Financial

management
By Buothong, Bui Phuc Duc, …
Financial management refers to the
strategic planning, organizing,
directing, and controlling of financial
undertakings in an organization or an
institute.

It includes applying management

principles to the financial assets of an
organization, while also playing an
important part in fiscal management.
The primary goal of financial management is to maximize
or increase shareholder value and expand the corporate
stake in its revenue generating processes.

In short, this management function is centered around two

key aspects - the procurement of funds and their effective
utilization. Financial management involves the following
activities:
1. Determining the capital structure:
This involves the decision of the
proportion of short-term and long-
term debt, types of capital and
monetary policies of the organization.

2. Investment of funds: The finance

manager has to decide to allocate
funds into profitable ventures so that
there is safety on investment and
regular returns are possible.
3. Profit planning: Profit is the main motive of any business and the
future growth of every business organization depends on the same.

4. Understanding the financial results: The company must have a

good understanding of its financial performance in order to make
strong decisions about budgeting and forecasting.

=> financial management is a critical aspect in business. Without

proper financial management, businesses can fail to meet their
obligations and run into cash flow issues.
Financial mathematics is a key
aspect of financial
management. It involves the
application of mathematical
methods and modeling to
solve financial problems. This
discipline is also known as
quantitative finance, financial
engineering, and
computational finance.
 Here's an example:
Suppose you want to invest in a savings account that offers a 5% annual interest rate. If
you deposit $1000, how much will you have after one year?

The formula to calculate the future value (FV) of an investment is: FV = PV * (1 + r)^n
where:
- PV is the present value or the amount of money you start with, which in this case is
$1000.
- r is the interest rate, which is 5% or 0.05 in decimal form. - n is the number of periods,
which is 1 year in this case.
So, FV = $1000 * (1 + 0.05)^1 = $1050 So, after one year, you will have $1050 in your
account.

This is a simple example, but financial mathematics can get much more complex,
involving statistics, probability, and stochastic processes, combined with economic
theory.
Five financial
management problems for
you to solve
1. Future Value Calculation: If you invest $5000 in a bank account
that offers an annual interest rate of 4%, how much will you have in
the account after 3 years?

2. Present Value Calculation: You want to buy a car that costs

$20,000. You found a bank that offers a loan with an annual interest
rate of 6%. If you plan to pay off the loan in 5 years, what is the
present value of the car?

3. Break-Even Analysis: A company sells a product for $50 per

unit. The variable cost per unit is $20 and the fixed costs are
$10,000. How many units does the company need to sell to break
even?
4. Budgeting: A company has a monthly budget of $5000. If the
company spends $2000 on salaries, $1000 on rent, $500 on utilities, and
$800 on supplies, how much is left for other expenses?

5. Profit Margin Calculation: A company sells a product for $100. The

cost to produce the product is $60. What is the profit margin on the
product? these problems involve key concepts in financial management
such as future value, present value, break-even analysis, budgeting, and
profit margin calculation. They can help you understand how to apply
these concepts in real-world situations.
let's solve these problems one by
one:
1. Future Value Calculation: The formula for future value is FV = PV
* (1 + r)^n. Here, PV = $5000, r = 4% or 0.04, and n = 3. So, FV =
$5000 * (1 + 0.04)^3 = $5624.32. So, you will have $5624.32 in the
account after 3 years.

2. Present Value Calculation: The formula for present value is PV =

FV / (1 + r)^n. Here, FV = $20,000, r = 6% or 0.06, and n = 5. So,
PV = $20,000 / (1 + 0.06)^5 = $14,883.42. So, the present value of
the car is $14,883.42.
3. Break-Even Analysis: The break-even point is where
total revenue equals total cost. The formula is Break-Even
Point = Fixed Costs / (Selling Price per Unit - Variable Cost
per Unit). Here, Fixed Costs = $10,000, Selling Price per
Unit = $50, and Variable Cost per Unit = $20.

So, Break-Even Point = $10,000 / ($50 - $20) = 333.33

units. Since you can't sell a fraction of a unit, the company
needs to sell 334 units to break even.
4. Budgeting: The company has a budget
of $5000 and spends $2000 on salaries,
$1000 on rent, $500 on utilities, and
$800 on supplies. So, the total expenses
are $2000 + $1000 + $500 + $800 =
$4300. So, the amount left for other
expenses is $5000 - $4300 = $700.

5. Profit Margin Calculation: The profit

margin is calculated as (Selling Price -
Cost of Production) / Selling Price. Here,
Selling Price = $100 and Cost of
Production = $60. So, Profit Margin =
($100 - $60) / $100 = 0.4 or 40%. So, the
profit margin on the product is 40%.
 I hope this helps! If you
have any other questions,
feel free to ask.