Fundamentals of Financial Management

Financial Management means applying management principles to

manage financial resources of an organization. It simply involves
planning, organizing, directing and controlling financial operations to
manage finance of an organization efficiently.
Definition of Financial Management By Authors
According to Ezra Solomon
 “Financial management is properly viewed as an integral part of
overall management rather than as a staff especially concerned
with funds raising operations.”
According to Dr. S. N. Maheshwari,
 “Financial management is concerned with raising financial
resources and their effective utilization towards achieving
the organizational goals.”
According to Solomon,
 “Financial management is concerned with the efficient use of an
important economic resource, namely, capital funds.”

What Is Financial Management Process?

Financial management means planning, organizing, directing, and
controlling the financial activities of the organization, this whole process
of managing funds is called financial management process.
Financial management helps the organization to manage the flow of
funds and make sure returns on investment.

Scope of Financial Management

Investment Decision
Financial management is involved in managing all investment decisions
of an organization. Investment decisions involve risk evaluation,
measuring the cost of capital, and estimating benefits expected out of a
particular project. Managers are responsible for deciding how available
funds should be invested in fixed or current assets to earn optimum
returns.
Working Capital Decision
Taking working capital decisions properly is another important scope of
financial management. These decisions are concerned with investment in
current assets or current liabilities. Working capital decisions revolve
around working capital and short-term financing. Current assets include
cash, inventories, receivables, short-term securities, etc. whereas current
liabilities include creditors, bank overdraft, bills payable.

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Financing Decision
Financing decisions involves deciding how the required funds should be
raised from available long term or short term sources. A financial
manager is required to form a proper finance mix or optimum capital
structure of the company to raise its value. They are required to maintain
a proper balance between equity and debt to provide maximum return to
shareholders.

Dividend Decision
Financial management involves taking all dividend decisions of the
company. These decisions involve developing a proper dividend policy
regarding the distribution or retaining of company profits. The finance
manager should decide an optimum dividend payout ratio out of
available profit. He should consider all expansion and growth
opportunities available to the organization and should avail them by
retaining a proper amount of profit.
Ensures Liquidity
Maintaining proper liquidity in an organization is another important role
played by financial management. The finance manager ensures that there
is a regular supply of funds in an organization. He monitors all cash-
inflows and cash-outflows and avoids any underflow or overflow like
situations. Ensuring the optimum level of liquidity in an organization is
one of the important scopes of financial management.
Profit Management
Financial management aims at increasing the profit of the company. It
works towards reducing the cost of various activities through proper
monitoring and setting up proper price policy. The finance manager
measures the cost of capital and chooses cheap sources of capital by
properly analyzing different sources available.
Nature of Financial Management
Estimates Capital Requirements
Financial management helps in anticipation of funds required for
running the business. It estimates working and fixed capital
requirements for carrying out all business activities. The finance
manager prepares a budget of all expenses and revenues for a particular
time period on the basis of which capital requirements are determined.

Decides Capital Structure

Deciding optimum capital structure for an organization is a must for
attaining efficiency and earning better profits. It involves deciding the
proper portion of different securities like common equity, preferred
equity, and debt. The proper balance between debt and equity should be
attained which minimizes the cost of capital.
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Select Sources Of Fund
Choosing the source of funds is one of the crucial decisions for every
organization. There are various sources available for raising funds like
shares, bonds, debentures, venture capital, financial institutions, retained
earnings, owner investment, etc. Every business should properly analyze
different sources of funds available and choose one which is cheapest
and involves minimal risk.
Selects Investment Pattern
Once funds are procured it is important to allocate them among
profitable investment avenues. The investment proposal should be
properly analyzed regarding its safety, profitability, and liquidity. Before
investing any amount in it all risk and return associated with it should be
properly evaluated.
Raises Shareholders Value
Financial management works towards raising the overall value of
shareholders. It aims at increasing the amount of return to shareholders
by reducing the cost of operations and increasing the profits. The finance
manager focuses on raising cheap funds from different sources and
invest them in the most profitable avenues.
Management Of Cash
Financial management monitors all funds movement in an organization.
Finance managers supervise all cash movements through proper
accounting of all cash inflows and outflows. They ensure that there is no
situation like deficiency or surplus of cash in an organization.
Apply Financial Controls
Implying financial controls in business is a beneficial role played by
financial management. It helps in keeping the company actual cost of
operation within the limit and earning the expected profits. There are
various processes involved in this like developing certain standards for
business in advance, comparing the actual cost or performance with pre-
established standards, and taking all required remedial measures.

Objectives of Financial Management

Financial management ensures that an adequate amount of funds is
always available in business from different sources and also it earns the
best return on its investments. It aims at the achievement of two main
objectives for an organization that is profit maximization and wealth
maximization.
1. Profit Maximization

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Profit maximization is the main objective of financial management.
Because every company invests a huge amount, so the company wants
to return on investment. A financial manager should take proper
decisions in order to maximize profit in the short and long term.
2. Wealth Maximization
Wealth maximization of shareholders shares is also the main objective
of financial management. Because shareholders provide their money to
the company. So, it is the responsibility of financial managers to
maximize the value of their shares.
3. Proper Mobilization
Mobilization of finance is an important objective of financial
management. The finance manager should decide the best sources of
finance which would be the cheaper and high volume of funds. The
finance manager collects funds from various sources i.e, shares,
debentures, bank loans, etc.
4. Create Goodwill
Financial manager should give more profits to the company and
shareholders. if the finance manager will able to do goodwill of the
company will also increase. that will help the company to collect funds
in the future.

5. Effective Utilisation Of Funds

After getting funds, the finance manager of the company should
utilize effectively. finance manager must not invest funds in
unrealistic and unprofitable projects.
Functions of Financial Management

1. Estimates Capital Requirement

Financial management is concerned with the estimation of an adequate
amount of funds required for an organization. The finance manager takes
into account organization goals, objectives, and costs associated with
them for determining the fund requirements. Future growth policies and
programs of an organization are also considered by the finance manager.
Proper estimation helps in procuring and utilizing required funds
efficiently thereby improving the revenue of the business.
2. Determines Capital Structure
Deciding the proper capital structure is a key decision to be taken by the
finance manager. Once capital requirements are estimated now the
proper capital mix is selected. The finance manager decides the optimum
proportion of different long term and short term equity debt securities.
The determination of capital structure tells the amount of fund that the
company is possessing and the additional amount that it needs to raise

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from outside. The finance manager selects such sources where cost of
procuring funds can be minimized.
3. Select Source Of Fund
The finance manager chooses from among different sources of funds
available for raising the additional fund requirements. After deciding on
an optimum capital structure, the finance manager selects suitable
sources of funds. The different sources available are the issue of shares
and debentures, commercial banks, financial institutions, public
deposits, etc. Share and debentures are considered favorable for meeting
long term capital requirements. Whereas for meeting short term capital
requirements banks, financial institutions, public deposits, etc. is
suitable.
4. Select Investment Pattern
The selection of proper patterns of investment is a must for attaining
desired goals and profitability. The finance manager should invest the
funds of an organization into a proper class of assets or avenues. Proper
analysis of risk and return factors of different avenues should be done
before allocating funds in them. It will help in ensuring safety on
investment so that higher regular return is attained.
5. Manages Cash
Financial management manages all cash requirements of the business. It
aims at maintaining an adequate amount of cash required for successful
operations of business activities. It records all cash expenses and
incomes fairly into accounts for avoiding any error. For meeting
different expenses like salaries and wages payment, payment to
creditors, electricity, and water bills payment, purchase of raw materials,
and maintenance of adequate stock proper amount of cash are required.
Management of cash helps in meeting these expenses timely and wisely.
6. Adequate Use Of Surplus
Financial management focuses on the efficient utilization of surplus
earned by the business. The efficient use of surplus earned affects the
growth and expansion plan of business and also the shareholder
interests. The finance manager has two options available for utilizing the
surplus i.e. Declaration of dividend to shareholders and retaining surplus
for plowing back of profits into the business. A proper balance between
the two should be done considering the expansion, diversification, and
innovation plans of business and also the interests of shareholders.
7. Implement Financial Controls
Financial management monitors and controls the finances of business for
maintaining a balance between risk and return. It exercises to minimize
the risk and expenses associated with undergoing the required
operations. Not only its plans, procures, and utilizes the funds efficiently
but also monitors the overall finance of the business. It uses different
techniques like budgetary control, returns on investment, cost control,

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ratio analysis, cost, and internal audit, break analysis as a device
for controlling finances.

What is Operations Management?

Operation management means the administration of business activities
for attaining higher efficiency. It is a process of planning, organizing,
and supervising the operations of the business for better productivity.
Operation management aims at reducing the cost to business by avoiding
any wastage of resources.

Functions of Operations Management

 Finance- Finance plays a main function in operations
management. The operation manager should not waste finance in
unproductive tasks. He should ensure that all finance of the
organization is utilized for the manufacturing of useful goods or
services which may satisfy consumer wants.
 Operation– The function of operation management is basically
concerned with planning, organizing, directing and controlling of
daily routine operations of an organization. The operation manager
ensures that all activities are going effectively and efficiently.
 Strategy– The strategy formulation is also the main function of
operation management. The operation manager should have pre-
planned tasks. Formulation of plans and tactics helps the
organization in optimizing their resources and developing a
competitive edge over competitors.
 Product Design– It is the duty of operations manager to design
the product according to the market trends and demands. He
should ensure that innovative techniques are incorporated within
the product and its quality is maintained.
 Maintaining Quality– Operations managers should ensure a
better quality of products. The manager should not compromise
with the quality of Products. They should work on quality
management and should supervise all tasks. If any defects are
found they should take steps to rectify such defects.
Importance of Operations Management
 Helps in achievement of objectives: Operations management
has an effective role in the achievement of pre-determined
objectives of an organization. It ensures that all activities are going
as per plans by continuously monitoring all operations of
organization.
 Improves Employee productivity: Operation management
improves the productivity of employees. It checks and measures
the performance of all people working in the organization.
Operation manager trains and educate their employees for better
performance.

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 Enhance Goodwill: Operation management helps in improving
the goodwill and presence of the organization. It ensures that
quality products are delivered to all customers that could provide
them better satisfaction and makes them happy.
 Optimum utilization of resources: Operation management
focuses on optimum utilization of all resources of the organization.
It frames proper strategies and accordingly continues all operations
of the organization. Operation managers keep a check on all
activities and ensure that all resources are utilized on only useful
means and are not wasted.
 Motivates Employees: Operation management helps in motivating
the employees towards their roles. Operation managers guide all
peoples in performing their roles and provide them with better
atmosphere. Employees are remunerated and rewarded according
to their performance level.

Scope of Operations Management

 Increase Productivity: Operation management played an
important role in increasing the productivity of business. It
manages all aspects of production activities to achieve highest
efficiency possible. Operation manager are responsible for
designing production plan for carrying out the operations. They
ensure that all inputs used by organisations are efficiently
transformed into outputs that is products or services. It is crucial
for all business for properly managing their day to day activities
and efficient utilisation of all its resources which helps in raising
productivity.
 Raises Revenue: Operational management directly influences the
profitability of the business. It works on reducing the cost of
operations to business by reducing the wastage of resources.
Operations managers monitor every production activity and take
all necessary steps for maintaining efficiency in the organisation.
They try to maintain an appropriate balance between cost and
revenue.
Maintenance of quality of products and delivering them as per
customer needs is another function played by these operation
managers. It helps in attracting more and more customers which
increase the overall revenue of business.
 Achievement Of Organisation Goals: Every organisation strives
towards achievement of its desired goals. Proper management of
production activities helps business to properly implement their
strategic plans in their operation. Operation management ensures
that all operations of business are going in desired direction.
It regularly monitors every activity and takes all corrective
measures as required according to prevailing situations. Proper

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 functioning of business as per strategic plans helps in achievement
of desired goals.
 Improve Customer Satisfaction: Customer satisfaction is
necessary for every business to improving its relations with its
customers. It helps them in retaining them for the long term.
Operation management monitors the quality of products
manufactured by organisations. It ensures that high-quality
products are produced in accordance with the requirements of
customers. When products manufactured by business completely
fulfil the needs of customers, their satisfaction level will improve.
 Reduce Investment Need: Operation management reduces the
additional capital requirements of the business. It ensures that all
capital employed in the business are efficiently used. Management
of operations ensures that all production activities go uninterrupted
without any shortage of capital. By increasing the efficiency and
avoiding the wastage of employed resources, it avoids any
deficiency of capital in business. Businesses are not required to
invest more in their production activities.
 Enhance Goodwill: Maintaining proper goodwill in the market is
the goal of every business. Operation management focuses on
improving the position of the organisation in the market. It ensures
that business works for providing better services to its customers.
Business should manufacture durable and high-quality products
that may provide better satisfaction to users. Customers will gain
confidence in their products which will improve their market
image.
 Improve Innovation: Operation management helps in
implementing innovative changes in organisational activities. All
decision regarding production planning is taken by operation
managers by doing research and analysis of prevailing market
situations. It takes into account all technological changes and
builds a strong base of knowledge and operations. This helps in
bringing various innovations in operations of the business.
5 ISSUES FACING FINANCIAL MANAGEMENT KEY

Transformation is accelerating in every part of all enterprises. But the

pressure is on for the finance department as the source of decision-
making on key strategic investments.

And finance faces its own challenges – both in terms of supporting

enterprise priorities and optimizing its own work. With pressure coming
from every side, determining the correct areas of focus can be difficult.

A recent report by The Hackett Group has highlighted multiple issues

and areas of priority for finance leaders in the coming year. We believe
the following 5 areas represent the most important financial issues to

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address – both in terms of unlocking value for the organization and in
improving finance’s ability to provide key strategic advice and
partnership to other departments.

1. Taking the position of a strategic adviser

Hackett highlights the increasing role of finance in setting the
company’s strategic course has been growing through COVID crisis.
The need for realistic scenario planning has seen finance professionals
working more and more closely with business leaders to offer insight
that informs some of the difficult choices we’ve all had to make in the
past year – from the allocation of resources to the execution of plans.
Finance is playing an increasingly pivotal role in this kind of high-level
decision-making – particularly in areas of investment like digital
transformation and comparing the relative value, risk, and return profiles
of different projects. The need for strategic advice from finance is only
set to grow as the pandemic forces organizations to fast-track
digitization and the adoption of new technologies and capabilities.
2. Improving financial agility
Fast-paced change is making predicting the financial needs of tomorrow
increasingly difficult. It requires organizations to be capable of rapidly
reassessing their priorities, redistributing funds and resources, and even
making strategic pivots on a month-to-month basis.
This shift towards constant and rapid change means finance departments
are under pressure to shift from traditional forecasting approaches. And
to adopt more flexible rolling forecasts and scenario plans that create the
flexibility and agility necessary to realign the priorities of the entire
organization to meet a variety of possible futures.
The expectation is that this trend will drive greater integration of finance
with the rest of the enterprise through digital operations platforms,
which will enable the finance team to manage new capabilities like
analytics, smart forecasting, and company-wide risk management.
3. Modernizing finance software platforms
Digitization is the order of the day – and in many cases, that means
replacing the brittle and outdated legacy systems that stand in the way of
flexibility and integration. The need for improved capabilities like up-to-
the-minute data analytics has already seen a projected increase in cloud
ERP adoption (up 25%.)
The cloud's unique capabilities - from virtually unlimited storage and
compute power that allows for advanced analytics and AI-based process
automation to improved security and scalability – present a considerable
advantage to finance leaders. Enabling integration between different
source systems and making a "single source of truth" possible across the
whole enterprise for more effective and agile decision-making.
4. Unifying financial strategies with skill and talent strategies to
support business needs
Until recently, talent wasn’t a key priority for the typical CFO. But with
the rapid advancement of data science and its role in corporate
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governance, new skillsets (from cyber security experts to data analysts)
has forced a reassessment of the importance of reskilling and upskilling
to underpin transformation efforts both in finance and the wider
organization.
This new focus on talent management will require finance to make key
strategic alliances with human resources – combining knowledge bases
and data to come up with strong long-term strategies to attract necessary
talent and keep skills current.
“Gartner® research shows that five digital competencies are key and
applicable to back-, middle- and front-office finance work. They are
technological literacy, digital translation, digital learning and
development, digital bias management, and digital ambition”.
5. Leveraging new financial technologies
According to Gartner, “RPA and workflow automation remain key [as a
digitalization initiative]. Process automation has brought speed,
efficiency, and cost optimization to finance. Given these benefits, the
use of robotic process automation (RPA), the de facto automation choice
for finance teams, has grown exponentially”.
The Hackett Group attributes the successful transformation of the
finance function to the broader implementation of RPA, AI, and
cognitive tools.
We believe that the future for organizations will depend on introducing
automation to complex processes that then gives finance the space, time,
and ability to identify new ways of innovating and creating value. This
will help secure the team’s position as trusted advisors to the business,
with the ability to help the organization identify opportunities for
increasing revenues, save money, and deploy finances strategically to
ensure continued growth.
Financial Environment
The financial Environment is an important part of an economy, where the major
participants are the business firms, investors, and the market. An important
ingredient of the financial environment is the financial market.
The financial environment in a country highlights the condition of the financial
markets as well as the economy of the county. Understanding monetart and fiscal
policies helps us in understanding the financial system.
The Financial market in the country id divided into two broad categories:
1. Capital Market
2. Money Market
What is Financial Market?
Financial markets can be defined as those markets buyers and sellers trade or buy
and sell various long terms and short terms securities such as equities, bonds,
currencies, and derivatives. Financial markets have their own rules and regulations
for transactions.
The Indian financial market comprises mainly of the following:

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  Credit Market
 Money Market
 Capital market
 Foreign exchange market
 Debt market
 Derivatives market
All these are important in the financial environment of an economy. All these
markets are not yet as developed and regulated as the credits/foreign/money/capital
market etc. Banks have been allowed to undertake insurance business. The bank
assurance market is also emerging.
TYPES OF FINANCIAL MARKETS
Financial markets can broadly be divided into two categories we have here
discussed the types of financial markets:
1. Capital Markets
2. Money Market
3.
Capital Markets
The capital market is generally understanding as the market for long-term fund.
However, sometimes the term is used in a very broad sense to include the market
for short term funds also. Capital markets are one in which individuals and
institutions, generally buy and sell long term equities and securities.
Here individuals and institutions purchase and sell securities to raise funds. Capital
market deals in ordinary securities such as shares and debentures, bonds, and
government securities.
The funds which flow into the capital market come from individuals, merchant
banks, commercial banks, and non-bank financial intermediaries, such as insurance
companies, finance hoses, unit trusts, investment trusts, venture capital firms,
leasing finance, and mutual funds, building societies, etc. capital markets are of
two types:
1. Primary Market
2. Secondary Market
Primary Market are ones in which new securities and issue are bought and sold.
The types of issues in the primary market are listed below.
 Initial public offer (IPO) (in case of an unlisted company).
 Follow-on public offer (FPO).
 Rights offer such that securities are offered to existing shareholders.
 Preferential issue/bonus issue
 The composite issue, that is, a mixture of rights and public offers, or offers
for sale (offer of securities by existing shareholders to the public for
subscription).
Secondary Market is one in which securities are bought and sold after being
initially offered to the public in the primary market and/or listed on the stock
exchange.

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Money Market
The money market is the market for short-term funds as distinct from Capital
Market which deals in long-term funds. In simple words, the money market is that
segment of the financial market that deals in short-term financial instruments
having high liquidity.
The participants of the money market purchase and sell financial securities of very
short-term maturity and the period varies from a few days to not more than a year.
Money Market is a center for dealings, mainly for short-term monetary assets. It
meets the short –term requirements of the borrowers and provides liquidity or cash
to the leaders.

TOPIC 2
Core Concepts of Financial
Management
Financial management is a fundamental skill that consists of some particular concepts and tactics
that are useful for business and personal life. It basically refers to planning and directing the
company’s financial resources to generate capital from investors. Financial management’s
importance in an organization is like blood in the body. Any mismanagement in finance can lead
to severe liquidation.

Thus, we bring some core concepts of financial management to enlighten you with the basics of
finance.

1. Budgeting
The most crucial concept of financial management is budgeting. Spending money without a plan
can lead to overspending, decreased profits, and missed bill payments. Thus, ensure to create a
budget list each year for your business, including income and expense projections, cash flow
statement, profit/loss statement, and balance sheet.

2. Financial Reporting
You need accurate information regarding the marketing, pricing, distribution strategies, hiring, of
your business to make the most effective decision. Because each decision may affect your
business’s bottom line.

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That’s why accurate financial reporting helps you know where your business is standing
financially. And how well your company is performing in the market, and what resources you
need in the future.

Here, a balance sheet lets you see your company’s assets and liabilities, cash flow reports tell
you about the bill payment and collection process. You see how interest cost information gives
you a decisive profit margin. All of these things are possible with efficient financial planning.

3. Cash Flow Management

One of the common reason that small businesses has to face a severe struggle with cash flow
management is poor planning. It usually happens when income is higher than expenses, and the
owner finds himself short of cash and unable to pay bills on time.

This problem can be handled with accurate and timely cash flow statements that help you avoid
customers’ loss, damage to credit, and production showdowns.

4. Proper Tax Planning

Effective tax planning helps you lower your income tax liability, reduce payroll taxes, avoid
paying sales taxes late, and any surprise that arises with a tax bill larger than your expectation.

Without proper tax planning, finance management is impossible because you end up paying
more taxes with the risk of fines, liens, and penalties. If tax planning is intricate for you to
manage, take help from a tax expert to minimize your tax obligations.

5. Debt Management
High debt can quickly lower your credit score to zero and decrease your ability to get more credit
when you need it. It also raises the interest rate that you need to pay on future borrowing.
However, all these circumstances are avoidable with effective financial planning and
management, including monitoring your debt and supervising it daily.

In A Nutshell

Financial management is one of the essential responsibilities for business owners to carry
throughout their careers. They must reflect the potential consequences of their management
decision on profits, the company’s financial condition, and cash flow.

SUB T2-A

What Is Risk and Return?

Risk and return in financial management is the risk associated with a certain
investment and its returns. Usually, high-risk investments yield better financial
returns, and low-risk investments yield lower returns. That is, the risk of a
particular investment is directly related to the returns earned from it.
The risk and return analysis aim to help investors find the best investments. Hence,
investors use many methods to analyze and evaluate the market, industry, and
company. Diversification of the portfolio, i.e., choosing an optimal mix of different
investment options, can reduce the risk and amplify returns.

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Financial risk and return in investing are perhaps the most crucial parameters
considered by investors while choosing an investment option. Individuals who
invest on a large scale analyze the risks involved in a particular investment and the
returns it can yield. Let’s take a step-by-step approach to understand the concept.

First, let’s begin with risk. A risk can be defined as the uncertainty related to the
investment, market, or company. Investors want profits, and the risks can
potentially reduce the profits, sometimes even making a loss for them.

Many types of risk and return concept are involved in investments – market-
specific, speculative, industrial, volatility, inflation, etc. However, studying the
market thoroughly can help investors make the right decisions. They can analyze
the trends and forecast the situation.

Now, let’s understand return on investment, or ROI. It can be explained as the

financial gains from investing in a certain investment. Ideally, individuals prefer
investments that give them higher returns, like stocks of Google, Amazon, etc.

Risk And Return Of A Portfolio

One of the ideal measures to reduce risk while simultaneously maximizing

revenue is by diversifying the investment portfolio. Investors can choose multiple
investments that offer different returns accordingly.

There are different investment options: stocks, bonds, commodities, mutual

funds, etc. Stocks usually carry high chance of failure but can give good returns.
On the other hand, government bonds can carry low to zero risk but offer low
profits.

There are many benefits of diversifying an investment portfolio. Investors can

choose to invest in stocks with high risk and compensate for the risk by investing
in bonds. Bonds usually give assured returns, although it is low. They can also
invest in mutual funds for a longer period with moderate risk.

In studying the risk and return concept, some financial experts suggest investing
in different industries or markets. Because different sectors prosper and fall at
different times. For example, during the onset of the COVID-19 pandemic, many
internet and e-commerce companies flourished, whereas automobile companies
didn’t do well. So, taking different investment stands can help investors in the long
run.

Types

The risk and return analysis is an important concept in the financial market. Both
pf them can be categorized as follows:

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 Types Of Risk

 Market risk – It is also called systematic risk and arise due to various market
related factors like economic and political problems, interest rate and currency
fluctuations, etc. They have a huge impact on the investors.
 Specific risks – They are related mostly to company itself. They may be controlled
through diversification an monitoring.
 Credit risk – This is related to credit worthiness of the company or business. If the
financial condition of the business is good, it will be able to meet its current and
future obligations and repay its debts on time. This will lead to good credit rating.
Credit risk is the result of deteriorating financial health of the company.
 Liquidity risk – This is the result of the business not being able to earn good
revenue to meet its financial obligations and maintain high working capital.
 Interest rate risk – The fluctuations in the interest rates in an economy can affect
the business’s borrowing capacity.
 Inflation – The inflation leads to erosion of value of investments and the value of
cash flows in future.

Types Of Return

 Capital gains – Any good investment will rise in value as time passes by. Thus the
assets will be valued higher if they are sold later on as compared to its purchase
price, giving capital gain.
 Dividends – they are a steady source of income for investors who invest in shares
of companies giving regular dividends which are a part of the profits set aside for
investors.
 Interest – Borrowers like individuals or corporates borrow money for meeting
expenses or capital requirements. The lenders give the funds to get interest on the
principal amount which is a return on investment for the lenders.
 Rental income – Any property rented out can earn rent on a regular basis, which is
also a return in the real estate property.
 Return from currency trading – Profits earned from trading in exchange rates by
using the differences is exchange rate of different currency is also a form of return
for those who do currency trading.

Thus the above a some important types of risk and return on investment that are
very popular in the financial market.

Examples

Here are a few examples of risk and return concept in investing.

Example #1

Consider the example of Jane, who has been investing for many years. However,
she wants to get maximum returns. She consults a money manager, John, for this
purpose. John advises her to diversify her portfolio.

He suggests the following:

 Hold a FAANG stock.

 Invest in stocks ranging from $100 to $150 like Volkswagen or Walmart.
 Invest in U.S. Treasury bonds.
 Invest in mutual funds.
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This would help her to get better returns and offset losses if any.

Example #2

Let’s look at a recent example of risk and return analysis. Currently, most stock
prices are falling, especially in the United States. Many are convinced that
an economic recession accompanies this bear market. Therefore, many people are
in a hurry to sell off their shares when they can still make profits, even if
negligible.

However, the New York Times has published a new article that tells investors not
to sell their stocks in a bear market. Instead, they should hold on to it. Even a
cheap stock wouldn’t be a loss in the long run. The theory behind this is that
investors will be able to buy low and sell high when the prices increase, which it
eventually will. But this will work out only for those ready to invest long-term.

Also, it doesn’t mean buying and accumulating cheap stocks. Instead, investors
should analyze the market and the company. If they decide to buy in a bear market,
the stock should be promising in the long run. And, like any investment, this too
requires a lot of planning.

How are risk and return related?

Financial risk and returns have a direct correlation. That is, high risk corresponds
to increased returns and vice-versa. However, it is necessary to remember that the
high risk can mean potential loss, and there might not be any revenue at all in some
cases.

What is risk and return analysis?

While investing, it is essential to evaluate the performance of the stocks, the
company, and the market. Analysis helps the investor get better insights into the
investments they find attractive. It includes evaluating the company’s financial
performance by considering profits, EBITDA, etc., and analyzing the stock
performance trends over the years.

Why risk and return is an important concept in finance?

This concept is necessary to optimize returns, rather than just investing randomly.
This is because the main objective of investors is to make profits. Risk and ROI are
the two important factors that affect profits, hence the importance of the concept.

SUB T2-B

Value Chain
A value chain is a series of consecutive steps that go into the creation of a finished
product, from its initial design to its arrival at a customer's door. The chain identifies

16
each step in the process at which value is added, including the sourcing,
manufacturing, and marketing stages of its production.

A company conducts a value-chain analysis by evaluating the detailed procedures

involved in each step of its business. The purpose of a value-chain analysis is to
increase production efficiency so that a company can deliver maximum value for the
least possible cost.

 A value chain is a step-by-step business model for transforming a product or

service from idea to reality.
 Value chains help increase a business's efficiency so the business can deliver
the most value for the least possible cost.
 The end goal of a value chain is to create a competitive advantage for a
company by increasing productivity while keeping costs reasonable.
 The value-chain theory analyzes a firm's five primary activities and four
support activities.

Understanding Value Chains

Because of ever-increasing competition for unbeatable prices, exceptional products,
and customer loyalty, companies must continually examine the value they create in
order to retain their competitive advantage. A value chain can help a company to
discern areas of its business that are inefficient, then implement strategies that
will optimize its procedures for maximum efficiency and profitability.

In addition to ensuring that production mechanics are seamless and efficient, it's
critical that businesses keep customers feeling confident and secure enough to remain
loyal. Value-chain analyses can help with this, too

Components of a Value Chain

In his concept of a value chain, Porter splits a business's activities into two
categories, "primary" and "support," whose sample activities we list
below.1 Specific activities in each category will vary according to the industry.
17
Primary Activities

Primary activities consist of five components, and all are essential for adding
value and creating competitive advantage:

1. Inbound logistics include functions like receiving, warehousing, and

managing inventory.
2. Operations include procedures for converting raw materials into a finished
product.
3. Outbound logistics include activities to distribute a final product to a
consumer.
4. Marketing and sales include strategies to enhance visibility and target
appropriate customers—such as advertising, promotion, and pricing.
5. Service includes programs to maintain products and enhance the consumer
experience—like customer service, maintenance, repair, refund, and
exchange.

Support Activities

The role of support activities is to help make the primary activities more efficient.
When you increase the efficiency of any of the four support activities, it benefits
at least one of the five primary activities. These support activities are generally
denoted as overhead costs on a company's income statement:

1. Procurement concerns how a company obtains raw materials.

2. Technological development is used at a firm's research and development
(R&D) stage—like designing and developing manufacturing techniques and
automating processes.
3. Human resources (HR) management involves hiring and retaining
employees who will fulfill the firm's business strategy and help design,
market, and sell the product.
4. Infrastructure includes company systems and the composition of its
management team—such as planning, accounting, finance, and quality
control.

Examples of Value Chains

Starbucks Corporation

Starbucks (SBUX) offers one of the most popular examples of a company that
understands and successfully implements the value-chain concept. There are
numerous articles about how Starbucks incorporates the value chain into its
business model.

Trader Joe's

Another example is privately held grocery store Trader Joe's, which also has
received much press about its tremendous value and competitive edge. Because
the company is private, there are many aspects of its strategy that we don't know.
However, when you enter a Trader Joe's store, you can readily observe instances
of Trader Joe's business that reflect the five primary activities of the value chain.

1. Inbound logistics. Unlike traditional supermarkets, Trader Joe's does all of its
receiving, shelving, and inventory-taking during regular store hours. Although
potentially maddening for shoppers, this system creates a ton of cost savings in
18
terms of employee wages alone. Moreover, the logistics of having this work take
place while customers are still shopping sends the strategic message that "we're all
in this together."

2. Operations. Here's an example of how a company could apply the value chain
creatively. In primary activity number two above, "converting raw materials into
finished product" is cited as an "operations" activity. However, because
converting raw materials is not an aspect of the supermarket industry, we can use
operations to mean any other regular grocery store function. So, let's substitute
"product development," as that operation is critical for Trader Joe's.

The company selects its products carefully, featuring items that you generally
can't find elsewhere. It's private-label products account for more than 80% of its
offerings, which often have the highest profit margins, too, as Trader Joe's can
source them efficiently in volume.2 Another vital piece of product development
for Trader Joe's is its taste-testing and chef-partnership programs, which ensure
high quality and continuous product refinement.

3. Outbound logistics. Many supermarkets offer home delivery, but Trader Joe's
does not. Yet here, we can apply the activity of outbound logistics to mean the
range of amenities that shoppers encounter once they are inside a Trader Joe's
store. The company has thought carefully about the kind of experience it wants us
to have when we visit its stores.

Among Trader Joe's many tactical logistics are its in-store tastings. Usually, there
are a few product tastings happening simultaneously, which create a lively
atmosphere, and often coincide with the seasons and holidays. The tasting stations
feature both new and familiar items that are prepared and served by staff.

4. Marketing and sales. Compared to its competitors, Trader Joe's barely does
any traditional marketing. However, its entire in-store experience is a form of
marketing. The company's copywriters craft product labels to appeal specifically
to its customer base. Trader Joe's' unique branding and innovative culture indicate
that the company knows its customers well—which it should, as the firm has
actually chosen the type of customers it prefers and has not deviated from that
model.

Via this indirect marketing of style and image, Trader Joe's has succeeded in
differentiating itself in the marketplace, thus sharpening its competitive edge.

5. Service. Customer service is paramount for Trader Joe's. Generally, you see
twice as many employees as shoppers in their stores. Whatever work they are
doing at the moment, the friendly, knowledgeable, and articulate staff are there
primarily for you. Employees welcome shoppers' interruptions and will instantly
rush to find your item or answer your question. In addition, the company has
always employed a no-questions-asked refund program. You don't like it, you get
your money back—period.

This list could go on and on before ever reaching the four support activities cited
above, as Trader Joe's is a wildly successful example of applying value-chain
theory to its business.

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 Topic 3
Financial Statement Analysis: How It’s Done, by Statement Type

What Is Financial Statement Analysis?

Financial statement analysis is the process of analyzing a company’s financial
statements for decision-making purposes. External stakeholders use it to understand
the overall health of an organization and to evaluate financial performance and
business value. Internal constituents use it as a monitoring tool for managing the
finances.

KEY TAKEAWAYS

 Financial statement analysis is used by internal and external stakeholders to

evaluate business performance and value.
 Financial accounting calls for all companies to create a balance sheet, income
statement, and cash flow statement, which form the basis for financial
statement analysis.
 Horizontal, vertical, and ratio analysis are three techniques that analysts use
when analyzing financial statements.

How to Analyze Financial Statements

The financial statements of a company record important financial data on every
aspect of a business’s activities. As such, they can be evaluated on the basis of past,
current, and projected performance.

In general, financial statements are centered around generally accepted accounting

principles (GAAP) in the United States. These principles require a company to create
and maintain three main financial statements: the balance sheet, the income
statement, and the cash flow statement. Public companies have stricter standards for
financial statement reporting. Public companies must follow GAAP, which requires
accrual accounting.1 Private companies have greater flexibility in their financial
statement preparation and have the option to use either accrual or cash accounting. 2

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Several techniques are commonly used as part of financial statement analysis. Three
of the most important techniques are horizontal analysis, vertical analysis, and ratio
analysis. Horizontal analysis compares data horizontally, by analyzing values of line
items across two or more years. Vertical analysis looks at the vertical effects that line
items have on other parts of the business and the business’s proportions. Ratio
analysis uses important ratio metrics to calculate statistical relationships.

Types of Financial Statements

Companies use the balance sheet, income statement, and cash flow statement to
manage the operations of their business and to provide transparency to their
stakeholders. All three statements are interconnected and create different views of
a company’s activities and performance.

Balance Sheet

The balance sheet is a report of a company’s financial worth in terms of book

value. It is broken into three parts to include a company’s assets, liabilities,
and shareholder equity. Short-term assets such as cash and accounts receivable
can tell a lot about a company’s operational efficiency; liabilities include the
company’s expense arrangements and the debt capital it is paying off; and
shareholder equity includes details on equity capital investments and retained
earnings from periodic net income. The balance sheet must balance assets and
liabilities to equal shareholder equity. This figure is considered a company’s book
value and serves as an important performance metric that increases or decreases
with the financial activities of a company.

Income Statement

The income statement breaks down the revenue that a company earns against the
expenses involved in its business to provide a bottom line, meaning the net profit
or loss. The income statement is broken into three parts that help to analyze
business efficiency at three different points. It begins with revenue and the direct
costs associated with revenue to identify gross profit. It then moves to operating
profit, which subtracts indirect expenses like marketing costs, general costs, and
depreciation. Finally, after deducting interest and taxes, the net income is reached.

Basic analysis of the income statement usually involves the calculation of gross
profit margin, operating profit margin, and net profit margin, which each divide
profit by revenue. Profit margin helps to show where company costs are low or
high at different points of the operations.

Cash Flow Statement

The cash flow statement provides an overview of the company’s cash flows from
operating activities, investing activities, and financing activities. Net income is
carried over to the cash flow statement, where it is included as the top line item
for operating activities. Like its title, investing activities include cash flows
involved with firm-wide investments. The financing activities section includes
cash flow from both debt and equity financing. The bottom line shows how much
cash a company has available.

Free Cash Flow and Other Valuation Statements

21
Companies and analysts also use free cash flow statements and other valuation
statements to analyze the value of a company . Free cash flow statements arrive at
a net present value by discounting the free cash flow that a company is estimated
to generate over time. Private companies may keep a valuation statement as they
progress toward potentially going public.

Financial Performance

Financial statements are maintained by companies daily and used internally for
business management. In general, both internal and external stakeholders use the
same corporate finance methodologies for maintaining business activities and
evaluating overall financial performance.

When doing comprehensive financial statement analysis, analysts typically use

multiple years of data to facilitate horizontal analysis. Each financial statement is
also analyzed with vertical analysis to understand how different categories of the
statement are influencing results. Finally, ratio analysis can be used to isolate
some performance metrics in each statement and bring together data points across
statements collectively.

Below is a breakdown of some of the most common ratio metrics:

 Balance sheet: This includes asset turnover, quick ratio, receivables

turnover, days to sales, debt to assets, and debt to equity.
 Income statement: This includes gross profit margin, operating profit
margin, net profit margin, tax ratio efficiency, and interest coverage.
 Cash flow: This includes cash and earnings before interest, taxes,
depreciation, and amortization (EBITDA) . These metrics may be shown on
a per-share basis.
 Comprehensive: This includes return on assets (ROA) and return on equity
(ROE), along with DuPont analysis.

What are the advantages of financial statement analysis?

Financial statement analysis evaluates a company’s performance or value

through a company’s balance sheet, income statement, or statement of cash flows.
By using a number of techniques, such as horizontal, vertical, or ratio analysis,
investors may develop a more nuanced picture of a company’s financial profile.

What are the different types of financial statement analysis?

Most often, analysts will use three main techniques for analyzing a company’s
financial statements.

First, horizontal analysis involves comparing historical data. Usually, the purpose
of horizontal analysis is to detect growth trends across different time periods.

Second, vertical analysis compares items on a financial statement in relation to

each other. For instance, an expense item could be expressed as a percentage of
company sales.

Finally, ratio analysis, a central part of fundamental equity analysis, compares

line-item data. Price-to-earnings (P/E) ratios, earnings per share, or dividend yield
are examples of ratio analysis.

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What is an example of financial statement analysis?

An analyst may first look at a number of ratios on a company’s income statement

to determine how efficiently it generates profits and shareholder value. For
instance, gross profit margin will show the difference between revenues and the
cost of goods sold. If the company has a higher gross profit margin than its
competitors, this may indicate a positive sign for the company. At the same time,
the analyst may observe that the gross profit margin has been increasing over nine
fiscal periods, applying a horizontal analysis to the company’s operating trends.

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 F-TOPIC 1

Investment Appraisal
There are different techniques used for appraisals. Professionals use
discounted cash flow techniques like NPV, considering the time value of
money, giving highly accurate results. At the same time, they also use non-
discounted techniques like payback period giving less accurate results since it
does not incorporate the time value of money concept. Using more than one
method gives a better insight into the investment opportunity.

Key Takeaways
 Investment appraisal definition portrays it as the techniques used by firms
and investors to determine whether an investment is profit-making or not.
 The examples include assessing the profitability and affordability of investing
in long-term projects, new products, machinery, etc.
 Its methods are categorized into discounted and non-discounted techniques.
 Examples of commonly used discounted techniques are net present value
(NPV), internal rate of return (IRR), profitability index (PI), and discounted
payback period. In contrast, non-discounted techniques include the payback
period and ARR.

Investment Appraisal Explained

The investment appraisal process is used by professionals to examine whether the

investment option under consideration is good for the firm or not. However, it isn’t
easy to ensure that an examination will be 100% accurate. Every investment entails
risks. However, appraisals facilitate management in making rational choices based
on the expected outcomes. Furthermore, management must align investment
decisions with the objective of maximization of shareholders’ value. Hence
conducting the valuation technique helps them corroborate the future cash inflows
from the investment.
The process is crucial when the investment involves a large sum of money, scarce
resources, etc. In such cases, the entities cannot rely on subjective data; they need a
combination of quantitative and qualitative aspects to analyze the return on
investment and risk. For example, management should not decide to construct a
new plant, buy machinery, and invest in research and development without
evidence of their initial outlay producing good future cash inflows.
The input to appraisal technique is another important observation. The projected
future cash flows and discount rate are the two key inputs. Other essential factors
to be considered include investment’s environmental impact, social impact,
operational benefits, risk elements, and legal considerations.

Example of Investment Appraisal

Consider the example of a property investment appraisal to better understand the

practical application of appraisal techniques.

The specialists or values employ discounted cash flow methodologies to estimate

the property’s worth. It includes discounting future elements such as investment

24
 income and costs to account for the time value of money. Hence, this valuation
procedure aids in estimating the factors like selling price, investment value, and
purchase price of a property. This outcome can be used to identify whether the
market is under-or over-priced and influence investors and other market
participants when buying and selling real estate.
Frequently Asked Questions (FAQs)

Define investment appraisal meaning?

It is the process of evaluating an investment opportunity to understand whether it is
profitable to the organization or not. The process primarily focuses on assessing
the economic feasibility of the proposed investment or project.

Why is investment appraisal important?

It forms an important element of fundamental analysis for many businesses and
investors. For example, the method derives whether the project under appraisal
process yields profit or loss in the future, the time it takes to return the benefit and
risk associated, etc. Different appraisal techniques give results in numerical terms,
and having quantitative results reduces the complexity of management decision-
making.

What is the investment appraisal formula?

The formula varies with the technique used for appraisal. For example, if the
profitability index technique is used, the formula will be “present value of future
cash flows divided by the initial investment.” Whereas, if the method used is the
payback period, the formula is “initial investment divided by cash flow per year.”

TOPIC 2
Risk Analysis
WHT IS RISK ANALYSIS?
Risk analysis is the procedure of analyzing and recognizing any kind of risk
that could adversely affect the primary business objective or any critical
projects that are about to take place in an organization in regards to avoiding
or to take necessary initiatives to reduce such risks in the organization.

The risk analysis process helps in assisting the efficient operations of the
entity by identifying and evaluating the risk in projects conducted in the
organization and helps in resolving and making decisions as to whether to
accept the project. It is also considered that conducting risk analysis would be
beneficial to the organization to make effective decisions.

Key Takeaways
 Risk analysis is a systematic process that involves identifying, assessing, and
evaluating potential risks to understand their likelihood of occurrence and
potential impact. Its objective is to develop strategies to manage or mitigate
those risks effectively.
 Risk analysis enables businesses and individuals to make informed decisions
by considering the potential risks associated with a specific course of action

25
 or project. It involves quantifying and prioritizing risks based on their
significance.
 The risk analysis process typically includes identifying risks, assessing their
probability and impact, analyzing their interdependencies, and developing
risk mitigation strategies or contingency plans.

Risk Analysis Explained

The risk analysis of a project or any other business operation is about
recognizing the adverse effects in an organization before taking up any new
important project or changing any essential objective that can impact the
entity negatively. The main aim is to estimate the extent of risk in the
organization, the methods that can help manage or reduce the risk, and the
approaches that can help address such risks. In addition, specific strategies
can help analyze the risk in the Projects about to take place in the
organization, like the Delphi technique, Swift analysis, Decision tree
analysis, Bowtie analysis, etc., in the later stage.

Analyzing risk in a project can have both a positive and negative effect. Such
effects can have both worldly and non-materialistic impacts on the
organization. A risk is an uncertain event that can have both positive and
negative effects.

Any organization shall follow the process for risk analysis of a project or
any other investment or operation which is discussed as below –

1. Identification of Risk

The First step comes as identifying the risk. Team members shall gather all
the inputs that shall be used in the projects and recognize the outcome of the
projects and the number of ways such as risk involved in the process, etc.

2. Analysing the Risk

After identifying risk, it’s likely to understand and assess the extent of risk
and nature of risk that most likely to happen and to what extent it may occur
to the organization shall be analyzed.

3. Evaluating the Risk

Risk analysis tools helps to estimate the capacity of risk that may happen.
Hence in evaluating the risk, the team shall rank the calculated risk to decide
whether to accept such risk or not.

4. Treat the Risk

In this step, the team shall decide whether to continue the project or not; if so,
26
 the project is accepted, then they shall try to treat or resolve the issue by
modifying any changes required in the project.

5. Review the Risk

As the risk is uncertain at any point in time, reviewing risk is essential to

evaluate risk in the project from time to time to avoid any future disturbance.

Methods
There are various methods that are commonly used in businesses to assess the
risk level. We can o through them in detail below:

Methods of Risk analysis include both Qualitative and Quantitative

application techniques. Most projects shall apply Quantitative risk
analysis tools in measuring risk, which is overlooked in terms of formal
qualitative risks. Here is some of the useful qualitative risk analysis
considered to be involved in project management.

1. Delphi Technique – Delphi Technique uses expert opinion to identify, analyze,

and evaluate risks on an individual and anonymous basis.
2. SWIFT Analysis – In SWIFT analysis, the team investigates how changes are
approved, designed, or planned that might affect the project in any way. It is a
systematic team-based approach.
3. Decision Tree Analysis – This analysis is done by proposed decisions and finding
different pathways and results due to the proposed findings. After all the
probabilities are analyzed, the course of action of modifying and verifying further
may take place.

Example

Let us assume that a cosmetics manufacturing company is planning to expand its

number of outlets in the city. There are already some very strong competitors who
are very well established in the cosmetics market and has good brand name.

For this company, the competitors are a huge risk. It is necessary for the
management to devise plans to upgrade its quality and introduce range of products
that the competitors do not produce, so as to capture a larger market share. It is
also important to search for locations that do not have good cosmetics outlets so
that they can establish themselves in those areas.

The above are some of the strategies that the new company should implement to
expand its business.

Importance

Some importance of risk analysis methods are mentioned below:

 Risk analysis is one of the essential procedures which is not done diligently or not
given enough significance will lead to many problems, which may, in turn, could
cause the failure of the project.

27
 A well-analyzed project will have chances of going more smoothly and have a
higher chance of success and will do more to reduce risk than any risk plan, no
matter how good it may be.
 It will help the business survive competition and retain its brand image and
customer base which are some of the main factors of increasing profitability.

Benefits

Let us identify some benefits of the process.

 Risk analysis methods helps to make very calculated and accurate decisions while
performing a project as, without proper research, management of the project would
not be considered to give positive results.
 It helps in avoiding the potential losses that could occur in the future. Some risks
which can be calculated and avoided and should be analysed for so that the
business is able t perform the maximum using its existing resources.
 It helps to determine the level of impact that a risk can have in an organization.
This is very important because it helps in devising plans and strategies that will
control or minimize the potential risk.

Limitations

Along with the benefits it is also necessary to look into the limitations of the risk
analysis techniques.

 It is measured based on probability, so it cannot give the exact measurement of

the risk exposure.
 Risk analysis is based on specific data, and if there is any manipulation in the data
or the data is wrong, it will not give the correct results.
 It requires the time and expertise of the person conducting the analysis. In case the
person is not aware of all the techniques and methods necessary, then the desired
purpose cannot be solved. Also, there is no standard method for its calculation, so
it depends on the personal approach.

TOPIC 3
COST CAPITAL
Cost of capital is a calculation of the minimum return that would be necessary in
order to justify undertaking a capital budgeting project, such as building a new
factory. It is an evaluation of whether a projected decision can be justified by its cost.

Many companies use a combination of debt and equity to finance business expansion.
For such companies, the overall cost of capital is derived from the weighted average
cost of all capital sources. This is known as the weighted average cost of
capital (WACC).

KEY TAKEAWAYS

 Cost of capital represents the return a company needs to achieve in order to

justify the cost of a capital project, such as purchasing new equipment or
constructing a new building.
 Cost of capital encompasses the cost of both equity and debt, weighted
according to the company's preferred or existing capital structure. This is
known as the weighted average cost of capital (WACC).

28
  A company's investment decisions for new projects should always generate a
return that exceeds the firm's cost of the capital used to finance the project.
Otherwise, the project will not generate a return for investors.

Understanding Cost of Capital

The concept of the cost of capital is key information used to determine a

project's hurdle rate. A company embarking on a major project must know how
much money the project will have to generate in order to offset the cost of
undertaking it and then continue to generate profits for the company. The
company may consider the capital cost using debt—levered cost of capital.
Alternatively, they may review the project costs without debt—unlevered.

Cost of capital, from the perspective of an investor, is an assessment of the return

that can be expected from the acquisition of stock shares or any other investment.
This is an estimate and might include best- and worst-case scenarios. An investor
might look at the volatility (beta) of a company's financial results to determine
whether a stock's cost is justified by its potential return.

What Is a Financial Decision-Making Process?

The financial decision-making process refers to the series of steps that individuals or
businesses undertake to identify, evaluate, and select among different financial
alternatives or options.

It involves analyzing financial information, weighing the pros and cons of different
choices, and making decisions that align with their overall financial goals and
objectives.

The financial decision-making process can encompass a wide range of activities,

including budgeting, investing, borrowing, and managing risk, and it can be
influenced by a variety of factors such as economic conditions, regulatory
environment, and personal preferences.

Effective financial decision-making requires a solid understanding of financial

concepts and principles, as well as the ability to make informed choices based on
relevant information and analysis.

Tools and Techniques for Financial Decision-Making

Financial Planning Software
Financial planning software can help individuals and businesses organize their
financial data, develop budgets, and forecast future financial performance.

Budgeting and Forecasting Tools

Budgeting and forecasting tools can be used to create detailed financial plans and
projections, helping individuals and businesses understand their financial position
and make informed decisions.

Risk Management Techniques

Risk management techniques, such as diversification and hedging, can help
individuals and businesses mitigate the potential negative consequences of
financial decisions.

Scenario Analysis and Simulation

29
Scenario analysis and simulation can be used to evaluate the potential outcomes
of different financial strategies and assess the impact of various factors on financial
performance.

Role of Financial Professionals in the Decision-Making Process

Financial Advisors and Consultants
Financial advisors and consultants can provide valuable guidance and advice to
individuals and businesses navigating the financial decision-making process.

Certified Financial Planners

Certified Financial Planners (CFPs) are professionals who have met rigorous
education, experience, and ethical requirements, and can help clients develop
comprehensive financial plans and strategies.

Benefits of Working With Financial Professionals

Working with financial professionals can help individuals and businesses make
more informed financial decisions, as these experts can offer insights, guidance,
and expertise based on their experience and knowledge.

Ethical Considerations in Financial Decision-Making

Ethical Dilemmas in Financial Decision-Making
Ethical dilemmas can arise during the financial decision-making process, as
individuals and businesses must balance the pursuit of financial goals with the
need to adhere to ethical standards and principles.

Corporate Social Responsibility and Sustainability

Corporate Social Responsibility (CSR) and sustainability initiatives are
increasingly important factors in financial decision-making, as companies must
consider the Environmental, Social, and Governance (ESG) impacts of their
decisions.

Importance of Ethics in Long-Term Financial Success

Adhering to ethical principles and engaging in responsible financial decision-
making can contribute to long-term financial success, as it helps build trust,
credibility, and positive relationships with stakeholders.

The Bottom Line

The financial decision-making process involves identifying financial goals,
gathering relevant information, analyzing data, developing alternative solutions,
selecting the best strategy, implementing the chosen strategy, and monitoring and
evaluating the decision.

Key factors influencing financial decision-making include personal factors

(financial knowledge, risk tolerance), economic factors (market trends, interest
rates), and regulatory factors (taxation policies, compliance).

Tools such as financial planning software, budgeting tools, risk

management techniques, and scenario analysis can aid in decision-making.

Financial professionals, such as advisors and certified planners, play a crucial role
in providing guidance.

30
 Ethical considerations, including ethical dilemmas, corporate social responsibility,
and sustainability, are important aspects of financial decision-making for long-term
success.

TOPIC 2 FINANCIAL PLANNING AND CONTROL

Typically, financial planner come with perfect solutions for financial

planning and control notes and also financial planning and control process flow
chart. Occasionally there are some different aspects with management. Mostly they
are focus is actually reducing costs instead of budget management. Hardly we must
have noticed that they consider to focus on financial control.

It is obvious that we are definitely live in age of financial planning and controlling.
Whether it is a student, small-business owner, industrialist or large company has
roles and responsibility in order to financial planning and control is everyday life
strategies therefore it is an essential factor in business finance as well as personal
finance.

Financial Planning and Control Process Flow Chart

Here we have presented an ideal financial planning and control process flow chart
which a financial manager should undergo with. Typically, financial planning and
control process flow goes through following steps:

 Listening: Focusing towards goals, desires and dreams of a company.

 Analysis Information: To perform data analysis for prepare a plan.

 Planning: Create a plan which will best suit for your client requirements.

31
 Implementation: Design strategies, methods and implementation of investment

plan for a company.

 Control & Monitoring: Keep periodically check whether the designed

techniques worked well for an organization or need further improvements.

Importance of Financial Planning and Control

One field that requires increased attention and understanding is precautionary
financial planning and controlling processes. Many entrust their administrative as
well as sinking fund money towards financial managers along with little or no
investigation into the way regarding how financial supervisor handles financial
planning and controlling internally. Here are listed out some of the key importance
of financial planning and control within a management of an organization. They
are:

Segregation of Tasks and Duties

When dividing responsibilities anywhere between people increases the risk of
protection against errors, fraud, oversights, etc. For example, if someone reports
cash received as well as then you check bank statements, it becomes smoother
towards detect dishonesty. Segregation of tasks and duties is among the importance
of financial planning and control for robust environment.

Qualification of Advisors and Employee

An organization must promise that your financial managers and advisory team are
enough competent. Also they should be properly trained with their task for
financial planning and control of an organization.

External Audits and Review

Certain organizations have always been legislatively forced to need audits prepared
every year, other companies have a concerns for performing external reviews and
external audits.

Often those who have concerns regarding not to have externally audits performed.
It is seriously advised to those who have concerns should discourage their
thoughts. Provided costs are an issue, then maybe you can choose to go for
external audit at least once in three years.

Financial Planning and Control Problems

In spite of all write-up all the financial planning and control notes concerning that
increasing investment, raising funds and utilization of those funds. Most business
then again need additional funds to make their goals achievable. When performing
research, you will need to respond to financial planning and control problems
regarding:

 What things impacted that implementation of financial planning to control

program at the business?

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 Do you might think that the investment supervisor or manager has effective

performed their work? If no, then does it affect financial planning and control

within a company.

 What other various type of financial planning and controlling should be used

exactly? and how effective that will control it?

TOPIC 3

STRATEGIC FINANCIAL MANAGEMENT

What Is Strategic Financial Management?

Strategic financial management means not only managing a company's finances but
managing them with the intention to succeed—that is, to attain the company's long-
term goals and objectives and maximize shareholder value over time.

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