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Module 1 CFMA

This document provides an overview of financial management and working capital concepts. It defines financial management as planning, organizing, and controlling a company's financial resources. The key functions of a financial manager include estimating capital needs, determining the capital structure, choosing funding sources, investing funds, managing cash flows, and exercising financial controls. Working capital refers to short-term assets like cash, receivables, and inventory, minus short-term liabilities. The objectives of working capital management are to balance profitability and risk. Different working capital policies like aggressive, conservative, and matching are also discussed.

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Christine Bea Limos
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68 views

Module 1 CFMA

This document provides an overview of financial management and working capital concepts. It defines financial management as planning, organizing, and controlling a company's financial resources. The key functions of a financial manager include estimating capital needs, determining the capital structure, choosing funding sources, investing funds, managing cash flows, and exercising financial controls. Working capital refers to short-term assets like cash, receivables, and inventory, minus short-term liabilities. The objectives of working capital management are to balance profitability and risk. Different working capital policies like aggressive, conservative, and matching are also discussed.

Uploaded by

Christine Bea Limos
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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CHARTERED FINANCIAL

MANAGEMENT ANALYST
(MODULE 1)

JOHN ANTHONY M. LABAY


CPA, MBA, CAP, CFMA
INTRODUCTION TO
FINANCIAL MANAGEMENT
✓ OVERVIEW
✓ WORKING CAPITAL CONCEPTS

2
FINANCIAL MANAGEMENT

Financial Management means planning, organizing,


directing, and controlling the financial activities such as
procurement and utilization of funds of the enterprise. It
means applying general management principles to
financial resources of the enterprise.
SCOPE/ELEMENTS OF FINANCIAL MANAGEMENT

1. Investment decisions includes investment in fixed assets


(called as capital budgeting). Investment in current assets
are also a part of investment decisions called as working
capital decisions.

2. Financial decisions - They relate to the raising of finance


from various resources which will depend upon decision on
type of source, period of financing, cost of financing and
the returns thereby.
SCOPE/ELEMENTS OF FINANCIAL MANAGEMENT

3. Dividend decision - The finance manager has to take


decision with regards to the net profit distribution. Net
profits are generally divided into two:
a. Dividend for shareholders - Dividend and the rate of
it has to be decided.
b. Retained profits - Amount of retained profits has to
be finalized which will depend upon expansion and
diversification plans of the enterprise.
FUNCTIONS OF FINANCIAL MANAGEMENT

1. Estimation of capital requirements: A finance manager


has to make estimation with regards to capital
requirements of the company. This will depend upon
expected costs and profits and future programs and
policies of a concern. Estimations have to be made in an
adequate manner which increases earning capacity of
enterprise.
FUNCTIONS OF FINANCIAL MANAGEMENT

2. Determination of capital composition: Once the


estimation has been made, the capital structure has to be
decided. This involves short- term and long- term debt
equity analysis. This will depend upon the proportion of
equity capital a company is possessing and additional
funds which have to be raised from outside parties.
FUNCTIONS OF FINANCIAL MANAGEMENT

3. Choice of sources of funds: For additional funds to be


procured, a company has many choices like-
a. Issue of shares and debentures
b. Loans to be taken from banks and financial
institutions
c. Public deposits to be drawn like in form of bonds.
FUNCTIONS OF FINANCIAL MANAGEMENT

4. Investment of funds: The finance manager has to decide


to allocate funds into profitable ventures so that there is
safety on investment and regular returns is possible.

5. Disposal of surplus: The net profit decision has to be


made by the finance manager. This can be done in two
ways:
a. Dividend declaration
b. Retained profits
FUNCTIONS OF FINANCIAL MANAGEMENT

6. Management of cash: Finance manager has to make


decisions with regards to cash management. Cash is
required for many purposes like payment of wages and
salaries, payment of electricity and water bills, payment
to creditors, meeting current liabilities, maintenance of
enough stock, purchase of raw materials, etc.
FUNCTIONS OF FINANCIAL MANAGEMENT

7. Financial controls: The finance manager has not only to


plan, procure and utilize the funds but he also has to
exercise control over finances. This can be done through
many techniques like ratio analysis, financial forecasting,
cost and profit control, etc.
WORKING CAPITAL MANAGEMENT CONCEPTS

Working Capital Management – the administration and


control of the company’s working capital. The primary
objective is to achieve a balance between return
(profitability) and risk. It relates to the management of
short-term investment (i.e., current assets) and short-
term liabilities (i.e., current liabilities).
WORKING CAPITAL MANAGEMENT CONCEPTS

Working Capital – is the firm’s investment in current assets


(cash, marketable securities, accounts receivable,
inventories, and other current assets).

Net Working Capital – is the excess of current assets over


current liabilities. Effective management of working
capital will improve the firm’s overall return on investment
performance.
OBJECTIVES OF WORKING CAPITAL MANAGEMENT

To make sure each type of working capital investment is


productive in
(1) generating income for the business,
(2) reducing the amount of investment needed to support
sales and production, and
(3) both generating income and reducing the amount of
investment needed to support sales and production.
WORKING CAPITAL FINANCING POLICIES
1. Conservative (Relaxed) Policy – operations are
conducted with too much working capital; involves
financing almost all asset investment with long-term
capital.

2. Aggressive (Restricted) Policy – operations are


conducted on a minimum amount of working capital; uses
short-term liabilities to finance, not only temporary, but
also part or all of the permanent current asset
requirement.
WORKING CAPITAL FINANCING POLICIES
3. Matching Policy (also called self-liquidating policy or hedging
policy) – matching the maturity of a financing source with
specific financing needs.
short-term assets are financed with short-term liabilities
long-term assets are funded by long-term financing sources

4. Balanced Policy – balances the trade-off between risk and


profitability in a manner consistent with its attitude toward
bearing risk.
RISK RETURN TRADE-OFF
The greater the risk, the greater is the potential for larger
returns.

More current assets lead to greater liquidity but yield lower


returns (profit).

Fixed assets earn greater returns than current assets.

Long-term financing has less liquidity risk than short-term


debt, but has a higher explicit cost, hence, lower return.
COMPONENTS OF WORKING CAPITAL

1. Cash and Marketable Securities


2. Accounts Receivable
3. Inventories
4. Short-term Financing
GOODLUCK &
GODBLESS!!!

jalcpa

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