Financial Management

Decisions in Financial Management

Liquidity	Cash flow management
Investment	Whether and when to invest in which assets
Financing	Structure of funds – debt/equity
Profit distribution	Dividends

Liquidity/working K management	Monitoring of current asset and current liability ratios to ensure sufficient cash flow
K investment – budgeting	Investment Decision Invest if NPV > 0 i.e. projected earnings > costs i.e. profitable Today’s value of future cash flows – today’s outlay
Financing – K structure and funding of investment	Financing Decision Debt or equity D/E ratio Gearing: Debt/assets
Dividends or retain profits	Based on dividend policy (retain earnings or provide dividends, what amount and frequency)

NPV: Difference between discounted capital inflows and outflows. Future value is discounted for risk and time value of money.

Time Value of Money: A dollar today is worth more than a dollar tomorrow due to the returns you can earn on it over time.

PV: present value of net future cash flows. The profit a project generates in today’s dollars.
Net: Difference between capital inflows and outflows.

Even if one project has greater returns, another may have a higher NPV if the returns are generated sooner.
Invest if NPV > 0

Excel formula:

IRR is the required discount rate/ rate of return that causes NPV = 0.

Compare this with a company’s target rate / minimum acceptable rate of return and IRR of projects with same duration.

The break even point is:

The payback period is the time taken to recover the investment / reach the break even point i.e. pay back the cost.

BCR: Benefit Cost Ratio

Accounting Rate of Return (ROI)
Profit / Investment
No DCF

The analysis of return (e.g. breakeven) is multiplied by the variance level (e.g. +- 15%) on both sides, to give worst, base and best case outcomes.

Higher debt/equity ratio indicates insolvency risk
However, if returns/earnings > Debt repayments, earnings will benefit from the debt.