Financial Management and Corporate Investment Strategies

Comparative Analysis

Comparative analysis is the comparison of financial statements of a company for two or more years to understand performance. It mainly compares the income statement and balance sheet of different years.

Objectives

• Identifying increases or decreases in profits
• Analyzing the growth of assets and liabilities
• Evaluating financial performance

Types

• Comparative income statement
• Comparative balance sheet

Importance

• Helping management in decision-making
• Identifying strengths and weaknesses

Infrastructure Financing

Infrastructure financing means arranging funds for large projects like roads, railways, power plants, airports, ports, and telecom.

Sources Include:

• Government funding
• Bank loans
• Financial institutions
• Public-private partnerships
• Bonds and debentures
• Foreign investment

Features Include:

• Long gestation period
• High capital investment
• Long-term loans
• High risk

Importance

• Economic development
• Employment generation
• Industrial growth

Working Capital

Working capital is the money required for day-to-day business operations. Working capital equals current assets minus current liabilities.

Types Include:

• Gross working capital
• Net working capital

Importance

• Smooth business operations
• Payment of wages and expenses
• Maintaining liquidity

Factors Affecting Working Capital

• Nature of business
• Size of business
• Credit policy
• Production cycle

Capital Budgeting

Capital budgeting is the process of evaluating long-term investment decisions like the purchase of machinery, new projects, or expansion.

Objectives

• Maximization of profits
• Proper utilization of resources
• Long-term growth

Methods Include:

• Payback Period
• Net Present Value (NPV)
• Internal Rate of Return (IRR)
• Accounting Rate of Return (ARR)

Importance

• Reduction of risk
• Selection of profitable investments

Risk Analysis

Risk analysis means identifying and evaluating risks involved in financial decisions.

Types of Risk Include:

• Business risk
• Financial risk
• Market risk
• Credit risk

Sources of Risk

• Uncertainty in demand
• Changes in interest rates
• Economic changes
• Competition

Methods of Risk Analysis

• Sensitivity analysis
• Probability analysis
• Scenario analysis

Importance

• Avoiding losses
• Improving planning and decision-making

Lease Financing

Lease financing is a method where the owner of an asset allows another party to use it in return for periodic payments.

Types of Lease

• Operating lease
• Financial lease
• Sale and leaseback

Advantages

• No heavy initial investment
• Tax benefits
• Better cash flow management

Disadvantages

• Higher long-term cost
• No ownership of the asset

Hire Purchase

Hire purchase is a system where goods are purchased by paying installments and ownership is transferred after the last installment.

Features

• Down payment
• Installment payments
• Interest charged on outstanding balance

Advantages

• Easy purchase of costly assets
• Ownership at the end

Disadvantages

• Higher overall cost
• Risk of repossession on default

Management of Receivables

Receivables management deals with controlling and collecting money due from customers.

Objectives

• Increasing sales
• Reducing bad debts
• Maintaining liquidity

Tools Used

• Credit policy
• Credit period
• Collection policy
• Aging schedule

Importance

• Improved cash flow
• Reduced losses
• Better customer relationships

Inventory Management

Inventory management means controlling the stock of raw materials, work in progress, and finished goods.

Objectives

• Avoiding overstocking
• Avoiding shortage of materials

Techniques

• Economic Order Quantity (EOQ)
• ABC Analysis
• Just-in-Time (JIT) system

Importance

• Smooth production process
• Cost control
• Better customer service

Decisions and Functions of a Finance Manager

Main financial decisions include investment decisions, financing decisions, and dividend decisions.

Other Functions

• Working capital management
• Financial planning
• Risk management
• Liquidity management
• Cost control

Role of a Finance Manager

• Maximizing shareholders' wealth
• Maintaining financial stability
• Supporting the growth of the business

Time Value of Money

Meaning

Time Value of Money means money available today is more valuable than the same amount in the future.

Reasons

• Money can earn interest
• Inflation reduces purchasing power
• Future involves risk

Present Value (PV)

PV = FV / (1 + r)^n

Future Value (FV)

FV = PV × (1 + r)^n

Importance

Used in investment decisions, capital budgeting, savings, loans, and retirement planning.

Ratio Analysis

Meaning

Ratio analysis is the analysis of financial statements using ratios to assess performance and financial position.

Objectives

• Measure profitability
• Measure liquidity
• Comparison of performance
• Decision-making

Types of Ratios

Liquidity Ratios

• Current Ratio: Current Assets / Current Liabilities (Ideal Ratio = 2:1)
• Quick Ratio: (Current Assets – Inventory) / Current Liabilities (Ideal Ratio = 1:1)

Profitability Ratios

• Gross Profit Ratio: (Gross Profit / Sales) × 100
• Net Profit Ratio: (Net Profit / Sales) × 100

Solvency Ratio

• Debt Equity Ratio: Total Debt / Shareholders' Funds (Ideal Ratio = 2:1)

Advantages

• Simple and useful
• Helps comparison
• Aids decisions

Limitations

• Based on past data
• Inflation ignored
• Different accounting methods affect results

Capital Budgeting Analysis

Meaning

Capital budgeting is the process of evaluating long-term investment projects.

Importance

• Selection of profitable projects
• Avoids wastage of funds
• Increases shareholder wealth

Methods

1. Payback Period

Payback Period = Initial Investment / Annual Cash Inflow

Decision Rule: A lower payback period is preferred.

Advantages

• Simple
• Less risk

Limitations

• Ignores time value of money
• Ignores profits after payback

2. Accounting Rate of Return (ARR)

ARR = (Average Annual Profit / Initial Investment) × 100

Decision Rule: A higher ARR is better.

Advantages

• Simple
• Uses accounting profit

Limitations

• Ignores time value of money
• Uses profit instead of cash flow

3. Net Present Value (NPV)

NPV = Present Value of Cash Inflows – Initial Investment

Decision Rules:

• NPV > 0: Accept
• NPV = 0: Neutral
• NPV < 0: Reject

Advantages

• Considers time value of money
• Best decision method

Limitations

• Difficult calculation
• Needs a discount rate