FINANCIAL MANAGEMENT

•This is the strategic planning, organizing, directing

and controlling the financial undertakings in an
organization for proper decisions.
•Is the part of the management activity which is
concerned with the planning and controlling of
firm’s financial resources. This part also deals
with finding out various sources for raising funds
for the firm. The sources must be suitable and
economical for the needs of the business.
•According to J.L. Massie, “Financial
management is the operational activity of
a business that is responsible in obtaining
and effectively utilising the funds
necessary for efficient operations.”
• We can observe five elements of financial
management which are planning,
controlling, organizing and directing,
together with making decision
IMPORTANCE OF FINANCIAL MANAGEMENT
Financial management is indispensable to any
organization as it helps in:
(i)Financial planning and successful promotion
of an enterprise
(ii) Acquisition of funds as when required at the
minimum cost
(iii)Proper use and allocation of funds
iv) Taking sound financial decisions
(v) Improving the profitability through
financial control
(vi) Increasing the wealth of the business
and other stakeholders
(vii)Promoting and mobilizing individual
and corporate savings
Financial Resources
They are all financial funds of the
organization. The liquid assets of
organization including cash and bank
deposits. The resources from which the
enterprises obtain the funds they need to
finance their investments, capital and
current activities.
The possible finance sources can be:
•Subscription and donations
•Parents and friends receipts
•Fundraising
•Government grant
•Assets, Sale of property
•Initial capital
•Loan from bank/overdraft
•Issue shares and investments
 Control of financial resources:
Financial control are procedures, policies
and ways to monitor the allocation and
usage of financial resources
•Assessing the continuing investment
project if it should be phased out to be
replaced by another profitable one or not.
•Maintaining debtors, creditors,stock,and
costs at their efficient levels.
•Create budget and review performance
against your budget
•Create contracts and get them signed for
evidence and inevitable
•Organize keeping of finance records.
•Check if the forecast for past investment
decision has materialized.
•Apply cash management tactic.
This is managing of cash inflow and cash
outflow in the organization. The inflow
should be accelerated while outflow being
reduced in order to keep optimal cash level.
The firm should remain with cash level for
transaction motive, for future contingences
and for speculative motive
FINANCIAL REPORT ANALYSIS &INTERPRETATION
Financial report is the information on financial
statements prepared at the end of accounting
period. The report is mainly for accounting users.
The users of accounting information are
customers, investors, suppliers, government,
managers etc
.
 The information as is provided in the
financial statements is not adequately
helpful in drawing a meaningful conclusion,
therefore analysis and interpretation of
financial statements is required. Analysis
means to study and
investigation/inspection of the reports by
comparing their outcomes
Advantages of financial statements analysis
and interpretation
i. To measure the profitability made from
capital invested
ii. Indicating the trend of achievements of
the firm
iii. Comparison of position in relation to
other firms
iv. Assess the solvency/wealth of the firm
v. Find the liquidity of the firm
TYPES OF FINANCIAL ANALYSIS
1. Trend analysis
2. Ratio analysis
i) Current ratio
ii) Quick ratio
1.Trend analysis
This refers to the study of the behavior of
individual financial statement items over
several accounting periods.
•The analysis of a given item may focus on
trends in the absolute amount of the item
or trends in percentages
When comparing more than two periods,
analysts use either of two basic approaches:
1) Choosing one base year from which to
calculate all increase or decrease .Any year
may be taken as the base year, depending on
the intention of doing the analysis.
2) Calculating each period’s percentage
change from the preceding figure.
TREND ANALYSIS

ITEM TO BASE 2020 2019 2018 2017

Sales Tsh 900,000 Tsh 800,000 Tsh 750,000 Tsh 600,000
Increase trend from 300,000 200,000 150,000 -
2017(amount)
% increase from 50% 33.3% 25% -
2017
Amount Increase 100,000 50,000 150,000 -
over Preceding year
% increase over 12.5% 6.6% 25%
preceding year -
Profit 3,000,000 1,000,000 1,500,000 2,000,000
Cost of goods sold 1800,000 1500,000 2000,000 2500,000
 Comments from the chart:
• The analysis on sales item basin on year
2017 shows that there was the change of
sales each year and the trend was
increasing from 150,000,200,000,and
300,000 .
•The analysis using percentage change basin
on year 2017 shows an increasing trend by
25%,33.3% to 50%
•The analysis made basin on each
preceding year shows the increasing
trend on each year which is more
visible. That the increase in sales from
2017 to 2018 increased by 25% while
the change from 2018 to 2019
increased only by 6% and from 2019 to
2020 sales increased by 12.5%
•You are required to make trend
analysis on business expenses item
from 2001 to 2005 in preceding years.
Use percentage change and comment
on your results.
  2005 2004 2003 2002 2001

Items Tsh Tsh Tsh Tsh Tsh

Revenue 170,000 100,000 120,000 200,000 150,000

Cost of Sales 142,000 55,000 60,000 120,000 100,000

Gross Profit 28,000 45,000 60,000 80,000 50,000

Expenses 21,000 35,000 40,000 45,000 30,000

Profit for the year 7,000 10,000 20,000 35,000 20,000

Financial Ratio analysis
Ratio means the fraction used as a
magnitude of comparison between two
items
Financial ratio is a relationship between two
accounting figures, expressed
mathematically.
Ratio Analysis helps to ascertain the financial
condition of the firm.
Types of ratio analysis
Liquidity Ratios
The liquidity of a company is the amount
of cash a company possess which
can be used to settle its debts (and
possibly to meet other unforeseen
demands for cash payments)
Liquid items consist of:
(a) Cash
(b) Short-term investments for which
there is a ready market
(c) Fixed-term deposits with a bank or
other financial institution, for
example, a six month high-interest
deposit with a bank
(d) Trade receivables
The ratios are to be studied in relation to
each other, in comparison of the past
ratios of the firm as well as ratios of the
industry, and with its immediate
competitors.
The standard ratios of testing the liquidity
of the firm are:
•The current ratio
•The quick (Acid test) ratio
 i. CURRENT RATIO
The ratio btn assets and the liabilities of the
company.
Current ratio = Current assets
Current liabilities
The idea behind this is that a company should
have enough current assets that give a
promise of 'cash to come' to meet its future
commitments on current liabilities.
Obviously, a ratio greater than 1 should be
expected. Otherwise, there would be the
prospect that the company might be
unable to pay its debts on time
 ii) QUICK RATIO
In some businesses, the inventory turnover is slow, most
inventories are not very 'liquid‘ assets, because the cash
cycle is so long.
For these reasons, we calculate an additional liquidity ratio,
known as the quick ratio or acid test ratio.
The quick ratio, or acid test ratio, is calculated as
follows
Quick ratio = Current assets less inventory
Current liabilities
•Both the current ratio and the quick ratio offer
an indication of the company's liquidity
position.
•It is often hypothesized that an acceptable
current ratio is 1.5 and an acceptable quick
ratio is 0.8.
•What is important is the trend of these ratios.
From this, one can easily ascertain whether
liquidity is improving or deteriorating
Example. Use the following summary of Balance sheet
to analyze the liquidity of the respective business.
Non-current assets
Machinery 20,000,000
Motor van 30,000,000
Current assets
Debtors 600,000
Cash 200,000
Bank 100,00
Inventory 300,000
 Current liabilities:
Creditors 500,000
Loans 1,000,000
Comments:
•The current ratio of the liquidity of the
business is 0.8. It is below the
recommended guide of the ratio of above
one. Therefore the liquidity of business is
not strong to meet all their debts and
unforeseen demands.
•The quick liquidity ratio of the same
business is 0.6. It is also below the
recommended guide level of 0.8. It
shows that the amount of cash the
business possess is not enough to
meet its obligations.
Exercise
Use the following given data to make an analysis of
the liquidity of the company and write your
comments.
2001 2000
Tsh Tsh
• Current assets 3,500,000 3,000,000
• Current liabilities 3,000,000 2,550,000
• Inventory 800,000 1,500,000