Level 7: Diploma in Management Studies

Managing Financial Principles

and Techniques
By:
R.A.R.G. Ranaweera

Contents

Forecasting
Funds
Investment
Investment Appraisal
Public Sector Capital Budgeting
Financial Statements
Ratios
Interpretation and limitations of ration
analysis

Process of Decision making

Identify alternatives
Identify the criteria
Collect data
Evaluate data
Select the best alternative (The decision)
Review the decision and feedback

Major Decisions in an organization

with relation to finance
Investment decisions
Capital structure decision
Dividend decision
Working capital decision

Forecasting
Financial decisions are future oriented
Mostly based on future cash flows
Needs substantial amount of predictions
about the future

Forecasting types
Based on the period
Long term
Medium term
Short term

Based on the data used

Time series
Non time series / cross sectional

Based on data availability

Projective (similar to time series)
Casual (similar to cross sectional)

What to forecast in an organization?

Fixed costs
Variable costs
Absorption rates
Level of activity
Cash flows

Data patterns and relationships

Constant
Linear trend
Cyclical
Seasonal
Random
Seasonal / Cyclical trend

Relationship identifying techniques

Scatter diagram
Covariance
Coefficient of Correlation
Page 1.11

Regression

Forecasting Techniques
Expert opinion
Delphi Method
Simple average
Moving average
Trend analysis (Page 1.18)
Regression analysis (Page 1.21 / 1.22)
Trend adjusted regression

Forecasting accuracy
MAD
Sensitivity How sensible the forecasted
value or method to the fluctuation of data
Ex / 3 month moving avg. vs. average and
accuracy

Forecasting Cash Flows (CFs)

Manufacturi
ng Account

Manufacturing
cost paid

Trading
Account

Cash receipts
from customers
/ Cash paid to
suppliers

P&L
Account
P&L
appropriatio
n Account
Balance
Sheet
Account

Other cash
receipts
and
payments
Tax paid /
Dividend
s paid
Cash and Bank
balance

Capital
Income

CFS

Capital
Expenditure

General Approach to derive CF

Project CF = Operating CF Change in
Net Working Capital (NWC) Project
Capital Spending
Operating CF = Earning before interest
and tax (EBIT) + Depreciation - Tax

Sales
Variable cost
Gross profit
Fixed costs
Depreciation
EBIT
Taxes (t%)
Net Income

Another approach to determine CF

Month/Year
Receipt
Sales Revenue
Payments
Purchase of stock
Running costs
Total payment
Opening bank balance at the beginning
Add: Total receipt
Minus: Total payment
Bank Balance at the end of the month

Jan

Feb

 Net CF = Total Receipts Total Payments