INTRODUCTION TO FINANCIAL MANAGEMENT

Presented by: Mr. Moses Bazibu Lecturer Faculty of Commerce Makerere University Business School Kampala - Uganda
Thursday, June 16, 2011 Makerere University Business School 1

Objectives of the module

To define and understand the concept of financial management. To appreciate the functions of a Financial manager. To appreciate the major financial management decisions. To assess the tax environment. To appreciate the basic tools of financial analysis and planning.
Thursday, June 16, 2011 Makerere University Business School 2

FINANCIAL MANAGEMENT DEFINED This is the business management function that is concerned with managing a business finances. It refers to the application of financial management tools and techniques to coordinate all the financial functions in the business.
Thursday, June 16, 2011 Makerere University Business School 3

Functions of a Financial Manager

Spearheading the process of capital budgeting Managing the liquidity of the firm. Sourcing and utilization of funds Financial analysis and planning. Taking custody of companys valuable documents Paying suppliers Monitoring the banking operations Budgeting and forecasting Proper earnings management Thursday, June 16, Makerere University Business School
2011

Importance of Proper Financial Management

Maximum use of resources

Make sound business decisions

FINANCIAL MANAGEMENT

Evaluate new business opportunities

Thursday, June 16, 2011

Makerere University Business School

Measure business performance

Importance of FM Contd

Maximize use of financial resources FM allows you to identify and plan for the use of your financial resources. It provides information for financial decision making.
Thursday, June 16, 2011 Makerere University Business School 6

Importance of FM Contd

Evaluate new business opportunities FM provides the key information and answer questions of whether to exploit such opportunities or not. That is, entrepreneurs can effectively analyze a business opportunity and determine whether it is worthwhile or not.
Thursday, June 16, 2011 Makerere University Business School 7

Importance of FM Contd

Measuring business performance

FM helps the investor to monitor the progress of their business towards achieving business goals and to take corrective action where necessary.
Thursday, June 16, 2011 Makerere University Business School 8

Importance of FM Contd

Making sound business decisions The financial information systems provides a wide range of information that can be used to make better decisions. This is done using financial ratios, break even analysis etc.
Thursday, June 16, 2011 Makerere University Business School

MAJOR FINANCIAL MANAGEMNET DECISIONS

Investment decision Working capital decision Financing decision Earnings management decision

Thursday, June 16, 2011

Makerere University Business School

10

1.

Investment decision

This is also known as the Capital budgeting, and it refers to the decision to invest in long term assets. The assets are expected to be used over a long period of time e.g. when a firm acquires plant and equipment or replaces an old equipment or when you invest in research and development.
Thursday, June 16, 2011 Makerere University Business School 11

Importance of Capital Budgeting:

It determines the asset mix and hence the business risk. It involves heavy initial outlays of the business resources. Benefits accrue in future which future is associated with risk and uncertainty.
Thursday, June 16, 2011 Makerere University Business School 12

Practical Financial Management Problem. Investment appraisal using NPV, IRR, Pay back period. Cost of capital

Thursday, June 16, 2011

Makerere University Business School

13

2.

Working capital decision

This is the decision concerned with the short term assets/resources an organization uses to meet its day to day obligations. Such assets include: Cash reserves of the organisation Funds collected from debtors of the organization. Inventories
Thursday, June 16, 2011 Makerere University Business School 14

3.

Financing decision

This is the decision concerned with the sourcing of funds that are utilized under the investment decision. Much management time and effort is devoted to trying to ensure the adequacy of the company's profit flow. However, it is just as important that a company has an adequate flow of funds if it is to remain in business and very much less management time and effort is devoted to this need.
Thursday, June 16, 2011 Makerere University Business School 15

Financing decision Contd

As companies expand, they require growing amounts of cash to finance acquisitions of fixed assets. They also require growing amounts of cash to finance their growing working capital (net current assets) requirements. Some of this funding requirement will come from INTERNAL sources, whilst some will need to come from EXTERNAL sources.
Thursday, June 16, 2011 Makerere University Business School 16

4.

Earnings management decision

The Financial Manager has to decide on what to do with the earnings once they have been realised. There are three options, To declare and pay all dividends to shareholders To retain all the earnings and hence declare and pay no dividends To decide on what proportion to be paid Thursday, June 16, Makerere University Business School 17 2011 and what to be retained.

Considerations in dividends payment

Internal restrictions that do not favour dividend payment Legal considerations. Level of the firms leverage position. Ease of raising additional capital. Will payment of dividends disadvantage the shareholders or investors? The preferences of the majority shareholders. Existence of profitable investment portfolio. The levels of control desired by the shareholders University Business School Thursday, June 16, Makerere 18
2011

THANK YOU FOR YOUR ATTENTION

Question time Comments/Remarks Experiences

Thursday, June 16, 2011

Makerere University Business School

20