Introduction To Financial Management

Introduction to Financial Management
A Presentation to WIMBIZ
October 2019
www.firstbanknigeria.com 1
Hands to the Plough?
Introduction
• The Board of Directors of a company is responsible for providing

strategic guidance to the company
• Since the collapse of companies such as Enron and WorldCom due

to abuse of powers and neglect, the role of the Non-Executive
Director (NED) has been enhanced by corporate governance
principles in an attempt to make Executive Directors more
accountable for their policies and activities
• However, a NED is not simply a watch dog, a good NED should

provide guidance to the Executive Directors and be an effective
member of the board
Objectives
The main objectives of this highly interactive and practical session

are to:
• provide aspiring, new, and existing NEDs with sound awareness
and knowledge on fiduciary duty with respect to the financial
statement of the company and how they can optimise their
effectiveness as board members
• help target group or delegates appreciate and understand
financial statements
• provide fundamental understanding of the principles of financial
statement analysis
Outline
Responsibilities of Directors on Financial Statements

Financial Management
Overview of Financial Statements
Red Flags Associated With Financial Statement Distortions
Accounting Is An Illusion
Statement of Financial Position (Balance Sheet)
Income Statement
Statement of Cash flows
Cash flow & Working Capital
Value Add Statement
Earning Capacity
Profitability & Efficiency Ratios
All About The Non Executive Director (NED)
• Who is a Non-Executive Director (NED)?
• Duties of a NED
• Financial Statement Drivers

• Case Study – The Role of the Board in
ENRON’s Collapse
Who Is A Non-Executive Director?
• A Non-Executive Director (NED) or “outside director” is a

member of the board of directors of a company who
does not form part of the “Executive Management team”
• He or she is not an employee of the company or affiliated
with it in any other way
• NEDs are the custodians of the governance process.
They are not involved in the day-to-day running of
business but monitor the executive activity and
contribute to the development of strategy
Source: Securities and Exchange Commission (SEC) Code of Corporate Governance
SEC Code of Corporate Governance
Requirements for Board & Committee Membership

(SEC Code of Corporate Governance)
Board Risk Management Committee Audit Committee
• Non-execs should be important • Basic financial literacy and
members of the board, bringing ability to read financial
independent judgment as well as statements, knowledge of
necessary scrutiny to the proposals accounting or financial
and actions of Management and management
executive directors, especially on
issues of strategy, performance Section 29 (I – II) • Section 30
evaluation and key appointments
• Non-executive members of the
board should be persons of high
calibre, with broad experience,
integrity and credibility
Accountability and Reporting
Section 34 (I – XV)
Duties Of A NED
Ensure the integrity Oversee the Section

Section
of the company’s effectiveness of the 3.1 (b & d)
3.1 (a, h, I, j)
financial reports, internal control
while ensuring system & risk
compliance with management
applicable laws framework
Ensure effective Performance

communication with appraisal,
shareholders and compensation and
overseeing the succession
Section appointment of planning for senior Section
3.1 (e & g) Auditors management staff 3.1 (c & f)
Source: SEC Code Of Corporate Governance
Fiduciary Duties & Capacity
Proper use
of
Information
Prevention
Acting in
of Insider
Good Faith
Trading
NEDs
Avoiding
Ethical use
Conflict of
of Position
Interest
Source: SEC Code Of Corporate Governance
Responsibilities Of NEDs On Financial Statements
Basic understanding of financial statements and analysis
• As an integral part of the overall Board of Directors and Audit

Committees, Non-Executive Directors (NEDs) are expected to have
basic understanding of financial statements and their interpretation
• Proforma, Trends, Common-Size, and Ratio analysis are some of the

basic tools that NEDs are expected to understand in order to be able
to observe and comment on financial statements being presented by
the Management of the enterprise especially as it relates to the Profit
& Loss account and Statement of Financial Position (Balance Sheet)
• Basic understanding of how the Cash flow and Changes in equity

statements work is also essential
Responsibilities Of NEDs On Financial Statements../2
Adherence to reporting frameworks

This is to ensure that preparation of the Financial Report is in line with
the industry regulations, laws and standards
• Legal Standards – this is the law and regulations of the

country/regulatory bodies in guiding Financial Reporting
• Professional Standards – this is the accounting standards laid down

in preparing Financial Reports e.g. IAS, GAAPs, IFRS, etc.
• Any other Standards relating to the industry of the company or as

demanded by applicable regulators
www.firstbanknigeria.com
Responsibilities Of NEDs On Financial Statements../3
Internal & Financial Controls & Reporting

This is to ensure that the entity’s internal and financial control
system is robust and efficient enough to be able to curtail material
misstatements and reduce the incidence and likelihood of fraud and
errors. The report on the effectiveness of the controls are also to be
given for the reporting period
Internal Auditors Reports Review

The Head of the Internal Audit function reports to the Audit
Committee which is in turn headed by a NED or a Shareholder. This
is to ensure independence of the internal audit and enhance the
integrity of the Financial Statements
Auditor’s Report
Statement of Directors’ Responsibilities in Relation to the Financial Statements for the year ended 31 December.
201X
The directors accept responsibility for the preparation of the annual financial statements set out on
pages 28 to 148 that give a true and fair view in accordance with Statements of Accounting
Standards applicable in Nigeria and in the manner required by the Companies and Allied Matters
Act of Nigeria, the Banks and Other Financial Institutions Act of Nigeria and relevant Central Bank
of Nigeria regulations.
The directors further accept responsibility for maintaining adequate accounting records as required
by the Companies and Allied Matters Act of Nigeria and for such internal control as the directors
determine is necessary ……………
Auditor’s Report & Statement of Directors Report -

XYZ Bank 201X
Financial Statements Drivers
CBN NAICOM
Regulators
PenCom SEC
FIRS
IFRS Financial BSEL
FMDQ
Statement
IAS Drivers
NSE
SAS
Reporting
Standards Others FRC
GAAPs MAN,
Etc.
Case Study: Role of the Board in Enron’s Collapse
Fiduciary Failure
High Risk Enron Conflict of

Accounting Collapse Interest
Excessive
Compensation
Reality of Directors’ Liability
• In the Enron settlement, 10 directors agreed

to a settlement of $13 Million and at the
insistence of the lead plaintiffs in the case,
the directors' payments were not to be
reimbursed by insurance or by the
companies involved
• The collapse of Enron was the result of
Management's falsification of the company's
financial statements, and it was determined
by the court that the directors had not
participated in the misrepresentations
involved; they had simply failed to detect it
• Thus, the directors involved were required to
make payments out of their personal assets
for failing to detect a fraud
Enron Documentary
https://www.youtube.com/watch?v=e5qC1YGRMKI
Overview of Financial Statements
• Business Model Canvas
• Accounting is an Illusion
• Statement of Financial Position (Balance Sheet)
• Income Statement
• Cash flow Statement
Business Model Canvass
Relationships
Key Activities
Key Value Customer

Proposition Segments
Partnerships
Key Resources
Channels
Cost Structure (y) Revenue Streams (x)
X – y = TT
What is Accounting?
• A system that communicates information through reports
• The reports are referred to as FINANCIAL STATEMENTS
• Reports include:
− Statement of Financial Position - Balance Sheet Report
− Income Statement - Profit & Loss Report
− Statement of Cash Flows
Financial & Managerial Reporting
• Financial – communicates information to external decision

makers especially to shareholders and creditors
• Managerial – information provided to internal decision makers
Financial & Managerial Reporting../2
FINANCIAL ACCOUNTING MANAGEMENT ACCOUNTING

Provides information for both internal and Provides information for internal users
external users only
Is required by FRCN and other regulatory Not required by regulation
authorities
Subject to accounting standards Not subject to accounting standards
Based on historical data Considers historical data and future-

focused
Financial accounting annual statements No requirement for independent
must be audited by an independent firm external review
Financial Management
Financial Management is the strategic planning, organising
and controlling of financial (monetary) undertakings in an
enterprise
• Regarded as one of the most important aspects in business as
it involves the efficient use of economic resources (capital
funds), ensuring proper source(s) of funds, and keeping the
right mix at the least possible cost
• Requires application of financial principles to the financial
assets, whilst simultaneously playing a pertinent role in fiscal
management
• Focuses on ratios, equities, debts, etc. in realising set
objectives of an enterprise
Financial management assists in taking sound financial decisions

often with the aid of well prepared financial statements, ratio
analysis, etc.
24
Overview Of Financial Statements
25
Overview Of Financial Statements../2
• The end product of all accounting entries is to develop a set of reports

presented to the owners of the business showing:
- A snapshot of the business at a point in time – Balance Sheet also

known as Statement of Financial Position under IFRS (International
Financial Reporting Standards)
- The flow of the resources resulting from the operations of the business
over a specified period of time – Income Statement
- A trace of the movement of funds (cash generated or expended) in the

business over a specified period of time – Cash flow Statement
Regulatory Requirements
The preparation of financial statements are regulated and therefore

required by law, the relevant guidelines and regulatory bodies that
determine the form and contents of financial statements are
Accounting Stock Financial

Companies Securities and
Standards & Exchange Exchange Reporting
and Allied Council of
Conventions, Commission Regulation
Matters Act Nigeria
IFRS (listed companies only) (listed companies
only)
27
The Annual Report

• Every year businesses prepare reports for users of
accounting information and the following are the contents of
these reports:
– Chairman’s Statements
– Auditors Report
– Statement of Profit or Loss & Other Comprehensive Income
(SPCLI)
– Statement of Financial Position (SFP)
– Statement of Cash flows
– Notes to the Accounts (including Significant Accounting
Policies)
– Management Discussions and Analysis
– Five Year financial Summary
28
Audit Matters
Registered companies are required by law to ensure that an

independent, competent and qualified external party carried out an
audit of the company’s state of affairs as at the end of the their financial
year
An auditor’s responsibility is to give an opinion about whether the

Financial Statements show a fair representation of transactions
undertaken by the business, based on the regulations guiding
preparations of financial statements
An Auditor’s opinion can either be Qualified or Unqualified
29
Interested Persons
The Public, Business/Financial Creditors & Loan

Shareholders
Trade Unions Analysts Providers
Government &
Competitors Customers Rating Agencies
Govt. Agencies
Regulators Employees
30
Limitations
• Timing of release of financial statements
• Possibility of manipulating or distorting results
• Financial statements are based on historical results and these

have great limitations in periods of inflation
• Flexibility in choice of accounting treatment
31
Financial Statements And The Accounting Model
Balance Sheet
ASSETS = LIABILITIES OWNERS EQUITY

Accounts PPE Accounts Retained
Cash Investments = Capital
Receivable (Net) Payable Earnings
Balance Sheet + Income Statement
LIABILITIE
ASSETS = OWNERS EQUITY
S
Accounts Investment PPE Accounts Retained
Cash = Capital Revenue Expense
Receivable s (Net) Payable Earnings
PPE: Property, Plant & Equipment
Financial Statements And The Accounting Model../2
Balance Sheet + Income Statement + Cash flow Statement
ASSETS = LIABILITIES OWNERS EQUITY

Retained
Operations Investing Financing Cash A/R Inv PPE (Net) = A/P Capital Rev Exp
Earnings
A/R: Accounts Receivable, A/P: Accounts Payable, Inv: Investments
Financial Statement Distortions
• Management can distort financial performance in 3 ways:

– revenue recognition
– expense recognition
– ignoring certain liabilities
Financial Statement Distortions../2
• Recording of Revenues
– premature recognition
– dubious/uncertain revenues
– manipulation of stock figures
– one-time gains from special events
– deferring current revenue to a future period
• Recording of Expenses
– shifting current expenses into the future
– shifting of future expenses to the current period
• Ignoring Liabilities
• Recording of Expenses - shifting current expenses into

the future may be through capitalisation of:
– marketing and legal costs
– software costs
– research and development
– store re-opening costs
– repair and maintenance costs
or
– shifting of future expenses to the current period by reversing capitalisation of expenses
• Recording of Expenses –by understating expenses

- increasing the discount rate of pension liability
- decreasing compensation growth
or
- reducing discount rate on pension assets to
increase return on the assets
• Manipulation of Accounting Policies

– long useful lives of fixed assets
– capitalisation of operating costs

– use of reserves to smooth income
– premature revenue recognition
– high discount rate/low rate of compensation growth can shrink

true pension liability
– Improper mark-to-market methodology
• Motivation for distorting books

– risks of getting caught are low versus high reward
• Some Management have high incentives to take on the

reputation risk:
– high-growth companies
– weak performing companies
– companies that have recently gone public
Red Flags Associated with Financial Statements Distortions
Fictitious Revenues – recording of goods or services sales that did not occur
Timing Differences – recording of revenue and/or expenses in improper periods
Improper Asset Valuations – fraudulent overstatement of inventory and/or
receivables, manipulation of the allocation of the purchase price of an acquired
business, misclassification of fixed and other assets, or improper capitalisation
of inventory or start-up costs
Concealed Liabilities and Expenses – increasing pre-tax income by the full
amount of the expense or liability not recorded, therefore having a significant
impact on reported earnings
Improper Disclosures – misleading a general public member of the financial

statements by one or more of the following: Liability Omissions, Subsequent
Events, Management Fraud, Related-Party Transactions, and Accounting
Changes
Underlying Accounting Concepts & Conventions
Concepts Conventions
• Business Entity • Full Disclosure
• Money Measurement
• Going Concern • Consistency
• Time Interval • Prudence
• Historical Cost
• Dual Aspect (Double Entry) • Materiality
• Revenue Recognition/Realisation • Objectivity
• Matching Concept
• Accruals
• Timeliness
• Substance Over Form
Illusion Accounting
• The balance sheet account values are based on assumptions made

by the company’s Management
• These assumptions and accounting policies may be changed
• The balance sheet is subject to manipulation
• Note that the balance sheet is at a particular point in time
• Assets shown on the balance sheet may even be obsolete
• For specialised companies, e.g. Engineering companies you may

want to see beyond accounting reports
The Accounting Equation
Asset = Liabilities + Owners’ Equity

• This is the primary equation that expresses the relationship of Assets
and Claims on assets of a company
• The equation illustrates that the assets of the company must equal the
claims against the company. These claims will arise from both Creditors
of the company and Owners of the company
Assets: Claims on Assets:

Liabilities:
What a company owns
What a company owes
Owners' Equity:
Claims of owners against the
business
Basic List of Assets & Claims on Assets
ASSETS CLAIMS ON ASSETS

Assets: Liabilities + Owners’ Equity
=
Cash Accounts Payable Common Shares
Inventories Taxes Payable Preferred Shares
Accounts Receivable Interest Payable Retained Earnings
Marketable Securities Short Term Debt Reserves
Equipment
Land & Buildings
In using the accounting equation, if two of the three components are known, the
third can be solved. For instance:
Asset = Liabilities + Owners’ Equity
₦200,000.00 = ₦50,000.00 + ?
Owners' Equity must be ₦150,000.00 (₦ 200,000.00 - ₦ 50,000.00)
Double Entry Accounting
• For every transaction that is recorded in a business, there has to be

two components that make up an entry—a debit and a credit
• Debits and credits arise whenever a "transaction" occurs, such as a

change in assets or a claim on assets. Therefore:
Assets Liabilities + Owners’ Equity

Debit Credit
Increases in Assets Increases in Claims
= Decreases in Asset
Decreases in Claims
Expense Items Revenue Items
Double Entry Accounting../2
• Assets – naturally a Dr. A/c
• Liabilities – naturally a Cr. A/c
• Owners’ Equity - naturally a Cr. A/c
Increase Decrease
Asset Dr Cr
Liabilities Cr Dr
Owners’ Equity Cr Dr
Double Entry Accounting../3
Revenues and Expenses

• Revenues allow the owners of the business to seek a higher claim in
the assets because there is likelihood of an increase; therefore,
revenues are credits that increase the owner's equity
• Alternatively, expenses are used up assets. They represent contra

revenues and reduce the amount of profit to which the owners can
lays claim to
Source: Bizzer Professional Training
Statement Of Financial Position – Balance Sheet
• A balance sheet (Statement of Financial Position) reveals a company's

assets, liabilities and owners' equity (net worth)
• A snapshot of a company. Simply put, the statement of financial

position shows the position of a company at a particular point in time
• It summarises the business ASSETS, LIABILITIES & EQUITY
• List of balances arranged according to whether they are assets,

liabilities or owners’ equity and so depict the financial situation on a
specified date
• The difference between assets and liabilities is called Equity
Statement of Financial Position../2
• It gives an indication of the company’s financial resources in

terms of resources controlled by the business (ASSETS),
how these resources have been financed (LIABILITIES) and
the amount invested by owners (EQUITY)
• 3 main components:
- Assets: what the company owns
- Liabilities: what the company owes
- Owners’ Equity: what belongs to the owners
50
Statement of Profit or Loss & Other Comprehensive Income
• This Statement summarises the REVENUES & EXPENSES of a

business over a given period of time
• It presents information about the PROFIT or LOSS of a business

during a financial year
• It shows the financial performance of a business during the period it

represents
51
Balance Sheet Structure
Balance Sheet
Owners’ Equity Assets Liabilities
Owners’ Equity = Assets – Liabilities

Owners’ Equity : residual interest in the assets of an entity after deducting all
liabilities
Assets : resources controlled by an entity
Liabilities : amounts owed to lenders and other creditors
Balance Sheet Structure../2
• Assets
- Current Assets (most liquid)
- Long-term Assets
- Intangible Assets (least liquid)
• Liabilities
- List in order in which they become due
• Shareholders’ Equity
- Start with Paid-Up Capital
- End with Retained Earnings The link between Income Statement and Balance Sheet
Asset Classes: Non-bank
Classification Detail Account Measurement
Intangible Assets Net Book Value (NBV)

Fixed Assets Net Book Value (NBV)
Non-Current
Properties NBV, at times Revalued
Assets
Deferred Tax Assets Actual
Long-term Investments Fair (Market Value)
Stocks Lower of Cost or Market Value
(LCM)
Debtors & Prepayments Net Realisable Value
Current Assets Due from Group

Actual
Deposit for Letters of Credit Actual

Bank Deposits & Cash Actual
Liabilities Classification And Account Measurement
Classification Examples Account Measurement

Accounts Payable Actual
Short-term Loans
Current Current portion of long-term

obligations Fair (Market Value)
Liabilities
Unearned revenues
Accrued expenses Actual
Bonds Issuance
Non – Current
Long-term Loans Net Book Value (NBV) -
Liabilities
Amortised
(Debt Capital) Lease Obligations
Income Statement - Profit & Loss For The Period
• The calculation of such profits and losses is probably the most

important objective of the accounting function
• Net profit for a specific period of time
• It is important to know how the actual profits compare with the

expected profits
• Knowing the profit helps the company in planning ahead, obtaining

loans from banks, telling prospective buyers who may be interested
in buying the business how successful the business is doing and
calculating the tax due
Income Statement Components & Terms
Revenue – Expenses = Net Income

• Revenue : amounts reported from sale of goods
and services in the normal course of business
for a reporting period
• Expenses : amounts incurred to generate
Revenue revenue for a reporting period
Expenses • Net Income : the residual income after all
expenses and losses for a reporting period
Net • Cost of Goods Sold : The direct costs
Income attributable to the production of the goods sold
by a company
• Gross Profit : an entity’s residual profit after
selling a product or service and deducting the
direct cost associated with its production and
sale
Income Statement • Operating Profit : The profit earned from a
firm's normal core business operations
Provisions
• Provision is an expense and only recognised when and only when:
(a) An entity has a present obligation legal or constructive as a result

of past event
(b) It is probable i.e. more likely than not that an outflow of resources
embodying economic benefit will be required to settle the
obligation
(c) A reliable estimate can be made of the amount of the obligation
Depreciation & Amortisation
Depreciation
• An expense recorded to allocate a tangible asset’s cost over its
useful life
• It is a non-cash expense
• It increases free cash flow while decreasing reported earnings
Amortisation
• Paying off of a debt in regular installments over a period of time
• Applicable for intangible assets
Statement Of Cash Flows
• Shows exactly where the cash has come from during the year and
exactly what it has been used for
• A summary of the inflows and outflows of cash and cash equivalents

from various activities of an entity
• Cash per balance sheet at the end of the current period = cash per
balance at the end of the previous period + changes (which must be
the result of cash flows during the current period)
• Cash is defined as cash in hand and deposits repayable on demand

(local and foreign currency denominated) with any qualifying
financial institution less overdrafts from any qualifying financial
institution repayable on demand
Statement Of Cash Flows../2
• Profit and liquidity are not directly related
• There are three main classifications of cash flow activities within

a business
– Cash flow from Operating Activities

– Cash flow from Investing Activities
– Cash flow from Financing Activities
61
Cash flow from

Investing
Activities
Cash flow from Cash flow from

Operating Financing
Activities Activities
Cash Flow
Statement
• Operating Activities – Trading profits, depreciation, gain or loss on

disposals, provisions, increase or decrease in long-term trade
debtors, working capital changes
• Investing Activities – Interest received, purchase of fixed assets,

proceeds from sale of fixed assets, proceeds from disposal of
investments
• Financing Activities – Interest paid, Dividend paid
Working Capital: Pillars of Working Capital Management
Working Capital
Composition & Level of Composition & Level of

Current Assets Current Liabilities
Liquidity. Profitability. Risk
Cash Conversion Cycle or Working Capital Cycle
Accounts Accounts
Receivable
Cash Payable
Raw
Sales
Materials
Finished Work-In- Progress

Goods (Value Creation)
Understanding Changes In Working Capital
Ties Down Cash Frees Up Cash
S/N Activity Ties Down Cash Frees Up Cash

1. Increase in Stocks √
2. Decrease in Stocks √
3. Increase in Debtors & Prepayments √
4. Decrease in Debtors & Prepayments √
5. Increase in Creditors √
6. Decrease in Creditors √
7. Increase in Accruals √
8. Decrease in Accruals √
Value Added
• Business organisations are involved in adding value

• Consider a manufacturing firm - it buys in raw
materials and components, then processes and
assembles them into finished products. The finished
goods are then sold to customers
• The manufacturing firm added value to the inputs that
it bought in
• Value added represents the additional wealth created
by the firm’s own efforts through the application of its
labour force and resources
• ‘Value added’ is a measure of the wealth created by the
company through its own activities
Value Added Statement
• A value added statement shows the value added to the

goods and services acquired by an organisation in order
to generate its sales
• It also shows how the value added has been distributed:
– to employees: Wages and salaries, Employers’ national insurance
contributions, Pension contributions, Fringe benefits and
employee facilities
– to shareholders: dividends paid
– to other providers of finance:interest on loans
– to the government: Corporation tax, National insurance
contributions, Value added tax, Customs and excise duties
– and how much has been retained: depreciation on fixed assets
and retained profits
Earning Capacity
• Earnings Capacity is actually the free cash-flow that a business can

generate over a significantly long period of time
• Free cash-flow is defined as EBITDA* - recurring working capital
adjustments – debt repayments/interest – CAPEX** - taxes. So in
essence Earnings Capacity = Long-term and Sustainable Free Cash-
Flow
• Earnings Capacity has absolutely nothing to do with the Accounting
Earnings that most companies report, but rather is a proper analysis
of value created and the distribution thereof (cash flow statement)
*EBITDA – Earnings before interest , taxes, depreciation and amortisation, **CAPEX – Capital Expenditure
Earnings Capacity../2
Definition
Revenue Lines Interest Income

Fees & Commissions
FX Income
Investment Returns
Sales Revenue
Revenue Drivers
Accounting earnings, or net income, represent the amount of money
gained or lost after all costs, depreciation, interest, taxes and expenses
have been deducted from a company's total sales
Customer, Partner and Innovation

Sales Growth Cost Reduction Risk Mitigation Employee Loyalty
Revenue Lines and Drivers
Accounting earnings, or net

Sales
Growth
income, represent the
amount of money gained or
lost after all costs,
depreciation, interest, taxes
Interest Income
and expenses have been
Fees &
Commissions
deducted from a company's
FX Income
Investment Returns
total sales
Sales Revenue
- Revenue Lines
- Revenue Drivers
Profitability & Efficiency Ratios
Liquidity Ratios Profitability Ratios
Ability to pay maturing Degree of success or failure for a

obligations. E.g. Current given period of time. E.g. Rate of
Return on Assets, Earnings Per
Ratio, Quick Asset Ratio Share
Leverage or Capital Adequacy Ratios Activity Ratios
Ratio of debt versus equity Effectiveness in using assets

sources of financing. E.g. employed. E.g. Receivables
Debt to Equity Turnover, Inventory Turnover
Purpose of Ratio Analysis
Different users of financial statements have different and

specific objectives for analysing financial statements and
these objectives are driven by the reasons for which they
are interested
A central purpose for analysing financial statements for

Ratio every user of financial statement information can be said to
Analysis be for gaining deeper insight into the business reasons for
the financial results for the period
For ratio analysis to be complete and meaningful there must

always be a basis for comparison
73
Profitability Ratios
These ratios are used by analysts to gain deeper insights

into the drivers of the profitability of a business, by
comparing the different levels of profit to the basis for
which these profits were derived
74
Profitability Ratios../2
Ratio Calculation What it Measures
Sales Growth (Current Year Sales - Previous Company Growth

Year Sales)/Previous Year Sales
*100%
Gross Profit Margin (Gross Profit/ Revenue)*100% Profitability of company’s product
Operating Profit (Operating Profit/ Revenue) Measures quality of earnings, and how well
Margin *100% managed business operations are
Net profit Margin (Net Profit/Revenue)*100% Percentage of revenue left after all
expenses have been deducted from sales
Return on Equity (Profit After Tax/ Equity) *100% Amount of Profit After Tax earned by every
Naira of shareholders’ wealth invested in
the business
Return on Assets (Profit After tax/ Total Assets) Amount of Profit After Tax earned for every
*100% Naira invested in the assets of the business
75
Liquidity Ratios
These ratios are crucial for most businesses as they help

understand a company’s ability to meet its short term
obligations with its liquid assets
76
Liquidity Ratios../2
Current Current Asset/Current Liability Ability of business to meet

Ratio its current obligations with
its current assets
Quick (Current Assets – Inventory)/ Ability of the business to

Ratio Current Liabilities meet its current
obligations with its most
liquid assets
77
Efficiency Ratios
Efficiency ratios help analysts understand better how efficiently

businesses run their operations, these ratios are also known as activity
ratios
78
Efficiency Ratios../2

Asset Turnover Revenue / Total Assets How well the business generates
(Number of Times) revenue with its Assets
Inventory Days Inventory/ Cost of Sales * 365 How long inventory stays in store
before it is sold. Typically, the shorter
the better
Receivables Receivables/Revenue * 365 How long it takes a business to
Days receive payments from its debtors.
Typically, the shorter the better
Payables Days Payables/ Cost of Sales * 365 How long it takes a business to pay
its creditors
Operating Receivable Days + Inventory How long it takes for the operations
Cycle Days - Payables Days of the business to generate and pay
cash. The shorter the operating cycle,
the more efficient the business
79
Leverage Ratios
Leverage ratios are also known as gearing ratios, they help analysts
understand the levels of exposure to risk that a company has, due to
the amount of debt in its financial statements . We will focus on three
key leverage ratios
80
Leverage Ratios../2
Interest Profit Before Interest Number of times the Profit

Coverage &Tax/ Interest Expense Before Interest & Tax of a
Ratio business can pay its interest
expense
Debt to Long Term Debt /Equity Measures the level of exposure
Equity Ratio of a business to risk by
comparing its Long term
contracted debts to its Equity
Debt to Total Total Debt Liabilities / Measures the overall exposure

Assets Total Assets of the business to risk
81
…no looking back
Q&A
THANK YOU

Introduction To Financial Management

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Introduction To Financial Management

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Introduction to Financial Management

• The Board of Directors of a company is responsible for providing

• Since the collapse of companies such as Enron and WorldCom due

• However, a NED is not simply a watch dog, a good NED should

The main objectives of this highly interactive and practical session

Responsibilities of Directors on Financial Statements

• Who is a Non-Executive Director (NED)?

• Financial Statement Drivers

• A Non-Executive Director (NED) or “outside director” is a

Source: Securities and Exchange Commission (SEC) Code of Corporate Governance

Requirements for Board & Committee Membership

Ensure the integrity Oversee the Section

Ensure effective Performance

Source: SEC Code Of Corporate Governance

Source: SEC Code Of Corporate Governance

Basic understanding of financial statements and analysis

• As an integral part of the overall Board of Directors and Audit

• Proforma, Trends, Common-Size, and Ratio analysis are some of the

• Basic understanding of how the Cash flow and Changes in equity

Adherence to reporting frameworks

• Legal Standards – this is the law and regulations of the

• Professional Standards – this is the accounting standards laid down

• Any other Standards relating to the industry of the company or as

Internal & Financial Controls & Reporting

Internal Auditors Reports Review

Auditor’s Report & Statement of Directors Report -

High Risk Enron Conflict of

• In the Enron settlement, 10 directors agreed

• Business Model Canvas

• Statement of Financial Position (Balance Sheet)

• Cash flow Statement

Key Value Customer

Cost Structure (y) Revenue Streams (x)

• A system that communicates information through reports

• The reports are referred to as FINANCIAL STATEMENTS

• Financial – communicates information to external decision

• Managerial – information provided to internal decision makers

FINANCIAL ACCOUNTING MANAGEMENT ACCOUNTING

Subject to accounting standards Not subject to accounting standards

Based on historical data Considers historical data and future-

Financial management assists in taking sound financial decisions

• The end product of all accounting entries is to develop a set of reports

- A snapshot of the business at a point in time – Balance Sheet also

- A trace of the movement of funds (cash generated or expended) in the

The preparation of financial statements are regulated and therefore

Accounting Stock Financial

The Annual Report

Registered companies are required by law to ensure that an

An auditor’s responsibility is to give an opinion about whether the

An Auditor’s opinion can either be Qualified or Unqualified

The Public, Business/Financial Creditors & Loan

• Possibility of manipulating or distorting results

• Financial statements are based on historical results and these

• Flexibility in choice of accounting treatment

ASSETS = LIABILITIES OWNERS EQUITY

Balance Sheet + Income Statement

PPE: Property, Plant & Equipment