Financial Management: Key Concepts and Cycle Analysis
Financial Management: Key Concepts
Tasks of Financial Administration
- Planning: Planning for the future of the company.
- Control: Monitoring and managing financial performance.
- Asset Management: Managing new investments, applications, and resources.
- Liability Management: Fundraising and managing debt.
Key Financial Decisions
- Investment Decisions: Evaluating the profitability of agreements.
- Financing Decisions: Balancing resources and contractor obligations.
- Dividend Decisions: Optimizing yields for the company.
Major Financial Risks
- Economic Risk: Competition, changing economic conditions, and new products.
- Financial Risk: Risks involving the financial management of the company, including the ability to meet financial obligations.
National Financial System
The national financial system consists of public and private financial institutions that facilitate fundraising, distribution, and transfer of funds between economic agents through various financial instruments.
Financial Intermediation
Financial intermediation reconciles the interests of economic agents by applying surplus savings to cover deficits, often through borrowed resources. This can be direct, through commercial banks, or indirect, acting on behalf of third parties.
Working Capital Management
Understanding Working Capital
Working capital refers to a company’s current assets. It represents the total resources required to fund the company’s operating cycle. Effective working capital management involves strategic buying and selling decisions, as well as managing operating and financial activities.
Net Working Capital (NWC)
Net Working Capital (NWC) represents the net value of applications processed in assets, net of short-term debt.
Formula: NWC = Current Assets – Current Liabilities
With a tighter focus: NWC = (Equity + Long-Term Liabilities) – (Fixed Assets + Long-Term Investments)
Working Capital Indicator (WCI)
The Working Capital Indicator (WCI) is a metric often used in practice. It is calculated as follows:
Formula: Equity – Fixed Assets = Current Assets
The resulting value indicates the volume of own resources that the company has applied to its current assets.
Operating and Financial Cycles
Operating Cycle
The operating cycle begins with the purchase of raw materials, includes storage, production, and sales, and concludes with the actual receipt of sales revenue.
- PMEmp: Average storage time of raw materials.
- PMF: Average manufacturing time.
- PMEpt / PMV: Average storage time of finished products / Average sales time.
- PMC: Average collection period.
- PMPF: Average payment period to suppliers.
Cycle Calculations
- Total Operating Cycle: PMEmp + PMF + PMV + PMC
- Economic Cycle: PMEmp + PMF + PMV
- Financial Cycle: (PMEmp + PMF + PMV + PMC) – PMPF
Cycle Expression
Identify the correct expression:
a) (Current Assets – Current Liabilities) = (Equity + Long-Term Liabilities) – (Fixed Assets + Long-Term Investments)
Example Calculation
Percapta LTDA has an equity of 50,000. The net capital stock is 20,000, current assets are 200,000, and total assets are 300,000. What is the participation rate of capital from third parties in relation to equity?
Resolution
Total assets = Total liabilities + Equity = 300,000 Equity = 50,000
Third-party capital = Total debt = Total assets – Equity = 300,000 – 50,000 = 250,000
Value of third-party capital / Equity = 250,000 / 50,000 = 500%