1 financial management and cash flow. 2 base of enterprise´s financing each activity in the company...

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Financial Management

and

Cash Flow

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Base of enterprise´s financingBase of enterprise´s financing

Each activity in the company has its two sides:

material (substantial, property) – flow of machines, raw materials, material, finished products; which can be divided into the activities of supply, production and sale,

monetary (financial) – flow of revenues and expenses; each activity has to be safed by the financial sources (money).

Material and monetary flows have to be in relative harmony.

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Relation between material and Relation between material and monetary flows in the companymonetary flows in the company

monetary expenses

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Missions of Financial ManagementMissions of Financial Management

1) Obtaining of capital for current and exceptional

enterprise´s needs and deciding of its structure and

changes in this structure (obtaining of credits,

emission of shares or obligations) → it deals with the

right side of the balance sheet – liabilites

2) Deciding about allocation of capital – to finance the

current firm activities, to finance development of new

product or to invest to buildings, lands, machines or

shares (or another securities) → it deals with the left

side of the balance sheet - assets

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Missions of Financial ManagementMissions of Financial Management

3) Deciding about profit division

(reinvestments, dividends)

4) Making predictions, planning, noting, analyzing,

monitoring and managing of enterprise´s economic

activity with the aim to ensure its financial stability

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Factors influencing the Factors influencing the enterprise´s financingenterprise´s financing

1) Time factor – monetary unit paid off or accepted in

various time moments has the different value.

2) Risk factor – financial manager chooses only one from

the possible versions, he can´t be assured of this

version´s results, because the version with higher risk in

principle brings also higher profit and vice versa –

version with lower risk brings usually lower profit.

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Types of financial decisionsTypes of financial decisions

1) Tactical (operative) decisions – they require small monetary amounts, otherwise they don´t change the existing enterprise´s activity (e.g. purchase of material or ordinary machines).

2) Strategic decisions – they require a lot of money and they bring the big changes in enterprise´s activity. It is possible to divide them into:

strategic long-term investment decisions, strategic long-term financial decisions.

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Sorts of enterprise´s financingSorts of enterprise´s financing

1) According to the origin of capital:

a) internal financing,b) external financing.

2) According to the time (when the capital is at disposal):

a) long-term financing,b) short-term financing.

3) According to the regularity of financing:

a) current financing,b) exceptional financing.

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1. Enterprise´s financing according to the origin of capital

financing

internal

external

-from profit (self-financing)

-from long-term reserves

from own sources - shares- obligations

from external sources - credits- bonds- leasing- factoring

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1.a) Internal financing1.a) Internal financing

The source of this capital is enterprise

economic activity; its economic result is profit

and depreciations.

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1.b) External financing1.b) External financing

- this capital comes from the outside of the enterprise –

either from owners of the company (deposits, shares,

emission of shares) → financing from own sources (own

capital), or from creditors (bonds, credits, leasing) →

financing from external sources (external capital)

Next sources of external financing are:

factoring – surrender of demands by specialized firm, innovated financial tools – futures, swaps, options.

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2.a) Long-term financing2.a) Long-term financing

The source of this capital is usually an own

capital and long-term external capital

(e. g. long-term bank credits).

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2.b) Short-term financing2.b) Short-term financing

The sources of this capital are short-term bank

credits, supplier credits, accounts payable

towards employees, state, etc.

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3.a) Current financing3.a) Current financing

= spending money on current enterprise´s running,

i. e. purchase of material, fuel, energy; payments of wages; rent; transport; taxes and other short-term debts

- it is related, above all, to current assets – the summary of them is called Gross working capital

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3.b) Exceptional financing3.b) Exceptional financing

Financing connected with:

a) foundation of the enterprise

b) enlargement of the enterprise and its activities

c) joining or rescuing of the enterprise

d) liquidation of the enterprise

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Financing of current assetsFinancing of current assets

Financing and management of working capital

Main tasks:

to determine the necessary (optimal) level of each current item

and level of their total sum,

to determine in which way the current assets will be financed

Gross working capital = value of all current assets in the firm

Net working capital = current assets – short-term external capital

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Net working capitalNet working capital

AKTIVA PASIVA

Čistý pracovní kapitál

stálá aktiva

oběžná aktiva

vlastní kapitál

dlouhodobé dluhy

krátkodobé dluhy

dlouhodobý kapitál

krátkodobýkapitál

Long-term assets

Current assets

ASSETS LIABILITIES

Net working capital

Internal capital

Long-term debts

Short-term debts

Long-term capital

Short-termcapital

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Principles of enterprise´s equity Principles of enterprise´s equity financingfinancing

1) Long-term assets – financing by internal (own) capital and long-term external capital

2) Current assets – financing by both long-term and short-term external capital

3) Net working capital (NWC) – it is an excess of current assets above the short-term debts,

-it is financed by long-term financial sources,

-NWC is at the firm´s disposal for its business activity, so it is important it to be in liquid form.

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Optimal level of current assetsOptimal level of current assets

Optimal level ≠ minimal level of current assets

Optimal level of current assets assures the standard (normal) enterprise´s running with the lowest total costs.

It is possible to determine the optimal level of current assets by Turnover money cycle.

Turnover money cycle – time between payment for purchased material and receiving money from customers for our sold products = it is a time when the enterprise´s funds are bounded in current assets.

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Methods of current assets Methods of current assets financingfinancing

One part of current assets is bounded in the company for a long time (e. g. insurance stores) → permanent bounded current assets, whereas the second part of current assets is bounded in the company for a shorter time and it fluctuates (e. g. stores for a season)→ fluctuated current assets (temporary assets).

According to the access of managers to the permanent bounded current assets´ financing we distinguish three accesses of working capital financing:

moderate access, aggressive access, conservative access.

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a) Ma) Moderate access

it harmonizes the lifetime of assets with lifetime of liabilities.

permanent assets (long-term assets + permanent bounded current assets) are financed by long-term sources (internal (own) capital, long-term external capital).

fluctuated current assets are financed by short-term debts.

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Graphic display Graphic display of Moderate accessof Moderate access

kolísajícíoběžná aktiva

trvaláaktiva

přechodná oběžná aktiva

trvalá výše oběžných aktiv

čas

aktiva(Kč)

stálá aktiva

krátkodobéfinancování

vlastní kapitálplus

dlouhodobý cizí kapitál

Fluctuated current assets

Permanent assets

Assets(CZK)

Temporarycurrent assets

Permanent level of current assets

Long-termassets

Short-term financing

Internal (own) capital

+ long-term

external capital

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b) Aggressive accessb) Aggressive access

for financing of permanent bounded current assets it uses short-term capital (e. g. short-term credits)

Advantages of short-term debts:

it is usually cheaper, it is possible to obtain it more easily, it is possible to obtain it more quickly.

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Graphic display Graphic display of of Aggressive accessAggressive access

kolísajícíoběžná aktiva

trvaláaktiva

přechodná oběžná aktiva

čas

aktiva(Kč)

stálá aktiva

krátkodobéfinancování

vlastní kapitálplus

dlouhodobý cizí kapitál

trvalá výše oběžných aktiv

Assets(CZK)


Permanent assets



Long-termassets



+ long-term

external capital

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c) c) Conservative access

it uses long-term capital not only for financing of permanent assets, but also for financing of fluctuated (temporary) current assets

short-term capital is used only for financing of top (peak) fluctuated current assets

it is an expensive way of financing, but the risk here is at minimum level

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Graphic display Graphic display of of Conservative access

Assets(CZK)


Permanent assets



Long-termassets



+ long-term

external capital

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Cash flowCash flow

= change of the financial means (increase and decrease) for a given period in connection with the business activity of the enterprise

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Cash flow managementCash flow management

Cash incomes- sale for cash- colleciton of reciavebles- loans, credits- contributions of partners in cash

Cash outcomes- payments of invoices- payments of wages- purchase of machines- placení daní- repayment of credits- payment of dividends

CASH FLOW

- payments of taxes

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Cash flowCash flow

Why is it important to monitor cash flow?

1) Profit is only the information from accounting, it does not represent real money (cash).

2) costs ≠ expenses (cash output)

benefits ≠ cash revenues.

3) The enterprise has to have sufficient level of cash (money) for paying invoices for material, energy, wages, loans, taxes etc. → cash expenses.

4) Main sources of cash flow are sales for cash, cashing receivables, loans from bank, etc.

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Methods of Cash flowMethods of Cash flow

1) Direct method

2) Indirect method

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1. Direct method1. Direct method

This method, although less popular, is favored by This method, although less popular, is favored by many financial managers because it reports the many financial managers because it reports the source of cash inflows and outflows directly, without source of cash inflows and outflows directly, without the potentially confusing adjustments to net income. the potentially confusing adjustments to net income.

Instead of starting with a reported net income, the Instead of starting with a reported net income, the direct method analyzes the various types of direct method analyzes the various types of operating activities and calculates the total cash operating activities and calculates the total cash flow created by each one. flow created by each one.

Before beginning the direct method, all accrual Before beginning the direct method, all accrual accounts must be first converted to a cash figure. accounts must be first converted to a cash figure.

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Payment calendarPayment calendar

- it is a simple tool of operative cash flow management - it is a table of expected revenues and expenses in the short time

- it is made for a week, a decade or a month before

- the principle of monitoring money in the payment calendar results from this formula:

FSM = OSM + R – EFSM – final score of money,OSM – opening score of money,R – cash revenues,E – cash expenses.

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Example of Payment calendar:Example of Payment calendar:

Item PeriodItem Period weekweek decadedecade monthmonth quarterquarter

1. Opening score of money

(OSM)

2. Expected 2. Expected cash revenues for a for a given period (R)given period (R)

3. Expected cash expenses for a 3. Expected cash expenses for a given period (E)given period (E)

4. Total (1 + 2 - 3)4. Total (1 + 2 - 3)

5. Balancing items (+, -)5. Balancing items (+, -)

6. Final score of money (FSM)6. Final score of money (FSM)

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Tasks of Payment calendar:Tasks of Payment calendar:

1) To forgo to payment problems of the enterprise

2) To foresee a shortage or a surplus of money → balancing items.

3) To keep the level of money in the certain limits – too low score of money may threaten liquidity of the enterprise and vice versa - too high score of money decreases profitability of the enterprise. A factor, which can put the needs of money into balance, may be a purchase and a sale of short-term securities.

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Development of money score Development of money score in the enterprisein the enterprise

70

60

50

40

30

20

10

5 10 15 20 25 30

čas (dny, týdny, dekády)

výše

pen

ěžní

ch p

rost

ředk

ů (t

is.

Kč)

dolní hranicepeněžních prostředků

horní hranicepeněžních prostředků

požadovaný stavpeněžních prostředků

nákup c. p. za 30 tis. Kč

prodej c. p. za 20 tis. Kč

Leve

l of m

oney

(th

ousa

nd C

ZK

)

Purchase of securities for 30 000 CZK

Upper limit of money

Lower limit of money

Required score of money

Sale of securities for 20 000 CZK

Time (days, weeks, decades)

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Cash Flow Statements are broken down into three Cash Flow Statements are broken down into three sections: sections:

Operating activities Operating activities Investing activities Investing activities Financing activitiesFinancing activities

2. Indirect method2. Indirect method

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Categories of indirect cash flowCategories of indirect cash flow

Operating activities (all transactions and events that Operating activities (all transactions and events that normally enter into the determination of operating normally enter into the determination of operating income) include cash receipts from selling goods or income) include cash receipts from selling goods or providing servicesproviding services..

Operating activities also include your cash payments Operating activities also include your cash payments such as inventory, wages, taxes, such as inventory, wages, taxes, rent, etc.rent, etc.

The net amount of cash provided (or used) by The net amount of cash provided (or used) by operating activities is the key figure on a statement of operating activities is the key figure on a statement of cash flows. cash flows.

a) Operating activitiesa) Operating activities

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a) Operating activitiesa) Operating activities

Cash receipts include:Cash receipts include: Sale of goods or servicesSale of goods or services Interest revenueInterest revenue

Cash payments include:Cash payments include: Inventory purchasesInventory purchases WagesWages TaxesTaxes Other (rent, etc.) Other (rent, etc.)

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b) Investing activitiesb) Investing activities

Investing activities include transactions and Investing activities include transactions and events involving the purchase and sale of events involving the purchase and sale of long- long- term term securities, land, buildings, equipment, and securities, land, buildings, equipment, and other assets not generally held for resale. It also other assets not generally held for resale. It also covers the making and collecting of loans. covers the making and collecting of loans.

Investing activities are not classified as Investing activities are not classified as operating activities because they have an operating activities because they have an indirect relationship to the central, ongoing indirect relationship to the central, ongoing operation of your business (usually the sale of operation of your business (usually the sale of goods or services). goods or services).

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b) Investing activitiesb) Investing activities

Cash receipts include:Cash receipts include: Sale of plant assetsSale of plant assets Sale of a business segmentSale of a business segment etc.etc.

Cash payments include:Cash payments include: Purchase of plant assetsPurchase of plant assets Loans to other entitiesLoans to other entities etc.etc.

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c) Financing activitiesc) Financing activities

All financing activities deal with the flow of cash to All financing activities deal with the flow of cash to or from the business owners (equity financing) or from the business owners (equity financing) and creditors (debt financing). and creditors (debt financing).

For example, cash proceeds from issuing capital For example, cash proceeds from issuing capital stock or bonds would be classified under stock or bonds would be classified under financing activities. financing activities.

Likewise, payments to repurchase stock (treasury Likewise, payments to repurchase stock (treasury stock) or to retire bonds and the payment of stock) or to retire bonds and the payment of dividends are financing activities as well. dividends are financing activities as well.

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c) Financing activitiesc) Financing activities

Cash receipts include:Cash receipts include: IssuIssuiinngg of own stock (shares) of own stock (shares) BorrowingBorrowingss (bonds, notes, mortgages, etc.) (bonds, notes, mortgages, etc.)

Cash payments include:Cash payments include: Dividends to stockholdersDividends to stockholders Repurchasing business' own stock (treasury stock) Repurchasing business' own stock (treasury stock) etc.etc.

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Utilization of Cash flow:Utilization of Cash flow:

in financial analyse for classification of financial stability of the enterprise and causes of money score´s changes

by short-term planning of cash revenues and expenses

by medium-term and long-term formation of financial enterprise´s perspectives

by classificaton of financial effectiveness of investment versions

one of the form of determination the enterprise´s market value base (discounted cash flow)

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Example – Payment Calendar:Example – Payment Calendar:1.1. 2.2. 3.3. 4.4. 5.5.

Opening score of money (OSM) 500500

1. Collection of demands1. Collection of demands 1 6001 600 2 0002 000 1 7001 700 1 8001 800 1 6001 600

2. Sale for chash2. Sale for chash 100100 100100 7070 5050 100100

Total revenues (1+2)Total revenues (1+2) 1 7001 700

1. Payments to suppliers1. Payments to suppliers 1 3001 300 1 2001 200 1 7001 700 1 9001 900 1 5001 500

2. Taxes2. Taxes 00 1 5001 500 00 00 00

3. Wages to employees3. Wages to employees 00 00 00 00 1 3001 300

4. Payments of credits4. Payments of credits 100100 00 00 00 00

Total expenses (1+4)Total expenses (1+4) 1 4001 400

Difference of revenues and expensesDifference of revenues and expenses 300300

Balancing items (+, -)Balancing items (+, -) 00

Final score of money (FSM)Final score of money (FSM) 800800

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Opening score of money (OSM) 500500 800800



Total revenues (1+2)Total revenues (1+2) 1 7001 700 2 1002 100


2. Taxes2. Taxes 00 1 5001 500 00 00 00



Total expenses (1+4)Total expenses (1+4) 1 4001 400 2 7002 700

Difference of revenues and expensesDifference of revenues and expenses +300+300 -600-600

Balancing items (+, -)Balancing items (+, -) 00 00

Final score of money (FSM)Final score of money (FSM) 800800 200200

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Opening score of money (OSM) 500500 800800 200200



Total revenues (1+2)Total revenues (1+2) 1 7001 700 2 1002 100 1 7701 770


2. Taxes2. Taxes 00 1 5001 500 00 00 00



Total expenses (1+4)Total expenses (1+4) 1 4001 400 2 7002 700 1 7001 700

Difference of revenues and expensesDifference of revenues and expenses +300+300 -600-600 +70+70

Balancing items (+, -)Balancing items (+, -) 00 00 00

Final score of money (FSM)Final score of money (FSM) 800800 200200 270270

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Opening score of money (OSM) 500500 800800 200200 270270



Total revenues (1+2)Total revenues (1+2) 1 7001 700 2 1002 100 1 7701 770 1 8501 850


2. Taxes2. Taxes 00 1 5001 500 00 00 00



Total expenses (1+4)Total expenses (1+4) 1 4001 400 2 7002 700 1 7001 700 1 9001 900

Difference of revenues and expensesDifference of revenues and expenses +300+300 -600-600 +70+70 -50-50

Balancing items (+, -)Balancing items (+, -) 00 00 00 00

Final score of money (FSM)Final score of money (FSM) 800800 200200 270270 220220

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Opening score of money (OSM) 500500 800800 200200 270270 220220



Total revenues (1+2)Total revenues (1+2) 1 7001 700 2 1002 100 1 7701 770 1 8501 850 1 7001 700


2. Taxes2. Taxes 00 1 5001 500 00 00 00



Total expenses (1+4)Total expenses (1+4) 1 4001 400 2 7002 700 1 7001 700 1 9001 900 2 8002 800

Difference of revenues and expensesDifference of revenues and expenses +300+300 -600-600 +70+70 -50-50 -1100-1100

Balancing items (+, -)Balancing items (+, -) 00 00 00 00 880880

Final score of money (FSM)Final score of money (FSM) 800800 200200 270270 220220 00

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Opening score of money (OSM) 220220 00

1. Collection of demands1. Collection of demands 1 6001 600 2 0002 000 1 9001 900 500500 1 3001 300


Total revenues (1+2)Total revenues (1+2) 1 7001 700 2 1002 100

1. Payments to suppliers1. Payments to suppliers 1 5001 500 1 1001 100 700700 950950 1 4001 400

2. Taxes2. Taxes 00 00 00 00 00



Total expenses (1+4)Total expenses (1+4) 2 8002 800 1 3001 300

Difference of revenues and expensesDifference of revenues and expenses -1100-1100 +800+800

Balancing items (+, -)Balancing items (+, -) 880880 00

Final score of money (FSM)Final score of money (FSM) 00 800800

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Opening score of money (OSM) 220220 00 800800



Total revenues (1+2)Total revenues (1+2) 1 7001 700 2 1002 100 2 0002 000


2. Taxes2. Taxes 00 00 00 00 00



Total expenses (1+4)Total expenses (1+4) 2 8002 800 1 3001 300 900900

Difference of revenues and expensesDifference of revenues and expenses -1100-1100 +800+800 +1 100+1 100

Balancing items (+, -)Balancing items (+, -) 880880 00 00

Final score of money (FSM)Final score of money (FSM) 00 800800 1 9001 900

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Opening score of money (OSM) 220220 00 800800 1 9001 900



Total revenues (1+2)Total revenues (1+2) 1 7001 700 2 1002 100 2 0002 000 570570


2. Taxes2. Taxes 00 00 00 00 00



Total expenses (1+4)Total expenses (1+4) 2 8002 800 1 3001 300 900900 1 1501 150

Difference of revenues and expensesDifference of revenues and expenses -1100-1100 +800+800 +1 100+1 100 -580-580

Balancing items (+, -)Balancing items (+, -) 880880 00 00 - 1000- 1000

Final score of money (FSM)Final score of money (FSM) 00 800800 1 9001 900 320320

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Opening score of money (OSM) 220220 00 800800 1 9001 900 320320



Total revenues (1+2)Total revenues (1+2) 1 7001 700 2 1002 100 2 0002 000 570570 1 3501 350


2. Taxes2. Taxes 00 00 00 00 00



Total expenses (1+4)Total expenses (1+4) 2 8002 800 1 3001 300 900900 1 1501 150 1 6001 600

Difference of revenues and expensesDifference of revenues and expenses -1100-1100 +800+800 +1 100+1 100 -580-580 -250-250

Balancing items (+, -)Balancing items (+, -) 880880 00 00 - 1000- 1000 00

Final score of money (FSM)Final score of money (FSM) 00 800800 1 9001 900 320320 7070

1 financial management and cash flow. 2 base of enterprise´s financing each activity in the company...

Documents

internal financing

current financing

leasing financing

regularity of financing

b external financing

sorts of enterprises

emission of shares financing

profit selffinancing