Business

Management
and
Adminstration
(BMAD5121)
LU 7 – Financial Management

Mrs. Nyiko Mogale

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Introduction
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Theme 1: Concepts and Principles of Financial Management
• LO 1: Demonstrate a basic understanding of financial management.
• LO 2: Describe the components and elements of financial statements

Learning Theme 2: Financial Calculations

Objectives • LO 3: Perform a ratio analysis on financial information.
• LO 4: Differentiate between fixed and variable costs.
• LO 5: Perform a cost-volume-profit analysis.

Theme 3: Budgeting
• LO 6: Describe a budget.
• LO 7: Describe the budgeting process.
• LO 8: Draft a budget.
• LO 9: Discuss the sources of finance
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CONCEPTS AND PRINCIPLES OF

FINANCIAL MANAGEMENT
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Business
Defined Demonstrate a basic
understanding of
financial
management
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Financial
Financial statements form an integral
Statements part of the financial function as they
summarise the financial activities of
an organisation and provide
information that is useful to the
various users of financial information
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Financial
Statements
Financial statements provide
financial information required
as a basis for various internal
and external decisions
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Provide information
Financial
Statements of the current and
prior years in order
to put the current
results in
perspective
 A complete set of financial statements consists of the following:

Statement of financial position

Financial
Statements Statement of comprehensive income or separate statement of
profit or loss and a statement of comprehensive income

Statement of changes in equity

Statement of cash flows

Notes to the financial statements

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Describe the
Business
Defined components and
elements of financial
statements
 Assets Liabilities
Elements of
Financial
Statements
Equity Income

Expenses
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 Assets

• A present economic resource controlled by the entity as

a result of past events*
• Include land and buildings, vehicles, bank(favourable
balance), inventory and trade receivables etc.
• Classified into current and non-current assets*
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*refer to the textbook for more details on these concepts
 Liabilities

• A present obligation of the entity to transfer an

economic resource of past events
• Includes long-term bank loans, bank (unfavourable
balance or overdraft) and trade payables etc.
• Classified into current and non-current liabilities*
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*refer to the textbook for more details on these concepts
 Equity

• Residual interest in the assets of the entity after

deducting all its liabilities
• Naming convention of equity items will depend on the
business form of the entity but will include items such
as share capital and retained earnings etc.
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 Expenses

• Decreases in assets or increases in liabilities that result

in decreases in equity other than those relating to
distributions to holders of equity claims
• Includes cost of sales, salaries, stationery, rental
expenses etc.
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 Income

• Increase in assets or decrease in liabilities that result

in increases in equity, other than those relating to
contributions from holders of equity claims
• Includes sales revenue and rent income etc.

16
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Statement of
profit or loss and Let’s review the different statements from the textbook
other
comprehensive
income
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FINANCIAL CALCULATIONS
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Business Perform a ratio

analysis on financial
Defined

information
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One method that the users of financial information use

to interpret the financial information is ratio analysis.

Ratio Analysis
Ratio analysis

• Performing an analysis of the financial

statement by calculating certain ratios that
will give you an indication of the financial
standing and performance of the organisation
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Profit ratios are calculated to determine the

profitability of the organisation over the period under

Profit Ratios review

Gross
Net profit
profit
percentage
percentage
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Gross Profit Percentage

Profit Ratios
Total Sales

• Calculates the organisation’s ability to generate profits by purely looking at

sales and the cost of sales.

• It will be the profit that links directly to the product and the cost thereof without
considering other operational expenses
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Net Profit Percentage

Profit Ratios Net Net

Total Sales

• Calculates the. organisation’s ability to generate profits by looking at the

organisation as a whole.

• It will therefore consider all income and expenses

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Liquidity refers to an organisation’s ability to meet its

short-term obligations.

Liquidity Ratios These ratios will measure the organisation’s ability to

pay creditors and other short-term obligations on time

Current Quick
ratio ratio
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Current Ratio

Liquidity Ratios Current Assets

Current Ratio =
Current Liabilities

• Compares the organisation’s current assets with its current liabilities to

determine whether there are sufficient current assets to cover the current
liabilities.

• This ratio is normally expressed as a ratio e.g. 1.5:1

• The norm should be 2:1 of more to indicate acceptable levels of liquidity

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Quick Ratio

Liquidity Ratios
Quick Ratio Current Assets - Inventory
(Acid Test Ratio) Current Liabilities

• Compares the current assets minus the inventory of an organisation with

current liabilities to determine whether there are sufficient liquid current
assets to cover the current liabilities.

• Inventory is removed as it cannot always be converted into cash immediately

• The norm ration should be 1:1 or more to indicate acceptable levels of liquidity
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Activity ratios are also called efficiency ratios that

measure an organisation’s ability to convert current

Activity Ratios assets and current liabilities into cash or sales.

Average Average Average

inventory collection settlement
days period period
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Average inventory days

Activity Ratios

• Measures the average amount of days that inventory is In stock.

• The acceptable number of days will depend on the type of product e.g.
perishable vs. non-perishable goods
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Average collection period

Activity Ratios Average

• The ratio measures how long it takes on average for debtors to pay their
accounts.

• This should be compared to the industry as well as to the credit terms

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Average settlement period

Activity Ratios Average Payables

Purchases

• The ratio measures how long it takes to settle outstanding accounts

• This should be in line with the supplier’s credit terms

• Usually suppliers allow for a 90-day pay-back period

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Solvency refers to an organisation’s ability to meet its

obligations and will include short-term and long-

Solvency Ratios term obligations.

ratio
Total liabilities
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Gearing ratio compares the organisation’s various

sources of funding.

Gearing Ratios • Gearing will compare the portion of finance

obtained from equity vs debt.

• High gearing means an organisation has a big

portion of debt compared to equity and vice versa.
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Business
Defined Differentiate
between fixed and
variable costs
 Fixed costs Variable costs

• Remain constant regardless of • Change in relation to the change

the activity level in a relevant in activity level e.g. direct labour,
range e.g. rent, insurance, direct materials
executive salaries • Constant per unit
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Business
Defined Perform a cost-
volume-profit
analysis
 CVP DEFINED

CVP is performed to
determine the
relationship between
sales, costs and net
profit
 BREAK-EVEN ANALYSIS DEFINED

Break-Even Analysis is a measurement

system that uses information from the income
statement and cash flow statements to
determine the amount of sales revenue
required to pay a business's fixed and
variable expenses
BREAK-EVEN ANALYSIS

Break-Even point is the

point where the income
is equal to the costs
and where no profit or
loss will be made
 Breakeven point in sales
units
• Break even sales units =
Fixed costs / Contribution
margin per unit*
*Contribution margin = Selling price per unit – Total variable costs per unit
 Breakeven point in sales
value
• Break even sales value =
Fixed costs / Contribution
margin ratio
*Contribution margin is calculated by expressing the contribution per unit as a percentage of the
sales price per unit
 Target Profit

• Units to be sold = Fixed

costs + target profit /
Contribution per unit
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BUDGETING
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Business
Defined Describe a budget
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Budgets defined Budgets are financial plans that

are prepare by an organisation to
plan for expected income and
expenses in the budgeting period
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Business
Defined Describe the
budgeting process
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Master budget
Budgeting
Process Operating budget Financial budget

Operating budget
includes various sub- Cash flow Capex
budgets budget budget

Budgeted Financial Statements

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Business
Defined Draft a budget
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How budgets are

Static vs. Flexible
prepared budgets

Zero-based vs.
incremental budgets
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Budgeted financial statements

Cash flow budget

Different types of
budgets Capital expenditure budget

Operating budget

• Sales budget
• Production budget
• Direct material budget
• Direct labour budget
• Staffing budget
• Administrative budget

Refer to section 13.5.3 for examples on how to prepare a budget

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Business
Defined Discuss the sources
of finance
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Sources of
Finance
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Equity Finance
Equity finance is finance that is
provided by the owners of the
entity
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Ordinary
shares
Equity Finance

Preference
shares
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Debt Finance
Debt finance is finance raised
through loans or debt
instruments on which interest is
payable
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Long-term
Debt Finance
financing
• Bond and debentures
• Loans
• Leases
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Short-term
financing
Debt Finance
• Factoring
• Short-term loans
• Bank overdrafts
• Lines of credit
• Revolving credit facilities
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Other sources of
Other sources of finances
Finance

• Venture capital
• Business angels
• Crowd funding
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Thanks!
Any questions?