DEPARTMENT OF COMMERCE AND FINANCE

GOVERNMENT COLLEGE UNIVERSITY

Kachahry Road, Lahore

NAME: Qaisar Shahbaz (2369)

CLASS: B.Com (Hons.) Session 2018-22

SECTION: (A)

SEMESTER: 5th

COURSE TITLE: Financial Management

SUBMITTED TO: Mam Nosheen Rasool

Subject Of Assignment: Role of Financial Management and Financial

Financial managers perform data analysis and advise senior managers on profit-maximizing ideas.
Financial managers are responsible for the financial health of an organization. They produce financial
reports, direct investment activities, and develop strategies and plans for the long-term financial goals of
their organization. Financial managers typically: Financial managers also do tasks that are specific to
their organization or industry. For example, government financial managers must be experts on
government appropriations and budgeting processes, and healthcare financial managers must know
about issues in healthcare finance. Moreover, financial managers must be aware of special tax laws and
regulations that affect their industry.

Finance alludes to how a business pays for its activities. Cost is pivotal businesses attempt to amplify
benefit, in this way in a serious market limiting expense and looking after effectiveness, quality is
central. Financial planning is essential to the achievement of a business from sourcing reserves following
incomes following costs permits educated choices to be made.

Financial management is the planning, sorting out and controlling the procurement and utilization of
financial assets to accomplish authoritative objectives. Data should be set up so that different divisions
can undoubtedly get data so choices can be made. Such records incorporate; Balance sheets Profit and
Loss Statements Cash Flow proclamations Budgets

Objectives of financial management The objectives are to augment a business' Profitability Liquidity
Efficiency Return on capital Growth Profitability The capacity of an association to amplify benefits
Satisfies the fundamental objective of all business Satisfies the proprietor Sustains the business
Businesses should screen Revenues Pricing strategy.. Expenses/costs Inventory levels Assets levels

Liquidity The capacity of an association to pay its obligations as they fall due. Businesses require enough
income to meet commitments Inventories should have the option to change over into money rapidly
Predicting incomes is essential A business should maintain a strategic distance from money deficiencies
or failing to meet expectations reserves.

Productivity the capacity of an association to deal with its resources for boost benefits requires: Efficient
utilization of associations’ resources should be checked. Counting Inventories Cash Collection of records
receivable

Profit for Capital the sum got back to proprietors or investors as a % of their capital commitment is
essential. Proprietors expect a profit for their venture that matches or betters market returns.
Proprietor's put away cash CAPITAL Expect to get a return FLOW Returns should make the speculation
beneficial must have the option to look at other potential ventures
Development The capacity of an association to expand its size in the long haul is another critical
objective of business. Keep up benefit levels Develop resources for: Increase deals Increase benefit
Increase piece of the pie.

CreatingValueThrough Financial Management A definitive target of financial management is esteem

ROLE OF FINANCIAL MANAGEMENT Productive and powerful management of cash how to raise the
capital how to designate capital long haul as well as the present moment planning is finished. It likewise
manages the profit strategies. Handling information just a single time to decrease process durations.
Organizing information so it gives data Leveraging individuals and innovation to improve exchange
handling.

THE FUNDAMENTAL FINANCE PRINCIPLE prior to settling on a business choice chief ought to ask: Will
the choice make raise an incentive for the firm? It tends to be replied with the assistance of the basic
money standard - A business proposition, for example, another venture the obtaining of another
organization a rebuilding plan will raise the company's worth just if its net present worth is positive
Worth creation has been communicated in the business compositions as the primary target of
Organizations An association should make an incentive for its proprietors or investors though some
demand that worth should be made for investors, yet for partners Value is the limit of a decent,
administration, or a movement, or exercises of an association to fulfill a need, or give an advantage to
an individual or legitimate element.

Capital Investment Decisions

Capital investment decisions are long-term corporate finance decisions relating to fixed assets and
capital structure. Decisions are based on several inter-related criteria. Corporate management seeks to
maximize the value of the firm by investing in projects which yield a positive net present value when
valued using an appropriate discount rate in consideration of risk. These projects must also be financed
appropriately. If no such opportunities exist, maximizing shareholder value dictates that management
must return excess cash to shareholders (i.e., distribution via dividends). Capital investment decisions
thus comprise an investment decision, a financing decision, and a dividend decision. Financial planning:
Financial planning incorporates the accompanying territories Investment planning Evaluation of new or
existing activities Pay-back Net – present worth Finance planning Decisions about getting, influence Mix
of liabilities to Owner's value Risk planning Various protection procedures. The importance of financial
management Businesses fall flat for various reasons: Lack of capital Too many long haul resources
Inadequate control of stock and credit Cash stream and obligation assortment (debt claims) Lack of
power over expenses and deals influencing benefits All include management and control of financial
assets.
Following are the main functions of a Financial Manager:

Raising of Funds

In order to meet the obligation of the business it is important to have enough cash and liquidity. A firm
can raise funds by the way of equity and debt. It is the responsibility of a financial manager to decide the
ratio between debt and equity. It is important to maintain a good balance between equity and debt.

Allocation of Funds

Once the funds are raised through different channels the next important function is to allocate the
funds. The funds should be allocated in such a manner that they are optimally used. In order to allocate
funds in the best possible manner the following point must be considered

• The size of the firm and its growth capability

• Status of assets whether they are long-term or short-term

• Mode by which the funds are raised

These financial decisions directly and indirectly influence other managerial activities. Hence formation of
a good asset mix and proper allocation of funds is one of the most important activity

Profit Planning

Profit earning is one of the prime functions of any business organization. Profit earning is important for
survival and sustenance of any organization. Profit planning refers to proper usage of the profit
generated by the firm.

Profit arises due to many factors such as pricing, industry competition, state of the economy,
mechanism of demand and supply, cost and output. A healthy mix of variable and fixed factors of
production can lead to an increase in the profitability of the firm.

Understanding Capital Markets

Shares of a company are traded on stock exchange and there is a continuous sale and purchase of
securities. Hence a clear understanding of capital market is an important function of a financial
manager. When securities are traded on stock market there involves a huge amount of risk involved.
Therefore a financial manger understands and calculates the risk involved in this trading of shares and
debentures. It’s on the discretion of a financial manager as to how to distribute the profits. Many
investors do not like the firm to distribute the profits amongst shareholders as dividend instead invest in
the business itself to enhance growth. The practices of a financial manager directly impact the operation
in capital market.
Help management make financial decisions.

The role of the financial manager, particularly in business, is changing in response to technological
advances that have significantly reduced the amount of time it takes to produce financial reports.
Financial managers’ main responsibility used to be monitoring a company’s finances, but they now do
more data analysis and advice senior managers on ideas to maximize profits. They often work on teams,
acting as business advisors to top executives.

Innovation in business:

Financial innovation refers to the process of creating new financial or investment products, services, or
processes. These changes can include updated technology, risk management, risk transfer, credit and
equity generation, as well as many other innovations. Financial innovation is only good if it allows
decentralization of risk. It is important that the tool being developed cannot be used for risk-taking at
all. … Hence, credit default swaps would qualify as a good financial innovation if the possibility of their
misuse was drastically reduced.

When discussing the future of financial technology (fintech), the conversation has moved over the years
to focus on financial innovation examples from EFT to PayPal, and most recently, to Bitcoin. The future
of fintech often moves at an intimidating rate, making it important to acknowledge which financial
innovations have transformed our lives, and which have failed drastically.

Innovation is far more valuable because it raises the productivity of both capital and labor. Some
innovators, like Kelleher and Walton, use existing technology to improve processes. Others, such as Jobs
and Zuckerberg, develop entirely new product categories and reshape industries.

How a Business Makes Money through innovation:

The goal of every business is to defy markets. Any firm at the mercy of supply and demand will find itself
unable to make an economic profit—that is profit over and above its cost of capital. In other words,
unless a firm can beat Adam’s Smith’s invisible hand, investors would be better off putting their money
in the bank.

That leaves entrepreneurs and managers with two viable strategies: rent seeking and innovation. Rent
seeking behavior, although often given purely negative connotations because it is associated with
activities like regulatory capture, can have a useful function, such as building a trusted brand name to
earn loyalty with customers.

Innovation is far more valuable because it raises the productivity of both capital and labor. Some
innovators, like Kelleher and Walton, use existing technology to improve processes. Others, such as Jobs
and Zuckerberg, develop entirely new product categories and reshape industries. Unlike rent seeking,
innovation creates significant new value that didn’t exist before.
Value creation:

sValue creation is the primary aim of any business entity. Creating value for customers helps sell
products and services, while creating value for shareholders, in the form of increases in stock price,
insures the future availability of investment capital to fund operations. From a financial perspective,
value is said to be created when a business earns revenue (or a return on capital) that exceeds expenses
(or the cost of capital). But some analysts insist on a broader definition of “value creation” that can be
considered separate from traditional financial measures. “Traditional methods of assessing
organizational performance are no longer adequate in today’s economy,” according to
ValueBasedManagement.net. “Stock price is less and less determined by earnings or asset base. Value
creation in today’s companies is increasingly represented in the intangible drivers like innovation,
people, ideas, and brand.”

When broadly defined, value creation is increasingly being recognized as a better management goal than
strict financial measures of performance, many of which tend to place cost-cutting that produces short-
term results ahead of investments that enhance long-term competitiveness and growth. As a result,
some experts recommend making value creation the first priority for all employees and all company
decisions. “If you put value creation first in the right way, your managers will know where and how to
grow; they will deploy capital better than your competitors; and they will develop more talent than your
competition,” Ken Favaro explained in Marakon Commentary. “This will give you an enormous
advantage in building your company’s ability to achieve profitable and long-lasting growth.”

The first step in achieving an organization-wide focus on value creation is understanding the sources and
drivers of value creation within the industry, company, and marketplace. Understanding what creates
value will help managers focus capital and talent on the most profitable opportunities for growth. “If
customers value consistent quality and timely delivery, then the skills, systems, and processes that
produce and deliver quality products and services are highly valuable to the organization,” Robert S.
Kaplan and David P. Norton wrote in their book Strategy Maps: Converting Intangible Assets into
Tangible Outcomes. “If customers value innovation and high performance, then the skills, systems, and
processes that create new products and services with superior functionality take on high value.
Consistent alignment of actions and capabilities with the customer value proposition is the core of
strategy execution.”

Creating Value for the Stakeholders the model introduced portrays how a private firm may make an
incentive for every one of its stakeholder gatherings. It additionally portrays the exercises, practices or
conditions that may demolish an incentive for the stakeholders of a firm, or what esteem stakeholders
may need to surrender in their associations with the firm. The model doesn't offer a standardizing
expression, or protect an ethical position; it basically spreads out potential blueprints for supervisors on
the off chance that they need to make an incentive for the stakeholders of the firm, or if nothing else
maintain a strategic distance from activities that decimate an incentive for them. The significant
advantage of this model is in distinguishing the exercises and practices that may make esteem and those
that can wreck esteem. Another commitment of the model is in presenting a generally disregarded
measurement, time, when researchers study the stakeholder management issues. Time isn't an asset in
the typical feeling of the word, in that it can't be aggregated, increased, or put away. In any case, when
supervisors are aware of the advantages that can be given along the time measurement, they may turn
out to be more successful in making an incentive for the stakeholders. The worth definition includes
fulfillment of a need or arrangement of an advantage. A few exercises of the firm may make advantages
or awards for one gathering (esteem creation), while lessening, or removing, profits by another
gathering, or expanding hazards for them (esteem obliteration). Accordingly, we propose to
contemplate this cycle as for its double character: esteem creation and worth obliteration.

Shareholder value creation:

Shareholder value is the financial worth owners of a business receive for owning shares in the company.
An increase in shareholder value is created when a company earns a return on invested capital (ROIC) …
Put more simply, value is created for shareholders when the business increases profits.

Manufacturing companies continue to look for ways to achieve greater business success. Whether the
measure is growth, profit, and return on investment, market share, or another similar metric,
manufacturers are constantly looking for opportunities to improve their business performance—and this
means increasing shareholder value. With the concept of the value delivery process solidly in mind, let’s
look at how manufacturers can increase shareholder value.

There are four fundamental ways to generate greater shareholder value:

Increase unit price increasing the price of your product, assuming that you continue to sell the same
amount, or more, will generate more profit and wealth. Of course, there are many obstacles in the way
of increasing the price of your product, such as the price charged by competitors, the perceived value
received by your customers, and so on. But what if you could increase prices, even by just a few
percentage points? What impact would this have on your company? Particularly in a low-margin
business, even a modest increase in price might have a significant impact.

Sell more units Assuming that you are able to keep fixed costs constant, or at least increase fixed costs
at a rate that is less than sales growth, this will effectively reduce per-unit cost and, as a result,
contribute to shareholder value creation.

Increase fixed cost utilization Increasing fixed cost utilization is a close cousin to selling more product,
with the common theme of decreasing fixed cost per unit. In addition to selling more product with the
same fixed costs, manufacturers can also focus on consolidating and rationalizing their fixed costs.
Perhaps production activity can be consolidated over fewer pieces of capital equipment? Maybe
multiple manufacturing facilities can share production planning and procurement resources? Regardless
of the action taken, manufacturers need to be certain that the ultimate goal of increased shareholder
value is not lost.

Decrease unit cost reducing unit is probably the most common shareholder value creation method cost.
It’s hard to argue with the benefit of, say, reducing the cost of purchased materials by five percent%, or
of reducing inventory investment by 10 percent. These are typically worthwhile objectives and have
been the focus of much of our improvement efforts. The list is long of improvement methodologies and
tools that, in theory, lead to reductions in cost.

How is shareholder value calculated? A company’s earnings per share (EPS) is defined as earnings
available to common shareholders divided by common stock shares outstanding, and the ratio is a key
indicator of a firm’s shareholder value. When a company can increase earnings, the ratio increases and
investors view the company as more

How do you measure value creation? The most simplistic way to measure value creation is through
Revenue. This measure ensures that the process of value undertaken wasn’t worthless, if someone is
willing to pay for it. Revenue is the measure of value creation — not profit. A company can create value
without creating a profit, and many do.

What is Shareholder Value? Shareholder value is the financial worth owners of a business receive for
owning shares in the company. An increase in shareholder value is created when a company earns a
return on invested capital (ROIC) that is greater than its weighted average cost of capital (WACC). Put
more simply, value is created for shareholders when the business increases profits.

How to Create Shareholder Value In order to maximize shareholder value, there are three main
strategies for driving profitability in a company: (1) revenue growth, (2) increasing operating margin, and
(3) increasing capital efficiency. We will discuss in the following sections the major factors in boosting
each of the three measures. Should also attract new customers through referrals from existing
customers, marketing and promotions, new products and services offerings, and new revenue streams.

Raising Sales Price A company may increase current product prices as a one-time strategy or gradual
price increases throughout several months, quarters, or years to achieve revenue growth. It can also
offer new products with advanced qualities and features and price them at higher ranges.

Ideally, a business can combine both higher volume and higher prices to significantly increase revenue.

Operating Margin Besides maximizing sales, a business must identify feasible approaches to cost
reductions leading to optimal operating margins. While a company should strive to reduce all its
expenses, COGS (Cost of Goods Sold) and SG&A (Selling, General, and Administrative) expenses are
usually the largest categories that need to be efficiently managed and minimized.

Cost of Goods Sold (COGS) When a company builds a good relationship with its suppliers, it can possibly
negotiate with suppliers to reduce material prices or receive discounts on large orders. It may also form
a long-term agreement with the suppliers to secure its material source and pricing.

Many companies use automation in their manufacturing processes to increase efficiency in production.
Automation not only reduces labor and material costs, but also improves the quality and precision of the
products and, thus, largely reduces defective and return rates. Return management is the process by
which activities associated with returns and reverse logistics are managed. It is an important factor in
cost reduction because a good return management process helps the company manage the product
flow efficiently and identify ways to reduce undesired returns by customers. Selling, General, and
Administrative (SG&A) Expenses Capital Efficiency Capital efficiency is the ratio between dollar expenses
incurred by a company and dollars that are spent to make a product or service, which can be referred to
as ROCE (Return on Capital Employed) or the ratio between EBIT (Earnings Before Interest and Tax) over
Capital Employed. Capital efficiency reflects how efficiently a company is deploying its cash in its
operations.

Shareholder Value – ROCE Formula

Capital employed is the total amount of capital a company uses to generate profit, which can be
simplified as total assets minus current liabilities. A higher ROCE indicates a more efficient use of capital
to generate shareholder value, and it should be higher than the company’s capital cost.

Property, Plant, and Equipment (PP&E)

To achieve high capital efficiency, a company would first want to achieve a high return on assets (ROA),
which measures the company’s net income generated by its total assets.

Over time, the company might also shift to developing proprietary technology, which is a system,
application, or tool owned by a company that provides a competitive advantage to the owner. The
company can then profit from utilizing this asset or licensing the technology to other companies.
Proprietary technology is an optimal asset to possess because it increases capital efficiency to a great
extent.

Inventory Inventory is often a major component of a company’s total assets, and a company would
always want to increase its inventory turnover, which equals net sales divided by average inventory. A
higher inventory turnover ratio means that more revenues are generated given the amount of
inventory. Increasing inventory turnover also reduces holding costs, consisting of storage space rent,
utilities, theft, and other expenses. It can be achieved by effective inventory management, which
involves constant monitoring and controlling of inventory orders, stocks, returns, or obsolete items in
the warehouse.

The Stakeholder & Stakeholder Theory "A stakeholder in an organization is any gathering or person
who can influence or is influenced by the accomplishment of the organizations goals."

The Stake we consider a private company that produces merchandise and additionally benefits from
offices situated in at least one networks expecting that every stakeholder bunch exists and has some
importance for the endurance and prosperity of the company.

1. Investors “Stockholders”2. Employees3. Customers4. Suppliers5. Society

Value Creation: Benefits and rewards

 Financial
  Non-Financial

 Time

Value Destruction:

 Costs and risks

 Financial

 Non-Financial

 Time

Corporate valuation Model It shows what corporate choices mean for investor show ever choices made
by chiefs not by investors, and boosting shareholders abundance isn't equivalent to singular supervisors
expanding their own fulfillment.

The estimation of tasks is the current estimation of all the future free incomes anticipated from activities
when limited at the weighted normal expense of capital and could be determined as follow:

Value-Based Management

Value-Based Management is the precise utilization of the corporate valuation model to every single
corporate choice and key activities. The goal of VBM is to build Market Value Added (MVA) corporate
resources comprise of: Operating resources Financial, or no working, resources. Working resources take
two structures: Assets set up (incorporate the land, structures, machines, and stock that the firm uses in
its tasks to deliver items and administrations) Development choices allude to promising circumstances
the firm needs to build deals. They incorporate chances emerging from R&D uses, client connections,
and so forth. Value-Based Management Financial, or non-working, resources are recognized from
working resources and incorporate things, for example, interests in attractive protections and non-
controlling interests in the load of different organizations and its value is normally near the figure
written about the accounting report.

Measuring Shareholder Value the Metrics

The idea of investor value and how this can be made and supported this has, thusly, prompted the
improvement of various "value metrics", the most critical of which are: Shareholder value analysis (SVA)
Economic profit (EP) Economic value added (EVA) Cash flow return on investment (CFROI) Total business
returns (TBR) Understanding the Drivers of Value

The Four Fundamental Value Drivers

The Impact of Growth

• The second term in sections can be either sure or negative, contingent upon the general size of
productivity, capital necessities, and required return by financial specialists.

• If the second term in sections is negative, at that point growth diminishes MVA. As such, benefits are
sufficiently not to balance the profit for capital needed by speculators.

• If the second term in sections is positive, at that point growth expands MVA.

Expected Return on Invested Capital (EROIC)

• The normal profit for contributed capital is the NOPAT expected next period separated by the measure
of capital that is at present contributed.

• If the spread between the normal return, EROIC, and the necessary return, WACC, is positive, at that
point MVA is positive and growth makes MVA bigger. The inverse is valid if the spread is negative.

References

1. A model for corporate value creation by Rider University

2. Damodaran, Aswath - Investment Valuation 2nd edition

3. Valuation measuring and managing the values of companies 3rd edition

4. Creating Value through financial Management by Matt H. Evans

5. CIMA article: Maximizing Shareholder Value “Achieving clarity in decision making”

6. CIMA article: Understanding corporate value “managing and reporting intellectual capital”

7. Financial Management Theory and Practice 12th edition chapter 158.