Corporate Finance: Management, Planning, and Analysis
Topic 1: Financial Management
What is Financial Management?
Financial management refers to the efficient and effective management of money (funds) in such a manner as to accomplish the objectives of the organization.
The Chief Financial Officer (CFO) is in charge of a company’s financial operations.
Key Aspects of Financial Management
- Anticipation: Financial management estimates the financial needs of the company.
- Allocation: It uses this collected finance to purchase fixed and current assets for the company.
- Distribution: It divides the company’s profits among the shareholders. It keeps a part of the profits as reserves.
- Assessment: It also controls all the financial activities of the company.
Accounting vs. Finance
- Accounting: The systematic and comprehensive recording of financial transactions pertaining to a business.
- Finance: Seeks to maximize the value of the company and, therefore, the wealth of the shareholders.
Financial Planning
Financial planning is the task of determining how a business will afford to achieve its strategic goals and objectives.
Proper financial management is key to ensuring liquidity and access to financial resources in the coming years.
Planning Timeframes
- Long-Term: 3-5 years
- Intermediate: Near future
- Short-Term: Below 1 year
Planning Activities
Assess environment, confirm objectives, identify resources, quantify resources, calculate costs, summarize costs, identify risks.
Risk Management
Avoid the risk/controlling: Taking steps to prevent losses. Assume the risk and the financial responsibility. Transferring the risk to another part.
Insurance is a means of protection from financial loss.
A Business Continuity Plan (BCP) is the process of creating systems of prevention and recovery to deal with potential threats to a company.
- Step 1: Risk Identification
- Step 2: Determine the continuity strategy for each risk
Topic 2: Financial Analysis
Key Financial Statements
- Financial Situation: Balance Sheet
- Gains and Losses: Income Statement
- Liquidity of Business: Cash Flow Statement
Income Statement
It measures the profitability of the business over a period of time.
Balance Sheet
The balance sheet reflects the patrimonial situation of a company at a particular time.
Cash Flow Statement
Cash flow is the net amount of cash and cash equivalents moving into and out of a business (manage, plan, control).
Surplus and Deficit Management
- Surplus (Excess of Treasury): The company must place the surplus in their own activities or outside through different investments (stock, funds, bonds) in order to achieve profitability with it.
- Deficit (Cash Required): The company must seek outside short-term financing through lines of credit, bank loans, etc.
Accounting Profit vs. Economic Profit
Accounting profit measures the actual cash outlays and inflows, while economic profits incorporate a “what if” analysis.
Key Financial Ratios and Concepts
- Debt Ratio: It is defined as the ratio of total – long-term and short-term – debt to total assets, expressed as a decimal or percentage.
- Solvency: Solvency is the ability of a company to meet its long-term financial obligations.
- Rotation: A company’s efficient way to manage their assets (inventories) to generate sales.
- Liquidity: A measure of the extent to which a person or organization has cash to meet immediate and short-term obligations, or assets that can be quickly converted to do this.
The “current ratio” can reveal whether the company has enough assets to generate the cash needed to pay off debt.
Production and Financial Terms
- Production Capacity: Volume of products/services that can be generated by a production plant or enterprise in a given period by using current resources.
- Revenue: Revenue is the total amount received by a business or recognized as earned when the business sells something, usually services and goods.
- Operating Expenses: Costs you incur while operating your business not directly attributable to the manufacture of your product.
- Cost of Goods Sold: The expenses your business incurs in the production of goods (salaries, utilities expenses, goods expenses, etc.).
- Inventory: Anything that goes into producing the items sold by your business.
- Stock: Stock is the finished product that is sold by the business.
- Depreciation: Depreciation is defined as the reduction of recorded cost of a fixed asset in a systematic manner until the value of the asset becomes zero or negligible. (Useful life, salvage value, the cost of the asset).
- Tax: A tax is a mandatory financial charge or some other type of levy imposed upon a taxpayer by a governmental organization in order to fund various public expenditures.
- Gross Margin: The gross margin number represents the portion of each dollar of revenue that the company retains as gross profit.
- Net Profit Margin: The net profit margin takes into account all business expenses.
- Cost of Finances (COF): COF is the cost and interest and other charges involved in the borrowing of money to build or purchase assets.
- Liability: A liability is an obligation of the entity to transfer cash or other resources to another party. (current/long-term).
- Working Capital Ratio: The working capital ratio (Current Assets/Current Liabilities) indicates whether a company has enough short-term assets to cover its short-term debt.
- Equity: Equity is the set of goods and rights belonging to a person, natural or legal.