FINANCIAL

MANAGEME
NT
Financial management refers to the
strategic planning, organizing,
directing, and controlling of financial
resources within an organization to
achieve its objectives efficiently and
effectively. It involves making
decisions about how to allocate and
utilize funds in order to maximize
shareholder wealth or achieve other
financial goals.

The 2 basic Functions are:

 acquisition of funds
 Investment of funds
 Key Aspects
Financial Planning
Developing short-term and long-term
financial goals and creating strategies
to achieve them. This involves
forecasting financial needs, budgeting,
and setting targets for revenue,
expenses, and profits.
Capital Budgeting
Evaluating investment opportunities and
determining which projects or assets to
invest in. This involves analyzing the
potential risks and returns associated with
each investment to ensure optimal
 Key Aspects
Financing Decisions
Determining the optimal mix of debt and equity
financing to fund the organization's operations
and investments. This includes assessing the
cost of capital, negotiating financing
arrangements, and managing relationships with
lenders and investors
Risk Management
Identifying, assessing, and mitigating financial risks that
could negatively impact the organization's financial
performance or stability. This involves implementing
strategies to hedge against risks such as interest rate
fluctuations, currency exchange rate fluctuations, credit
risks, and market volatility.
 Key Aspects
Financial Control
Monitoring financial performance against
established targets and benchmarks, and taking
corrective action when necessary. This involves
establishing internal controls, financial reporting
systems, and performance measurement
mechanisms to ensure accountability and
compliance with regulatory requirements.
Cash Management
Managing cash flow effectively to meet short-term
obligations and take advantage of investment
opportunities. This includes optimizing cash
balances, managing receivables and payables, and
forecasting cash flow needs.
 Key Aspects

Financial Analysis
Analyzing financial statements, ratios, and other
financial metrics to assess the organization's
financial health, performance, and profitability.
This information is used to make informed
decisions and identify areas for improvement.
CAPITAL
BUDGETI
NG
 is the process through which a company
evaluates and selects long-term investment
opportunities that involve significant capital
expenditures. These investments typically include
projects such as purchasing new equipment,
expanding facilities, launching new product lines,
or acquiring other businesses. The goal of capital
budgeting is to allocate resources effectively to
projects that will generate the highest returns
and add value to the company
Identification of Investment
Opportunities
• identifying potential investment
opportunities that align with the
company's strategic objectives.
This could involve analyzing
market trends, technological
advancements, competitive capital
landscape, and internal needs.
Project Evaluation
• each project undergoes a thorough
budgeting
evaluation to assess its feasibility and process
potential returns. This evaluation typically
involves estimating cash flows associated
with the project over its entire lifespan. Cash
flows include initial investment outlay,
operating cash inflows, and terminal cash
flows (such as salvage value). It's essential 9
 Icon

Analyzing Trends Internal Needs Technology Competitive

Landscape
.
The overall
environment in
which a company or
organization
operates, including
its competitors,
market dynamics,
and other external
factors that can
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influence its
performance and
Time Value of Money capital
• Since cash flows occur at different
points in time, it's crucial to account for budgeting
the time value of money. This involves
discounting future cash flows back to process
their present value using an
appropriate discount rate, often the
company's cost of capital.
Risk Assessment

• Projects carry varying degrees of risk,

including market risk, technological risk,
and operational risk. It's important to
assess and incorporate these risks into
the evaluation process
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Selection Criteria

• Different selection criteria may be used

to evaluate and prioritize projects.
capital
Common methods include Net Present
Value (NPV), Internal Rate of Return budgeting
process
(IRR), Payback Period, and Profitability
Index (PI). These metrics help in
comparing projects and selecting those
that maximize shareholder value.
Capital Rationing

• rationing involves prioritizing projects within the

constraints to optimize resource allocation. This
requires balancing the expected returns of
projects with the available capital budget.

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Post-Implementation Review
• it's essential to monitor its performance
and compare it against the initial
projections. This helps in assessing the
accuracy of the capital budgeting
capital
process, identifying any deviations, and
learning from past experiences to
budgeting
improve future investment decisions. process

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1. Involves investments of different amounts

• Capital expenditures entail a Importanc

substantial amount of resources.
However, regardless of the
e of
amount involved, a firm must capital
have a high chance of success in
undertaking such an investment. budgeting
Thus. The benefit must be
greater than its cost.

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2. It limits the firm’s flexibility

• Capital expenditure restricts a

firm’s flexibility because it Importanc
requires a commitment of funds.
If a wrong decision is made,
e of
resources are tied up for a long capital
period in an investment that may
not be profitable. Conversely, if budgeting
the right decision is made, a firm
will be benefited for a long time.

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3. It defines a firm’s strategic
direction
• Firms that want to penetrate new Importanc
markets or develop new products
and/or services have to e of
undertake the capital budgeting
process. A firm’s strategy affects
capital
its future. budgeting

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4. It is concerned with the
planning and control of
investments
Importanc
• Capital budgeting involves the
upgrading of machinery and
e of
equipment, acquisition of new
product lines, and expansion.
capital
budgeting

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To arrive at a long-term
investment decision, a firm
needs to identify the following:
Importanc
• 1. The estimated cash flows which are e of
the inflows and outflows over the entire
life of the investment proposal. The cash capital
inflows must exceed the cash outflows
to be acceptable. The cash flows,
budgeting
generally, are as follows:

a. The initial investment

which is the initial cash outlay needed to
undertake the investment.
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To arrive at a long-term
investment decision, a firm
needs to identify the following:
Importanc
b. The annual cash returns which e of
are computed by adding the non-cash
expenses to the firm’s net income after capital
tax. In capital budgeting, the firms are
more concerned with the cash inflow
budgeting
rather than the net income. Included also
in the cash returns are the increase or
decrease in the working capital over the
entire life of the project.

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To arrive at a long-term
investment decision, a firm
needs to identify the following:
Importanc
c. The terminal cash flow which is e of
associated with the termination of the
project. For example, the scrap value of capital
the equipment purchased and used which
is added to the firm’s cash inflows at its
budgeting
discounted amount.

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To arrive at a long-term
investment decision, a firm
needs to identify the following:
Importanc
• 2. The estimated cost of capital or the e of
weighted average cost of capital. A
firm’s cost of capital plays a vital role capital
when financial decisions are made, i.e.
the project with the lowest cost of
budgeting
capital is preferred. Moreover, the lower
the cost of capital the more projects the
firm can accept.

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To arrive at a long-term
investment decision, a firm
needs to identify the following:
Importanc
• 3. The acceptance criteria which are the e of
rules that enable a firm to resolve issues
concerning long-term investments. The capital
acceptance criteria are the methods to
evaluate the “attractiveness” of an
budgeting
investment proposal.

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1. Replacement decisions to
continuous current operations
• These consist of expenditures to replace
worn-out or damaged equipment required in
the production of profitable products. The
questions here should the operation be
continued and if so, should the firm continue
to use the same production processes? Capital
Should the equipment be replaced now? If
the answer is yes. The project will be Budgeting
approved without going through an elaborate
decision process.
Decisions
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2. Replacement to effect cost
reduction.
• This category includes expenditures to
replace still serviceable but obsolete
equipment and thereby lower costs. These
decisions are discretionary and may be
deferred for later action and a fairly detailed
analysis is generally required. Capital
Budgeting
Decisions
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3. Expansion into new products
or markets
• These investments relate to new products or
geographic areas and they involve strategic
decisions that could change the fundamental
nature of the business. Another example is
should a new plant warehouse or other
facility should be acquired to increase Capital
capacity and sales. A detailed analysis is
needed and decision is generally made at the Budgeting
top level of management.
Decisions
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4. Expansion of existing
products or markets
• These are expenditures to increase output of
existing products to expand distribution or
retail outlets in markets being currently
served. Again, a more detailed analysis is
required because expansion decisions are
more complex since they require an explicit Capital
forecast of growth in demand. Also, decision
is generally made at a higher level within the Budgeting
firm.
Decisions
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5. Equipment selection
decisions.
• These investments relate to decisions at to
which of several available machines should be
purchased or leased.

Capital
Budgeting
Decisions
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The basic concept underlying capital budgeting
is the cost-benefit analysis. According to
economic theory, a firm should operate at the
point where the marginal cost of an additional
unit of output just equals the marginal revenue
derived from the output Capital
Budgeting
Framework
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 Capital
Budgeting
Framework 29
A capital budgeting technique that
does not consider the time value of
money, the payback period method
measures the length of time it takes
to recover a project’s initial
investment.

If the annual cash inflow is even, the payback

period is computed by dividing the initial cash
Payback Period
outlay by the annual cash inflow. If the annual
cash inflow is uneven, the payback period is
computed by deducting the annual cash inflow
per year from the amount of the investment
until it becomes zero.
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The acceptance criterion under the
payback period is dependent on the
firm’s minimum or required
payback. An investment proposal
whose payback period is less than
or equal to the firm’s required
payback is accepted and an
investment proposal whose payback Payback Period
period is greater than the standard
set by the firm is rejected.

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If the payback period< required
payback -→ accept the project

If the payback period > required

payback -→ reject the project Payback Period

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Payback Period

• a. Even Cash Inflow

Moanna plans to purchase a piece of equipment
which amounts to P180,000 in accordance with an
investment proposal from a member of his staff. If the
equipment is bought, it is expected to generate an annual
cash inflow of P30,000. A five-year payback period is
acceptable to Moanna.

PB Period = 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡−𝑆𝑐𝑟𝑎𝑝 𝑉𝑎𝑙𝑢𝑒

𝐴𝑛𝑛𝑢𝑎𝑙 𝑎𝑓𝑡𝑒𝑟−𝑡𝑎𝑥 𝑐𝑎𝑠ℎ 𝑠𝑎𝑣𝑖𝑛𝑔𝑠

Decision?

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Payback Period

b. Uneven Cash Inflows

• Assume the same set of facts in the
preceding example for the annual cash
inflows which have now been changed
as follows:
First Year P20,000
Second Year 30,000
Third Year 40,000
Fourth Year 50,000
Fifth year 50,000
Sixth Year 40,000
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