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    UNIVERSITY OF SAN JOSE RECOLETOS

    Financial Managent

    DBA

    By

    Mojgan Mashayekhi

    June 2011

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    I. Introduction:

    Companies do not work in a vacuum, isolated from everything else. It interacts

    and transacts with the other entities present in the economic environment. These

    entities include Government, Suppliers, Lenders, Banks, Customers,

    Shareholders, etc. who deal with the organisation in several ways. Most of these

    dealings result in either money flowing in or flowing out from the company. This

    flow of money (or funds) has to be managed so as to result in maximum gains to

    the company. Managing this flow of funds efficiently is the purview of finance. So

    we can define finance as the study of the methods which help us plan, raise and

    use funds in an efficient manner to achieve corporate objectives. Finance grew

    out of economics as a special discipline to deal with a special set of common

    problems.

    The corporate financial objectives could be to:

    1. Provide the link between the business and the other entities in the

    environment; and

    2. Investment and financial decision making.

    Let us first look at what we mean by investment and financial decision making.

    1. Investment Decision: The investment decision, also referred to as the

    capital budgeting decision, simply means the decisions to acquire assets

    or to invest in a project. Assets are defined as economic resources that

    are expected to generate future benefits.

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    2. Financing Decision: The second financial decision is the financing

    decision, which basically addresses two questions:

    a. How much capital should be raised to fund the firm's operations

    (both existing & proposed)

    b. What is the best mix of financing these assets?

    Financing could be through two ways: debt (loans from various sources like

    banks, financial institutions, public, etc.) and equity (capital put in by the investors

    who are also known as owners/ shareholders). Shareholders are owners

    because the shares represent the ownership in the company.

    II. COST OF CAPITAL

    The cost ofcapital is a term used in the field of financial investment to refer to

    the cost of a company's funds (both debt and equity), or, from an investor's point

    of view "the shareholder's required return on a portfolio of all the company's

    existing securities. It is used to evaluate new projects of a company as it is the

    minimum return that investors expect for providing capital to the company, thus

    setting a benchmark that a new project has to meet.

    The Cost of Capital

    Sources of capital

    Component costs

    WACC

    Adjusting for flotation costs

    http://en.wikipedia.org/wiki/Capital_(economics)http://en.wikipedia.org/wiki/Debthttp://en.wikipedia.org/wiki/Equity_(finance)http://en.wikipedia.org/wiki/Capital_(economics)http://en.wikipedia.org/wiki/Debthttp://en.wikipedia.org/wiki/Equity_(finance)
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    Adjusting for risk

    Why is the cost of retained earnings cheaper than the cost of issuing new

    common stock?

    When a company issues new common stock they also have to pay

    flotation costs to the underwriter.

    Issuing new common stock may send a negative signal to the capital

    markets, which may depress the stock price.

    III. CAPITAL BUDGETING

    Capital budgeting is a required managerial tool. One duty of a financial manager

    is to choose investments with satisfactory cash flows and rates of return.

    Therefore, a financial manager must be able to decide whether an investment is

    worth undertaking and be able to choose intelligently between two or more

    alternatives. To do this, a sound procedure to evaluate, compare, and select

    projects is needed. This procedure is called capital budgeting.

    CAPITAL IS A LIMITED RESOURCE

    In the form of either debt or equity, capital is a very limited resource. There is a

    limit to the volume of credit that the banking system can create in the economy.

    Commercial banks and other lending institutions have limited deposits from

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    which they can lend money to individuals, corporations, and governments. In

    addition, the Federal Reserve System requires each bank to maintain part of its

    deposits as reserves. Having limited resources to lend, lending institutions are

    selective in extending loans to their customers. But even if a bank were to

    extend unlimited loans to a company, the management of that company would

    need to consider the impact that increasing loans would have on the overall cost

    of financing.

    In reality, any firm has limited borrowing resources that should be allocated

    among the best investment alternatives. One might argue that a company can

    issue an almost unlimited amount of common stock to raise capital. Increasing

    the number of shares of company stock, however, will serve only to distribute the

    same amount of equity among a greater number of shareholders. In other

    words, as the number of shares of a company increases, the company ownership

    of the individual stockholder may proportionally decrease.

    The argument that capital is a limited resource is true of any form of capital,

    whether debt or equity (short-term or long-term, common stock) or retained

    earnings, accounts payable or notes payable, and so on. Even the best-known

    firm in an industry or a community can increase its borrowing up to a certain limit.

    Once this point has been reached, the firm will either be denied more credit or be

    charged a higher interest rate, making borrowing a less desirable way to raise

    capital.

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    Faced with limited sources of capital, management should carefully decide

    whether a particular project is economically acceptable. In the case of more than

    one project, management must identify the projects that will contribute most to

    profits and, consequently, to the value (or wealth) of the firm. This, in essence, is

    the basis of capital budgeting.

    Basic Steps of Capital Budgeting

    1. Estimate the cash flows

    2. Assess the riskiness of the cash flows.

    3. Determine the appropriate discount rate.

    4. Find the PV of the expected cash flows.

    5. Accept the project if PV of inflows > costs. IRR > Hurdle Rate and/or

    payback < policy

    Evaluation Techniques

    A. Payback period

    B. Net present value (NPV)

    C. Internal rate of return (IRR)

    D. Modified internal rate of return (MIRR)

    E. Profitability index

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    IV. OPERATING AND FINANCIAL LEVERAGE

    One of the most important of the various financial decisions is how much

    leverage a firm should employ. A fundamental decision made by any business is

    the degree to which it incurs fixed costs. A fixed cost is one that remains the

    same regardless of the level of operations. As sales increase, fixed costs don't

    increase in the same proportion. Some fixed costs do not increase at all till a

    particular point. As a result, profits can rise faster during good times. On the

    other hand, during bad times fixed costs don't decline, so profits fall more rapidly

    than sales do. The degree to which a firm locks itself into fixed costs is referred

    to as its leverage position. The more highly leveraged a firm, the riskier it is

    because of the obligations related to fixed costs that must be met whether the

    firm is having a good year or not. At the same time, the more highly leveraged

    the greater the profits during good times. This presents a classic problem of

    making a decision where there is a trade-off between risk and return.

    There are two major types of leverage - financial and operating. Financial

    leverage is specifically the extent to which a firm gets its cash resources from

    borrowing (debt) as opposed to issuance of additional shares of (equity). The

    greater the debt compared to equity, the more highly leveraged the firm because

    debt legally obligates the firm to interest payments. These interest payments

    represent a fixed cost. Operating leverage is concerned with the extent to which

    a firm commits itself to high levels of fixed costs other than interest payments. A

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    firm that rents property using cancellable leases has less leverage than a firm

    that commits itself to a long-term noncancellable lease does. A firm that has

    substantial vertical integration has created a highly leveraged situation. Consider

    what happens if a company vertically integrates by acquiring its raw materials'

    supplier. Raw materials will now cost the company less, because it doesn't have

    to buy them from an outside firm. But when times are bad, the firm will have to

    bear the fixed costs associated with the supplier subsidiary. Had there still been

    two separate companies, the big company could have simply slowed its

    purchases of raw materials from supplier without having to bear its fixed costs.

    In the cases of both financial and operating leverage, the crucial question is how

    much everage is appropriate. We can't answer that question in absolute terms,

    but we will help you understand the topic. This understanding should make it

    simpler to make appropriate choices or to understand what went into making the

    choices your firm has already made.

    Operating Leverage

    While decisions about financial leverage is strictly the domain of the firm's

    highest levels of management, operating leverage is an issue that directly affects

    the line managers of the firm. The level of operating leverage a firm selects

    should not be made without input from the managers directly involved in the

    production process. For example, one of the most significant operating leverage

    issues is the choice of technology levels. Selection of the highest level of

    technology available is not always in the best interests of the business. Suppose

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    that we are opening a chain of copy centres. Each centre will provide a full

    service operation. Customers can drop work off in the morning and pick it up later

    in the day or the week. The employees will do the actual photocopying. We are

    faced with the choice of renting a relatively slow copy machine, or the newest

    technology machine, which is considerably faster. The faster machine is also

    considerably more expensive to lease. It will generally be the case that newer

    technology has a higher fixed cost and lower variable cost than the older

    technology. Variable costs are those that vary directly with volume. If we double

    the number of copies made, we double the amount of paper, printing ink toner,

    and labour time needed for making the copies. One of the principle functions of

    new technology is to reduce the variable costs of production. It may turn out that

    a machine that can reduce the variable costs is more expensive to make, and

    thus has a higher purchase or lease price than the older generation machine.

    However, even if it doesn't cost more to make, its manufacturer will charge more

    for the new machine than for the older machine. Intuitively, if the new machine is

    in some respect better than the old machine (that is, it lowers the variable cost

    without reducing quality), and doesn't cost more to buy, then no one will buy the

    older machine. Thus, anytime we see two technologies being sold side by side,

    such as slow and fast copy machines, we can expect the faster machine to have

    a higher rental fee or purchase price, and therefore a higher fixed cost.

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    V. RAISING CAPITAL

    Raising capital for small business expenses is not the easiest step of starting a

    small business but it is necessary. One major reason why small businesses fail is

    because the owner lacked necessary funds. Money is needed for equipment,

    property and more essentials for your small business. You may wonder how you

    can raise the money needed to start your small business.

    There are two major sources of funding you can seek for your business: Equity

    VS Debt Financing. Below there are listed various methods of raising capital for a

    small business including forms of equity and debt financing. Analyze each option

    below and determine which method/ methods is better suited for your particular

    small business.

    9 Ways of Raising Capital

    1. Saving up your own money- When starting a small business you may not

    have all the money needed for start up costs; however you should have some

    money saved up for the purpose of starting your business. Bank lenders in

    particular are more suspicious of entrepreneurs who dont invest in their own

    business. As a result they can decline a loan because of your lack of investment.

    2. Borrow from Friends and Family- I know raising capital for small business

    expenses by asking friends and family for money isnt fun, but hopefully you can

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    win them over with your great business idea. To avoid complications in the future

    make sure to have a written agreement stating terms and details of the loan. You

    wouldnt want to fight with loved ones over money. Be sure to present your

    proposition in a professional manner. Show them your business plan, explain to

    them why they should invest in you, and answer all their questions. If someone is

    giving you money for your business as a gift, be sure you obtain a letter from

    them stating the amount of money and that it was a gift. This is precaution to

    avoid future complications and misunderstandings.

    3. Getting a small business loan- When raising capital for small business

    expenses many entrepreneurs go this route. However before attaining a loan you

    should be aware that there are many factors associated with business loans such

    as interest rates, late charges and collateral. Local community banks are often a

    great place to obtain a business loan. Click here for SME Loans and otherFund

    sources here.

    4. Find a business partner and use their funds- Another way of raising capital

    for small business expenses is to develop a business partnership with someone

    who can invest in your business. Make sure to present them with a persuasive

    explanation for why they should join forces with you.

    5. Incorporating your small business- Many entrepreneurs decide to

    incorporate their businesses for the purpose of raising capital for small business

    expenses. When you incorporate your small business, you will be able to sell

    shares of stocks. However when you sell shares of stocks you will also be selling

    http://www.pinoybisnes.com/2009/08/business-planning/http://www.kanegosyo.com/http://www.pinoybisnes.com/2009/08/raising-a-fund/http://www.pinoybisnes.com/2009/08/raising-a-fund/http://www.pinoybisnes.com/2009/08/business-planning/http://www.kanegosyo.com/http://www.pinoybisnes.com/2009/08/raising-a-fund/http://www.pinoybisnes.com/2009/08/raising-a-fund/
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    a percentage of the ownership over the business. So if you sell 50% of your

    corporations shares of stocks you are selling 50% of the business ownership.

    6. Finding a venture capitalist- Venture Capitalists are professionals who invest

    in businesses that show a high growth potential. Not only do venture capitalists

    provide funding for their clients by investing in their business but they also

    provide valuable business advice and strategies. If a venture capitalist decides to

    invest in your business it demonstrates to others that they viewed your chances

    of success to be favorable. However once a venture capitalist decides to invest in

    your business they often have a say on how it should be run. Since venture

    capitalists invest in businesses that demonstrate very high and fast growth rates,

    many small businesses do not meet the criteria.

    7. Small Business Investment Companies- Small Business investment

    companies are venture capitalists targeted for small businesses. They are

    partnered with the government and provide small businesses with funding in

    exchange for a percentage of ownership in the business.

    8. Angel investors- Finding an angel investor is another way of raising capital

    for small business expenses. Angel investors are simply private investors who

    invest money in your business with the belief and hope that in a couple of years

    they will see a higher return on their investment. After a 5 year period an angel

    investor may expect a return of at least double their initial investment. Of course

    starting a small business is risky business so the angel investor may not see any

    return if your small business fails. Naturally an angel investor will want

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    guaranteed exit provisions in the case that your small business fails. You can find

    an angel investor by networking with other business owners and small business

    professionals. You can also subscribe to angel network firms that can match you

    with an angel investor.

    9. Credit Cards Many small businesses have turned to credit cards in order to

    pay their small business expenses. Credit Cards may seem like a quick fix but

    make sure the terms and interest rates are reasonable.

    Wait Before you go

    Before raising capital for small business expenses it is important that you first

    determine how much capital you need for your small business. Create a business

    budget. Take in consideration that entrepreneurs often underestimate how much

    money is needed to run a small business and fail to expect the unexpected. For

    example what if your equipment gets damaged and you need replacementsdo

    you have a back up plan? That is why it is a good idea to always have extra

    money put aside just in case.

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    VI. CREDIT AND INVENTORY MANAGEMENT

    Inventory management is primarily about specifying the size and placement of

    stocked goods. Inventory management is required at different locations within a

    facility or within multiple locations of a supply network to protect the regular and

    planned course of production against the random disturbance of running out of

    materials or goods. The scope of inventory management also concerns the fine

    lines between replenishment lead time, carrying costs of inventory, asset

    management, inventory forecasting, inventory valuation, inventory visibility, future

    inventory price forecasting, physical inventory, available physical space for

    inventory, quality management, replenishment, returns and defective goods and

    demand forecasting

    Other definitions of inventory management from across the web:

    Involves a retailer seeking to acquire and maintain a proper merchandise

    assortment while ordering, shipping, handling, and related costs are kept

    in check.

    Systems and processes that identify inventory requirements, set targets,

    provide replenishment techniques and report actual and projected

    inventory status.

    Handles all functions related to the tracking and management of material.

    This would include the monitoring of material moved into and out of

    stockroom locations and the reconciling of the inventory balances. Also

    may include ABC analysis, lot tracking, cycle counting support etc.

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    Management of the inventories, with the primary objective of

    determining.controlling stock levels within the physical distribution function

    to balance the need for product availability against the need for minimizing

    stock holding and handling costs.

    In business management, inventory consists of a list of goods and

    materials held available in stock.

    An inventory can also be a self examination, a moral inventory.

    Credit Management: Key Issues

    Granting credit increases sales

    Costs of granting credit

    Chance that customers wont pay

    Financing receivables

    Credit management examines the trade-off between increased sales and

    the costs of granting credit.

    Components of Credit Policy

    Terms of sale

    = Credit period

    = Cash discount and discount period

    = Type of credit instrument

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    Credit analysis distinguishing between good customers that will pay

    and bad customers that will default

    Collection policy effort expended on collecting receivables

    Credit Policy Effects

    Revenue Effects

    Delay in receiving cash from sales

    May be able to increase price

    May increase total sales

    Cost Effects

    Cost of the sale is still incurred even though the cash from the sale has

    not been received

    Cost of debt must finance receivables

    Probability of nonpayment some percentage of customers will not pay

    for products purchased

    Cash discount some customers will pay early and pay less than the full

    sales price

    Five Cs of Credit

    Character willingness to meet financial obligations

    Capacity ability to meet financial obligations out of operating cash flows

    Capital financial reserves

    Collateral assets pledged as security

    Conditions general economic conditions related to customers business

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    Types of Inventory

    Manufacturing firm

    Raw material starting point in production process

    Work-in-progress

    Finished goods products ready to ship or sell

    Remember that one firms raw material may be another firms finished

    good

    Different types of inventory can vary dramatically in terms of liquidity

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    VII. FORMS OF CORPORATE RESTRUCTURING

    Corporate restructuring changes the way a company approaches finances,

    technology or its business focus.Corporate restructuring is a general term used

    to describe major changes within a company. These changes usually affect basic

    business practices, redetermining who makes the major decisions in a company

    or how certain parts of its business plan are approached. The type of

    restructuring depends on the elements of the business being affected and the

    reasons that the restructuring is occurring.

    Internal Restructuring

    Corporate restructuring occurs based on the needs of the company. Internal

    restructuring typically occurs as a result of business analysis that shows a need

    for greater efficiency in the way business departments communicate and

    complete tasks. Sometimes a particular segment of the business will start to fail,

    and the company will need to reallocate resources in order to support it.

    Sometimes a business may have expanded to much, and needs to refocus on its

    core abilities. At other times a business may need to restructure its financial

    position in order to continue making profits. Often, restructuring plans are

    necessary simply to meet the constantly change demands of technology that

    competitors are embracing. Not all reasons for restructuring are negative, and

    many benefit employees as well as executives in the company.

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    Financial Restructuring

    Financial restructuring deals with all changes the businesses makes to its debts

    and equity, including mergers, acquisitions, joint ventures and other deals.

    Generally these occur when a company joins or is bought by another company.

    Ownerships of the company, or at least some interest in the company, is

    transferred to another organization or group of investors. Actual business

    practices may remain unchanged.

    Technological Restructuring

    Technological restructuring occurs when a new technology has been developed

    that changes the way an industry operates. This type of restructuring usually

    affects employees, and tends to lead to new training initiatives, along with some

    layoffs as the company improves efficiency. This type of restructuring also

    involves alliances with third parties that have technical knowledge or resources.

    Restructuring Methods

    Restructuring methods are typically divided into expansion, refocusing, corporate

    control, and ownership structure. The last two, corporate control and ownership

    structure, apply mostly to financial changes and affect ownership. Corporate

    control, for instance, is a method where the company buys back enough shares

    to be able to make its own decisions again. Expansion occurs with acquisition,

    mergers, or joint ventures. Refocusing can take many forms, including business

    splits, sell offs of certain ventures, and general consolidation practices.

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    VIII. COMPARATIVE ANALYSIS

    Comparative financial statements are ones, which have been prepared in a

    systematic manner and provides statistical information about a particular event

    (financial transaction) or aspect, taking place on different dates or during different

    periods.

    The comparative financial statements are chalked out in a columnar form (in

    majority of the cases). One is also able to view comparative accounts of different

    companies.

    Comparative financial statements, like all other financial statements have the

    following types of financial statements:

    Income statements

    Cash flow statements

    Balance Sheet

    Income statements:

    Also known as profit and loss financial statement, these types of comparative

    financial statements suggest profit amount earned by a company as well as

    amount of money lost by a company. Loss or profit may not always mean, loss or

    profit of money, it may also include any asset or stock, which has an economic

    value. Income statements also include expenditure incurred for conducting

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    activities, related to operations. This type of a financial statements is referred to

    as an operating financial statement.

    An income statement can be of two types:

    Single step income statements

    Multi step income statements

    It is suggested that, in the preparation of a financial statement, the income

    statement, is first worked on. This is generally followed by the statements of cash

    flow and balance sheet. In the preparation of a balance sheet, information from

    the cash flow statement as well as income statement is often required.

    Balance sheet:

    Information pertaining to expenses and profit earned by a company are recorded

    in the balance sheet.

    Statement of cash flow:

    Records information about movement of cash within and outside the company.

    Usefulness of comparative financial statements: The comparative financial

    statements are very helpful in carrying out company analysis. This type of

    financial statement is also helpful in observing trends. The auditor traces the

    various trends pertaining to a particular financial activity of a company. The

    auditor may suggest measures to improve the financial health of the company.

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    IX. FINANCIAL RATIOS

    Financial ratios are useful indicators of a firm's performance and financial

    situation. Most ratios can be calculated from information provided by the financial

    statements. Financial ratios can be used to analyze trends and to compare the

    firm's financials to those of other firms. In some cases, ratio analysis can predict

    future bankruptcy.

    Financial ratios can be classified according to the information they provide. The

    following types of ratios frequently are used:

    Liquidity ratios

    Asset turnover ratios

    Financial leverage ratios

    Profitability ratios

    Dividend policy ratios

    Liquidity Ratios

    Liquidity ratios provide information about a firm's ability to meet its short-term

    financial obligations. They are of particular interest to those extending short-term

    credit to the firm. Two frequently-used liquidity ratios are the current ratio (or

    working capital ratio) and the quick ratio.

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    The current ratio is the ratio of current assets to current liabilities:

    Current Ratio =Current Assets

    Current Liabilities

    Short-term creditors prefer a high current ratio since it reduces their risk.

    Shareholders may prefer a lower current ratio so that more of the firm's assets

    are working to grow the business. Typical values for the current ratio vary by firm

    and industry. For example, firms in cyclical industries may maintain a higher

    current ratio in order to remain solvent during downturns.

    One drawback of the current ratio is that inventory may include many items thatare difficult to liquidate quickly and that have uncertain liquidation values. Thequick ratio is an alternative measure of liquidity that does not include inventory inthe current assets. The quick ratio is defined as follows:

    Quick Ratio =Current Assets - Inventory

    Current Liabilities

    The current assets used in the quick ratio are cash, accounts receivable, and

    notes receivable. These assets essentially are current assets less inventory. The

    quick ratio often is referred to as the acid test.

    Finally, the cash ratio is the most conservative liquidity ratio. It excludes allcurrent assets except the most liquid: cash and cash equivalents. The cash ratiois defined as follows:

    Cash Ratio =Cash + Marketable Securities

    Current Liabilities

    The cash ratio is an indication of the firm's ability to pay off its current liabilities if

    for some reason immediate payment were demanded.

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    Asset Turnover Ratios

    Asset turnover ratios indicate of how efficiently the firm utilizes its assets. They

    sometimes are referred to as efficiency ratios, asset utilization ratios, or asset

    management ratios. Two commonly used asset turnover ratios are receivables

    turnoverand inventory turnover.

    Receivables turnover is an indication of how quickly the firm collects its accountsreceivables and is defined as follows:

    Receivables Turnover =Annual Credit Sales

    Accounts Receivable

    The receivables turnover often is reported in terms of the number of days thatcredit sales remain in accounts receivable before they are collected. This numberis known as the collection period. It is the accounts receivable balance divided bythe average daily credit sales, calculated as follows:

    Average Collection Period =Accounts Receivable

    Annual Credit Sales / 365

    The collection period also can be written as:

    Average Collection Period =365

    Receivables Turnover

    Another major asset turnover ratio is inventory turnover. It is the cost of goodssold in a time period divided by the average inventory level during that period:

    Inventory Turnover =Cost of Goods Sold

    Average Inventory

    The inventory turnover often is reported as the inventory period, which is thenumber of days worth of inventory on hand, calculated by dividing the inventoryby the average daily cost of goods sold:

    Inventory Period =Average Inventory

    Annual Cost of Goods Sold / 365

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    The inventory period also can be written as:

    Inventory Period =365

    Inventory Turnover

    Other asset turnover ratios include fixed asset turnover and total asset turnover.

    Financial Leverage Ratios

    Financial leverage ratios provide an indication of the long-term solvency of the

    firm. Unlike liquidity ratios that are concerned with short-term assets and

    liabilities, financial leverage ratios measure the extent to which the firm is using

    long term debt.

    The debt ratio is defined as total debt divided by total assets:

    Debt Ratio =Total Debt

    Total Assets

    The debt-to-equityratio is total debt divided by total equity:

    Debt-to-Equity Ratio =Total Debt

    Total Equity

    Debt ratios depend on the classification of long-term leases and on the

    classification of some items as long-term debt or equity.

    The times interest earnedratio indicates how well the firm's earnings can coverthe interest payments on its debt. This ratio also is known as the interest

    coverage and is calculated as follows:

    Interest Coverage =EBIT

    Interest Charges

    where EBIT = Earnings Before Interest and Taxes

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    Profitability Ratios

    Profitability ratios offer several different measures of the success of the firm at

    generating profits.

    The gross profit margin is a measure of the gross profit earned on sales. Thegross profit margin considers the firm's cost of goods sold, but does not includeother costs. It is defined as follows:

    Gross Profit Margin =Sales - Cost of Goods Sold

    Sales

    Return on assets is a measure of how effectively the firm's assets are being used

    to generate profits. It is defined as:

    Return on Assets =Net Income

    Total Assets

    Return on equityis the bottom line measure for the shareholders, measuring the

    profits earned for each dollar invested in the firm's stock. Return on equity is

    defined as follows:

    Return on Equity =Net Income

    Shareholder Equity

    Dividend Policy Ratios

    Dividend policy ratios provide insight into the dividend policy of the firm and the

    prospects for future growth. Two commonly used ratios are the dividend yield

    and payout ratio.

    The dividend yield is defined as follows:

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    Dividend Yield =Dividends Per Share

    Share Price

    A high dividend yield does not necessarily translate into a high future rate ofreturn. It is important to consider the prospects for continuing and increasing the

    dividend in the future. The dividendpayout ratio is helpful in this regard, and isdefined as follows:

    Payout Ratio =Dividends Per Share

    Earnings Per Share

    Use and Limitations of Financial Ratios

    Attention should be given to the following issues when using financial ratios:

    A reference point is needed. To to be meaningful, most ratios must be

    compared to historical values of the same firm, the firm's forecasts, or

    ratios of similar firms.

    Most ratios by themselves are not highly meaningful. They should be

    viewed as indicators, with several of them combined to paint a picture of

    the firm's situation.

    Year-end values may not be representative. Certain account balances that

    are used to calculate ratios may increase or decrease at the end of the

    accounting period because of seasonal factors. Such changes may distort

    the value of the ratio. Average values should be used when they are

    available.

    Ratios are subject to the limitations of accounting methods. Different

    accounting choices may result in significantly different ratio values.

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    X. FINANCIAL RISK MANAGEMENT

    Financial risk management is a process to deal with the uncertainties resulting

    from financial markets. It involves assessing the financial risks facing an

    organization and developing management strategies consistent with internal

    priorities and policies. Addressing financial risks proactively may provide an

    organization with a competitive advantage. It also ensures that management,

    operational staff, stakeholders, and the board of directors are in agreement on

    key issues of risk. Managing financial risk necessitates making organizational

    decisions about risks that are acceptable versus those that are not. The passive

    strategy of taking no action is the acceptance of all risks by default. rganizations

    manage financial risk using a variety of strategies and products. It is important to

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    understand how these products and strategies work to reduce risk within the

    context of the organizations risk tolerance and objectives.Strategies for risk

    management often involve derivatives. Derivatives are traded widely among

    financial institutions and on organized exchanges. The value of derivatives

    ontracts, such as futures, forwards, options, and swaps, is derived from the price

    f the underlying asset. Derivatives trade on interest rates, exchange rates,

    commodities, equity and fixed income securities, credit, and even weather. The

    products and strategies used by market participants to manage financial risk are

    the same ones used by speculators to increase leverage and risk. Although it can

    be argued that widespread use of derivatives increases risk, the existence of

    derivatives enables those who wish to reduce risk to pass it along to those who

    seek risk and its associated opportunities. The ability to estimate the likelihood of

    a financial loss is highly desirable. However, standard theories of probability

    often fail in the analysis of financial markets. Risks usually do not exist in

    isolation, and the interactions of several exposures may have to be considered in

    developing an understanding of how financial risk arises. Sometimes, these

    interactions are difficult to forecast, since they ultimately depend on human

    behavior. The process of financial risk management is an ongoing one.Strategies

    need to be implemented and refined as the market and requirements change.

    Refinements may reflect changing expectations about market rates, changes to

    the business environment, or changing international political conditions, for

    example. In general, the process can be summarized as follows:

    Identify and prioritize key financial risks.

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    Determine an appropriate level of risk tolerance.

    Implement risk management strategy in accordance with policy.

    Measure, report, monitor, and refine as needed.

    Risk Management Process

    The process of financial risk management comprises strategies that enable an

    organization to manage the risks associated with financial markets. Riskmanagement is a dynamic process that should evolve with an organization and

    its business. It involves and impacts many parts of an organization including

    treasury, sales, marketing, legal, tax, commodity, and corporate finance. The risk

    management process involves both internal and external analysis. The first part

    of the process involves identifying and prioritizing the financial risks facing an

    organization and understanding their relevance. It may be necessary to examine

    the organization and its products, management, customers, suppliers,

    competitors, pricing, industry trends, balance sheet structure, and position in the

    industry. It is also necessary to consider stakeholders and their objectives and

    tolerance for risk. Once a clear understanding of the risks emerges, appropriate

    strategies can be implemented in conjunction with risk management policy. For

    example, it might be possible to change where and how business is done,

    thereby reducing the organizations exposure and risk. Alternatively, existing

    exposures may be managed with derivatives. Another strategy for managing risk

    is to accept all risks and the possibility of losses. There are three broad

    alternatives for managing risk:

    1. Do nothing and actively, or passively by default, accept all risks.

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    2. Hedge a portion of exposures by determining which exposures can and should

    be hedged.

    3. Hedge all exposures possible.

    Measurement and reporting of risks provides decision makers with information to

    execute decisions and monitor outcomes, both before and after strategies are

    taken to mitigate them. Since the risk management process is ongoing, reporting

    and feedback can be used to refine the system by modifying or improving

    strategies. An active decision-making process is an important component of risk

    management. Decisions about potential loss and risk reduction provide a forum

    for discussion of important issues and the varying perspectives of stakeholders.

    XI. TYPES OF SHORT TERM BARROWINGS

    A loan can be a big financial commitment. By taking one out, you will be required

    to give up a portion of your salary every month until the loan is paid off, and

    ailing to do so could result in serious consequences. There are two main types of

    loan: secured and unsecured. Each have their advantages and disadvantages,

    depending on a) your financial health and b) how much you want to borrow.

    Secured loan

    If a loan is secured, it means it is secured against something you own (an

    asset) and failing to repay the loan could result in the lender taking possession

    of that asset, and selling it to cover their losses.

    The asset in a secured loan will normally be your home, but it can also be your

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    car or another item of a high value.

    Advantages of a secured loan

    Its usually possible to borrow more than with an unsecured loan. Its also

    possible to spread payments over a longer period of time. Since the lender

    knows they have your asset as backup, there is much less uncertainty

    about whether they are going to get all their money back.

    For the same reason, interest rates are often lower.

    Even if you have a bad credit history, you may be able to get a secured

    loan. Your secured asset will reassure lenders that they are able to get all

    their money back. However, if you currently have other debt problems,

    taking out further loans of any type could be a bad idea.

    Unsecured loan

    An unsecured loan does not require you to secure anything against the loan

    the lender relies on your contractual obligation to pay it back.

    Because there is no security and the risk they are taking is therefore greater, the

    amount you can borrow tends to be less, and the repayment period is usually

    shorter.

    The lending criteria also tend to be tighter: lenders generally charge a higher

    interest rate which is determined mainly by your credit history and level of

    income.

    Advantages of an unsecured loan

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    Preserves the equity in your property and avoid the risk of losing your

    home or assets. Lenders are not entitled to repossess your belongings if

    you struggle to make your payments although they can attempt to

    pursue this in court if necessary.

    You dont need a property or any other expensive assets to take out an

    unsecured loan.

    Its cheaper than credit/store cards for smaller purchases. Credit and store

    cards usually have very high interest rates, so if youre planning on

    repaying over a few months, you can save a lot of money by taking out an

    unsecured loan to fund your purchase.

    XII. WORKING CAPITAL MANAGEMENT

    Working capital management is the device of finance. It is related to manage of

    current assets and current liabilities. After learning working capital management,

    commerce students can use this tool for fund flow analysis. Working capital is

    very significant for paying day to day expenses and long term liabilities.

    Meaning and Concept of Working Capital and its management

    Working capital is that part ofcompanys capital which is used for purchasing raw

    material and involve in sundry debtors. We all know that current assets are very

    important for proper working of fixed assets. Suppose, if you have invested your

    money to purchase machines of company and if you have not any more money

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    to buy raw material, then your machinery will no use for any production without

    raw material. From this example, you can understand that working capital is very

    useful for operating any business organization. We can also take one more liquid

    item of current assets that is cash. If you have not cash in hand, then you can not

    pay for different expenses of company, and at that time, your many business

    works may delay for not paying certain expenses. If we define working capital in

    very simple form, then we can say that working capital is the excess of current

    assets over current liabilities.

    Types of Working Capital

    1. Gross working capital

    Total or gross working capital is that working capital which is used for all the

    current assets. Total value of current assets will equal to gross working capital.

    2. Net Working Capital

    Net working capital is the excess of current assets over current liabilities.

    Net Working Capital = Total Current Assets Total Current Liabilities

    This amount shows that if we deduct total current liabilities from total current

    assets, then balance amount can be used for repayment of long term debts at

    any time.

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    3. Permanent Working Capital

    Permanent working capital is that amount of capital which must be in cash or

    current assets for continuing the activities of business.

    4. Temporary Working Capital

    Sometime, it may possible that we have to pay fixed liabilities, at that time we

    need working capital which is more than permanent working capital, then this

    excess amount will be temporary working capital. In normal working of business,

    we dont need such capital.

    In working capital management, we analyze following three points

    Ist Point

    What is the need for working capital?

    After study the nature of production, we can estimate the need for working

    capital. If company produces products at large scale and continues producing

    goods, then company needs high amount of working capital.

    2nd Point

    What is optimum level of Working capital in business?

    Have you achieved the optimum level of working capital which has invested in

    current assets? Because high amount of working capital will decrease the return

    on investment and low amount of working capital will increase the risk of

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    business. So, it is very important decision to get optimum level of working capital

    where both profitability and risk will be balanced. For achieving optimum level of

    working capital, finance manager should also study the factors which affects the

    requirement of working capital and different elements of current assets. If he will

    manage cash, debtor and inventory, then working capital will automatically

    optimize.

    3rd Point

    What are main Working capital policies of businesses?

    Policies are the guidelines which are helpful to direct business. Finance manager

    can also make working capital policies.

    1st Working capital policy

    Liquidity policy

    Under this policy, finance manager will increase the amount of liquidity for

    reducing the risk of business. If business has high volume of cash and bank

    balance, then business can easily pays his dues at maturity. But finance manger

    should not forget that the excess cash will not produce and earning and return on

    investment will decrease. So liquidity policy should be optimized.

    2nd Working Capital Policy

    Profitability policy

    Under this policy, finance manger will keep low amount of cash in business and

    try to invest maximum amount of cash and bank balance. It will sure that profit of

    business will increase due to increasing of investment in proper way but risk of

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    business will also increase because liquidity of business will decrease and it can

    create bankruptcy position of business. So, profitability policy should make after

    seeing liquidity policy and after this both policies will helpful for proper

    management of working capital.

    XIII. TYPES OF FINANCIAL STATEMENTS

    Financial statements can be referred to as representation of the financial status

    of a company in a systematically documented form.

    There are different types of financial statements. Financial statements, are

    required to be audited by authentic, efficient audit firms to avoid manipulation of

    numbers. Statements are usually audited by the accounting firms after a

    thorough study of the company records. The accounting and the audit firms make

    sure that the company is obeying and operating as per norms laid down by the

    Generally Accepted Accounting Principles or GAAP.

    Basically, there are four different types of financial statements. The different

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    types of financial statements indicate the different activities occurring in a

    particular business house.

    Balance Sheet

    Income statement

    Statement of retained earnings

    Statement of cash flow or Cash flow statement

    Balance sheet:

    The balance sheet provides an insight into the financial status of a company at a

    particular time. The balance sheet, type of financial statement is different in

    comparison to the other types of financial statements. Other financial statements

    are prepared by taking into account the financial health of the company over a

    considerable span of time.

    Income statements:

    Also known as the P&L statement or the Profit And Loss Statement. This

    statement, ascertains the profit and loss of any business. This can be again of

    two types:

    Single Step Income Statement

    Multi Step Income Statement

    Statements Of Retained earnings:

    This financial statement denotes alterations in the title rights of equities, in any

    business.

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    Cash flow statement:

    This statement highlights flow of cash over a period of time. The cash flow may

    be from investment activities, operations or financing activities.

    XIV. CONCLUSION

    The Financial Management SMF describes the principal processes in managing

    the financial aspect of the IT organization, addresses financial risk as part of

    these processes, and discusses the means to measure the value realized from IT

    solutions.

    The major financial management processes described by the Financial

    Management SMF are:

    Establish service requirements and plan budget.

    Manage finances.

    Perform IT accounting and reporting.

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