FINANCIAL MANAGEMENT

Module:

DBA Program(THAI NGUYEN UNIVERSITY)

Vietnam

DR. TRAN DAI NGHIAACIS, BSCP, MAEAB, PhD-NREM

FINANANCIAL MANAGEMENT

COURSE OVERVIEW :

The main focus of a business organization is to earn profits.

It is therefore important for managers to understand therelationship between business plan and financial plan , so thatthey can make better business decisions that has an impact on thefinancial objective of the management & investors.

Their ability to use various financial management tools are crucial for effective managers because major business decisions require good comprehension and analysis of financial information.

OBJECTIVES :

* Able to read and clearly understand Financial Statements.

• Able to calculate the financial ratios and interpret the financial position of a company.

* Develop an analytical mind in analyzing financial reports.

* Able to calculate and evaluate the viability of a project through Net Present Value (N.P.V) or Internal Rate of Return (I.R.R)

FINANCIAL MANAGEMENT

What is Financial Management It involves the understanding of Financial concepts and the application of financial tools to achieve the financial objective of the firm effectively and efficiently

1) Functions of Business2) Different Types of Company Structure3) Business Plan to Financial Plan4) Accounting Equation5) Financial Budgets6) Understanding Financial Accounting7) Understanding Financial Reports8) Ratio Analysis & Interpretation of Accounts9) Capital Budgeting

THE FUNCTION OF BUSINESS

PART 1

Business is the function of commercial activities with the purpose of achieving a profit.

Note:

Profit is the excess of sales revenue over the costs spentto earn the said revenue.

Types of Business

Manufacturing&

TradingTrading Services

1) Buy Raw Materials & Make into Finished Goods.2) Sell the Finished Goods

i) Consumer Electronicsii) Testing & Automation Equipmenti) Computersii) LCD Monitors

1) Buy Finished Goods from Suppliers.2) Sell the Finished Goods

i) Hypermarkets,ii) Car distributors,iii) Books & Stationariesiv) Office Equipments

1)Provide professional Services to Clients:

i) Education/Training,ii) Insurance,iii) Hospitality,iv) Medical Centresv) Bankingvi) Satellite TV

Combo

DIFFERENT TYPES OF COMPANY STRUCTURES

PART 2

Business Organizations

BusinessObjectives

SoleProprietor Partnership Limited

Liability

DIFFERENT TYPES OF BUSINESS ORGANIZATION STRUCTURES & THE NATURE OF THEIR RISKS & ADVANTAGES

Mr A100%

Mr A (Trading as)Big Business Enterprise

CustomersSuppliers :

Goods,Services,

Financing

LegalPosition

LegalPosition

SOLE PROPRIETOR

Advantages1) Fast decision Making2) Can do any business (legal)3) Only Mr A is the boss.

Risks :1) Non perpetual2) Legal liabilities is 100% personal3) Restriction in raising funds ( subject to personal net worth)4) Cannot attract investors.

Mr A70%

Mr B30%

Mr A and Mr B (Trading as)Super Big Business Enterprise

Suppliers:Goods,

Services,Financing

Customers

LegalPosition

LegalPosition

PARTNERSHIPS

Advantages

1) Fast Decision2) Any business (legal)3) Two boss – Mr A & Mr B.

Risks1) Non Perpetual2) Legal liabilities are 100% & jointly3) Restriction in raising funds (Subject to joint networth)4) Cannot attract investors (Cannot divest part of the company)

Mr A33.33%

Mr B33.33%

Mr C33.33%

Viet Nam Joint Stock Co

Paid up Capital : VND 30,000(comprising 3 shares of VND 10,000/- each)

InvestsVND 10,000

InvestsVND 10,000

InvestsVND10,000

1 shareOf VND10,000

1 shareOf VND10,000

1 share ofVND 10,000

Shareholders

Companyissuessharesto acknowledgeinvestment receivedproportionately

Advantages

1)The shareholders are not personally liable for the liabilities of the company.

2) Liabilities are limited to the extent of their investments.

3) Company is a legal entity with own name

4) Company can exists perpetually ( unless wound-up).

5) Easier to attract investors & financiers

6)Shareholders reap better returns as their shares can be valued and sold to others

PRIVATE LIMITED LIABILITY COMPANY ( BY SHARES )

Suppliers Customers

Legal Position

InitialAllot/mt

ShareholdersMr A-33.33%Mr B - 33.33%Mr C -33.33%

Shareholders appoints theBoard of Directors

(2 or more individuals)

Board of Director appoint Managing Directors/ CEOManages the daily operations of the business

Viet Nam Join Stock Company

(separate legal entity fromshareholders/directors)

(can sue or be sued in theFirm’s name)

Customers dealing with Viet Nam JSC

Sell(LegalPosition)

Security(Personal guarantees)

Suppliers dealing withViet Nam JSC

Danger!(Personal guarantee)

Buy (Legal Position)

Managing a Corporation ( Limited Liability)

2) Articles of Association- Internal rules to governing the rights of parties and the decision making process in a limited liability corporation.

1) Memorandum of Association -Nature of Business of the Company

Corporate Governance-Ethical Conduct( always act according to law and best interests of investor)

PART 3

FROM BUSINESS PLAN TO FINANCIAL PLAN

BusinessPlan

Costing/Pricing/Profits

Decision

DevelopingFinancialBudgets

ImplementBusiness

Plan

MeasureFinancialSuccess

FROM VISION TO FINANCIAL SUCCESSVision $ Success

1) Decide on the type of business- Product orServices or both.

2) Decide onOrganization type.

2)Market size & estimatedmarket share.

3) Estimate transactions Per year

1) PrepareDetail costing.

2) EstimateTransaction volume per year.

3) Determine expected profits

4) Decision on the pricing – market acceptance

1) Prepare a financial budget that reflects the achievement of business plan

2) DetermineThe type of funding required-Paid up capital orborrowings.

1) Start theBusiness.

2) Record all transactions according to accounting rules.

1) Prepare financial statements to measure success of business plan :

i) Balance Sheet.

ii) Income Statement

Iii) Cash Flow Statement

TO BEGIN THE BUSINESS -ACCOUNTING EQUATION

PART 4

Business Organization(Sole Proprietor/ Partnerships/ Joint Stock)

- Name of Company

CAPITAL- Total value in $(VND)

Invested in the companyby investors

LIABILITIES- Total value of $(VND)Loan to the company

by loan creditors

ASSETS- Total value in $ (VND) owned by Company

(Everything owned by the company that has a value

and is used to do the business)

ACCOUNTING EQUATION : CAPITAL + LIABILITIES = ASSETS

FINANCIAL BUDGETS

PART 5

Budgetary Planning

What is a Financial Budget ? (budget: thực hiện cho tương lai; accouting: thực hiện cho quá khứ, các hoạt động đã xảy ra)

Budget is a financial plan designed to reflect a planned futurebusiness performance to achieve a planned future financial objective. Difference between Financial Budgets and Financial Accounting.

Financial accounts is a measurement of past business performanceperformance and achievement of past financial objective.

BudgetaryAssumptions

(giả định)

Anticipated (dự báo)Business

Conditions

Desired (mong muốn)

FinancialObjective

J , F , M , A , M , J , JL , AG , S , O , N , D . TOTAL

FinancialAccounting

1) Record past monetary transaction• 2) Measure monthly financial performance and compare the difference between budget and actual. 3) Take necessary corrective actions to achieved the desired financial objectives.

1

4

5Implementation of business activities

Budgeted :Balance Sheet,Income Statement

Past/ Audited : (kiểm toán !!!!)Balance Sheet,Income Statement

FinancialBudgets2

3

FixedAssets

InvestsMoney

+Bank/ Other

Loan

Customers

ValueAddedGoods

Value Added

Services

Inflow of $ from Sales Revenue

PeopleGoods

Outflow of $ to Pay

OperationCosts

WorkingCapitalProfits

4

5

6

8

7

3

BusinessPlan

1Budgets areDeveloped Based onFinancialAssumptions

2

Capital +Liabilities Assets

Planned Business Operations

UNDERSTANDING FINANCIAL ACCOUNTING

PART 6

It is the process of recording,analysing and interpretation of all monetary transactions in an organization.

Definition of Financial Accounting

The limitations of financial acounting are :

a) Financial accounts reflects past financial information and performance. b) It analyses only monetary transaction and the contribution of human resources and other intangible asset (which may be crucial to the competitiveness of the firm)is not reflected.

c) Accounting recording is based on documentation evidence.

d) The objectivity of the financial information is influenced by the adoption of the accounting conventions which may sometimes lead to ' creative accounting', ( which may provide misleading information).

e) If the person analysing the finacial information lacks sufficient experience, then the analysis may not be accurate.

Limitations of Financial Accounting

FixedAssets

InvestsMoney

+Bank/ Other

Loan

Customers

ValueAddedGoods

Value Added

Services

Inflow of $ from Sales Revenue

PeopleGoods

Outflow of $ to Pay

OperationCosts

WorkingCapitalProfits

4

5

6

8

7

3

BusinessSTARTS

1FinancialAccounting Measures thePast monetarytransactions

2

Capital +Liabilities Assets

Actual Business Operations

UNDERSTANDING FINANCIAL STATEMENTS REPORTS

PART 7

DailyMonetary Transactions

DailyRecord in accounts

All Accounts are keptIn a General Ledger

Monthly Accounts areOrganized forInformation

Trading/Income/Expense Capital Liability Assets

Record accoring to Accounting principles(ghi theo nguyên tắc t.c)

Income Statement Balance Sheet

HOW TO PREPARE FINANCIAL STATEMENTS

Based on appropriate documentation evidence(chứng từ)

Master accounting records(sổ cái)

The Financial Statements (of Joint-Stock Companies) consists of :

1. Balance Sheet - Statement of financial position representing the Accounting Equation.

2. Income Statement -To determine profit/loss on sales of products and/or services.

3. Cash Flow Statement -To indicate how business activities impact on cash reserves , i.e. increase or decrease. Supporting Reports by : Directors Report. -Declaration that the accounts reflects a true & fair view of financial affairs. External Auditor's Report (kiểm toán ngoài)*-Confirmation that the financial statements representing a true and fair view on the financial affairs of the firm.

What comprises the Financial statements ?

1) BALANCE SHEET STATEMENT

A Balance Sheet is a representation of a STATEMENT OF FINANCIAL POSITION representing the accounting equation) at a particular point in time (called financial period/ yr end).It indicates the net worth of the organization at aParticular point in time.

2) INCOME STATEMENT :

i) TRADING ACCOUNT

The TRADING account is prepared to indicate the profits, derived from trading activities (buying and selling of the product ) called GROSS PROFITS (lãi ròng).

Financial Statements

ii) Profit & Loss Account

The Profit & Loss Account is prepared to matched the gross profitsand other profits generated for a particular accounting period with the expenditure incurred for earning those profits in the same period.

The excess of profits over expenditure gives rise to Profit before Tax .

The excess of expenditure over profits gives rise to Operating Losses for the period.

3) Cash Flow Statements

Analyses how the business activities for a particular period has been affected as compared to the last period and it's net impact on cash reserves for that period , i.e. increase or decrease.

i) An external auditor verifies the accounting records on which the financial accounts are prepared to ensure that they comply with generally acceptable accounting rules.They further ensures that the financial information reflects a true and fair view of the financial position of the organization.

ii) An internal auditor sets and monitors financial control and operational policies of the organization to ensure that they are diligently adhered to. An internal auditor is someone not from the financial or operational department.

What are the roles of an external auditor and internal audiitor

REE JOINT STOCK COMPANYCONSOL. INCOME STATEMENT FOR THE YEAR ENDED 31 Dec 2008

% of sales VND VNDNET SALES & SERVICES REVENUE 1,154,393,374(Sales less returns inwards)LESS COST OF SALES 824,317,894 GROSS PROFIT 330,075,480

ADD Finance Income 183,012,218Less OPERATING EXPENSES :Finance (525,042,497)Selling & Distribution ( 39,710,186)Administration ( 97,607,391) OPERATING ( LOSS )/PROFIT (149,273,176)ADD Other Profit 7,614,580(LOSS)/ PROFIT BEFORE TAX (141,658,596)LESS Current Corporate Income Tax ( 15,036,430)ADD Deferred Income Tax 2,868,075NET (LOSS)/PROFIT AFTER TAX (153,826,951)

REE JOINT STOCK COMPANY

CONSOL. BALANCE SHEET AS AT 31 DECEMBER 2008 VND

Current Assets 1,118,977,987Non-Current Assets 1,489,276,511TOTAL ASSETS 2,608,254,498

A. LIABILITIES 508,968,718-Current Liabilities 403,833,580-Non- Current Liabilities 105,435,638

B. OWNER'S EQUITY 2,088,465,068-CAPITAL 2,087,167,691-Other Funds 1,297,377- Minority Interests 10,820,712TOTAL LIABILITIES & OWNER'S EQUITY 2,608,254,498

Notes to definition of terms in Balance Sheet :

1) ASSETS (tài sản):Anything owned by the company that has a monetary value.

A) Current Assets (tài sản ngắn hạn)Assets that are cash or can be converted into cash within 12 months :- Bank Balance- Cash in Hand- Trade debtors / Trade receivables- Other debtors / Other receivables- Inventories.

B) Non-Current Assets (tài sản dài hạn)Assets that are used for doing the business .

Fixed Assets : Intangible Assets :Tangible assets (hữu hình): - Licence- Land and Buildings - Investment in shares- Plant and Machineries- Office Equipment- Motor Vehicles

Notes to definition of terms in Balance Sheet :

2) LIABILITIES (nợ):Total value owed to others by the company that must be re-paid.

A) Current LiabilitiesLiabilities that must be paid within 12 months :- Trade Creditors / Trade payables- Short-Term Loan Creditors / Other payables- Taxation

B) Long Term LiabilitiesLiabilities that must be paid after more than 12 months .- Long Term Loan

3) OWNER'S EQUITY (vốn chủ sở hữu) Total value of funds invested in the business by shareholders. - Paid Up Capital - VND- Accumalted Profits - VND

CASH FLOW STATEMENT

- Statement to show how cash is generated and used by an organization throughout an accounting period.

- It reconciles the opening cash balance position to the closing cash balance position of the organization.

PREPARATION OF CASH FLOW STATEMENTS

INCOME before Tax for the period

Adjustments for items not involving a movement of cash

Adjustments for debtors, inventories, tax (Working Capital adjustments)

NET CASH FLOWS from OPERATING ACTIVITIES

NET CASH FLOWS FROM INVESTING ACTIVITIES

NET CASH FLOWS FROM FINANCING ACTIVITIES

CHANGES IN NET CASH FLOW

CLOSING BANK BALANCES

Add-Inflow/ (Minus-Outflow)

Add- Inflow/ (Minus-Outflow)

Add-Inflow/ (Minus-Outflow)

Add-Inflow/ (Minus-Outflow) Opening Balances

RATIO ANALYSIS &INTERPRETATION OF ACCOUNTS

PART 8

RATIO ANALYSIS & INTERPRETATION OF ACCOUNTS

RATIO ANALYSIS

Ratio analysis is performed on the financial results of the company tofacilitate an understanding of the company's performance between one financial period to another, or between companies in the same industry or with companies from other industries.

INTERPRETATION

Interpretation is the process of explaining the results of the ratio analysis on what the ratios represents and possible reasons.

By understanding the reasons for the ratios changes, the management canmake decisions to improve the financial performance of the company forthe future period.

CAPITAL BUDGETING(INVESTMENT APPRAISAL)

PART 9

Investments Decisions

• The investment decision is the decision to commit the financial and other resources to a particular course of action.

a) Cash flow analysis considers all cash inflows and outflows resulting from the investment decisions.

b) We seek to estimate the streams of cash flows arising from a particular course of action and the period in which they occur.

Cash Flows

a) Capital Budgeting are basically financial techniques that are used to evaluate the viability of various investment proposals in order to select the

most appropriate investment option .

b) The 3 common capital budgeting / (investment appraisal) tools are :

- Payback Period (Years)

- Net Present Value ( NPV )$

- Internal Rate of Return ( IRR )%

Capital Budgeting Techniques

PAY-BACK PERIOD

The pay-back period is the period of time taken for the future net cash inflowsto match the initial cash outlay.

Example :

Lara’s Project requires an initial capital outlay of USD 40,000. It’s expected to have a project lifespan and the cash inflows as follows:Year 1 USD 16,000Year 2 USD 16,000Year 3 USD 16,000Year 4 USD 12,000

Therefore it’s pay back period is 2 ½ years calculated as follows:Initial Outlay (USD 40,000)Less Yr 1 Cash inflows USD 16,000 Yr 2 Cash inflows USD 16,000) ‘1/2 Yr 3 Cash inflows USD 8,000 --------------------Note: Pay-back period does not take into account the future value of money.

NET PRESENT VALUE

The net present value method measures between the difference between anInvestments market value and it’s costs.

An investment should be accepted if it’s net present value ( NPV ) is positiveand rejected if it is negative.

NPV computation of a specific project involves the following : 1)Discounting the future cash inflow streams into it’s present value using the company’s cost of capital.

2)Adding up the cumulative present value of the cash inflow streams.

3) Offsetting the Cumulative Present Value of the Cash Inflows against the Present Value of the Investment Costs to arrive at Net Present Value.

4) If the Net Present Value (NPV) is a positive value, the project is viable. If the NPV is a negative value, the project is rejected.

Example :

1) Project A : Investment Cost is USD 850,000 ( Cost of Capital is 15 %) Yr Cash flow streams Discount Factor Present Value0 (USD 850,000) 1.00 (USD 850,000)1 USD 180,000 0.87 USD 156,6002 USD 180,000 0.75 USD 135,0003 USD 180,000 0.66 USD 118,8004 USD 180,000 0.57 USD 102,6005 USD 180,000 0.50 USD 90,0006 USD 180,000 0.43 USD 77,4007 USD 180,000 0.38 USD 68,4008 USD 180,000 0.33 USD 59,4009 USD 180,000 0.28 USD 50,40010 USD 180,000 0.25 USD 45,000 ---------------- ---------------- USD1,800,000 Net Present Value USD 53,600 ---------------- (project is viable) -----------------

INTERNAL RATE OF RETURN ( IRR )

The IRR on an investment is the required return that results in a zero NPV when it is used as the discount rate.

Based on the IRR Rule, an investment is acceptable if the IRR exceeds the required return. It should be rejected otherwise.

Year Cash Flow DCF @ 18% PV DCF @ 20% PV 0 (USD 40,000) 1.00 (USD 40,000) 1.00 (USD 40,000) 1 USD 16,000 0.84746 USD 13,559 0.83333 USD 13,333 2 USD 16,000 0.71818 USD 11,490 0.69444 USD 11,111 3 USD 16,000 0.60863 USD 9,738 0.57870 USD 9,259 4 USD 12,000 0.51579 USD 6,189 0.48225 USD 5,787 -------------- ----------------- USD 976 USD 510 ========= ========== IRR = 18 % + (976/ ( 976+ 510)) * 2 % = 19.31%

Example: Project B has the following information

18% 20%

976

(510)

NPV

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