PROJECT REPORT

FINANCIAL MANAGEMENT AND

ANALYSIS

ALI SIDDIQUI
00413401920
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TOPIC INTRODUCTION
The decision making of financial managers involves investment decisions and
financing decisions. Financial managers assess the potential risks and rewards
associated with investment and financing decisions through the application of
financial analysis. The form of the business enterprise—whether a sole
proprietorship, partnership, corporation, or some other form—affects the life of
the enterprise, the liability of its owners, the taxation of income, and access to
funds.
In turn, the form of business influences financial decision-making through its effect
on taxes, governance, and the liability of owners. The objective of financial
decision-making in a business is the maximization of the wealth of owners. Because
managers' self-interest may not be consistent with owners' best interests, owners
must devise ways to align managers' and owners' interests. Recent scandals have
enhanced the awareness of the responsibility of CEOs, CFOs, and board members
to the stakeholders of a business enterprise.

OBJECTIVES OF STUDY
● Diverse career opportunities: Studying financial management opens up a
lot of diverse career opportunities. It could be in the private or public sector.
Some of the career options include investment banking, entrepreneurship,
financial analysis, financial and managerial accounting, and strategic financial
management. It is also beneficial for those people who are interested in
starting their own business. Doing a financial management course or
obtaining a finance degree can help people get promotions or better
accounting jobs.
● Improve interpersonal skills: Doing a course in this field will allow you to
build better communication and teamwork skills through developing
relationships with your colleagues.
● Builds personality: Doing a course in this field also helps in improving your
soft skills. This is because people who wish to work in this sector must be
extroverts, and should be able to talk about finance for hours altogether.
This helps in improving their personality, knowledge, and communication.
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● Higher salary packages: People working in this sector are usually paid very
well, whether it is at the entry-level or at the management level. Additionally,
this is a highly skilled job role that is always in demand, even during
recessions.
● Career growth: There is always an opportunity to develop your professional
skills and climb the career ladder. You can quickly acquire in-depth
knowledge of financial management systems and financial management
software once in this field. If you possess this knowledge and great aptitude
skills, this field is perfect for you.

RESEARCH METHODOLOGY

PLANNING
The financial manager projects how much money the company will need in order to
maintain positive cash flow, allocate funds to grow or add new products or services and
cope with unexpected events, and shares that information with business colleagues.
Planning may be broken down into categories including capital expenses, T&E and
workforce and indirect and operational expenses.

BUDGETING
The financial manager allocates the company’s available funds to meet costs, such as
mortgages or rents, salaries, raw materials, employee T&E and other obligations. Ideally,
there will be some left to put aside for emergencies and to fund new business
opportunities.
Companies generally have a master budget and may have separate subdocuments
covering, for example, cash flow and operations; budgets may be static or flexible.

MANAGING AND ASSESSING RISK

Line-of-business executives look to their financial managers to assess and provide
compensating controls for a variety of risks, including:
Market risk: Affects the business’ investments as well as, for public companies, reporting
and stock performance. May also reflect financial risk particular to the industry, such as a
pandemic affecting restaurants or the shift of retail to a direct-to-consumer model.
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Credit risk: The effects of, for example, customers not paying their invoices on time and
thus the business not having funds to meet obligations, which may adversely affect
creditworthiness and valuation, which dictates the ability to borrow at favourable rates.
Liquidity risk: Finance teams must track current cash flow, estimate future cash needs and
be prepared to free up working capital as needed.
Operational risk: This is a catch-all category, and one new to some finance teams. It may
include, for example, the risk of a cyber-attack and whether to purchase cybersecurity
insurance, what disaster recovery and business continuity plans are in place and what crisis
management practices are triggered if a senior executive is accused of fraud or
misconduct.

PROCEDURES
The financial manager sets procedures regarding how the finance team will process and
distribute financial data, like invoices, payments and reports, with security and accuracy.
These written procedures also outline who is responsible for making financial decisions at
the company—and who signs off on those decisions.
Companies don’t need to start from scratch; there are policy and procedure templates
available for a variety of organization types, such as this one for nonprofits.

FINDINGS AND ANALYSIS

FUNDAMENTALS OF FINANCIAL MANAGEMENT

So, in the firms, when you talk about that finance, what role it plays, what is the importance
of the finance and how to properly manage the finance and what all about we call it as the
financial management.
Under this process of learning about financial management, we will have to learn about the
optimum amount of financial resources to be invested into the business and the proper
management of all those sources of finances. When you run the business or when you start
the business and you start running the business, you have a number of factors of
productions, you need land, plant, building machinery, material, capital, labour.
When you talk about the financial decision areas, we have the 6 financial important
financial decision areas, one is the investment analysis. The second is the working capital
management, the third one is the sources and the cost of funds. The fourth one is the
determination of the capital structure and then is the dividend policy and then is the
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analysis of the risk and returns. Because the ultimate purpose of any business is to have
the maximum returns at the optimum level of risk.

TIME VALUE OF MONEY

This is basically what you can call, the backbone of any financial learning or the learning
about finance and financial management.
Time value of money means that a sum of money is worth more now than the same sum of
money in the future. This is because money can grow only through investing. An
investment delay is an opportunity lost. The formula for computing the time value of
money considers the amount of money, its future value, the amount it can earn, and the
time frame. For savings accounts, the number of compounding periods is an important
determinant as well.
The formula for Time Value of Money:
● FV = Future value of money
● PV = Present value of money
● i = interest rate
● n = number of compounding periods per year
● t = number of years

Based on these variables, the formula for TVM is:

FV = PV x [ 1 + (i / n) ] (n x t)

The recognition of the time value of money is extremely significant in financial decision
making because, most the financial decisions such as the acquisition of assets or
procurement of funds, affect a firm’s cash flows in different time periods, for example, if a
fixed asset is purchased, it will require an immediate cash outlays and will affect cash flows
during many future periods.

CAPITAL BUDGETING
Capital budgeting is the process a business undertakes to evaluate potential major projects
or investments. Construction of a new plant or a big investment in an outside venture are
examples of projects that would require capital budgeting before they are approved or
rejected.
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Capital budgeting is used by companies to evaluate major projects and investments, such
as new plants or equipment. The process involves analyzing a project’s cash inflows and
outflows to determine whether the expected return meets a set benchmark. The major
methods of capital budgeting include discounted cash flow, payback, and throughput
analyses.
A capital budgeting decision is both a financial commitment and an investment. By taking
on a project, the business is making a financial commitment, but it is also investing in its
longer-term direction that will likely have an influence on future projects the company
considers.
Different businesses use different valuation methods to either accept or reject capital
budgeting projects. Although the net present value (NPV) method is the most favourable
one among analysts, the internal rate of return (IRR) and payback period (PB) methods are
often used as well under certain circumstances. Managers can have the most confidence in
their analysis when all three approaches indicate the same course of action.

ESTIMATION OF PROJECT CASH FLOWS

Project cash flow refers to how cash flows in and out of an organization in regard to a
specific existing or potential project. Project cash flow includes revenue and costs for such
a project.
It is a crucial part of financial planning concerning a company’s current or potential projects
that don’t require a vendor or supplier.
Experts sometimes call project cash flow relevant cash flow, which refers to when a
company is still deciding whether a project is worth its time. In order to calculate the
relevant cash flow of a project, a company analyzes the cash inflows and outflows that
would occur if it decided to take on the project. When performing a project cash flow
analysis, be sure to exclude all ongoing and non-relevant costs, like office rent or regular
salaries.
A project cash flow analysis allows you to look closely at the cash inflows and outflows
associated with an existing or potential project. The analysis also addresses opportunity
costs (i.e., the amount of money your company loses by embarking on a project).
Here are some details to consider when performing a project cash flow analysis:
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● Sunk Costs: These are costs that your company incurs whether you take on a
project or not. Sunk costs generally refer to the fixed costs you incur by running
your business, such as rent, overall payroll, research and development, and
other expenses.
● Initial Investments: These investments refer to the cash outlays for the
equipment and other assets that you need to execute a project.
● Relevant Cash Flows: These are the revenue and costs that occur due to a
project. They include the following:
● Incremental Cash Flows: These refer to all the cash inflows and
outflows that result from a project, including payments to suppliers
and equipment leases.
● Terminal Cash Flow: This term refers to proceeds from the
equipment that you buy and use specifically for a project.
● Opportunity Costs: This refers to the amount of money your
company loses by embarking on a project.

RISK ANALYSIS IN CAPITAL BUDGETING

Uncertainties can exist when the outcome of an event is not known for certain, and when
dealing with assets whose cash flows are expected to extend beyond one year, certainly,
there’s an element of risk in that situation. The evaluation of risk, therefore, depends, on
the decision-maker ability to identify and understand the nature of uncertainty
surrounding the key variables and on the other, having the tools and methodology to
process its risk implications.
METHODS:

● NPV: NPV is an indicator of how much value an investment adds to the firm. It
estimates the future values of the projected variables. Generally, we utilize
information regarding a specific event of the past to predict a possible future
outcome of the same or similar event. If there’s a choice between two mutually
exclusive alternatives, the one yielding the higher NPV should be selected. The
output is not a single value but a probability distribution of all possible expected
returns. The results give a complete risk/return profile, showing all the possible
outcomes that could result from the decision.
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● Situation Reviewed: Suppose PT. X plan to invest in new machinery with two
options, buy a used rapier machine from a European manufacturer or buy a new
rapier machine from China manufacturer. Information and assumption from
each option can be used as an input for the capital budgeting model for
deterministic and probabilistic methods. The deterministic approach only uses
the most probable estimation and mean estimation as to its input.
The first option offers a more durable machine but is riskier in initial installation
because there will be no manual book, difficultness to find a spare part
replacement, no supporting trained mechanics from the previous owner. The
second option, on the other hand, offers a more certain initial installation but is
more easily damaged because of the lesser quality of their machine material and
spare part.
● Deterministic Method: ResultUnit sales for 1st year can be calculated by
1st-year capacity x 12 months x capacity adjustment for installation. In the
second year, we add phase 1 capacity with adjusted phase 2 capacity, then from
year 3, the sales become phase 1 and 2 capacity.
The revenue is calculated by multiplying unit sales with unit price. Then every
period net cash flow can be calculated by subtracting revenue with a fixed cost
and variable cost. In starting year and 1st year, initial investment and phase 2
investments are also included in cash flow computation. After that, we can
calculate the Net Present Value of the selected alternative. Repeat the process
for the 2nd alternative.
The output of the method (figure 4) shows that buying a new machine from
China manufacturer yields a higher NPV than buying a used machine from a
European manufacturer, because of that, the decision is to select the second
option.
● Probabilistic Method Result: Probabilistic method is not a substitute of
Deterministic method but rather a tool that enhances its results. A good
appraisal model is a necessary base on which to set up a meaningful simulation.
Risk analysis supports the investment decision by giving the investor a measure
of the variance associated with an investment appraisal return estimate.
Probabilistic method is not a substitute of Deterministic method but rather a
tool that enhances its results. A good appraisal model is a necessary base on
which to set up a meaningful simulation. Risk analysis supports the investment
decision by giving the investor a measure of the variance associated with an
investment appraisal return estimate.
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COST OF CAPITAL
Cost of capital is a company's calculation of the minimum return that would be necessary
in order to justify undertaking a capital budgeting project, such as building a new factory.
The term cost of capital is used by analysts and investors, but it is always an evaluation of
whether a projected decision can be justified by its cost. Investors may also use the term to
refer to an evaluation of an investment's potential return in relation to its cost and its risks.
Many companies use a combination of debt and equity to finance business expansion. For
such companies, the overall cost of capital is derived from the weighted average cost of all
capital sources. This is known as the weighted average cost of capital (WACC).
Weighted Average Cost of Capital (WACC)
A firm's cost of capital is typically calculated using the weighted average cost of capital
formula that considers the cost of both debt and equity capital.
Each category of the firm's capital is weighted proportionately to arrive at a blended rate,
and the formula considers every type of debt and equity on the company's balance sheet,
including common and preferred stock, bonds, and other forms of debt.
Finding the Cost of Debt
The cost of capital becomes a factor in deciding which financing track to follow: debt,
equity, or a combination of the two.
Early-stage companies rarely have sizable assets to pledge as collateral for loans, so equity
financing becomes the default mode of funding. Less-established companies with limited
operating histories will pay a higher cost for capital than older companies with solid track
records since lenders and investors will demand a higher risk premium for the former.
The cost of debt is merely the interest rate paid by the company on its debt. However, since
interest expense is tax-deductible, the debt is calculated on an after-tax basis as follows:

Cost of debt=Interest expense/Total debt×(1−T)

where:
Interest expense=Int. paid on the firm’s current debt
T=The company’s marginal tax rate
The cost of debt can also be estimated by adding a credit spread to the risk-free rate
and multiplying the result by (1 - T).
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​Finding the Cost of Equity

The cost of equity is more complicated since the rate of return demanded by equity
investors is not as clearly defined as it is by lenders. The cost of equity is approximated by
the capital asset pricing model as follows:
​

CAPM(Cost of equity)=Rf+β(Rm−Rf)
where:
Rf=risk-free rate of return
Rm=market rate of return

Beta is used in the CAPM formula to estimate risk, and the formula would require a public
company's own stock beta. For private companies, a beta is estimated based on the
average beta among a group of similar public companies. Analysts may refine this beta by
calculating it on an after-tax basis. The assumption is that a private firm's beta will become
the same as the industry average beta.

CAPITAL STRUCTURE
Capital structure is the particular combination of debt and equity used by a company to
finance its overall operations and growth.
Equity capital arises from ownership shares in a company and claims to its future cash
flows and profits. Debt comes in the form of bond issues or loans, while equity may come
in the form of common stock, preferred stock, or retained earnings. Short-term debt is also
considered to be part of the capital structure.
Both debt and equity can be found on the balance sheet. Company assets, also listed on
the balance sheet, are purchased with debt or equity. Capital structure can be a mixture of
a company's long-term debt, short-term debt, common stock, and preferred stock. A
company's proportion of short-term debt versus long-term debt is considered when
analyzing its capital structure.
When analysts refer to capital structure, they are most likely referring to a firm's
debt-to-equity (D/E) ratio, which provides insight into how risky a company's borrowing
practices are. Usually, a company that is heavily financed by debt has a more aggressive
capital structure and therefore poses a greater risk to investors. This risk, however, may be
the primary source of the firm's growth.
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Debt is one of the two main ways a company can raise money in the capital markets.
Companies benefit from debt because of its tax advantages; interest payments made as a
result of borrowing funds may be tax-deductible. Debt also allows a company or business
to retain ownership, unlike equity. Additionally, in times of low-interest rates, debt is
abundant and easy to access.
Equity allows outside investors to take partial ownership of the company. Equity is more
expensive than debt, especially when interest rates are low. However, unlike debt, equity
does not need to be paid back. This is a benefit to the company in the case of declining
earnings. On the other hand, equity represents a claim by the owner on the future earnings
of the company.
How Do Managers Decide on Capital Structure?
Assuming that a company has access to capital (e.g. investors and lenders), they will want
to minimize their cost of capital. This can be done using a weighted average cost of capital
(WACC) calculation. To calculate WACC the manager or analyst will multiply the cost of each
capital component by its proportional weight.
How Do Analysts and Investors Use Capital Structure?
A company with too much debt can be seen as a credit risk. Too much equity, however,
could mean the company is underutilizing its growth opportunities or paying too much for
its cost of capital (as equity tends to be more costly than debt). Unfortunately, there is no
magic ratio of debt to equity to use as guidance to achieve real-world optimal capital
structure. What defines a healthy blend of debt and equity varies depending on the
industry the company operates in, its stage of development, and can vary over time due to
external changes in interest rates and regulatory environment.
What Measures Do Analysts and Investors Use to Evaluate Capital Structure?
In addition to the weighted average cost of capital (WACC), several metrics can be used to
estimate the suitability of a company's capital structure. Leverage ratios are one group of
metrics that are used, such as the debt-to-equity (D/E) ratio or debt ratio.

DIVIDEND DECISIONS
The financial decision relates to the disbursement of profits back to investors who supplied
capital to the firm. The term dividend refers to that part of the profits of a company that is
distributed by it among its shareholders. It is the reward of shareholders for investments
made by them in the share capital of the company. The dividend decision is concerned with
the quantum of profits to be distributed among shareholders.
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A decision has to be taken whether all the profits are to be distributed, to retain all the
profits in business or to keep a part of profits in the business and distribute others among
shareholders. The higher rate of dividend may raise the market price of shares and thus,
maximize the wealth of shareholders. The firm should also consider the question of
dividend stability, stock dividend (bonus shares) and a cash dividend.
1. Earning:
Dividends are paid out of current and previous year’s earnings. If there are more earnings
then the company declares a high rate of dividend whereas during the low earning period
the rate of dividend is also low.
2. Stability of Earnings:
Companies having stable or smooth earnings prefer to give a high rate of dividends
whereas companies with unstable earnings prefer to give a low rate of earnings.
3. Cash Flow Position:
Paying dividends means an outflow of cash. Companies declare a high rate of dividend only
when they have surplus cash. In the situation of shortage of cash, companies declare no or
very low dividends.
4. Growth Opportunities:
If a company has a number of investment plans then it should reinvest the earnings of the
company. As to investing in investment projects, the company has two options: one to raise
additional capital or invest its retained earnings. The retained earnings are a cheaper
source as they do not involve floatation costs and any legal formalities.
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CONCLUSION

To say that I have figured out all of who I am would be a lie. The purpose of this research
was to identify effective strategies that are used in Financial Management and Analysis.
Based on the analysis conveyed, it can be concluded that Financial management is one of the
most important aspects of the business. In order to start up or even run a successful business,
you will need excellent knowledge in financial management.