Financial Management Overview

Financial Management: Key Roles and Goals

• Financial managers are responsible for making crucial decisions regarding a company's finances, including:

  • Determining the appropriate credit terms for customers
  • Deciding whether to take on additional debt
  • Evaluating potential investments in new equipment

• The primary objective of financial management is to maximize the current value per share for the company's shareholders.

• A company is considered to be adhering to financial management goals when it implements strategies that lead to an increase in the market value per share.

• Ethical considerations play a significant role in business decisions as unethical behavior can have negative repercussions for individuals, companies, and society at large.

• Potential conflicts of interest can arise between managers and shareholders, as managers may prioritize their personal interests over the shareholders' interests.

Financial Management: Key Ratios

• The current ratio is a measure of a company's ability to meet its short-term obligations. It is calculated by dividing current assets by current liabilities.

  • A current ratio of 2.00 means that a company has P2.00 in current assets for every P1.00 in current liabilities.

• The quick ratio measures a company's ability to meet its short-term obligations using its most liquid assets. It is calculated by dividing quick assets (current assets minus inventory) by current liabilities.

  • A quick ratio of 1.00 means that a company has P1.00 in quick assets for every P1.00 in current liabilities.

• The inventory turnover ratio indicates how efficiently a company is managing its inventory. It is calculated by dividing cost of goods sold by average inventory.

  • An inventory turnover ratio of 5.00 means that a company sells its entire inventory five times per year.

• The days sales outstanding (DSO) measures the average number of days it takes a company to collect its receivables. It is calculated by dividing average accounts receivable by average daily sales.

  • A DSO of 30 days means that it takes a company 30 days on average to collect its receivables.

• The total asset turnover ratio measures how efficiently a company is using its assets to generate sales. It is calculated by dividing sales by average total assets.

  • A total asset turnover ratio of 1.00 means that a company generates P1.00 in sales for every P1.00 in assets.

• The profit margin measures how much profit a company makes for every P1.00 in sales. It is calculated by dividing net income by sales.

  • A profit margin of 10% means that a company makes a profit of P0.10 for every P1.00 in sales.

• The return on assets (ROA) measures how efficiently a company is using its assets to generate profits. It is calculated by dividing net income by average total assets.

  • A ROA of 10% means that a company generates a profit of P0.10 for every P1.00 in assets.

• The return on equity (ROE) measures how efficiently a company is using its equity to generate profits. It is calculated by dividing net income by average shareholders' equity.

  • A ROE of 15% means that a company generates a profit of P0.15 for every P1.00 in equity.