1. Study of Financial Statements Module B Financial Management CAIIB

2. 20/11/2006 Akila Maheshwari 2 Unit 10 Learning Objectives Broad Scope and Coverage of Financial Management Broad Scope and Coverage of Financial Management Objective of Financial Management Objective of Financial Management Increasing Importance of Financial Management Increasing Importance of Financial Management

3. 20/11/2006 Akila Maheshwari 3 Scope Designing and Implementing Business Plans Designing and Implementing Business Plans Ensuring Effective Fund Utilisation Ensuring Effective Fund Utilisation Resource Allocation Resource Allocation Investment decisions Investment decisions Profit generation Profit generation Wealth creation Wealth creation

4. 20/11/2006 Akila Maheshwari 4 Objectives Maximise the wealth of the firm Maximise the wealth of the firm Maximise Shareholder value Maximise Shareholder value Owner-Manager- Employee conflict Owner-Manager- Employee conflict Profit Maximisation vs Wealth Maximisation Profit Maximisation vs Wealth Maximisation Risk and uncertainty Risk and uncertainty

5. 20/11/2006 Akila Maheshwari 5 Important Decisions Financing Financing Investment Investment Dividend Policy Dividend Policy Current Asset Management Current Asset Management

6. 20/11/2006 Akila Maheshwari 6 Unit 11 Capital Expenditure Learning Objectives Learning Objectives Capital Expenditure Capital Expenditure Phases of Capital Budgeting Phases of Capital Budgeting Levels of decision making Levels of decision making Facets of Project Analysis Facets of Project Analysis Feasibility Study Feasibility Study

7. 20/11/2006 Akila Maheshwari 7 Capital Expenditure- Importance Long term Effects Long term Effects Irreversibility Irreversibility Substantial outlays Substantial outlays

8. 20/11/2006 Akila Maheshwari 8 Capital Expenditure- Difficulties Measurement Problems Measurement Problems Uncertainty Uncertainty Temporal Spread Temporal Spread

9. 20/11/2006 Akila Maheshwari 9 Capital Budgeting Phases Planning Analysis Selection Implementation Review

10. 20/11/2006 Akila Maheshwari 10 Planning Planning is concerned with the articulation of a broad Investment Strategy and the generation and preliminary screening of project proposals. Planning is concerned with the articulation of a broad Investment Strategy and the generation and preliminary screening of project proposals. The investment Strategy of a firm delineates the broad areas or types of investments the firm plans to undertake. The investment Strategy of a firm delineates the broad areas or types of investments the firm plans to undertake.

11. 20/11/2006 Akila Maheshwari 11 Analysis A detailed anlaysis of the marketing, technical, financial, economic and ecological aspects is undertaken. A detailed anlaysis of the marketing, technical, financial, economic and ecological aspects is undertaken. At this pint the focus is on gathering information, preapring and summarising information about various proposal being considered for inclusion in the capital budget. At this pint the focus is on gathering information, preapring and summarising information about various proposal being considered for inclusion in the capital budget. Based on this the projections may be made. Based on this the projections may be made.

12. 20/11/2006 Akila Maheshwari 12 Selection CriterionAcceptReject Payback Period( PBP)PBP < target periodPBP > target period Accounting Rate of Return ( ARR )ARR > target rateARR < target rate Net Present Value( NPV)NPV > 0NPV < 0 Internal Rate of Return ( IRR)IRR > cost of capitalIRR < cost of capital Benefit Cost Ratio( BCR)BCR > 1BCR < 1

13. 20/11/2006 Akila Maheshwari 13 Implementation Stages Stages Project & Engineering Design Project & Engineering Design Negotiations and Contracting Negotiations and Contracting Construction Construction Training Training Plant commissioning Plant commissioning

14. 20/11/2006 Akila Maheshwari 14 Tools for expeditious Implementation 1. Adequate formulation of projects 2. Responsibility Accounting 3. Network Techniques 4. Profit Centre Concepts

15. 20/11/2006 Akila Maheshwari 15 Decision making levels OperatingAdministrativeStrategic Where is it taken?Lower Level Management Middle Level Management Top Level Management How structured is it? RoutineSemi- structuredUnstructured Level of Resource Commitment Minor Resource Moderate ResourceMajor Resource What is the time horizon? Sort termMedium termLong term

16. 20/11/2006 Akila Maheshwari 16 Profitability Analysis Market Market Technical Technical Financial Financial Economic Economic Ecological Ecological

17. 20/11/2006 Akila Maheshwari 17 Key Issues in Project Analysid Market AnalysisPotential Market & Market Share Technical AnalysisTechnical Viability & Sensible Choices Financial AnalysisRisk and Return Economic AnalysisBenefits & Costs in Shadow Prices- Other Impacts Ecological AnalysisEnvironmental Damage & Restoration measures

18. 20/11/2006 Akila Maheshwari 18 Preliminary Work Idea Generation Initial Screening Prima Facie analysis Feasibility AnalysisTerminate NO YES

19. 20/11/2006 Akila Maheshwari 19 Analysis Technical Analysis Financial Analysis Market Analysis

20. 20/11/2006 Akila Maheshwari 20 Evaluation Economic & Ecological Analysis Is it Worthwhile? Funding ProposalTerminate NO YES

21. 20/11/2006 Akila Maheshwari 21 Decisions, Return, Risk, Market Value Return Investment Decisions Financing Decisions Risk Market Value

22. 20/11/2006 Akila Maheshwari 22 UNIT 12- Sources of Finance Learning Objective Learning Objective Sources of Finance- Long term & Short Term Sources of Finance- Long term & Short Term Advantages and Disadvantages Advantages and Disadvantages Various Types of Funding Various Types of Funding

23. 20/11/2006 Akila Maheshwari 23 Sources of Company Finance Permanent Sources Long-term Sources Medium –Term Sources Short-term Sources Share CapitalRedeemable Preference Shares Medium Term Loans Cash Credit Retained ProfitsDebenturesDeferred CreditOverdraft BondsPublic Fixed Deposit Bills Discounting Long term Loans- Indian Rupees or Foreign Currency Loans Working Capital Term Loans Commercial Paper Seed CapitalTrade Credit

24. 20/11/2006 Akila Maheshwari 24 Matching Sources to Uses Types of CapitalUsesMatching AssetsSources PermanentBroaden borrowing base/major financing/takeover /merger Freehold or long term property/shares of acquired or merged company, Share Capital, retained profits Long TermFinancing assets with long life/Plant & machinery/Perma nent Working capital Freehold or leasehold property long term/Permanent stock or debtor requirement Redeemable preference shares/Long term loans Medium TermFixed assets/working capital Vehicles/Plant/fittings, stock, debtors, leasing Medium term loans/Hire purchase Short termWorking Capital/financing seasonal fluctuations/expor t orders/bridging finance/minor fixed assets Stock/debtorsCash credit/overdraft/bi ll discounting/LC/E xport credit/creditors

25. 20/11/2006 Akila Maheshwari 25 Equity Financing Nature Nature Advantages Advantages Disadvantages Disadvantages

26. 20/11/2006 Akila Maheshwari 26 Retained Profits Nature Nature Advantages Advantages Disadvantages Disadvantages

27. 20/11/2006 Akila Maheshwari 27 Preference Shares Nature Nature Advantages Advantages Disadvantages Disadvantages

28. 20/11/2006 Akila Maheshwari 28 Debentures and Bonds Nature Nature Advantages Advantages Disadvantages Disadvantages

29. 20/11/2006 Akila Maheshwari 29 Term loans Nature Nature Advantages Advantages Disadvantages Disadvantages

30. 20/11/2006 Akila Maheshwari 30 Term Loans Maturity Maturity Security Security Repayment Repayment Interest Rate Interest Rate

31. 20/11/2006 Akila Maheshwari 31 Seed Capital Venture Capital Venture Capital Seed Capital Assistance Schemes of IDBI Seed Capital Assistance Schemes of IDBI

32. 20/11/2006 Akila Maheshwari 32 Medium Term Sources Loans Loans Deferred Credit Bill Discounting Scheme of IDBI Deferred Credit Bill Discounting Scheme of IDBI Fixed Deposits Fixed Deposits Working Capital Term Loan Working Capital Term Loan

33. 20/11/2006 Akila Maheshwari 33 Short Term Sources Bank loans Bank loans Trade Credit Trade Credit Cash Credit and Overdraft Cash Credit and Overdraft Bill discounting Bill discounting Commercial Paper Commercial Paper Lease Lease

34. 20/11/2006 Akila Maheshwari 34 Cost of Capital Minimum return Minimum return Weighted average cost of projected sources of finance Weighted average cost of projected sources of finance

35. 20/11/2006 Akila Maheshwari 35 Unit 13 Financial Statements Learning Objectives Learning Objectives Understand the meaning of Financial Statements Understand the meaning of Financial Statements Uses of Financial Statements for decision making Uses of Financial Statements for decision making Financial Analysis Financial Analysis Interpretation of Statements Interpretation of Statements Meaning of Fund Flows Meaning of Fund Flows

36. 20/11/2006 Akila Maheshwari 36 Key Financial Statements Balance Sheet Balance Sheet Profit & Loss or Income Statement Profit & Loss or Income Statement Sources & Uses of Funds Statement Sources & Uses of Funds Statement

37. 20/11/2006 Akila Maheshwari 37 Balance Sheet LiabilitiesAssets Share CapitalFixed Assets Reserves and SurplusInvestments Secured LoansCurrent Assets, Loans and Advances Unsecured LoansCurrent Assets Current Liabilities and ProvisionsLoans and Advances Current LiabilitiesMiscellaneous expenditures Provisions

38. 20/11/2006 Akila Maheshwari 38 Balance Sheet 1. Sources of Funds 1. Shareholder’s Funds a. Share Capital b. Reserves and Surplus 2. Loan Funds a. Secured Loans b. Unsecured Loans II. Application of Funds 1. Fixed Assets 2. Investments 3. Current Assets Loans and Advances Less Current Liabilities and Provisions 4. Miscellaneous Expenditure

39. 20/11/2006 Akila Maheshwari 39 Income Statement RevenueCommission actually Received230000.00 Less Expenses Cost of Goods SoldInventory expenses for the year2950.00 Gross Profit Depreciation/General Admin/Selling4000.00 S,G & A Overhead Total Expenses Profit Before Interest and Taxes Less InterestInterest on loan10000.00 Other Income/Loss0.00 Profit Before Tax Tax@30% Net Profit- Bottomline

40. 20/11/2006 Akila Maheshwari 40 Balance Sheet-Financial Management Balance Sheet ItemsFinance Topics Share Capital/Reserves and Surplus/Loans/Debentures Capital Structure and Cost of Capital Loans and Advances/Current Liabilities/Trade Credit/Provisions Working Capital Financing Policy Fixed Assets( Net) Gross Block-less depreciation Capital Budgeting InvestmentsSecurity Analysis Current assets, loans and advances, cash and bank Working Capital mgt/cash management ReceivablesCredit Management InventoriesInventory Management

41. 20/11/2006 Akila Maheshwari 41 Income Statement- Financial Management Income Statement ItemFinance Topic Net SalesRevenue Risk Cost of Goods Sold- Stocks/ Wages and Salaries/other manufacturing Expenses Gross ProfitGross Profit Margin Operating Expenses- SGA/DepreciationDepreciation Policy Operating Profit- non operating surplus/deficit- EBIT Business Risk InterestFinancial Risk Profit Before Tax TaxTax Planning Profit After TaxReturn on Equity DividendsDividend Policy Retained Earnings

42. 20/11/2006 Akila Maheshwari 42 Funds Flow Statement- Working Capital Basis Operations Issue of Share Capital Long Term Borrowing Sale of non current assets Purchase of non current assets Repayment of long term borrowing Dividend Payment Working Capital Pool

43. 20/11/2006 Akila Maheshwari 43 Funds Flow- (WC basis) Sources of Working CapitalUses of Working Capital OperationsDividends Profit after taxPurchase of Fixed assets DepreciationRepayment of term loan Issue of Share CapitalTotal working capital used Long term borrowings Sale of fixed assets Total working Capital generated Net change in working capital

44. 20/11/2006 Akila Maheshwari 44 Funds Flow- Cash Flow Statement Sources of Cash Sources of Cash Operations Operations Net Income Net Income Depreciation Depreciation Issue of Share Capital Issue of Share Capital Long term borrowings Long term borrowings Sale of non current liabilities Sale of non current liabilities Decrease in current assets other than cash Decrease in current assets other than cash

45. 20/11/2006 Akila Maheshwari 45 Funds Flow Statement- Cash Flow Uses of Cash Uses of Cash Payment of Dividends Payment of Dividends Purchase of non current assets Purchase of non current assets Repayment of long term borrowings Repayment of long term borrowings Decrease in current liabilities Decrease in current liabilities Increases in current assets other than cash Increases in current assets other than cash

46. 20/11/2006 Akila Maheshwari 46 Financial Statement Analysis Assessment of Past Performance and current Position Assessment of Past Performance and current Position Protection of Net Income and growth prospects Protection of Net Income and growth prospects Prediction of Bankruptcy and failure Prediction of Bankruptcy and failure Loan decisions by FIs and banks Loan decisions by FIs and banks

47. 20/11/2006 Akila Maheshwari 47 Techniques Horizontal analysis Horizontal analysis Vertical Analysis Vertical Analysis Trend Analysis Trend Analysis Ratio Analysis Ratio Analysis Common size Analysis Common size Analysis

48. 20/11/2006 Akila Maheshwari 48 Focus of Financial Statements Analysis 1. Liquidity or short term solvency anlysis 2. Profitability Analysis 3. Capital Structure or gearing analysis 4. Market strength or Investor analysis 5. Growth and stability analysis

49. 20/11/2006 Akila Maheshwari 49 Projected Statements Projected Balance Sheet Projected Balance Sheet Projected Income Statements Projected Income Statements Projected cash flows Projected cash flows

50. 20/11/2006 Akila Maheshwari 50 Thanks You Thanks You Indian Institute of Banking and Finance Indian Institute of Banking and Finance