1.1 INTRODUCTION
The word managerial finance and managerial accounting are used interchangeably. Managerial finance according to www.essortment.com, 2010, "Managerial finance covers two areas: corporate finance and management accounting". Therefore, we shall define managerial finance or accounting as "The process of identifying, measuring, analyzing, interpreting, and communicating information in the pursuit of a company's business goals. Also known as cost accounting", (www.financial-dictionary.thefreedictionary.com, 2010). These are all the duties of a financial manager in the business.
1.2 ROLE AND ENVIRONMENT OF MANAGERIAL FINANCE
Finance is the art and science of managing money because it affects every single person in the organisation as a whole. One of the major roles of managerial finance is the interaction with finance personnel and procedures. All finance managers must be able to adequately understand economic environment they are operating in and see the marginal cost benefit before making decision that may affect the company positively or negatively.
Further to this, Scott & Eugene (2008, p17) summarizes that due to the non day to day involvement of shareholders in the business, managers are expected to take decision for the organisation. This has led to the rise of agency relationship. The management of finance is for the sole purpose of future decision that can help the organisation improve on the overall.
In another point of view, Thea Mann (2006) highlights that, "The finance manager must assess the style and pattern of growth that will suite the corporation in term of shareholder's maximization of wealth." (www.associatedcontent.com, 2010). Managerial finance is so relevant to the finance manager who must constantly review the company performance and see how they maximize the wealth. Gitman (1987) added that "there is a need to protect resource as part of decision making."
Managerial finance operates in an environment that is closely related to all other aspect of management. The role of financial institution and markets are ever present. The financial market serves as a source of loan and supplier of it as well. In the capital market, transactions relating to long term goals are planned and undertaken. Security exchange creates some form of continuous liquid markets so as to allocate their most productive uses.
Further to this, corporate incomes are central to tax rates. Companies pay about fifteen to thirty percent of all their earning and thus are very crucial to the function and duties of finance managers. These are the sort of environment that managerial finance is found, so as to incorporate all these existing structure together. Finance managers must always make decision and this is the sole aim of managerial finance.
1.3 CONCEPT OF TIME VALUE OF MONEY
As part of decision making, the need to understand value of money is very important and essential. "It can be used to compare investment alternatives and to solve problems involving loans, mortgages, leases, savings, and annuities" (www.getobjects.com, 2010). It means time value of money give guidance to finance manager in choosing alternative investment as well as solving company's liabilities.
The concept time is conceived so as to be able to offer opportunity and investment whereby funds are readily provided today. According to Ridha (1994), "time exercises a strong influence on economic activity and on economic decisions of both individuals and communities". Many reviews [Mahbub (n.d), Trippi & Lewin (1974) and Datta & Pal (1991)] have suggested that the value of money today and in the future alongside the study of inflation. For decision making, managers are faced with the option of having to buy something or invest today than doing so tomorrow due to the existing trend in the business world. The concept time value of money takes into consideration of compound interest, future value of money, net present value of money (NPV) and annuities as well.
2.1 DUTCH LADY MILK INDUSTRY BERHAD'S FINANCIAL STATEMENT ANALYSIS
Dutch Lady Milk Industry Berhad has reported its 2009 financial statement. Below are the evaluations of company's data.
2.1.1 Current Ratio
According to www.valuebasedmanagement.net (2010), current ratio is defined as "A model of measuring the liquidity of a company by calculating the ratio between all current assets and all currents liabilities." It means current ratio is part of measurement tools for company to assess the financial stability. It is useful in ensuring whether the company has enough resources to settle its debt over next year.
Refer to table 2.1, the current ratio of 2.0 shows that the company is acceptable. As an industrial company, the ratio shows Dutch Lady has enough assets to cover its liability for another twelve months.
2.1.2 Quick Ratio
Quick ratio is defined as "A model of measuring the liquidity of a company by calculating the ratio between all assets quickly convertible into cash and all current liabilities." (www.valuebasedmanagement.net, 2010), It means that this ratio is similar to current ratio but the only different is the inventory will be deducted in asset. The point is to ensure the company's ability to settle its short-term debt.
Refer to table 2.2, the quick ratio for Dutch Lady is 1.41 times. It shows the company able to pay its short term debt from its current assets. Obviously, it is a good position for Dutch Lady to be in because the firm able to meet its short-term debt without stress.
2.1.3 Total Asset Turnover
According to Christina Pomoni, total asset turnover is defined as "The operating performance of a firm is examined with the use of operating efficiency ratios." (www.helium.com, 2010). It simply defined the point of total asset turnover is to ensure the company equitability return on sales is success by using its assets.
For Dutch Lady company, refer to table 2.3, total asset turnover shows 2.43 times which shows the company has made rapid sales for the whole year. The company use it asset effectively to generate sales for 2009.
2.1.4 Inventory Turnover
Inventory turnover is defined as "This ratio is a relationship between the cost of goods sold during a particular period of time and the cost of average inventory during a particular period." (www.accountingformanagement.com, 2010). It means that inventory turnover is used to measure velocity conversion of stock into sales.
Based on table 2.4, the ratio of inventory turnover shows 6.98 which is consider as very high ratio for manufacturing company. Dutch Lady has done a brisk business over the whole year by converting its stock into sales rapidly.
2.1.5 Net Profit Margin
Referring to www.wisegeek.com (2010), "It is a figure that identifies how much profit is left after all taxes and other expenses related to the operation of the business have been settled." In other words, net profit margin will shows how effective the company is at cost control.
Based on table 2.5, the result shows 9% of net profit generated by Dutch Lady. This percentage translate into pure profit of RM 5 436 000 from net income. Thus, Dutch Lady has to increase number of sales by remaining the cost to meet higher net profit in future.
2.1.6 Return on Assets (ROA)
Return on assets is "all about the return the company got over its assets."(ezinearticles.com, 2010). It gives idea on how effective the company playing with its assets to earn profit.
Refer to table 2.6, the percentage shows 21% return on assets. Dutch Lady has made such return derives from total asset in the company. Firm can increase profit margin or asset turnover to increase ROA.
2.1.7 Return on Equity (ROE)
According to www.qfinance.com (2010), "It is a relationship between net income and stockholders' funds." It reveals on how much the firm earns in comparison with total equity of stakeholder in balance sheet.
Refer to table 2.7, the return shows 35% of profit from the total amount of investment in Dutch Lady. Meaning here is the investors or the owners have better returned for year 2009. The firm also is suggested to increase its net income to possess better return in future.
2.1.8 Payout Ratio
According to www.stock-market-investors.com (2010), payout ratio is defined as "The money that is paid out in the form of dividends by the company to its shareholders." It means that sum amount of money from earning paid by the firm as dividend to its stakeholder.
Refer to table 2.8, it shows that 70% of dividend paid by Dutch Lady to its stakeholder. This ratio shows the company has well growth in its industry. Thus, the firm is able to pay such amount as dividend to its stakeholder.
2.1.9 Price to Earnings (PE) Ratio
Price to earnings is a "Valuation ratio of a company's current share price compared to its per-share earnings." (www.valuebasedmanagement.net, 2010) It means that PE ratio is use to measure how much does the investors are able to pay for each shares earning.
For example, refer to table 2.9, the ratio stock shows 12.36. Dutch Lady has high hope for its stock in future by having that ratio. Investors look at Dutch Lady PE ratio as an overpriced stock.
2.1.10 Return on Investment (ROI)
Return on investment is defined as "A measure of the net income a firm's management is able to earn with the total assets." (financial-dictionary.thefreedictionary.com, 2010). It means that the ROI is used to describe monetary gain made by investing from bonds or stocks.
Refer to table 2.10, the ROI for Dutch Lady shows 29% return. This percentage shows the firm has made such profit from the money a business owner puts into the business. This ratio is a positive ratio in dairies industry where the return on investment could still be made by the owner.
3.1 CAPITAL BUDGETING TECHNIQUES
Capital budgeting techniques are very useful to finance manager to compare which project should be invested in which has higher return and lower risk in certain period of time. As a financial analyst, Dutch Lady Milk Industries Bhd is recommended to accept Project B. It is because, due to present economic conditions, the risk for Project B is lower than Project A. Refer to table 3.1, the NPV for Project A (RM465, 921.85) is higher than Project B (RM365, 835.61). However, refer to table 3.3, the payback period for Project B (2.536 years) is shorter than Project A (3.25 years). Thus, to avoid the high risk, Project B is more efficient to be selected. For IRR, table 3.2, Project B (24%) is higher compared to Project A (17%). As the investor, the higher the return, the better in maximising actual discount rate. With discounted cash flow, it will be longer in return. IRR for Project B (24%) is the maximum rate that can give high return on investment. If the IRR become 25%, the company will get negative value in return.
