.000
Retained earnings
(reinvested)
80.000
Revenues
$ 465.000
Gross sales (TR)
() less sales returns and allowances
9.500
() less sales discounts
Net sales
451.000
4.500
117.000
3.000
General expenses
18.500
Office salaries
8.500
Rent
Depreciation delivery equipment
1.500
Depreciation office furniture
2.500
Utilities expense
500
Miscellaneous expenses
Total general expenses
36.500
TOTAL OPERATING EXPENSES
79.500
4.000
Financial Ratios
A financial ratio is a number that
shows the relationship between two
elements of a firms financial
statements.
Types of the financial ratios:
Profitability ratios a measure of how
much profit its activities
generate(theme 10)
Short-term financial ratios
(liquidity ratios) ability of a
business to meet its debts
Ratio Analysis
Ratio Analysis
Example:
Assume two firms produce identical products
and have identical capital structures:
Firm A Capital Assets = $1,000,000
Profit = $250,000
Firm B Capital Assets = $1,000,000
Profit = $100,000
Easy to see in this instance that firm A is the more
efficient as every $1 of capital generates 25c
in profit whereas for Firm B, every $1 of capital only
generates 10c profit
ROCE allows us to have a measure of efficiency
for firms with different capital structures
Ratio Analysis
Net
Profit
ROCE = ----------------------------------- x100
Owners Equity
Ratio Analysis
Liquidity Ratios(short-term financial
ratios):
Look at the ability of a firm to meet its
expenditure and how much cash is tied up in
the business available to pay for that
expenditure
Careful management of its income and
expenditure is important to its cash flow and its
ultimate long term survival
Liquidity Ratios
Working Capital having sufficient
funds at the right time to be able to
meet liabilities
Working capital management
is crucial to the success of a firm
Working capital = the difference
between current assets and current
liabilities
Liquidity Ratios
The Current Ratio the proportion
of current assets to liabilities.
A current ratio of 2:1 means the firm
has sufficient liquidity to cover its
liabilities twice over
A current ratio of 0.75:1 would suggest
that the firm is unable to meet its
liabilities
and could be in a weak financial position
A ratio below 1 does not mean the firm will
collapse but it will be in a vulnerable
position
Liquidity Ratios
Acid Test Ratio or quick ratio =
(Current Assets - Stocks) : Current Liabilities, or
(Cash + marketable securities + accounts
receivables + notes receivable )/ Current
Liabilities
The Acid Test Ratio is a measure of the firms ability to
pay current liabilities quickly with the cash,
marketable securities, and receivables.
It gives a clear and quick indication of the state of the
firms liquid assets.
Comparing the Current ratio and the Acid Test ratio
therefore gives an indication of the relative size of the
stock holdings of a firm.
Formula
Northe
ast Art
Supply
Overall
Busines
s
average
Profitability
ratios
Net profit
margin
6,7%
4% - 5%
Return of
equity
13%
12% 15%
Earnings per
share
Short-term
financial ratios
Working
Working
capital
capital
Current
Current ration
ration
Acid-test
Acid-test ratio
ratio
$ 3,02
per
share
Current
Current assets
assets less
less
current
current liabilities
liabilities
$
$
112.00
112.00
2,6
2,6
1,99
1,99
2,0
2,0
1.0
1.0
Ratio
Formula
Overal
l
Northe
Busine
ast Art
ss
Supply
avera
ge
Activity
Rations
Account
receivable
turnover
11,9
Inventory
turnover
8,2
Debt-toassets ratio
32%
33%
Debt-toequity ratio
48%
33% 50%
Long-term
debt rations
Ratio Analysis