2. FINANANCIAL MANAGEMENT
COURSE OVERVIEW :
The main focus of a business organization is to earn profits.
It is therefore important for managers to understand the
relationship between business plan and financial plan , so that
they can make better business decisions that has an impact on the
financial objective of the management & investors.
Their ability to use various financial management tools are
crucial for effective managers because major business decisions
require good comprehension and analysis of financial information.
3. OBJECTIVES :
* Able to read and clearly understand Financial Statements.
• Able to calculate the financial ratios and interpret the financial
position of a company.
* Develop an analytical mind in analyzing financial reports.
* Able to calculate and evaluate the viability of a project through
Net Present Value (N.P.V) or Internal Rate of Return (I.R.R)
4. FINANCIAL MANAGEMENT
What is Financial Management
It involves the understanding of Financial
concepts and the application of financial tools to
achieve the financial objective of the firm
effectively and efficiently
1) Functions of Business
2) Different Types of Company Structure
3) Business Plan to Financial Plan
4) Accounting Equation
5) Financial Budgets
6) Understanding Financial Accounting
7) Understanding Financial Reports
8) Ratio Analysis & Interpretation of Accounts
9) Capital Budgeting
6. Business is the function of commercial activities with the
purpose of achieving a profit.
Note:
Profit is the excess of sales revenue over the costs spent
to earn the said revenue.
7. Types of Business
Manufacturing
&
Trading
Trading Services
1) Buy Raw Materials
& Make into Finished
Goods.
2) Sell the Finished Goods
i) Consumer Electronics
ii) Testing & Automation
Equipment
i) Computers
ii) LCD Monitors
1) Buy Finished Goods
from Suppliers.
2) Sell the Finished
Goods
i) Hypermarkets,
ii) Car distributors,
iii) Books & Stationaries
iv) Office Equipments
1)Provide professional
Services to Clients:
i) Education/Training,
ii) Insurance,
iii) Hospitality,
iv) Medical Centres
v) Banking
vi) Satellite TV
Combo
10. Mr A
100%
Mr A
(Trading as)
Big Business Enterprise
Customers
Suppliers :
Goods,
Services,
Financing
Legal
Position
Legal
Position
SOLE PROPRIETOR
Advantages
1) Fast decision Making
2) Can do any business
(legal)
3) Only Mr A is the
boss.
Risks :
1) Non perpetual
2) Legal liabilities is 100% personal
3) Restriction in raising funds
( subject to personal net worth)
4) Cannot attract investors.
11. Mr A
70%
Mr B
30%
Mr A and Mr B
(Trading as)
Super Big Business Enterprise
Suppliers:
Goods,
Services,
Financing
Customers
Legal
Position
Legal
Position
PARTNERSHIPS
Advantages
1) Fast Decision
2) Any business
(legal)
3) Two boss –
Mr A & Mr B.
Risks
1) Non Perpetual
2) Legal liabilities are 100% & jointly
3) Restriction in raising funds
(Subject to joint networth)
4) Cannot attract investors
(Cannot divest part of the company)
12. Mr A
33.33%
Mr B
33.33%
Mr C
33.33%
Viet Nam Joint Stock Co
Paid up Capital : VND 30,000
(comprising 3 shares of VND 10,000/- each)
Invests
VND 10,000
Invests
VND 10,000
Invests
VND
10,000
1 share
Of VND
10,000
1 share
Of VND
10,000
1 share of
VND 10,000
Shareholders
Company
issues
shares
to
acknowledge
investment
received
proportionately
Advantages
1)The shareholders are
not personally liable for
the liabilities of the
company.
2) Liabilities are limited to
the extent of their
investments.
3) Company is a legal
entity with own name
4) Company can exists
perpetually ( unless
wound-up).
5) Easier to attract
investors & financiers
6)Shareholders reap better
returns as their shares can
be valued and sold to
others
PRIVATE LIMITED LIABILITY COMPANY ( BY SHARES )
Suppliers Customers
Legal Position
Initial
Allot/mt
13. Shareholders
Mr A-33.33%
Mr B - 33.33%
Mr C -33.33%
Shareholders appoints the
Board of Directors
(2 or more individuals)
Board of Director appoint
Managing Directors/ CEO
Manages the daily operations
of the business
Viet Nam Join Stock
Company
(separate legal entity from
shareholders/directors)
(can sue or be sued in the
Firm’s name)
Customers
dealing with
Viet Nam JSC
Sell
(Legal
Position)
Security
(Personal guarantees)
Suppliers
dealing with
Viet Nam JSC
Danger!
(Personal
guarantee)
Buy
(Legal
Position)
Managing a Corporation ( Limited Liability)
2) Articles of Association
- Internal rules to
governing the rights of
parties and the decision
making process in a
limited liability
corporation.
1) Memorandum of Association
-Nature of Business of the
Company
Corporate
Governance
-Ethical
Conduct
( always act
according to
law and best
interests of
investor)
15. Business
Plan
Costing/
Pricing/
Profits
Decision
Developing
Financial
Budgets
Implement
Business
Plan
Measure
Financial
Success
FROM VISION TO FINANCIAL SUCCESS
Vision $ Success
1) Decide on
the type of
business-
Product or
Services or
both.
2) Decide on
Organization
type.
2)Market size &
estimated
market share.
3) Estimate
transactions
Per year
1) Prepare
Detail
costing.
2) Estimate
Transaction
volume per
year.
3) Determine
expected
profits
4) Decision
on the pricing
– market
acceptance
1) Prepare a
financial
budget that
reflects the
achievement
of business
plan
2) Determine
The type of
funding
required-
Paid up
capital or
borrowings.
1) Start the
Business.
2) Record all
transactions
according to
accounting
rules.
1) Prepare
financial
statements
to measure
success of
business
plan :
i) Balance
Sheet.
ii) Income
Statement
Iii) Cash
Flow
Statement
16. TO BEGIN THE BUSINESS
-ACCOUNTING EQUATION
PART 4
17. Business Organization
(Sole Proprietor/ Partnerships/ Joint Stock)
- Name of Company
CAPITAL
- Total value in $(VND)
Invested in the company
by investors
LIABILITIES
- Total value of $(VND)
Loan to the company
by loan creditors
ASSETS
- Total value in $ (VND) owned by Company
(Everything owned by the company that has a value
and is used to do the business)
ACCOUNTING EQUATION : CAPITAL + LIABILITIES = ASSETS
19. Budgetary Planning
What is a Financial Budget ? (budget: thực hiện cho tương lai;
accouting: thực hiện cho quá khứ, các hoạt động đã xảy ra)
Budget is a financial plan designed to reflect a planned future
business performance to achieve a planned future financial objective.
Difference between Financial Budgets and Financial Accounting.
Financial accounts is a measurement of past business performance
performance and achievement of past financial objective.
20. Budgetary
Assumptions
(giả định)
Anticipated (dự báo)
Business
Conditions
Desired
(mong muốn)
Financial
Objective
J , F , M , A , M , J , JL , AG , S , O , N , D . TOTAL
Financial
Accounting
1) Record past monetary transaction
• 2) Measure monthly financial performance and
compare the difference between budget and actual.
3) Take necessary corrective actions to achieved the
desired financial objectives.
1
4
5Implementation of business activities
Budgeted :
Balance Sheet,
Income Statement
Past/ Audited :
(kiểm toán !!!!)
Balance Sheet,
Income Statement
Financial
Budgets2
3
23. It is the process of recording,analysing and interpretation of
all monetary transactions in an organization.
Definition of Financial Accounting
24. The limitations of financial acounting are :
a) Financial accounts reflects past financial information and performance.
b) It analyses only monetary transaction and the contribution of human
resources and other intangible asset (which may be crucial to the
competitiveness of the firm)is not reflected.
c) Accounting recording is based on documentation evidence.
d) The objectivity of the financial information is influenced by the adoption
of the accounting conventions which may sometimes lead to ' creative
accounting', ( which may provide misleading information).
e) If the person analysing the finacial information lacks sufficient
experience, then the analysis may not be accurate.
Limitations of Financial Accounting
27. Daily
Monetary Transactions
Daily
Record in accounts
All Accounts are kept
In a General Ledger
Monthly Accounts are
Organized for
Information
Trading/Income/Expense
Capital Liability Assets
Record accoring to
Accounting principles
(ghi theo nguyên tắc t.c)
Income Statement Balance Sheet
HOW TO PREPARE FINANCIAL STATEMENTS
Based on appropriate
documentation evidence
(chứng từ)
Master accounting records
(sổ cái)
28. The Financial Statements (of Joint-Stock Companies) consists of :
1. Balance Sheet
- Statement of financial position representing the Accounting Equation.
2. Income Statement
-To determine profit/loss on sales of products and/or services.
3. Cash Flow Statement
-To indicate how business activities impact on cash reserves , i.e. increase
or decrease.
Supporting Reports by :
Directors Report.
-Declaration that the accounts reflects a true & fair view of financial affairs.
External Auditor's Report (kiểm toán ngoài)*
-Confirmation that the financial statements representing a true and fair
view on the financial affairs of the firm.
What comprises the Financial statements ?
29. 1) BALANCE SHEET STATEMENT
A Balance Sheet is a representation of a STATEMENT OF FINANCIAL
POSITION representing the accounting equation) at a particular point in time
(called financial period/ yr end).It indicates the net worth of the organization at a
Particular point in time.
2) INCOME STATEMENT :
i) TRADING ACCOUNT
The TRADING account is prepared to indicate the profits, derived from trading
activities (buying and selling of the product ) called GROSS PROFITS (lãi ròng).
Financial Statements
30. ii) Profit & Loss Account
The Profit & Loss Account is prepared to matched the gross profits
and other profits generated for a particular accounting period with
the expenditure incurred for earning those profits in the same period.
The excess of profits over expenditure gives rise to Profit before
Tax .
The excess of expenditure over profits gives rise to Operating
Losses for the period.
3) Cash Flow Statements
Analyses how the business activities for a particular period has been
affected as compared to the last period and it's net impact on cash
reserves for that period , i.e. increase or decrease.
31. i) An external auditor verifies the accounting records on which the
financial accounts are prepared to ensure that they comply with
generally acceptable accounting rules.They further ensures that the
financial information reflects a true and fair view of the financial
position of the organization.
ii) An internal auditor sets and monitors financial control and
operational policies of the organization to ensure that they are
diligently adhered to. An internal auditor is someone not from the
financial or operational department.
What are the roles of an external auditor and internal audiitor
32. REE JOINT STOCK COMPANY
CONSOL. INCOME STATEMENT FOR THE YEAR ENDED 31 Dec 2008
% of sales VND VND
NET SALES & SERVICES REVENUE 1,154,393,374
(Sales less returns inwards)
LESS COST OF SALES 824,317,894
GROSS PROFIT 330,075,480
ADD Finance Income 183,012,218
Less OPERATING EXPENSES :
Finance (525,042,497)
Selling & Distribution ( 39,710,186)
Administration ( 97,607,391)
OPERATING ( LOSS )/PROFIT (149,273,176)
ADD Other Profit 7,614,580
(LOSS)/ PROFIT BEFORE TAX (141,658,596)
LESS Current Corporate Income Tax ( 15,036,430)
ADD Deferred Income Tax 2,868,075
NET (LOSS)/PROFIT AFTER TAX (153,826,951)
33. REE JOINT STOCK COMPANY
CONSOL. BALANCE SHEET AS AT 31 DECEMBER 2008
VND
Current Assets 1,118,977,987
Non-Current Assets 1,489,276,511
TOTAL ASSETS 2,608,254,498
A. LIABILITIES 508,968,718
-Current Liabilities 403,833,580
-Non- Current Liabilities 105,435,638
B. OWNER'S EQUITY 2,088,465,068
-CAPITAL 2,087,167,691
-Other Funds 1,297,377
- Minority Interests 10,820,712
TOTAL LIABILITIES & OWNER'S EQUITY 2,608,254,498
34. Notes to definition of terms in Balance Sheet :
1) ASSETS (tài sản):
Anything owned by the company that has a monetary value.
A) Current Assets (tài sản ngắn hạn)
Assets that are cash or can be converted into cash within 12 months :
- Bank Balance
- Cash in Hand
- Trade debtors / Trade receivables
- Other debtors / Other receivables
- Inventories.
B) Non-Current Assets (tài sản dài hạn)
Assets that are used for doing the business .
Fixed Assets : Intangible Assets :
Tangible assets (hữu hình): - Licence
- Land and Buildings - Investment in shares
- Plant and Machineries
- Office Equipment
- Motor Vehicles
35. Notes to definition of terms in Balance Sheet :
2) LIABILITIES (nợ):
Total value owed to others by the company that must be re-paid.
A) Current Liabilities
Liabilities that must be paid within 12 months :
- Trade Creditors / Trade payables
- Short-Term Loan Creditors / Other payables
- Taxation
B) Long Term Liabilities
Liabilities that must be paid after more than 12 months .
- Long Term Loan
3) OWNER'S EQUITY (vốn chủ sở hữu)
Total value of funds invested in the business by shareholders.
- Paid Up Capital - VND
- Accumalted Profits - VND
36. CASH FLOW STATEMENT
- Statement to show how cash is generated
and used by an organization throughout
an accounting period.
- It reconciles the opening cash balance
position to the closing cash balance position
of the organization.
37. PREPARATION OF CASH FLOW STATEMENTS
INCOME before Tax for the period
Adjustments for items not involving a movement of cash
Adjustments for debtors, inventories, tax (Working Capital adjustments)
NET CASH FLOWS from OPERATING ACTIVITIES
NET CASH FLOWS FROM INVESTING ACTIVITIES
NET CASH FLOWS FROM FINANCING ACTIVITIES
CHANGES IN NET CASH FLOW
CLOSING BANK BALANCES
Add-Inflow/ (Minus-Outflow)
Add- Inflow/ (Minus-Outflow)
Add-Inflow/ (Minus-Outflow)
Add-Inflow/ (Minus-Outflow) Opening Balances
39. RATIO ANALYSIS & INTERPRETATION OF ACCOUNTS
RATIO ANALYSIS
Ratio analysis is performed on the financial results of the company to
facilitate an understanding of the company's performance between one
financial period to another, or between companies in the same industry or
with companies from other industries.
INTERPRETATION
Interpretation is the process of explaining the results of the ratio analysis
on what the ratios represents and possible reasons.
By understanding the reasons for the ratios changes, the management can
make decisions to improve the financial performance of the company for
the future period.
41. Investments Decisions
• The investment decision is the decision to commit the financial and
other resources to a particular course of action.
a) Cash flow analysis considers all cash inflows and outflows resulting from the
investment decisions.
b) We seek to estimate the streams of cash flows arising from a particular course
of action and the period in which they occur.
Cash Flows
42. a) Capital Budgeting are basically financial techniques that are used to
evaluate the viability of various investment proposals in order to select the
most appropriate investment option .
b) The 3 common capital budgeting / (investment appraisal) tools are :
- Payback Period (Years)
- Net Present Value ( NPV )$
- Internal Rate of Return ( IRR )%
Capital Budgeting Techniques
43. PAY-BACK PERIOD
The pay-back period is the period of time taken for the future net cash inflows
to match the initial cash outlay.
Example :
Lara’s Project requires an initial capital outlay of USD 40,000.
It’s expected to have a project lifespan and the cash inflows as follows:
Year 1 USD 16,000
Year 2 USD 16,000
Year 3 USD 16,000
Year 4 USD 12,000
Therefore it’s pay back period is 2 ½ years calculated as follows:
Initial Outlay (USD 40,000)
Less Yr 1 Cash inflows USD 16,000
Yr 2 Cash inflows USD 16,000)
‘1/2 Yr 3 Cash inflows USD 8,000
--------------------
Note: Pay-back period does not take into account the future value of money.
44. NET PRESENT VALUE
The net present value method measures between the difference between an
Investments market value and it’s costs.
An investment should be accepted if it’s net present value ( NPV ) is positive
and rejected if it is negative.
NPV computation of a specific project involves the following :
1)Discounting the future cash inflow streams into it’s present value using
the company’s cost of capital.
2)Adding up the cumulative present value of the cash inflow streams.
3) Offsetting the Cumulative Present Value of the Cash Inflows against the
Present Value of the Investment Costs to arrive at Net Present Value.
4) If the Net Present Value (NPV) is a positive value, the project is viable.
If the NPV is a negative value, the project is rejected.
45. Example :
1) Project A : Investment Cost is USD 850,000 ( Cost of Capital is 15 %)
Yr Cash flow streams Discount Factor Present Value
0 (USD 850,000) 1.00 (USD 850,000)
1 USD 180,000 0.87 USD 156,600
2 USD 180,000 0.75 USD 135,000
3 USD 180,000 0.66 USD 118,800
4 USD 180,000 0.57 USD 102,600
5 USD 180,000 0.50 USD 90,000
6 USD 180,000 0.43 USD 77,400
7 USD 180,000 0.38 USD 68,400
8 USD 180,000 0.33 USD 59,400
9 USD 180,000 0.28 USD 50,400
10 USD 180,000 0.25 USD 45,000
---------------- ----------------
USD1,800,000 Net Present Value USD 53,600
---------------- (project is viable)
-----------------
46. INTERNAL RATE OF RETURN ( IRR )
The IRR on an investment is the required return that results in a zero NPV
when it is used as the discount rate.
Based on the IRR Rule, an investment is acceptable if the IRR exceeds the
required return. It should be rejected otherwise.
