Financial Management
Financial Management
Financial Management
MANAGEMENT
SHENAL RAJAKARUNANAYAKE
DEPARTMENT OF INDUSTRIAL MANAGEMENT
FACULTY OF BUSINESS
UNIVERSITY OF MORATUWA
LEARNING OUTCOMES
• For years, many governments including the Sri Lankan government, funded projects by using
existing surplus funds or issued debts (T/bonds) to be repaid over a specific period.
• However, governments worldwide have increasingly found this funding mechanism/structure
to be less attractive, as it strained their own balance sheets and therefore limited their
ability to undertake other projects.
• This concern has stimulated the search for alternative sources of funding.
PUBLIC FINANCE
CORPORATE FINANCE
This is a mechanism where private sector participant uses its own credit for
raising the funds due to its capacity and the limited size, and nature of the
project.
This option is used for shorter, less capital-intensive projects that do not
warrant outside financing.
CORPORATE FINANCE
PROJECT FINANCE
Project financing uses the project’s assets and/or future revenues as the basis
for raising funds.
Generally, the sponsors create a special purpose, legally independent company
in which they are the principal shareholders.
PROJECT FINANCE
PROJECT FUNDING ALTERNATIVES
There are different types of long-term securities that a project may issue in
raising funds.
They are listed in order of seniority from the most risky, requiring the highest
level of return, to the least risky, requiring the lowest returns.
PROJECT FUNDING ALTERNATIVES
Common Equity: This represents ownership of the project. The sponsors usually hold a significant
portion of the equity in the project.
Preferred Equity: This also represents the ownership of the project. However, the sponsors have
priority over the common equity holders in receiving dividends and funds in the event of liquidation.
Unsecured Debt: This could be short-term or long-term, and although not secured by specific
assets, is senior to equity in dividends and repayment of principal.
Secured Debt: This could also be short-term or long-term. However, this is secured by specific
assets or sources of revenues.
Lease financing: This can vary in terms of structure and duration, although the lessor always retains
the rights to the leased assets. Tax issues and the strength of the collateral are usually the driving
forces behind a lease strategy. A lessor may be able to depreciate an asset for tax purpose, or the
lessee may be exempt from taxes or expect losses in the early stages of the project.
PROJECT FUNDING ALTERNATIVES
• Types of cost
• Direct, Indirect
• Fixed, variable, total
• Relationship between Revenue/Profit and cost
• P & L account
• Break Even Analysis
• Calculation
• Chart
TYPES OF COSTS
1200
400
200
0
100 200 300 400 500
OUTPUT UNITS
(£000)
VARIABLE COSTS
1200
400
200
0
100 200 300 400 500
OUTPUT UNITS
(£000)
TOTAL COST = FC + VC
1400
1200
1000
800
VARIABLE
TOTAL COSTS
COSTS 600
(£000)
400
FIXED
200 COSTS
0
100 200 300 400 500
OUTPUT UNITS
(£000)
EXERCISE
Abrams and Lyons are a small manufacturer which assemble electric kettles. They
lease a factory in Southampton and employ 38 workers. Their fixed costs are
£100,000 and variable costs are £2.50 per kettle.
a) Draw a table showing output, fixed costs, variable costs (use a range from 0 -
100,000 in divisions of ten thousand) Plot your figures on a graph
b) If variable costs rise to £3.50,what will happen to total cost if output is :
(i)Zero
(ii)50,000
EXERCISE
EXERCISE
350
300
250
TOTAL
COSTS
200
(£000)
VARIABLE
COSTS
150
100
FIXED
50 COSTS
0
10 20 30 40 50 60 70 80 90 100
OUTPUT UNITS
(£000)
EXERCISE
TOTAL
10000 100000 35000 135000 COSTS 300
20000 100000 70000 170000 (£000)
30000 100000 105000 205000 No of units
zero
200
40000 100000 140000 240000 VARIABLE
50000 100000 175000 275000 COSTS
60000 100000 210000 310000 100
FIXED
70000 100000 245000 345000 COSTS
80000 100000 280000 380000
90000 100000 315000 415000 0
10 20 30 40 50 60 70 80 90 100
100000 100000 350000 450000
OUTPUT UNITS
(£000)
BREAK EVEN ANALYSIS
• Break even point - ‘The level of sales or output, where total costs are
exactly the same as total revenue’
• Companies often want to know how much they want to produce or
sell to break even
• It is possible to calculate the ‘break even’ point if a firm knows the value
of its costs and the price it can charge in the market place
BREAK EVEN ANALYSIS
• A small producer makes wrought iron park benches in a foundry. The fixed costs (FC)
are £60,000 and variable costs are £40 per bench. He sells the benches for £100.
Calculate the breakeven output.
TR = TC
£60,000 = £60q
180
TOTAL
160 REVENUE
140 BREAK EVEN
POINT Profit
COST
120
REVENUE
PROFIT
100
VARIABLE
(£000) 80 COSTS
60
Loss
40 FIXED
COSTS
20
0
200 400 600 800 1000 1200 1400 1600
BENCHES
(000)
PRACTICE QUESTIONS
• A company wishes to introduce a new product. In order to do this, it must invest in some new
manufacturing equipment. The choice is between Machine A and Machine B. Costs and income
associated with each machine are as follows in Table 01 .
Plot a graph which shows the break-even point for each machine in terms of the number of
products produced. Which machine would you recommend for purchase? Explain your choice.
REVENUE AND PROFIT
Total Revenue - ‘The amount of money a company receives from selling its product’
Revenue JAN
Sales £1,980,000
Net Sales £1,980,000
Cost of Goods Sold
Direct materials 1,359,000
Direct labour 300,000
Manufacturing overhead
Indirect labour
Net cost of goods sold £ 1,659,000.00
Gross Profit £ 321,000
Period Expenses JAN
Salaries & Wages £ 40,000
Depreciation 0
Rent 5,000
Office Supplies 150
Utilities 1,000
Telephone 800
Insurance 300
Travel 250
Maintenance 54,000
Advertising 3,000
Direct Marketing 500
R&D 3,000
Total Expenses £ 108,000
Income From Operations £ 213,000
Total Expenses £ 108,000
Income From Operations £ 213,000
Interest Income (Expense) 0
Income Before Income Taxes 213,000
Income Tax Expense 42,600
Net Income(Profit) £ 170,400.00
C ASH FLOW STATEMENTS
• Sales prices per unit 65. Customers are given two month’s credit before they pay you.
• Material price per unit 20. Suppliers give you one month’s credit before you pay them.
• Labour costs are 15 per unit. Labour is paid for in the month of use.
• Overheads are 4,000 per month.
• There is a scheduled loan repayment of 15,000 per month for the duration of this
project.
C ASH FLOW STATEMENTS
B/F £12,000
Sales Income
Total Available
Expenditure
Materials
Labour
Overheads
Loan
Total Expenditure
Closing Balance
C ASH FLOW STATEMENTS
COSTS
Overheads 4000 4000 4000 4000 4000 4000
Materials 88000 44000 60000 60000 100000 72000
Labour 3300 45000 45000 75000 54000 42000
Loan 15000 15000 15000 15000 15000 15000
TOTAL EXPENSES 110300 108000 29500 100000 83000 133000