ENTREPRENEURIAL

FINANCE
PART 1

Financial Performance Targets

Managing Cash Flows &
Time Value Of Money
 ENTREPRENEURIAL FINANCE

Introduction

This course introduces financial management as an

important tool for planning and taking business decisions.
Learners are advised to revise the earlier module on
accounting and record keeping for a stronger foundation.
The end result of all decisions are reflected in past
financial statements.
 Judging by the financial performance of an enterprise,
decision makers would wish they could turn back the
clock and make higher profits. Financial Managements
makes this wish come through at least by helping
managers plan for the future in several ways by applying
basic business finance principles.
 Business finance or entrepreneurial financial
management uses financial statements with other
economic or operational data to measure performance
and plan for the future.

 Performance is key because operating , financial and

investment activities of a business relate the each other
based on the performance of each component, overall..
Sustained management of these three activities
determines profitability and growth.
BUSINESS STRATEGY

The business strategy is a combination of product and

market selection with the entire mechanism of the

business model-the strategy is a design of how the

managers or owners intend the create value, profit

and grow according to the expectation and timing of

key stakeholders.
BUSINESS STRATEGY

The business strategy will involve how sales will be

sustained, operations will be efficient, competition

will be managed and product positioned. In some

cases the business strategy also details growth plans

acquisition of assets expansion projects and

financing with investment decisions.

BUSINESS STRATEGY

 An enterprise is better of with a strategy than without

one. Financial management will help new business
managers to begin to understand the implication of
decisions especially from a “Cost/ Benefit’’ stand point.
 SETTING TARGETS
BUSINESS STRATEGY 101
.

Learning to manage an enterprise by rules guidelines

and polices is the starting point to mastering the
discipline of setting business goals, objectives and
creating initiatives to help you measure and achieve
them.
TARGETING FINANCIAL RESULTS
 Financial results are the performance of a business
as expressed in the Financial statements; Income
statement explains Profits, Losses and Operational
details, the Balance Sheet measures growth.

 While the cash flow statement measures Cash flows

for a particular time
 Depending on a number of industry related factors like
competition product life cycle and market growth; a business
can actually make projections on the desired performance of
the business.

 These Targeted results helps the system to focus its efforts

and resources on the direction and course it charts for itself;
that way the business can look back and analyse the pros and
cons of the decisions that led to the outcomes at hand.
 Targets plans strategies and decisions can help
businesses navigate through a number of alternative
courses of action with real data on merits and demerits of
such actions.

 This helps the system to strengthen those measures that

led to desirable results and change policies that led to
failure.
FINANCIAL PERFORMANCE TARGETS
 Consider a business takes a loan of NI5,000,000:00 at
an interest rate of 27% Payable in Three Years .

 What Financial Targets Should such an enterprise set, to

help it run the business, pay back the loan and make a
profit.

 The first step is to set a return on investment target (ROI)

higher than the cost of capital or loan interest if he does
that a target ROI of 47%
 ROI of 47% on an investment of N15,000,0000 will assume
a profit of 15M x 47% or N15,000,000 x .47 = N7,050,000
ROI = Net Profit
Total Investment

 A target Net Profit of N7,050,000 ( Working backwards )

would require a favorable net profit margin to pay the
principal and interest in a year
(N6,350,000) and still make a profit of N7,050,000.
SETTING PROFIT TARGETS AND CASH FLOWS
 Target Net Profit Margin is required having gotten the cost of
capital (Interest rate) and ROI, Target, Net Profit , we need to
assume a net profit Margin to help us set a sales or turnover
Target.

 Net Profit Margin is = Net profit x 100

Sales or Turnover
we will assume a Net Profit
margin of (25%) ( Working Backwards the expected sales on a
Net profit margin of 25%, with net profit of N7,050,00 =
{7,050,000 ÷ .25} =N28,200,000
Question1 : Use the following data to build up a projected
Profit and loss account for a Bakery Business located in
Zaria Kaduna State.

Loan Capital (Only Financing)= N15,000,000

Cost of Capital/ Anum 27% (Payable in Three years)
Target ROI.. 49%
Target Net Profit Margin 23%
Taxation is 30% of Net Profit

All administrative expenses should not exceed N1M

Net Monthly Salaries is estimated at N260,000
Question2 :Cash flow Projections
Apply the same Variables in Question 1 above and develop a
Monthly Cash flow Projection for One Year.

Take Note of the following in the cash flow Projections

1. Monthly Beginning and Ending Cash Balance must be
indicated
2. Determine the operational constraints and favorable
scenarios in your Cash flow fluctuations
3. Include Operations, investments and Financing Items
4. suggest and include extra sources of cash inflows
possible
 Question 3: What are the major differences between
the cash flow statement and income statement.
TIME VALUE OF MONEY
Money has time value. One Naira (N1) today is more
valuable than (N1 next year) hence. It is on this
concept “the time value of money” is based. The
recognition of the time value of money and risk is
extremely vital in financial decision making.
Most financial decisions such as the purchase of assets or
procurement of funds, affect the firm’s cash flows in different
time periods. For example,

 if a fixed asset is purchased, it will require an immediate

cash outlay and will generate cash flows during many
future periods.

 Similarly if the firm borrows funds from a bank or from

any other source, it receives cash and commits an
obligation to pay interest and repay principal in future
periods.
The firm may also raise funds by issuing equity shares. The
firm’s cash balance will increase at the time shares are
issued, but as the firm pays dividends in future, the
outflow of cash will occur.

Sound decision-making requires that the cash flows which a

firm is expected to give up over period should be logically
comparable. In fact, the absolute cash flows which differ in
timing and risk are not directly comparable.
Cash flows become logically comparable when they are
appropriately adjusted for their differences in timing and
risk.

The recognition of the time value of money and risk is

extremely vital in financial decision-making. If the
timing and risk of cash flows is not considered, the firm
may make decisions which may allow it to miss its
objective of maximising the owner’s welfare.
The welfare of owners would be maximized when Net
Present Value is created from making a financial
decision. It is thus, time value concept which is
important for financial decisions.
Thus, we conclude that time value of money is central to the
concept of finance. It recognizes that the value of money is
different at different points of time. Since money can be put
to productive use, its value is different depending upon when
it is received or paid.

In simpler terms, the value of a certain amount of money

today is more valuable than its value tomorrow

It is not because of the uncertainty involved with time but

purely on account of timing. The difference in the value of
money today and tomorrow is referred as time value of
money
 REASONS FOR TIME VALUE OF MONEY
Money has time value because of the following reasons:
1. Risk and Uncertainty : Future is always uncertain and
risky. Out flow of cash is in our control as payments to
parties are made by us.
There is no certainty for future cash inflows. Cash inflows is
dependent out on our Creditor, Bank etc. As an individual or
firm is not certain about future cash receipts, it prefers
receiving cash now.

2. Inflation: In an inflationary economy, the money received

today- has more purchasing power than the money to be
received in future. In other words, a rupee today represents a
greater real purchasing power than a rupee a year hence.
 3.Consumption: Individuals generally prefer current
consumption to future consumption.

4. Investment opportunities: An investor can profitably

employ a rupee received today, to give him a higher value to
be received tomorrow or after a certain period of time.
TECHNIQUES OF TIME VALUE OF MONEY
There are two techniques for adjusting time value of money. They are:

1. Compounding Techniques/Future
Value Techniques &

2. Discounting/Present Value Techniques

The value of money at a future date with a given interest rate
is called future value. Similarly, the worth of money today
that is receivable or payable
at a future date is called Present Value.

Compounding Techniques(Future Value )Fv

In this concept, the interest earned on the initial principal
amount becomes a part of the principal at the end of the
compounding period.
Suppose you invest N1,000 for three years in a saving
account that pays 10 per cent interest per year. If your let your interest
income be reinvested, your investment will grow as follows:

 First year : Principal at the beginning 1,000

 Interest for the year (` 1,000 × 0.10) 100

 Principal at the end 1,100

 Second year : Principal at the beginning 1,100

 Interest for the year (` 1,100 × 0.10) 110

 Principal at the end 1210

 Third year : Principal at the beginning 1210

 Interest for the year (` 1210 × 0.10) 121

Principal at the end N1,331

Formula: FVn = PV(1 + r)n
In this equation (1 + r)n is called the future value interest
factor (FVIF)
where, FVn = Future value of the initial flow in years
hence
 PV = Initial cash flow

 r = Annual rate of Interest

 n = number of years
By taking into consideration, the above example, we get
the same result.

FVn = PV (1 + r)n
FVn = 1,000 (1.10)3
FVn = N1,331
 EXAMPLE

If you deposit N55,650 in a bank which is paying a 12% per

cent rate of interest on a ten-year (10) time deposit, how
much would the deposit grow at the end of ten years..
SOLUTION:
FVn = PV(1 + r)n or FVn = PV(FVIF12%,10 yrs)
 FVn = N55, 650 (1.12)10

 = N55,650 × 3.106 = `N1,72,848.90

1. What is an investment

2. Identify 5 types of financial investments or securities.

3.Mention 4 factors that influence time value of money

4. Define the following terms; a)Present value(PV) b- Future Value
(FV) c- Interest rate d) Compounding e)discounting.

5. Let’s suppose your rich uncle promises to give you N70,000,000 in 15

years. Assuming a six percent interest rate, what is the present value
of the amount your uncle is promising to give you in 15years.

6. Calculate the future value (in 7 years) of N13,425,000. that is

earning 11(%) percent; compound interest,