Study of Financial Statements Module B Financial Management CAIIB

Study of Financial Study of Financial StatementsStatements

Module BModule B

Financial ManagementFinancial Management

CAIIBCAIIB

20/11/200620/11/2006 Akila MaheshwariAkila Maheshwari 22

Unit 10 Learning ObjectivesUnit 10 Learning Objectives

Broad Scope and Coverage of Broad Scope and Coverage of Financial ManagementFinancial Management

Objective of Financial ManagementObjective of Financial Management Increasing Importance of Financial Increasing Importance of Financial

ManagementManagement


ScopeScope

Designing and Implementing Designing and Implementing Business PlansBusiness Plans

Ensuring Effective Fund UtilisationEnsuring Effective Fund Utilisation Resource AllocationResource Allocation Investment decisionsInvestment decisions Profit generationProfit generation Wealth creationWealth creation


ObjectivesObjectives

Maximise the wealth of the firmMaximise the wealth of the firm Maximise Shareholder valueMaximise Shareholder value Owner-Manager- Employee conflictOwner-Manager- Employee conflict Profit Maximisation vs Wealth Profit Maximisation vs Wealth

MaximisationMaximisation Risk and uncertaintyRisk and uncertainty


Important DecisionsImportant Decisions

FinancingFinancing InvestmentInvestment Dividend PolicyDividend Policy Current Asset ManagementCurrent Asset Management


Unit 11 Capital ExpenditureUnit 11 Capital Expenditure

Learning ObjectivesLearning Objectives Capital ExpenditureCapital Expenditure Phases of Capital BudgetingPhases of Capital Budgeting Levels of decision makingLevels of decision making Facets of Project AnalysisFacets of Project Analysis Feasibility StudyFeasibility Study


Capital Expenditure- ImportanceCapital Expenditure- Importance

Long term EffectsLong term Effects IrreversibilityIrreversibility Substantial outlaysSubstantial outlays


Capital Expenditure- DifficultiesCapital Expenditure- Difficulties

Measurement ProblemsMeasurement Problems Uncertainty Uncertainty Temporal SpreadTemporal Spread


Capital Budgeting PhasesCapital Budgeting Phases

Planning

Analysis

Selection

Implementation

Review


PlanningPlanning

Planning is concerned with the Planning is concerned with the articulation of a broad Investment articulation of a broad Investment Strategy and the generation and Strategy and the generation and preliminary screening of project preliminary screening of project proposals.proposals.

The investment Strategy of a firm The investment Strategy of a firm delineates the broad areas or types delineates the broad areas or types of investments the firm plans to of investments the firm plans to undertake. undertake.


AnalysisAnalysis

A detailed anlaysis of the marketing, A detailed anlaysis of the marketing, technical, financial, economic and technical, financial, economic and ecological aspects is undertaken. ecological aspects is undertaken.

At this pint the focus is on gathering At this pint the focus is on gathering information, preapring and summarising information, preapring and summarising information about various proposal being information about various proposal being considered for inclusion in the capital considered for inclusion in the capital budget. budget.

Based on this the projections may be Based on this the projections may be made. made.


Selection Selection

Criterion Accept Reject

Payback Period( PBP) PBP < target period PBP > target period

Accounting Rate of Return ( ARR )

ARR > target rate ARR < target rate

Net Present Value( NPV) NPV > 0 NPV < 0

Internal Rate of Return ( IRR) IRR > cost of capital IRR < cost of capital

Benefit Cost Ratio( BCR) BCR > 1 BCR < 1


Implementation Implementation

StagesStages Project & Engineering DesignProject & Engineering Design Negotiations and ContractingNegotiations and Contracting ConstructionConstruction TrainingTraining Plant commissioningPlant commissioning


Tools for expeditious Tools for expeditious ImplementationImplementation

1.1. Adequate formulation of projectsAdequate formulation of projects

2.2. Responsibility AccountingResponsibility Accounting

3.3. Network TechniquesNetwork Techniques

4.4. Profit Centre ConceptsProfit Centre Concepts


Decision making levelsDecision making levels

Operating Administrative Strategic

Where is it taken? Lower Level Management

Middle Level Management

Top Level Management

How structured is it?

Routine Semi- structured Unstructured

Level of Resource Commitment

Minor Resource Moderate Resource Major Resource

What is the time horizon?

Sort term Medium term Long term


Profitability AnalysisProfitability Analysis

MarketMarket TechnicalTechnical FinancialFinancial EconomicEconomic EcologicalEcological


Key Issues in Project AnalysidKey Issues in Project Analysid

Market Analysis Potential Market & Market Share

Technical Analysis Technical Viability & Sensible Choices

Financial Analysis Risk and Return

Economic Analysis Benefits & Costs in Shadow Prices- Other Impacts

Ecological Analysis Environmental Damage & Restoration measures


Preliminary Work Preliminary Work Idea Generation

Initial Screening

Prima Facie analysis

Feasibility Analysis Terminate

NO YES


AnalysisAnalysis

Technical Analysis

Financial Analysis

Market Analysis


EvaluationEvaluation

Economic & Ecological Analysis

Is it Worthwhile?

Funding Proposal Terminate

NO YES


Decisions, Return, Risk, Decisions, Return, Risk, Market Value Market Value

Return

Investment Decisions

Financing Decisions

Risk

Market Value


UNIT 12- Sources of FinanceUNIT 12- Sources of Finance

Learning ObjectiveLearning Objective Sources of Finance- Long term & Sources of Finance- Long term &

Short TermShort Term Advantages and DisadvantagesAdvantages and Disadvantages Various Types of FundingVarious Types of Funding


Sources of Company FinanceSources of Company Finance

Permanent Sources

Long-term Sources

Medium –Term Sources

Short-term Sources

Share Capital Redeemable Preference Shares

Medium Term Loans

Cash Credit

Retained Profits Debentures Deferred Credit Overdraft

Bonds Public Fixed Deposit

Bills Discounting

Long term Loans- Indian Rupees or Foreign Currency Loans

Working Capital Term Loans

Commercial Paper

Seed Capital Trade Credit


Matching Sources to UsesMatching Sources to UsesTypes of Capital Uses Matching Assets Sources

Permanent Broaden borrowing base/major financing/takeover/merger

Freehold or long term property/shares of acquired or merged company,

Share Capital, retained profits

Long Term Financing assets with long life/Plant & machinery/Permanent Working capital

Freehold or leasehold property long term/Permanent stock or debtor requirement

Redeemable preference shares/Long term loans

Medium Term Fixed assets/working capital

Vehicles/Plant/fittings, stock, debtors, leasing

Medium term loans/Hire purchase

Short term Working Capital/financing seasonal fluctuations/export orders/bridging finance/minor fixed assets

Stock/debtors Cash credit/overdraft/bill discounting/LC/Export credit/creditors


Equity FinancingEquity Financing

NatureNature AdvantagesAdvantages DisadvantagesDisadvantages


Retained ProfitsRetained Profits



Preference SharesPreference Shares



Debentures and BondsDebentures and Bonds



Term loansTerm loans



Term LoansTerm Loans

MaturityMaturity SecuritySecurity RepaymentRepayment Interest RateInterest Rate


Seed CapitalSeed Capital

Venture CapitalVenture Capital Seed Capital Assistance Schemes of Seed Capital Assistance Schemes of

IDBI IDBI


Medium Term SourcesMedium Term Sources

LoansLoans Deferred Credit Bill Discounting Deferred Credit Bill Discounting

Scheme of IDBIScheme of IDBI Fixed DepositsFixed Deposits Working Capital Term LoanWorking Capital Term Loan


Short Term SourcesShort Term Sources

Bank loansBank loans Trade CreditTrade Credit Cash Credit and OverdraftCash Credit and Overdraft Bill discountingBill discounting Commercial PaperCommercial Paper Lease Lease


Cost of CapitalCost of Capital

Minimum returnMinimum return Weighted average cost of projected Weighted average cost of projected

sources of financesources of finance


Unit 13 Financial StatementsUnit 13 Financial Statements

Learning ObjectivesLearning Objectives Understand the meaning of Financial Understand the meaning of Financial

StatementsStatements Uses of Financial Statements for Uses of Financial Statements for

decision makingdecision making Financial AnalysisFinancial Analysis Interpretation of StatementsInterpretation of Statements Meaning of Fund FlowsMeaning of Fund Flows


Key Financial StatementsKey Financial Statements

Balance SheetBalance Sheet Profit & Loss or Income StatementProfit & Loss or Income Statement Sources & Uses of Funds StatementSources & Uses of Funds Statement


Balance SheetBalance Sheet

Liabilities Assets

Share Capital Fixed Assets

Reserves and Surplus Investments

Secured Loans Current Assets, Loans and Advances

Unsecured Loans Current Assets

Current Liabilities and Provisions Loans and Advances

Current Liabilities Miscellaneous expenditures

Provisions


Balance SheetBalance Sheet

1. Sources of Funds

1. Shareholder’s Funds

a. Share Capital

b. Reserves and Surplus

2. Loan Funds

a. Secured Loans

b. Unsecured Loans

II. Application of Funds

1. Fixed Assets

2. Investments

3. Current Assets Loans and Advances

Less Current Liabilities and Provisions

4. Miscellaneous Expenditure


Income Statement Income Statement Revenue Commission actually Received 230000.00

Less Expenses

Cost of Goods Sold Inventory expenses for the year 2950.00

Gross Profit

Depreciation/General

Admin/Selling 4000.00

S,G & A Overhead

Total Expenses

Profit Before Interest and Taxes

Less Interest Interest on loan 10000.00

Other Income/Loss 0.00

Profit Before Tax

Tax@30%

Net Profit- Bottomline


Balance Sheet-Financial Balance Sheet-Financial ManagementManagement

Balance Sheet Items Finance Topics

Share Capital/Reserves and Surplus/Loans/Debentures

Capital Structure and Cost of Capital

Loans and Advances/Current Liabilities/Trade Credit/Provisions

Working Capital Financing Policy

Fixed Assets( Net) Gross Block-less depreciation

Capital Budgeting

Investments Security Analysis

Current assets, loans and advances, cash and bank

Working Capital mgt/cash management

Receivables Credit Management

Inventories Inventory Management


Income Statement- Financial Income Statement- Financial ManagementManagement

Income Statement Item Finance Topic

Net Sales Revenue Risk

Cost of Goods Sold- Stocks/ Wages and Salaries/other manufacturing Expenses

Gross Profit Gross Profit Margin

Operating Expenses- SGA/Depreciation Depreciation Policy

Operating Profit- non operating surplus/deficit- EBIT

Business Risk

Interest Financial Risk

Profit Before Tax

Tax Tax Planning

Profit After Tax Return on Equity

Dividends Dividend Policy

Retained Earnings


Funds Flow Statement- Working Funds Flow Statement- Working Capital Basis Capital Basis

Operations

Issue of Share Capital

Long Term Borrowing

Sale of non current assets

Purchase of non current assets

Repayment of long term borrowing

Dividend Payment

Working Capital Pool


Funds Flow- (WC basis) Funds Flow- (WC basis)

Sources of Working Capital Uses of Working Capital

Operations Dividends

Profit after tax Purchase of Fixed assets

Depreciation Repayment of term loan

Issue of Share Capital Total working capital used

Long term borrowings

Sale of fixed assets

Total working Capital generated

Net change in working capital


Funds Flow- Cash Flow StatementFunds Flow- Cash Flow Statement

Sources of CashSources of Cash OperationsOperations Net IncomeNet Income DepreciationDepreciation Issue of Share CapitalIssue of Share Capital Long term borrowingsLong term borrowings Sale of non current liabilitiesSale of non current liabilities Decrease in current assets other than cash Decrease in current assets other than cash


Funds Flow Statement- Cash FlowFunds Flow Statement- Cash Flow

Uses of CashUses of Cash Payment of DividendsPayment of Dividends Purchase of non current assetsPurchase of non current assets Repayment of long term borrowingsRepayment of long term borrowings Decrease in current liabilitiesDecrease in current liabilities Increases in current assets other Increases in current assets other

than cash than cash


Financial Statement AnalysisFinancial Statement Analysis

Assessment of Past Performance and Assessment of Past Performance and current Positioncurrent Position

Protection of Net Income and growth Protection of Net Income and growth prospectsprospects

Prediction of Bankruptcy and failurePrediction of Bankruptcy and failure Loan decisions by FIs and banksLoan decisions by FIs and banks


TechniquesTechniques

Horizontal analysisHorizontal analysis Vertical AnalysisVertical Analysis Trend AnalysisTrend Analysis Ratio AnalysisRatio Analysis Common size AnalysisCommon size Analysis


Focus of Financial Statements Focus of Financial Statements AnalysisAnalysis

1.1. Liquidity or short term solvency Liquidity or short term solvency anlysisanlysis

2.2. Profitability AnalysisProfitability Analysis

3.3. Capital Structure or gearing Capital Structure or gearing analysisanalysis

4.4. Market strength or Investor analysisMarket strength or Investor analysis

5.5. Growth and stability analysisGrowth and stability analysis


Projected StatementsProjected Statements

Projected Balance SheetProjected Balance Sheet Projected Income StatementsProjected Income Statements Projected cash flowsProjected cash flows


Thanks YouThanks You

Indian Institute of Banking and Indian Institute of Banking and FinanceFinance

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Study of Financial Statements Module B Financial Management CAIIB