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7/31/2019 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
7/31/2019 F658 122 01 Overview of FM FA
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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
7/31/2019 F658 122 01 Overview of FM FA
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Mohd Sabri Mohd Amin, Fakulti Pengurusan Perniagaan, UiTM 3
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
7/31/2019 F658 122 01 Overview of FM FA
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Mohd Sabri Mohd Amin, Fakulti Pengurusan Perniagaan, UiTM 4
Financial Management Framework
ExternalEnvironment
InternalEnvironment
Financial
Consideration& Decisions
InvestmentDecision
FinancingDecision
Financial
Structure
AssetStructure BusinessRisk
Financial
Risk
Total
Risk
Share
Price
Total
Returns
Feedback
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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.
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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.
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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
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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.
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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 moneyfrom … ?
Cash Disbursements: The company spendmoney on … ?
Mohd Sabri Mohd Amin 9
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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
Mohd Sabri Mohd Amin 10
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
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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 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
Mohd Sabri Mohd Amin 11
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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
Mohd Sabri Mohd Amin 12
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
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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, 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.
Mohd Sabri Mohd Amin 13
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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
Mohd Sabri Mohd Amin 14
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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”
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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
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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 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?
Mohd Sabri Mohd Amin 17
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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 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?
Mohd Sabri Mohd Amin 18
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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?
Mohd Sabri Mohd Amin 19
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THE END
THANK YOU