Economy and Finance

“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