Financial Management

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Financial Management

• CAIIB
• MODULE D
• Presentation by
• Prof. S.D.Bargir
• Joint Director,IIBF

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Module D topics

• Marginal Costing
• Capital Budgeting
• Cash Budget
• Working Capital

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COSTING

• Cost accounting system provides information about
  cost
• Aim best use of resources and maximization of
  returns
• cost amount of expenditure incurred( actual
  notional)
• Purposes profit from each job/product, division,
  segmentpricingdecisioncontrolprofit planning
  inter firm comparison

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Marginal costing

• Marginal costing distinguishes between fixed cost
  and variable cost
• Marginal cost is nothing bust variable cost of
  additional unit
• Marginal cost variable cost
• MC Direct Material Direct Labour Direct
  expenses

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Marginal costing problems

• Sales (-) variable cost () contribution
• Contribution(/ divided by) sales
• () C.S. Ratio
• ContributionFixed cost ()Break even point
• Fixed Cost (/ divided by) contribution per unit
  break even units

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Basic formulaSales price (-) variable cost
contribution
SP less VC Contribution
10 6 4
9 6 3
8 6 2
7 6 1
6 6 0
5 6 (1)
4 6 (2)
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Marginal costing problems

• SP Rs.10, VC Rs.6 Fixed Cost Rs.60000
• Find
• Break even point (in Rs. in units)
• C/S ratio
• Sales to get profit of Rs.20000

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Marginal costing problems

• Sales Rs.100000
• Fixed Cost Rs.20000
• B.E.Point Rs.80000
• What is profit ?

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Management decisions- assessing profitability
CONTRIBUTION/SALESC.S.RATIO
Product sp vc Contribtion c/s Ratio ranking
A 20 10 10 10/20 50 1
B 30 20 10 10/30 33 2
C 40 30 10 10/40 25 3
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DECISION when limiting factors
SP Rs.14 Rs.11
VC 8 7
Contribution Per unit 6 4
Labour hr. pu 2 1
Contri.per hr 3 4
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DECISIONS

• Make or buy decisions
• Close department
• Accept or reject order
• Conversion cost pricing

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CAPITAL BUDGETING

• It involves current outlay of funds in the
  expectation of a stream of benefits extending far
  into the future

Year Cash flow
0 (100000)
1 30000
2 40000
3 50000
4 50000
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Types of capital investments

• New unit
• Expansion
• Diversification
• Replacement
• Research Development

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Significance of capital budgeting

• Huge outlay
• Long term effects
• Irreversibility
• Problems in measuring future cash flows

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Facets of project analysis

• Market analysis
• Technical analysis
• Financial analysis
• Economic analysis
• Managerial analysis
• Ecological analysis

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Financial analysis

• Cost of project
• Means of finance
• Cost of capital
• Projected profitability
• Cash flows of the projects
• Project appraisal

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Methods of capital investment appraisal
DISCOUNTING NON-DISCOUNTING
Net present value (NPV) Pay back period
Internal rate of return (IRR) Accounting rate of return
Profitability Index or Benefit cost ratio
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Present value of cash flow stream- (cash outlay
Rs.15000)_at_ 12
Year Cash flow PV factor _at_12 PV
1 1000 0.893 893
2 2000 0.799 1594
3 2000 0.712 1424
4 3000 0.636 1908
5 3000 0.567 1701
6 4000 0.507 2028
7 4000 0.452 1808
8 5000 0.404 2020 13376
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Present value of cash flow stream- (cash outlay
Rs.15000 )_at_10
Year Cash flow PV factor _at_10 PV
1 2000 0.909 1818
2 2000 0.826 1652
3 2000 0.751 1502
4 3000 0.683 2049
5 3000 0.621 1863
6 4000 0.564 2256
7 4000 0.513 2052
8 5000 0.466 2330 15522
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CALCULATION NPV/IRR
Outlay PV _at_10 PV _at_ 12 NPV
15000 15522 - 522
15000 - 13376 (1624)
Difference - - 2146





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IRR continued

• IRR LR ( NPV by LR/ difference between NPV) x
  (HR-LR)
• LR 10
• NPV by LR 522
• Difference between NPV 2146
• HR less LR 12 (-) 10 2
• IRR 10 (522/2146)X2
• IRR100.49
• IRR10.49

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PRICING DECISIONS

• Full cost pricing
• Conversion cost pricing
• Marginal cost pricing
• Market based pricing

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BUDGET

• Quantitative expression of management objective
• Budgets and standards
• Budgetary control
• Cash budget

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PROFIT PLANNING

• Budget budgetary control
• Marginal costing
• CVP and break even point
• Comparative cost analysis
• ROCE

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PRICING DECISIONS

• Full cost pricing
• Conversion cost pricing
• Marginal cost pricing
• Market based pricing

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Operating leverageFinancial leverage

• OL amount of fixed cost in a cost structure.
  Relationship between sales and op. profit
• FL effect of financing decisions on return to
  owners. Relationship between operating profit and
  earning available to equity holders (owners)

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BUDGET

• Quantitative expression of management objective
• Budgets and standards
• Budgetary control
• Cash budget

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PROFIT PLANNING

• Budget budgetary control
• Marginal costing
• CVP and break even point
• Comparative cost analysis
• ROCE

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PRICING DECISIONS

• Full cost pricing
• Conversion cost pricing
• Marginal cost pricing
• Market based pricing

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Operating leverageFinancial leverage

• OL amount of fixed cost in a cost structure.
  Relationship between sales and op. profit
• FL effect of financing decisions on return to
  owners. Relationship between operating profit and
  earning available to equity holders (owners)

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Working capital

• Current assets less current liabilities net
  working capital or net current assets
• Permanent working capital vs. variable working
  capital

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Working capital cycle

• cashgt Raw material gt Work in progress gt finished
  goods gt Sales gt Debtors gt Cashgt
• Operating cycle it is a length of time between
  outlay on RM /wages /others AND inflow of cash
  from the sale of the goods

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Examples from book

• P-369
• P-375
• P-377
• P-379
• P-380
• P-385
• P-387
• P-393

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Examples from book

• P-413
• P-414
• p-415
• P-417

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• THANK YOU
• WISH YOU BEST OF LUCK
• sudaaba_at_iibf.org.in