FINANCIAL TECHNIQUES

FOR
PROCUREMENT AND SUPPLY CHAIN MANAGEMENT

BY LUKAS NAKWEENDA
 CHAPTER 1

INTRODUCTION TO FINANCIAL MANAGEMENT

(For more detailed content, please refer to the text book and other sources)!

Source: Correia
 Learning objectives
3
At the end of the chapter, you should be able to answer the
following questions:

 What is Financial Management?

 Why is the objective of financial management to maximize the

value of the firm?

 What is the role of a financial manager?

 What is the relationship of corporate finance to accounting and

economics?

 What are the various forms of business organization?

 1.0. What is Financial Management?
4

Which assets
should the
company
invest in?

Payout Dividends
How should the
company finance
these investments?
 1.1. Financial management environment
5
The Namibian economic environment:
Size and nature of the Namibian economy
Capital Markets

Namibian entity forms - key: legal liability:

Sole Proprietor
Partnership
Private Company [also Close Corporation]
Public Company

The taxation system:

Taxation of company profits
VAT
Assessed losses
Individual taxation
 1.2. Financial Management environment–other pertinent issues
6
 Deregulation/Regulation (e.g. NAMFISA/FIMA*, CRAN, ECB)

 Taxation (NAMRA)

 Interest rates (BoN)

 Inflation (NSA)

 Privatisation / nationalisation (GRN)

 Globalisation / internationalization (FDI)

 Mergers and acquisitions (NCC)

 Currency exchange rates (BoN)

 1.3. Objective of Financial Management
7

Is it Profit Maximisation?
What are the problems with this concept?

 Manipulation of accounting profits;

 Timing of Returns;

 Does not reflect cash flows (revenue vs cash flow);

 Accounting profits do not account for the cost of equity capital ;

 Risk – if higher profits come with much higher risk, then the
share price may fall.
8
1.4. Objective of Financial Management…

Shareholders desire Value Maximisation.

 Maximisation of firm’s value (new investment opportunities)

 Share price maximization (decrease unit cost);

9
1.5. Objective of Financial Management…

 The objective of business operations:

 Focus on decision making
 Level of Risk vs Expected return
 1.6. The role of the financial manager
10

Opportunities to create wealth

Investing in Non-current Do you know the difference

operating assets between Capital markets
assets and Money Markets?
Working
Investing in capital
financial
assets Investments

Finance from Finance from

capital creditors
markets Finance from
Issue of retained earnings
shares Finance from
Issue of debt money markets
 1.7. Investment in Operating Assets
11  What are operating assets?
 Non-current assets
 Property plant and equipment
 Intangible assets – patents, trademarks
 Working Capital
 Inventory
 Accounts receivable
 Cash
 Financial assets / Investments
 Money market investments
 Bonds or preference shares
 Loans
 Derivatives (currency swaps, forward and future contracts)
 Investments in non-operating assets (vacant building, idle equipment)
12
1.8. Financing Decision: Selecting the Optimal Finance
Mix
 Sourcing the funds to finance the investment decisions.
Suppose our company won a
 Emphasis on cost and risk of financing. N$1mil tender to cater for
Heroes Day, 26 Aug 2022.
 Cost of financing is linked to the risk associated with the
investment

 Risk depends on, among others – (hence due diligence is done):

• Type of projects undertaken;

• Length of time for which funds are provided, and

• Individuals involved (track record)

 1.9. Financing Decision: Sources of Finance
13

 Finance from Capital Markets

• Long-term financing (bonds)
• Equity vs Debt financing depends on risk preference of the investor
• Types of investors (risk taker, risk averse, neutral)
 Issue of shares
• Equity shares : High risk but high expected return
• Why considered riskier (price is determined by the market forces)
 Issue of debt
• Debt : Low risk
• Debentures or bonds
 1.10. Financing Decision: Sources of Finance
 Finance from Money Markets:
14

• Short term financing (Treasury Bills)

• Based on cyclical nature of businesses

 Finance from Creditors:

• Working capital financing (Cash Conversion Cycle)

 Finance from Retained Income:

• Use of accumulated profits of prior years

• Retain or distribute profits through dividends?

• NB: Thump of rule – pay out dividends if no new opportunities

 1.11. Highlight: Corporate Strategy
15
 PESTEL Analysis:

• Political – taxation, government policies

• Economic – interest and exchange rates

• Social – demographics, black middle class

• Technological – research and development, obsolescence

• Environmental issues – Objection of the Phosphate project

• Legal factors – compliance risk (labour laws)

1.12. Ethics in business: Professional Ethics – “do the right thing”
16

o Integrity

o Objectivity

o Professional competence & due care

o Confidentiality

o Professional behaviour
1.13. Link btw Managerial Finance, Accounting and Economics

o The three are closely related:

o Economics – micro vs macro

o Accounting – external reporting

o Managerial Finance – funds management

THANK YOU!