SELECTED FINANCIAL MANAGEMENT THEMESFOR SERVICE PROVIDERS Presented by: Onyango Obiero to KMA Annual Conference on April

INTRODUCTION Financial management: Addresses the fundamental question of how to secure the greatest possible return in exchange for accepting the smallest amount of risk. 2

Theme 1 RISKS & RETURNS 1.RETURN A company that invests in fixed assets and business operations expect returns in form of profits and/or increased cash flows A company that buys corporate bonds expect regular returns in the form of interest payments. 2. RISKS The possibility that the actual return may be different from the expected return. A risky investment implies that there is significant possibility of actual return being different from its expected return 3

Theme 2: Sources of business finance INTERNAL FINANCE (IF)  Cash generated by an entity, which is not needed to meet operating costs, interest payments, tax liabilities, cash dividends or fixed asset replacement.  Only cash can be invested.  A company with substantial retained profits in its balance sheet, no cash in the bank will clearly be unable to finance investments  Retained earnings;- Ready source of cash An internal decision (to pay shareholders) No dilution of control If cash flow is high- IF is favorable Opportunity costs to shareholders EXTERNAL FINANCE (EF)  Debt and equity finance  Short term finance (Less than one year)  Medium term (1-5 years)  Long term (more than 5 years) Issue costs Dilution of control Restrictions on business operations Larger Projects 4

Theme 3:KEY FINANCIAL RATIOS RETURN ON CAPITAL EMPLOYED Profit before interest and tax X 100 Capital employed (or fixed assets plus W.C) If ROCE in 2005 is 13.7% and in 2006 it dips to 10% It means that the investments in Fixed Assets have not paid off GEARING RATIO (Debt/Equity ratio) Long term debt X 100 Capital employed Shows the proportion of debt finance used by a company. A company is highly geared if capital gearing is greater than 50% DEBTOR DAYS (Activity ratio) Debtors X 365 Cost of sales Gives the average period of credit being taken by customers. If compared with allowed credit allowed, it gives an indication of the efficiency of debtor administration CURRENT RATIO ( Liquidity) Current Assets Current liabilities Varies according to Industry. Measures the ability to meet short term obligations 5

Theme 4 CASH FLOW PROBLEMS Possible causes of cash flow problems Losses: Not a problem in the short term, but on a regular basis will lead to serious cash flow problems and lead to liquidation or takeover One off expenditure e.g. redemption of debt Seasonality: cash flow imbalances Inflation: historical profit may be insufficient to fund the replacement of fixed Assets POSSIBLE REMEDIES A cash budget is necessary: to be able to anticipate deficits and surpluses. Postpone non essential expenditure Set up a sinking fund Offering debtors discounts for early payments Sell off investments Sale of unwanted stocks Improved debt collection 6

Theme 5 INVESTING SURPLUS CASH Cash which is surplus to immediate needs should earn a return by being invested on a short term basis. Set limits you invest with particular banks Factors to consider when choosing an appropriate investment method for short term cash surpluses: The size of the surplus The ease with which an investment can be liquidated The tenor: When does it mature? Risk and yield of the investment Any penalty that may be incurred for early liquidation. 7

Theme 6 GAB’s INTERVENTION THROUGH GAB DAKTARI FINANCE SCHEME The greatest selling point for india’s growing medical tourism industry, remains its drastically low costs compared to other countries that offer the same standard of care. There is a need in Kenya and indeed the greater East African region for a seamless integrated acquisition of medical equipment for use in specialized areas of medicine. From all angles, it is clear that this sub sector is on a growth trajectory. 8

Theme 7 Salient features of GAB Daktari o Medical Equipment financing facility with an inbuilt tailor made mortgage facility. o Improves Business cash flow through easy installments o TAT: Short loan processing period (within 60 hours ) o Flexible rates (between % p.a) Risk adjusted pricing according to risk profile of the applicant. o Tenor: Upto 96 months repayment period o Loan Size: Kes 1,000,000 to Kes 80,000,000, based on need. o No additional Collateral o Upto 95% financing from GAB. o Moratorium on payment: upto 12 months, based on need. 9

KONGOI MISING! 10