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Financial Management

Financial Management. CAIIB MODULE D Presentation by Prof. S.D.Bargir Joint Director,IIBF. Module D topics. Marginal Costing Capital Budgeting Cash Budget Working Capital. COSTING. Cost accounting system provides information about cost

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Financial Management

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  1. Financial Management CAIIB MODULE D Presentation by Prof. S.D.Bargir Joint Director,IIBF

  2. Module D topics • Marginal Costing • Capital Budgeting • Cash Budget • Working Capital

  3. 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, segment+pricingdecision+control+profit planning +inter firm comparison

  4. 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

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

  6. Basic formulaSales price (-) variable cost= contribution

  7. 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

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

  9. Management decisions- assessing profitability CONTRIBUTION/SALES=C.S.RATIO

  10. DECISION when limiting factors

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

  12. It involves current outlay of funds in the expectation of a stream of benefits extending far into the future CAPITAL BUDGETING

  13. Types of capital investments • New unit • Expansion • Diversification • Replacement • Research & Development

  14. Significance of capital budgeting • Huge outlay • Long term effects • Irreversibility • Problems in measuring future cash flows

  15. Facets of project analysis • Market analysis • Technical analysis • Financial analysis • Economic analysis • Managerial analysis • Ecological analysis

  16. Financial analysis • Cost of project • Means of finance • Cost of capital • Projected profitability • Cash flows of the projects • Project appraisal

  17. Methods of capital investment appraisal

  18. Present value of cash flow stream- (cash outlay Rs.15000)@ 12%

  19. Present value of cash flow stream- (cash outlay Rs.15000 )@10%

  20. CALCULATION NPV/IRR

  21. 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 IRR=10%+0.49 IRR=10.49%

  22. PRICING DECISIONS • Full cost pricing • Conversion cost pricing • Marginal cost pricing • Market based pricing

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

  24. PROFIT PLANNING • Budget & budgetary control • Marginal costing • CVP and break even point • Comparative cost analysis • ROCE

  25. PRICING DECISIONS • Full cost pricing • Conversion cost pricing • Marginal cost pricing • Market based pricing

  26. 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)

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

  28. PROFIT PLANNING • Budget & budgetary control • Marginal costing • CVP and break even point • Comparative cost analysis • ROCE

  29. PRICING DECISIONS • Full cost pricing • Conversion cost pricing • Marginal cost pricing • Market based pricing

  30. 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)

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

  32. Working capital cycle • cash> Raw material > Work in progress > finished goods > Sales > Debtors > Cash> • Operating cycle – it is a length of time between outlay on RM /wages /others AND inflow of cash from the sale of the goods

  33. Examples from book • P-369 • P-375 • P-377 • P-379 • P-380 • P-385 • P-387 • P-393

  34. Examples from book • P-413 • P-414 • p-415 • P-417

  35. *** THANK YOU WISH YOU BEST OF LUCK sudaaba@iibf.org.in ***

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