“In fact, a business can contribute to social welfare only if it is highly profitable.”
Peter F. Drucker
Economics and finance contains terms, management methods, various analytical techniques, financial indicators and standards, whose subject are the financial management in an enterprise or organization.
It includes the comprehensive financial management, various financial management methods, i.e. the handling of financial resources throughout their life cycle - from fund and capital (financing, financial market) raising, budgeting, allocation and distribution of financial resources, management and effective handling of financial resources, financial risk management, profit sharing and other financial operations in the organization.
The goal of financial management in a market economy is to maximize its market value, i.e. the market value of equity capital, for which managers through their work are responsible to the business owners and other stakeholders. The manager responsible for the financial management throughout the organization is called Chief Financial Officer (CFO). Other goals of financial management are: ensuring a business’ solvency, assets liquidity and return on assets (profitability) of the enterprise.
The objectives of financial management in public sector and Public Finance Management are described in the article Public Finance.
Financial management includes several different categories of processes such as:
Financial Planning
Obtaining financial resources (financing)
Budgeting
Financial Analysis
Financial operations, Accounting
Financial management methods:
Financial analysis - is one of the methods for theevaluation of the organization. Its basis is the evaluation of financial statements and various financial indicators. The result is a ratio and synthetic indicators and other analytical outputs. Financial analysis can use various analytical techniques.
Cash Flow analysis
Indebtedness analysis
Liquidity analysis
Profit analysis
Return on assets and activity analysis
Cost analysis
ABC Method (Activity Based Costing)
Break Even Point Analysis
Fixed costs
Marginal costs
Total Cost of Ownership (TCO)
Unit costs
Variable costs
Current assets management methods
Accounts receivable management methods
Cash flow management methods
Cash management methods
Inventory management methods
Liquidity management methods (cash management, cash flow management)
Payment methods
Methods and means of financing (obtaining financial resources)
Leasing methods
Long-term financing methods
Short-term financing methods
Investments management methods
Depreciation methods
Enterprise Valuation Methods
Financial management methods are based on various financial indicators and statements:
Profit ratios
EAC, EAT, EBT, EBIT,EBITDA, Gross Margin, NOPAT, Economic profit, Net profit plus interest after taxes
Valuation Criteria for Enterprise Performance Measurement
CFROI - Cash Flow Return on Investment
CROGA - Cash Return on Gross Assets
EVA - Economic Value Added
MVA - Market Value Added
RONA - Return on Net Assets
Cash Flow ratios
Cash flow liquidity
Cash flow per share
CF interest coverage
CF Return On Assets - ROA (CF)
CF Return on Equity
CF Return On Equity – ROE (CF)
CF return on sales - ROS(CF)
CF solvency
Debt relief level
Debt repayment period
Fixed payment coverage
Price-To-Cash-Flow-Ratio
Self-financing ratio
Liquidity ratios
CPR - Cash Position Ratio
CR - Current Ratio
QAR - Quick Asset Ratio
Profitability ratios
DuPont Analysis – decomposition of Return on Equity ratio
ROA - Return on Assets
ROC - Return on Capital
ROCE - Return on Capital Employed
ROE - Return on Equity
ROGIC - Return on Gross Invested Capital
ROI - Return on Investments
ROIC - Return on Invested Capital
ROO - Return on Organization
ROR - Return on Revenue
ROS - Return on Sales
Investment evaluation techniques (investment options)
AAR - Average Annual Return
ABPM - Accounting-Based Profitability Measures
Average Payback Period
Average Percentage Return
IRR - Internal Rate of Return
NPV - Net Present Value
PI - Profitability Index
Payback Period
Debt Ratios
DCR - Debt Coverage Ratio
Debt to Equity Ratio
Equity Indebtedness Ratio
Equity Ratio
Financial leverage
Interest Coverage (TIE) Ratio
Total Debt to Total Assets Ratio
Activity Ratios
Asset Turnover Ratio
Average Collection Period
Business Deficit
Creditors Payment Period
Fixed Asset Turnover
Inventory Turnover
Inventory Turnover Ratio
Market value ratios (capital market)
P/S - Price to Sales Ratio
BV - Book Value
Dividend Cover
Dividend Yield
EPS - Earnings Per Share
P/B - Price Book Value, M/B - Market to Book Ratio
P/E - Price Earnings Ratio
Payout Ratio
Plowback Ratio
Price to Earnings to Growth Ratio
Sustainable Growth Rate
Productivity ratios
EVA - Economic Value Added
TFP - Total Factor Productivity
Other financial ratios
Altman Analysis (Altman Z-score) - Altman Index
CAGR - Compound annual growth rate
DAR - Debt/Asset Ratio
NWC - Net Working Capital
WACC - Weighted Average Cost of Capital
WC - Working Capital
Absolute ratios
Horizontal analysis
Vertical analysis
Difference ratios
Relative ratios
Activity Ratios
Debt Ratios
Liquidity Ratios
Market Value Ratios (capital market)
Profitability Ratios
Set of interrelated ratios - e.g. Balanced ScoreCard (BSC)
Basic financial statements:
Balance Sheet
Cash Flow
Income Statement
Analytical techniques used in financial management:
Pareto Principle
PESTLE Analysis
SWOT Analysis
VRIO Analysis
Standards in field of finance:
Accounting Standards
SOX (Sarbanes-Oxley Act)
Keywords in finance field:
Accounting
Assets
Budget
Costs (Expenditure and Costs)
Capital
Debt
Equity
Expenditure (Expenditure and Costs)
Financial resources, Finance
Financial Result
Liability
Income (Income and Revenue)
Money
Cash
Currency
Exchange rate
Revenue (Income and Revenue)
Related management field:
Inventory Management
Risk Management
Other information and sources (International)
IMA (Institute of Management Accountants)