FINANCIAL MANAGEMENT GROUP 5 1.
Is the company generating sufficient positive cash
● Usefulness of the Statement of the Cash flow
● The Basic Approach to a Cash Flow Statement
● Classification of Cash Flow Activities
Key Term remember
Cash – comprises cash on hand and demand
deposits.
Cash Equivalents – are short-term highly liquid
investments that are readily convertible to known
amounts of cash and which are subject to an
insignificant risk of change in value.
Cash flows – is the inflow and outflow of cash and
cash equivalents.
Statement of Cash Flow - A statement of cash
flows is a component of financial statements
summarizing the operating, investing, and financing
activities of an entity.
USEFULNESS OF THE STATEMENT OF CASH
FLOW- Although net income provides a long-term
measure of a company’s success or failure, cash is
its lifeblood. Without cash, the company will not
survive.
Usefulness to creditors or lenders.
Creditors examine the cash flow statement
carefully because they are concerned about being
paid.
Consequently, creditors look for answers to the
following questions in the company’s cash flow
statement:
CLASSIFICATION OF CASH FLOW ACTIVITIES
flows from its ongoing operations to remain
variable? OPERATING ACTIVITIES- Operating activities are
2. Will the company be able to meet its financial the cash flows derived primarily from the principal
obligations to creditors? revenue-producing activities of the entity.
3. What expansion activities took place and how were
those financed? INFLOWS
4. Will the company be able to pay its customary ● Sales of goods
dividend? ● Revenue from services
5. . Why did cash decrease even though a net income ● Returns on interest earnings assets
was reported? ● Returns on equity securities
6. To what extent will the company have to borrow ● Receipts from contracts held for dealing and
money in order to make needed investments? trading purposes
7. What happened to the proceeds received from the
OUTFLOWS
issuance of capital stock?
● Payments for purchases of inventories
Purpose of Cash Flow Statement - The primary ● Payments for operating expenses
● Payments for purchases from suppliers other than
purpose of a cash flow statement is to provide
inventory
relevant information about a company’s cash
● Payments for lenders (interest)
receipts and cash payments during an accounting
● Payments for taxes
period that is useful in evaluating the preceding
items.
INVESTING ACTIVITIES
Investing activities are the cash flows derived from
● A company’s ability to generate positive future net
the acquisition and disposal of long-term assets
cash flows
and other investments not including cash
● A company’s ability to meet its obligations and pay
equivalents
dividends
● A company’s need for external financingIn addition,
the statement of cash flows provide the means of INFLOWS
● Sales of property, plant, and equipment,
measuring a business firm’s
intangibles, and other long-term assets
● Sales of equity or debt instruments of other entities
● Financial Liquidity – which refers to the “measure
to cash” of assets and liabilities.
OUTFLOWS
● Financial Flexibility – which refers to the
● Acquisition of property, plant, and equipment,
company’s ability to respond and adapt to financial
intangibles, and other long-term assets
adversity and unexpected needs and opportunities.
● Acquisition of equity or debt instruments of other
entities

FINANCING ACTIVITIES
Financing activities are the cash flows derived from
the equity capital and borrowings of the entity.
INFLOWS
● Proceeds from borrowing
● Proceeds from issuing the firm’s own equity
securities
OUTFLOWS
● Repayment of debt principal
● Repurchase of a firm’s own shares
● Payment of dividends
● Acquisition of the enterprise’s own shares
Content and form of the Statement of the Cash
Flows- A statement of cash flows(SCF) for a period
shall report the ff:
A. Net Cash
● Provided or used by operating activities
● Provided or used by investing activities
● Provided or used by financing activities
B. Net effect of those flows on cash and cash
equivalents during the period in a manner that
reconciles the beginning and ending cash and cash
equivalents.
Reporting Requirements
1. An entity shall report cash flows from operating
activities using either:
● Direct Method
● Indirect Method
2. An entity shall report separately major classes of
gross cash receipts and gross cash payments
arising from investing and financing activities,
except to the extent that cash flows described in
paragraph (3) and (4) below are reported on a net
basis.
3. Cash flows arising from the ff. operating investing
or financing activities may be reported on a net
basis:
Cash receipts and payments on behalf of
customers when the cash flows reflect the activities
of the customer rather than those of the entity; and
Cash receipts and payments for items in which the
turnover is quick, the amounts are large, and
maturities are short.
4. Cash flows arising from each of the ff. activities of
a financial institution may be reported on a net
basis:
Cash receipts and payments for the acceptance
and repayment of deposits with a fixed maturity
date;
The placement of deposits with and withdrawal of
deposits from other financial institution; and
Cash advances and loans made to customers and
the repayment of those advances and loans.
5. Cash flows arising from transactions in a foreign
currency should be recorded in an entity's
functional currency by applying to currency
amount the exchange rate between the functional
currency and the foreign currency at the date of the
cash flow.
6. Cash flows from interest and dividends received
and paid should each be disclosed separately. Each
should be classified in a consistent manner from
period to period as either operating, investing, or
financing activities.
7. Cash flows arising from taxes on income shall be
separately disclosed and shall be classified as cash
flows from operating activities unless they can be
specifically identified with financing and investing
activities.
Cash flow from operating activities (CFO)
CFO represents the cash a company generates
from its day-to-day business operations. It's the
money needed to keep the company running
smoothly.
OPERATING ACTIVITIES
Operating activities are a critical part of the cash
flow statement.They reveal a business's ability to
generate cash from its core operations.
Some examples of cash flows from operating
activities are shown below to help illustrate the
basic concept:
● Cash receipts from the sale of goods and rendering
of services
● Cash receipts from royalties, fees, commissions,
and other revenue
● Cash payments to suppliers for goods and services
● Cash payments to and on behalf of employees
● Cash receipts and payments from contracts
How to Calculate Net Cash Flow From Operating
Activities
 Businesses can calculate the net cash flow from
operating activities (CFO) using:
Direct Method:
Shows actual cash receipts and payments.
Provides a clear breakdown of cash inflows and
outflows.
Less common due to complexity.
Indirect Method
● Begins with net profit/loss.
● Adjusts for non-cash transactions and
accruals.
● Widely used for its simplicity.
Certain adjustments need to be considered when
calculating cash flow from operating activities.
● Prepaid Expenses
● Outstanding Expenses
● Interest Paid or Received
● Depreciation
● Profit or Loss On Sale of Fixed Assets
● Stock Debtors and Bills Receivable
● Creditors and Bills Payable
First, a company's profit for the year is $1,500,000
after considering the following items
Profit on sale of land: $18,000
Depreciation on fixed assets: $60,000
Transfer to general reserves: $32,000
Goodwill written off: $20,000
What is Financial Leverage
Leverage is an investment strategy of using
borrowed money-specifically, the use of various
financial instruments or borrowed capital-to
increase the potential return of an investment.
Importance of Financial Leverage to a Business
The primary objective of introducing leverage is for
shareholders/ investors to achieve maximum
wealth.
OPERATING LEVERAGE
Leverage is a concept that has various meanings
depending on the context in which it is used.
Generally, leverage involves using a particular
advantage or resource to achieve a desired
outcome or amplify an effect.
LEVERAGE IN BUSINESS
● Financial Leverage
● Operational Leverage
● Strategic Leverage
● Employee Leverage
● Marketing and Sale Leverage
● Technology Leverage
● Supplier and Vendor Leverage
● Custom Leverage
A cost accounting formula that measures the
degree to which a firm or project can increase
operating income by increasing revenue.
VARIABLE COST
A corporate expense that changes in proportion to
how much a company produces or sells- they rise a
production increases and falls when production
decreases
FIXED COST
A cost that does not change with an increase or
decrease in number of goods or services produced
or sold
FINANCIAL MANAGEMENT GROUP 6
Financial Forecasting For Strategic Growth

Financial Planning - formulates the way in which
financial goals are to be achieved. Financial plan in
thus, a statement of what is to be done in the future
Perspective of financial planning
Planning Horizon - means how much time an
individual or an organization is planning ahead.
When making plans, the individual or organization
has the option to plan in the long or short term to
arrive at their desired goals
Short - term planning - covers the coming 12 month
or less
Long term planning - covers the coming two or five
years
Aggregation - is the process of combining
individual projects and required investment
proposals to determine the total needed
investment, treating it as one big picture
Benefit of financial planning
1. Provides a rational way of planning
options or alternatives
2. Interaction or linkages between
investment proposals carefully examined
3. Possible problems related to the
proposal project are identified actions to
address them are studied
4. Feasibility and internal consistency are
ensured
5. Managers are forced to think goals and
establish priorities
Financial Planning Models - will differ from firm to
firm, just as companies differ in size and products,
however, a basic financial planning model will have
the following common elements
6 elements
● Economic Environment Assumption
refers to all the economic factors that affect
commercial and consumer behavior. The economic
The environment consists of all the external factors
in the immediate marketplace and the broader
economy. These factors can influence a business,
i.e., how it operates and how successful it might
become.
● SALES FORECAST'
performance assessment tool, can be an effective
measuring tool where you measure the efficiency of
your sales team or the organization as a whole and
given as the growth rate
Determinants of Growth Rate
❖ PROFIT MARGIN
❖ DIVIDEND POLICY
❖ FINANCIAL POLICY
❖ TOTAL ASSET
❖ TURNOVER
● Pro Forma Statements
ARE A SET OF PROJECTED FINANCIAL
STATEMENTS THAT ESTIMATE A COMPANY’S
FINANCIAL PERFORMANCE IN A FUTURE PERIOD
BASED ON CERTAIN ASSUMPTIONS.
● Asset Requirements
financial documents that provide a comprehensive
overview of an individual or organization’s assets.
These statements are used to assess the financial
health and net worth of an entity by detailing the
value of its various assets.
● Financial Requirements
Is a section about the necessary financing
arrangements. This part of plan should discuss
dividend policy and debt policy, sometimes firms
will expect to raise cash by selling new shares of
stocks or borrowing.
● Additional Funds Needed (AFN)
It is a concept used most commonly in businesses
looking to expand operations and influence. Since a
business that seeks to increase its sales level will
require more assets to meet that goal, some
provision must be made to accommodate the
change in assets
The Projected financial statement method
● Step 1 Forecasting the Income Statement
Establishes a sales projection.
Prepare the production schedule and project the
corresponding production costs; direct materials,
direct labor and overhead. Estimate selling and
administrative expenses. Consider financial
expenses, if any. Determine the net profit
● Step2 Forecasting the Statement of
Financial Position
Project the assets that will be needed to support
projected sales. Project funds that will be
spontaneously generated and by retained earnings.
Project liability and stockholders equity accounts
that will not rise spontaneously with sales .
Determine if additional funds will be needed
● Step3 Raising Additional Funds Needed
Target capital structure: Effect of short-term
borrowing on its current ratio: Conditions in the debt
and equity markets; or Restrictions imposed by
existing debt agreements.
● Step 4: Considering Financing Feedback
Financing feedback is the is a change in the amount
of external financing needed
Forecasting short term operating financial
requirements
Financial planning - involves making projection on
sales , income and asset based on alternative
production and marketing strategies and then
deciding how to meet the forecasted financial
requirement
Financial control move on the implementation
phase dealing with feedback and adjustment
process that is required:
a. To ensure that plans are followed
b. To modify existing plans and response to
changes in the operating environment
Budgeting is the act of a budget
Budget is a financial plan of the resources Needed
to carry out task and meet financial goals
- Is also a quantitative expression of the
goals the organization wishes to achieve
and the cost of attaining this goals
Budgetary control the use of budget to control a
firm activities
THE PURPOSE OF THE BUDGET (The process of
preparing the budget requires management at all
levels to focus on the future of the business entity.)
* - Defining broad objectives and goals and
formulating strategies to achieve such objectives; -
Coordinating the activities of the organization by
integrating the plans of the various parts thereby
pulling everyone in the same direction;
-Allocating resources to those parts of the
organization where they can be used most
effectively;
-Communicating management’s approved plans
throughout the organization; Uncovering and
preparing for potential bottleneck in the operations
before they occur;
-Motivating managers to achieve the desired
results; and
-Setting a standard or benchmark for evaluating
actual performance
ADVANTAGES
It forces planning and reveals when the plans of
smaller parts are not enough. It allows repeated
processes to bring the goals. It provides a means of
communication. It provides a basis for every activity
of organization. It provides a basis by which activity
can be monitored
lIMITATION
. It tends to oversimplify real situations and forget
external factors. It is difficult to prepare. There may
be a lack or higher and lower commitment. It is only
a representation of future plans and not an end in
itself. Budget reports usually emphasize results, not
reasons.
TYPES OF BUDGET
1. OPERATING BUDGET - An operating
The budget encompasses several smaller or sub-
budgets. The different budget components are
pulled together into one comprehensive overview
of the business's monthly revenue, costs, and
expenses
1. Budgeted Income Statement
a. Sales budget
b. b. Production budget
Material cost budget
Direct labor cost budget
Factory overhead budget
Inventory levels
2. Cost of Sales budget
3. Selling and Administrative expenses budget 4.
Financial expense budget
2. FINANCIAL BUDGET - A financial budget is
predicting the incomes and expenses of the
business on a long-term and short-term basis.
- budgeted Statement of Financial Position
- Cash budget
- Budgeted Statement of Sources and Uses
of Funds
3. CAPITAL INVESTMENT BUDGET - A capital
budget is a long-term plan that outlines the
financial demands of an investment, development,
or major purchase. As opposed to an operational
budget that tracks revenue and expenses, a capital
budget must be prepared to analyze whether or
not the long term endeavor will be profitable
Working Capital Management GROUP 7
Accounts Receivable and Inventory Management -
Robert N.Anthony, explained it as "Accounts
receivables are amounts owed to the business
enterprise, usually by its customers. Sometimes it is
broken down into trade accounts receivables; the
former refers to amounts owed by customers, and
the latter refers to amounts owed by employees
and others"
What is Accounts Receivable Management?
- The term receivables is described as debt
owed to the firm by the customers
resulting from the sale of goods or services
in the ordinary course of business.
- Receivables Management is also known as
trade credit management
- Accounts Receivables Management
denotes to make decisions relating to the
investment in the current assets as vital
part of operating process, the objective
being maximization of return on
investment in receivables
- Receivables management denotes to the
decision a business makes regarding to the
overall credit, collection policies and the
evaluation of individual credit applicants
The objective of Receivables Management is to
promote sales and profits until that point is reached
where the return on investment in further funding
receivables is less than the cost of funds raised to
finance that additional credit i.e. cost of capital
Cost of management of accounts receivables: the
expenses incurred by a company for managing and
holding its accounts receivables
opportunity cost - the value of the option not taken
when a business makes a decision.
Bad debt - refers to loans or outstanding balances
owed that are no longer deemed recoverable and
must be written off
Collection cost- the cost incurred to collect debt
that is owed
ADVANTAGES OF ACCOUNTS RECEIVABLES
MANAGEMENT:
INCREASED SALES: Offering goods and services on
credit enhances sales, by holding old customer and
attraction potential customer.
INCREASED MARKET SHARE: When the firm is
able to maintain old customers and attract new
customers automatically market share will be
bigger to the extent new sales.
INCREASED IN PROFITS: Increased sales, leads to
increase in profits, because it need to produce
more products with given sales network in both
cost per unit comes down and the profit will be
better
MANAGEMENT OF INVENTORY: Is basically related
to the task of controlling the assets that are
produced to be sold in the normal course of firms
procedures. In supply chain management , the
majority variable is to effectively manage inventory.
the significance of inventory management to the
company depends on the extend of its inventory
investment
OBJECTIVES OF INVENTORY MANAGEMENT ARE
OF TWOFOLD
1. The operational objective is to uphold
enough, to meet demand for product by
efficiently organizing the firm's production
and sales operations.
2. Financial interpretation is to minimize
unproductive inventory and reduce
inventory, carrying costs.
Four Main Components of Inventory Management
Raw goods are materials used in the manufacturing
of products. Raw materials can include metal,
plastic, fabric, or wood that are used to create
finished goods.
Work-in-progress (WIP)WIP is a partially finished
product that is waiting to be completed. They
signify products that need to undergo some other
process to become finished products
Finished goods Finished goods are products that
are available in stock for customers to buy. When a
WIP is complete, it becomes part of finished goods
inventory.
Maintenance, repair, and operations goods
(MRO):As the name suggests, maintenance, repair,
and operations (MRO) inventory is essential to keep
your factory operational. MRO inventory is strictly
for your consumption and is not available for
customers to purchase
TYPES OF INVENTORY
Raw-Material Inventory: The intention is to
separate the production function from the
purchasing function that is, to make these two
functions independent of each other so delays in
the delivery of raw materials do not cause
production delays. If there is a delay, the firm can
satisfy its need for raw materials by liquidating its
inventory
Work in Progress Inventory: The main aim of work-
in-process inventory is to disengage the various
operations in the production process so that
machine failures and work stoppages in one
operation will not affect other operations
. Finished Product Inventory: The purpose of a
finished-goods inventory is to separate the
production and sales functions so that it is not
required to produce the goods before a sale can
occur and sales can be made directly out of
inventory.
MOTIVES OF INVENTORY MANAGEMENT The
transaction motive ,The precautionary motive ,The
speculative motive
MERITS OF INVENTORY MANAGEMENT Reduce
risk of overselling , Avoiding stockouts and excess
stock, increase profit , Better customer experience
DEMERITS OF HOLDING INVENTORY Price
decline , Product deterioration, Product
obsolescence
What is short-term financing? taking out a loan to
make a purchase, usually with a loan term of less
than one year. used to finance all or part of the
firm’s working capital requirements and sometimes
to meet permanent financing needs
FACTORS That are need to be consider in deciding
the best source of financing
- Effective cost of using the source of
financing
- availability of each financing based on the
amount needed
- length of time that the financing is
required
Sources of short term financing
Spontaneous Sources
Trade Credit - Automatically obtained whenever
the firm purchases goods or services on credit
More readily available than other sources of short
term financing
Accruals Represent the services that are provided
to the company but not paid yet
Deferred Income Customers advance payment for
goods and services that will be delivered at some
future date
Sources of short term financing
Negotiated Sources
- Commercial Bank Loan Provided by
commercial banks and requiring the
borrower to sign promissory note Amount
of debt, Maturity, and interest
Cost of bank loan interest Regular interest rate =
Interest/Borrowed amount Discounted interest rate
= Interest/Borrowed amount - interest
- Commercial papers Issued by Large firms
with great financial strength Limited
access and availability since large firms
can only issue it
- Other Sources Of Short-Term Funds
Factoring of accounts receivable An
individual or a third party buys your
accounts receivable and assumes the risk
of collection
Others sources of Short-term sources of financing
for current assets
Lines of Credit- providing them with a
predetermined borrowing limit. They can draw
funds as needed and repay based on the agreed
terms
Inventory Financing - Businesses can use their
inventory as collateral to secure a short-term loan.
This is especially common in industries where
inventory turnover is relatively fast.
Informal arrangement
Bank Overdrafts- A business may set up an
overdraft facility with its bank, allowing it to
withdraw more money than is available in its
account, up to a specified limit