,
,Ratio analysis Financial management
Financial management as a discipline
seeks to optimize the financial resources
(of) and returns (to) the entity, by
optimizing two primary activities, namely:
Advanced analysis of information
Financing activities
By deciding which sources of funding (debt or equity)
should be used by the entity and what the optimal
proportion is for the various sources used; and
Investing activities
By deciding which investments should be undertaken by the entity
Financial analysis
within the limitations of available funds and the identified feasible
(can it be done?) and viable (does it derive a positive return?)
investment projects.
The key goal of any entity is to create long-term
sustainable value for its stakeholders.
In the private sector, this involves the objectives of
Goal of an entity
optimizing long-term shareholder or owner returns on
a sustainable basis as well as the responsibility of
minimizing or avoiding negative impacts on the natural
environment is well as society.
In a non-profit or government entity, the key goal
remains to create value for stakeholders by achieving
the objectives of economic, efficient and effective
utilization of resources. 3
, Shareholder wealth maximization theory:
The purpose of business is to maximize shareholder
wealth by generating profit thus creating capital, this
profit and capital being the property right of
shareholders or owners of the business.
Advanced analysis of information
Stakeholder theory:
Firms should identify their stakeholders and perform a
value analysis as part of the process. The requirements
of legitimate major stakeholders are taken into Financial capital
account in the strategic choices that an entity makes, The pool of funds that is available to the entity through
and therefore in the objective(s) that it pursues debt and equity sources.
Manufactured capital
Business model or value creation model of an entity
Buildings, equipment, infrastructure, plant and
A business model describes the rationale of how an
machinery and other tangible assets.
organization creates, delivers, and captures value, in
economic, social, cultural or other contexts. The process of
Human capital
business model construction is part of business strategy.
The competencies, capabilities and experience of the
management and staff available to the entity.
Although value is created within an entity, the ability of any
entity to create value is largely dependent
on the following factors:
Intellectual capital
The knowledge based intangibles available to the entity
• The external environment within which the entity that provide a competitive advantage such as
operates; intellectual property (patents, copyrights, software,
• The relationships with stakeholders, which includes, licenses and rights), organizational knowledge (systems,
employees, partners, networks, suppliers, customers; processes, procedures and protocols) and other
• The availability, affordability, quality and management accumulated intangible investments and resources
of various resources, or ‘capitals’ (brands, goodwill and technological advances).
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