MANAGEMENT CONTROL

AND INFORMATION SYSTEMS

(MCIS)
BBA VI Semester

Dr. S. Sandhya
Financial control and ratio analysis

• Financial control
• Financial policies and procedures
• Bookkeeping
• Tools of financial control
Financial controls
• Financial controls are the procedures, policies, and means by which
an organization monitors and controls the direction, allocation, and usage of its
financial resources.

• Financial controls are at the very core of resource management and operational
efficiency in any organization.

• The analysis of a company's actual results, approached from different perspectives

at different times, compared to its short, medium and long-term objectives and
business plans.
 
Cash flow maintenance

Resource management

Profitability

Fraud prevention
Financial policies and procedures
• Financial policies are the rules or principles of your business's accounting and
financial practices. They should reflect your business's values and culture.

• Procedures are the instructions that outline what your employees must do to abide
by these policies.

• Depending on your business, you might have financial policies and procedures
about things like how to handle petty cash, debt collection or payments from
clients and customers

• Effective financial policies and procedures can help provide efficient financial
management, risk mitigation, and the alignment of financial operations with the
overall mission of the organization
Examples:

• Current expenditures will be funded by current revenues.

• Maintain an unrestricted cash reserve that is equivalent to 6 months of operating

expenditures or greater

• Department Directors are responsible for managing their budgets within the total
appropriation for their department

• Long-term debt or bond financing shall not be used to finance current operating
expenditures.

• Uses the cash basis of accounting which is a departure from generally accepted
accounting principles (GAAP).
Book keeping

• Bookkeeping is the process of recording your company’s financial transactions

into organized accounts on a daily basis

• When you keep transaction records updated, you can generate accurate financial

reports that help measure business performance

• Methods of book keeping

• Helps budget accurately, prepared for tax, organized records, business targets,
meeting regulations
Tools of financial control

Budgetary control

Financial Audit

Financial Ratio or Ratio Analysis

 Financial Statements

Profit and Balance Cash flow

loss account sheet statement
 Financial Ratios

Activity or Profitability Long-term

Liquidity ratios Solvency Ratios
turnover ratios Ratios
Liquidity Ratios

= Higher current ratio, better liquidity

Current Ratio

= Quick assets are Current assets excluding inventory

Quick ratio/acid
and prepaid expenses
test ratio

Cash ratio or =
Cash Burn Ratio
Activity or turnover ratios

Accounts It shows how quickly receivables or =

receivable debtors are converted into cash.
turnover ratio

Inventory
Measures the activity/liquidity of
turnover ratio inventory of a firm; the speed with =
which inventory is sold.

indicates the efficiency with which firm

Fixed assets
turnover ratio uses all its assets to generate sales.
Profitability Ratios related to sales

Gross Profit Margin= *100

Operating profit ratio =

Net profit ratio =

Profitability Ratios related to Investments
Return on Investments (ROI) =Profits/ Investment

Return on Assets (ROA) = Net Profits after taxes/ Average total assets *100

Return on Capital Employed (ROCE) = EBIT/Average total capital employed *100

Return on Equity = Net profits after taxes/ Average total shareholder’s equity *100

Earnings Per Share (EPS)

=Net profit available to equity holders / Number of ordinary shares outstanding
• Price Earnings (P/E) Ratio =

• Dividend Pay-out (D/P) Ratio =

• Earnings Yield = * 100

• Dividend Yield = * 100

• Capitalization rate =
Leverage/Capital Structure Ratios-(i) ability to repay the principal when due, and
(ii) regular payment of the interest

Debt –Equity Ratio =

Or

Debt assets ratio =

Interest coverage ratio =

Fixed charges coverage ratio=

Debt service coverage ratio =

Valuation ratios

• A valuation ratio shows the relationship between the market value of

a company or its equity and some fundamental financial metric (e.g.,
earnings). 

• The point of a valuation ratio is to show the price you are paying for
some stream of earnings, revenue, or cash flow (or other financial
metric)
Key Valuation ratios

• Price-to-Earnings ratio (P/E) = MP/ EPS

• Price-to-Sales ratio (P/S) = Market capitalization/ Total Sales revenue
• Price-to-cash flow ratio (P/CF) = share price/ operating cashflow per share
• Price-to-book ratio (P/B)= MP/ BV per share
• Price/earnings-to-growth ratio (PEG) = P/E / growth rate
• If Stock A is trading at Rs30 and Stock B at Rs20, Stock A is not necessarily more
expensive. The P/E ratio can help us determine, from a valuation perspective,
which of the two is cheaper

• If the sector’s average P/E is 15, Stock A has a P/E = 15 and Stock B has a P/E =
30, stock A is cheaper despite having a higher absolute price than Stock B because
you pay less for every Rs1 of current earnings.

• However, Stock B has a higher ratio than both its competitor and the sector. This
might mean that investors will expect higher earnings growth in the future relative
to the market
For instance, if a company’s latest closing share price is $5.00 and its  EPS in
the last twelve months is $2.00, company’s expected EPS growth rate is 4.0%.
Economic Value Added (EVA)

• Economic Value Added (EVA) is a financial performance metric which measures the
true economic profit of an organization in terms of wealth creation for the shareholders

• Residual Income technique that serves as an indicator of the profitability of projects

undertaken.

• Its underlying premise consists of the idea that real profitability occurs when
additional wealth is created for shareholders and that projects should create returns
above their cost of capital.

• A positive EVA indicates that the company has been successfully creating
shareholder’s wealth whereas, a negative EVA indicates that it has failed to do so
• Following is the Balance Sheet and Income statement of Indus Ltd. Cost of
equity: 20%, cost of debt: 10% and tax rate: 50%.Calculate EVA of Indus Ltd.

Liabilities Amt.(In Assets Amt.(In

Million) Million)
Equity 200 Fixed Assets 250
Debt 200 Net Current Assets 150
Total 400 Total 400

Particulars Amt.(In
Million)
Net sales 400
Cost of goods sold 312
Profit before interest and tax 88
Interest 20
Profit before tax 20
Tax (50%) 34
Profit after tax 34
Market Value Added
• Market value added (MVA) is the amount of wealth that a company is able to
create for its stakeholders since its foundation.
• In simple terms, it’s the difference between the current market value of the
company’s stock and the initial capital that was invested in the company by both
bondholders and stockholders.

• Market Value Added = Market Value - Capital Invested

• The stockholders' equity of ABC Company shows a total of Rs8,52,000 (share
capital, additional paid-in capital, and retained earnings). It has 100,000 common
shares and 5,000 preference shares outstanding. The common shares currently
have a market value of Rs12.50 per share. Preferred shares are currently selling at
Rs100 per share. Compute for the market value added.
 Cash flow return on investment (CFROI)

• CFROI is a valuation model that assumes that the stock market decides the prices based
on the cash flow of the company

CFROI Formula = Operating Cash Flow (OCF) / Capital Employed

• Cash Flow Return on Investment can’t be interpreted without comparing it to the hurdle

rate. Usually, the hurdle rate is the Weighted Average Cost of Capital (WACC).

Net CFROI = Cash Flow Return on Investment (CFROI) – Weighted Average Cost of
Capital (WACC)
• If the Net CFROI is positive (i.e., Net CFROI > WACC), then it increased the value of
shareholders and
• if Net CFROI is negative (i.e., Net CFROI < WACC), then it decreased the value of
shareholders.
Strategic Profit Model