Financial Management Learning Programme Overview

Learning Programme 5 Financial Management 252040, 252036

Modules Module 1 Understand the Key Concepts of Managerial Finance Interpret Financial Statements Describe and Prepare Financial Forecasts Draft Budgets and Supervise Financial Management of a Unit Use Mathematical Techniques to Collect and Organise Data Apply Mathematical Techniques to Calculate and Represent Data Apply Mathematical Analysis to Indicate Economic Relationships Module 2 Module 3 Module 4 Module 5 Module 6 Module 7

Module 1 Understand the Key Concepts of Managerial Finance 1.1 The Accounting Cycle 1.2 The Role of Budgeting and Forecasting in Strategic Planning 1.3 The Accounting Conventions applied in Financial Management 1.4 The Financial Reports Published in the Organisation

Understanding the Key Concepts of Managerial Finance Financial figures, by themselves, usually do not mean much. When you compare the financial figures with certain other numbers you can learn much about how your organisation is doing. Financial management is managerial activity which is concerned with the planning and controlling of the firm s financial resources.

Understanding the Key Concepts of Managerial Finance The relationship of financial management with other fields of study is explained as below:

Understanding the Key Concepts of Managerial Finance Financial analysis is part of financial management, which includes: The management and recording of the flow of money Planning the future use of money Ensuring that the money is well spent and not misused Building financial sustainability of the organisation

1.1 The Accounting Cycle The accounting cycle is a series of steps in recording an accounting event from the time a transaction occurs to its reflection in the financial statements (also called the book keeping cycle). All the rules of accounting and accounting measurement are collected in one group called International Financial Reporting Standards (IFRS )

1.1 The Accounting Cycle Statutory Regulations Accounting Records - In terms of the Companies Act, 2008, all companies must keep accounting records in one of the eleven official languages.

1.1 The Accounting Cycle Annual Financial Statements - The Companies Act, 2008 aims to provide a flexible regime that balances accountability and transparency, with less of a regulatory burden. To that end, it sets certain common requirements for all companies. To expand your knowledge, it is suggested that you acquire and read guidelines to IFRS in South Africa.

1.1 The Accounting Cycle IFRS Standards Some of the IFRS standards include: Standard Topic IAS 1 Presentation of financial statements IAS 2 Inventories IAS 16 Accounting for property, plant and equipment IAS 18 Revenue

1.1 The Accounting Cycle Using IFRS in Financial Analysis For internal reporting and analysis purposes an organisation has to abide by IFRS. Calculating Ratios according to IFRS IFRS includes numerous guidelines and conventions that help insure that reported financial information is accurate, objective and reasonably consistent for all types of business.

1.1 The Accounting Cycle The Relationship between the Financial Statements: The Statement of Comprehensive Income (income statement) (statement of profit and loss) shows how profitable the firm is. The Statement of Retained Earnings is developed after the Statement of Comprehensive Income (income statement) because it uses data from the Statement of Comprehensive Income (income statement).

1.1 The Accounting Cycle The business firm's Statement of Financial Position (balance sheet) shows how much money the firm is worth -- its net worth. The Statement of Cash Flows uses data from both the Statement of Comprehensive Income (income statement) and Statement of Financial Position (balance sheet).

1.2 The Role of Budgeting and Forecasting in Strategic Planning Strategic planning is a structured and coordinated approach for developing long-term organisational goals and for developing strategies to accomplish them. One of the primary purposes of strategic planning is to set the stage for the annual budget process, providing a roadmap for annual resource allocation decisions.

1.2 The Role of Budgeting and Forecasting in Strategic Planning Budgets: are implementing a business plan on paper are an anticipation of the future a standard for monitoring compiled and re-evaluated on a periodic basis

1.3 The Accounting Conventions applied in Financial Management Accounting Conventions: Historical cost convention Monetary measurement Separate Entity Realisation Materiality

1.3 The Accounting Conventions applied in Financial Management Accounting Concepts: Four important accounting concepts underpin the preparation of any set of accounts: Going Concern Consistency Prudence Matching (or "Accruals")

1.3 The Accounting Conventions applied in Financial Management Key Characteristics of Accounting Information: Accounting information should satisfy the following criteria: Understandability Relevance Consistency Comparability Reliability Objectivity

1.4 The Financial Reports Published in the Organisation The organisation is required to create the following financial statements: A Statement of Financial Position (balance sheet) A Statement of Comprehensive Income (income statement) A Statement of changes in equity A Statement of Cash Flows Class Activity 1

Module 2 Interpret Financial Statements 2.1 Analyse Financial Statements 2.2 Apply Ratios to Measure Profitability and Liquidity 2.3 Apply Ratios to Measure Working Capital and Asset Utilisation 2.4 Apply Ratios to Measure Return 2.5 Make Recommendations based on Ratio Analysis

Interpreting Financial Statements Financial statements are used to do financial analysis. Financial statements are accounting reports prepared periodically to inform the owner, creditors and other interested parties as to the financial condition and operating results of the business.

Interpreting Financial Statements Financial Analysis Users There are two broad categories of accounting information and financial analysis users: External Users - Investors, creditors and brokers, to name a few, represent external users Internal Users - The group of internal users includes managers, employees and unions

2.1 Analyse Financial Statements The main considerations in every analysis are: To establish the purpose of the analysis that needs to be done. Only when the purpose of the analysis is defined is it possible to select the appropriate ratios and items for analysis. The results of the analysis are then compared and evaluated in a trend analysis. Finally the decisions require a prediction based on the ratio and trend analysis.

2.1 Analyse Financial Statements Using trends and ratios to analyse financial reports provides the organisation (management) with an understanding of financial information. In trend analysis, financial ratios are compared over time, typically years. Ratio analysis involves the comparison of ratios either with ratios of other companies and/or with previous ratios within the same organisation.

2.2 Apply Ratios to Measure Profitability and Liquidity Profitability Ratios Profitability ratios determine if returns will be generated to ensure the sustainability of an organisation. These ratios should be compared on a period over period basis (i.e. year to year).

2.2 Apply Ratios to Measure Profitability and Liquidity Standard profitability ratios include: Gross margin percentage Net margin Net Profit margin on sales Return on assets before interest and tax (ROABIT) Return on capital employed (ROCE) Return on equity (ROE) Return on net worth

2.2 Apply Ratios to Measure Profitability and Liquidity Liquidity Ratios Liquidity ratios help you determine your company s ability to generate sufficient amounts of cash to meet any current or short- term obligation. Liquidity ratios include: Current Ratio Acid Test Ratio (Quick Ratio)

2.3 Apply Ratios to Measure Working Capital and Asset Utilisation Efficiency ratios evaluate how effectively your company uses its fixed and current assets. Efficiency ratios include: Fixed assets turnover (sales or gross revenue) Total assets turnover Days inventory Debtors collection period Creditors settlement period Inventory turnover

2.3 Apply Ratios to Measure Working Capital and Asset Utilisation Working Capital Turnover Ratio This ratio represents the number of times the working capital is turned over in the course of year The working capital turnover ratio measures the efficiency with which the working capital is being used by a firm.

2.4 Apply Ratios to Measure Return Leverage Ratios Leverage ratios provide information about a business s ability to meet its long-term obligations. Leverage ratios include: Debt ratio (Total Debt to Total Assets) Debt to equity ratio Interest cover (Times Interest Earned)

2.5 Make Recommendations based on Ratio Analysis One of the uses of ratios is to determine the profitability of an organisation. Profitability is an indicator of the viability of an organisation or its ability to sustain itself into the future. Once the ratio and trend analysis has been done, the analyst is in a position to make certain recommendations based on the outcome of the analysis. Class Activity 2

Module 3 Describe and Prepare Financial Forecasts 3.1 Identify Types and Formats of Financial Forecasts 3.2 Identify Sources of Financial Forecasts 3.3 Outline Factors in Preparing Financial Forecasts 3.4 Incorporate Factors in the Preparation of Financial Forecasts 3.5 Analyse Financial Forecasts to Determine Viability

Describing and Preparing Financial Forecasts Business entities need to plan for the future; they must also consider alternative management strategies and prepare capital and operating budgets; they must also consider alternative funding and cash budget possibilities.

Describing and Preparing Financial Forecasts You will need realistic forecasts to support your business plan if you need a loan or investor funds. The elements of and influences on pro forma statements include: Prior Financial Statements Internal Factors External Factors Projected Financial Statement

Describing and Preparing Financial Forecasts Part of your role as a manager requires that you analyse past performance, recognise opportunities and plan for the future of your unit. Three ways to uncover potential opportunities: 1. Examine your current client base 2. Look at how you are currently receiving clients 3. Identify complementary services/products that will open up a different market for you

3.1 Identify Types and Formats of Financial Forecasts Trend Analysis A trend analysis tries to predict the future movements of figures on financial statements and/or their ratios. A trend analysis can be done in two ways, such as: Using a spread sheet Graphically

3.2 Identify Sources of Financial Forecasts Your financial forecast will be based on information gathered from industry and market research. Make sure your estimates and assumptions are realistic Be consistent and make sure that your financial forecast reflects the rest of the business plan

3.3 Outline Factors in Preparing Financial Forecasts The following key factors related to future results must be considered in the preparation of financial statements: Factors Related to the Specific Entity Factors Related to the Industry Factors Related to the Market Factors Related to the Economy

3.4 Incorporate Factors in the Preparation of Financial Forecasts When preparing the financial forecasts for your business unit you must incorporate the previous mentioned factors impacting on the organisation into account in terms of how they relate to your business unit.

3.5 Analyse Financial Forecasts to Determine Viability In order to evaluate the financial viability of an organisation, a combination of the following information is required: Financial performance Financial position Cash flow Class Activity 3

Module 4 Draft Budgets and Supervise Financial Management of a Unit 4.1 Link Budget Plans to Operational Objectives 4.2 Establish Operational Objectives 4.3 Formulate the Budget 4.4 Review and Modify the Drafted Budget 4.5 Supervise Financial Management of a Unit

Drafting Budgets and Supervising Financial Management Budgeting is the process of planning financial activities for an upcoming accounting period, usually a year. It requires analysing how a business is currently performing and setting objectives for improving its future financial health. Specific revenue and expense expectations are identified with the intention of increasing a business s profits while keeping expenses in check.

4.1 Link Budget Plans to Operational Objectives Budgeting offers five main benefits: Budgeting facilitates planning Budgeting enhances communication Budgeting reinforces accountability Budgeting identifies problems Budgeting motivates employees

4.1 Link Budget Plans to Operational Objectives In general, there are three different types of budgets: Operating Budget: This is often referred to as the annual budget Cash Budget: Shows the amount of cash you expect to receive and pay Capital Budget: Shows how much money you have to spend if you want to buy, operate ad maintain major pieces of equipment

4.2 Establish Operational Objectives In order to set effective objectives, you can follow four steps: Use the data from the previous accounting periods Address strengths and weaknesses Assess resources required Make adjustments to objectives

4.2 Establish Operational Objectives Guidelines for Avoiding Budget Traps Losing sight of your objectives Failing to keep objectives realistic Using an incorrect approach Accepting arbitrary changes Believing that sales have to increase Inflexible budgets

4.3 Formulate the Budget When we are compiling a budget, we would have to analyse the items in the budget from previous years or even the items in other business units, such as: Fixed Variable Product Period

4.3 Formulate the Budget Opportunity Controllable Non-Controllable Future Past From three figures -- targeted profit, fixed expenses and variable expenses -- you can determine your required level of income

4.3 Formulate the Budget The cash budget is compiled to give the business an idea as to when and how much additional funds it may require Use an Income and Expenditure Statement to determine the revenue and expenditure for your department

4.4 Review and Modify the Drafted Budget Once complete, the drafted budget is reviewed, reflected on and modified to ensure alignment to the operational plan of the unit. Variance analysis entails measuring actual performance against the standards and the coordinated plan.A deviation from the standard could be favourable or unfavourable. Class Activity 4