What to do with profits

Theme of Financial Management

• Understanding how to manage profits effectively.

• Examples of decisions a financial manager can make with profits (e.g., reinvestment, dividends).

Responsibilities of Financial Managers

• Assess the company's financial situation.

• Make informed decisions regarding profit allocation and future investments.

• Consider both internal (as part of management) and external (as a stakeholder) perspectives.

Understanding Profits

• Profits are mean to be divided in different ways.

• Key concepts include:

  • Dividends: Money paid to shareholders.

  • Retained Earnings: Profits kept within the company for future use.

• Profits are calculated after deducting all expenses from revenues.

Creative Role of Financial Management

• Financial managers must be innovative in decision-making, not just follow strict formulas.

• Example: Different methods for calculating the breakeven point.

Cash vs Profits

• Differentiating between cash generated and profits made.

• Money coming in (revenue) must be properly allocated and spent wisely.

Financial Decision Making

• Consider options for financing (short-term vs. long-term loans).

• Importance of choosing the right source based on business strategy.

Sources of Income

• Primary Income Stream: Main business activities (e.g., selling products).

• Secondary Income Stream: Other means of generating income (e.g., investments, dividends from other companies).

Difference Between Accounting and Financial Management

• Accounting: Focus on historical data and ensuring accuracy of past events.

• Financial Management: Uses historical data to make projections and prepare for the future.

Forecasting Revenue

• financial managers use historical data alongside market analysis and trend observation to project future revenue.

• Consider potential changes in laws and agreements affecting sales.

Spending and Profit Allocation

• Decisions on how to allocate profits, including repaying shareholders and retaining reserves.

• Financial managers must weigh investments for growth against risk of unexpected events (e.g., economic downturns).

Maximizing Shareholder Value

• Understanding finance costs (the cost of liabilities) is essential for maximizing shareholder value.

• After accounting for liabilities with finance costs, remaining profits can be allocated to dividends or retained earnings.

Financial Ratios

• Debt to Asset Ratio: Understanding whether a company’s ratios reflect sound financial health.

• Return on Total Assets: Measures how much income is generated from total assets.

  • Reflects efficiency of asset utilization in generating profit.

• Return on Shareholders' Equity: Similar to ROA but specific to what shareholders can expect after liabilities are paid.

  • Accounts for finance costs before calculating returns for equity holders.

  • Importance of comparing these ratios against industry benchmarks and past company performance.

Conclusion

• Success in financial management lies not just in analysis but in strategic decision-making that aligns with both short-term results and long-term enterprise sustainability.