14. finance department

Finance Department

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FinanceFinanceFinanceFinance

DepartmentDepartmentDepartmentDepartment

Finance Department

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IIIINDEXNDEXNDEXNDEX

Sr.Sr.Sr.Sr. ParticularsParticularsParticularsParticulars PagePagePagePage

1.1.1.1. IntroductionIntroductionIntroductionIntroduction 70707070

2.2.2.2. Organization StructureOrganization StructureOrganization StructureOrganization Structure 71717171

3.3.3.3. Financial PlanningFinancial PlanningFinancial PlanningFinancial Planning 72727272

4.4.4.4. Capital Structure & CapitalizationCapital Structure & CapitalizationCapital Structure & CapitalizationCapital Structure & Capitalization 73737373

5.5.5.5. ManagementManagementManagementManagement Of Fixed Assets & Share Of Fixed Assets & Share Of Fixed Assets & Share Of Fixed Assets & Share

CapitalCapitalCapitalCapital

75757575

6.6.6.6. Depreciation PolicyDepreciation PolicyDepreciation PolicyDepreciation Policy 76767676

7.7.7.7. Management Of Working Management Of Working Management Of Working Management Of Working CapitalCapitalCapitalCapital 77777777

8.8.8.8. Management Of Inventory & Cash/BankManagement Of Inventory & Cash/BankManagement Of Inventory & Cash/BankManagement Of Inventory & Cash/Bank 78787878

9.9.9.9. Management Of ProfitsManagement Of ProfitsManagement Of ProfitsManagement Of Profits 79797979

10.10.10.10. Leverage AnalysisLeverage AnalysisLeverage AnalysisLeverage Analysis 80808080

11.11.11.11. Ratio AnalysisRatio AnalysisRatio AnalysisRatio Analysis 81818181

Finance Department

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IIIINNNNTRODUCTIONTRODUCTIONTRODUCTIONTRODUCTION

Finance holds the key of all activities. The path of success is greased

with money. “ Money is an aim on a leg. You either use it or loose it” .

Kenneth Midgley & Ronald Burns state:

“ Financing is the process of organizing the flow of fund so that Financing is the process of organizing the flow of fund so that Financing is the process of organizing the flow of fund so that Financing is the process of organizing the flow of fund so that

business can carry out its objectives in the most efficient manner & business can carry out its objectives in the most efficient manner & business can carry out its objectives in the most efficient manner & business can carry out its objectives in the most efficient manner &

most its obligation a fall due.most its obligation a fall due.most its obligation a fall due.most its obligation a fall due.”

Finance guides & regulates investment decisions & expenditures. To

get the best out of the available funds is the major task of finance

department. Finance is the common denominator for a vast range of

corporate objectives & the major part of any co-operate plan. It must

be expressed in financial terms.

Financial management today is recognized as the most important

branch of business administration. Finance management provides the

best guide for future resources allocation by a firm.

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OOOORGANIZATION RGANIZATION RGANIZATION RGANIZATION SSSSTRUCTURTRUCTURTRUCTURTRUCTUREEEE

Organization of finance department means the division & the

classification of various functions which are to be performed by the

finance department. The place of financial department in the

organization chart depends generally on the size & the nature of the

business.

Organization structure of finance department in Bharat Gears Ltd is:

The nature of finance is so peculiar that it may even affect the very

existence of the concern and therefore the company has not

decentralized the finance functions and so the control &

administration of finance is in the hand of managing partner.

Chief Managing PartnerChief Managing PartnerChief Managing PartnerChief Managing Partner

ManagerManagerManagerManager C.A.C.A.C.A.C.A.

Office A/C’sOffice A/C’sOffice A/C’sOffice A/C’s Officer (excise)Officer (excise)Officer (excise)Officer (excise)

Assistant A/c’sAssistant A/c’sAssistant A/c’sAssistant A/c’s AssisAssisAssisAssistant General tant General tant General tant General

Assistant General Assistant General Assistant General Assistant General

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FFFFINANCIAL PLANNINGINANCIAL PLANNINGINANCIAL PLANNINGINANCIAL PLANNING

Financial planning means deciding in advance, the financial activities to

be carried on to achieve the basic objective of the firm. The basic

objective of the firm is to get maximum profits out of minimum efforts

or to maximize the wealth of the cooperation to its shareholders in an

efficient manner.

In Bharat Gears Ltd financial planning is done for both capital

requirements i.e. long term & short term. Both long term & short term

financial planning is done by financial manager and the top

management. Generally long term financial planning they do for buying

plant & machinery.

It is the financial manager and the top management who makes the

financial planning for the firm. A plan is made for every six months.

Financial manager makes the plan on the basis of calculation of total

receipts & payment that are to be made within those six months.

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CCCCAPITAL STRUCTUREAPITAL STRUCTUREAPITAL STRUCTUREAPITAL STRUCTURE &&&&

CCCCAPITALIZATIONAPITALIZATIONAPITALIZATIONAPITALIZATION

The finance is needed from the date of incorporation &

commencement. Capital structure of a company refers to composition

or make up of its capitalization & it covers all long term capital

resources, loans, reserves, shares & bonds.

“ Capitalization comprises a corporation ownership capital & its Capitalization comprises a corporation ownership capital & its Capitalization comprises a corporation ownership capital & its Capitalization comprises a corporation ownership capital & its

borrowed capital as represented by its long term indebtedness.borrowed capital as represented by its long term indebtedness.borrowed capital as represented by its long term indebtedness.borrowed capital as represented by its long term indebtedness.”

In Bharat Gears Ltd the capital structure as of equity & debt is as

under:

☯☯☯☯ Partners/ share capital: Partners/ share capital: Partners/ share capital: Partners/ share capital: 1716171617161716 LakhsLakhsLakhsLakhs

☯☯☯☯ ecured loan: ecured loan: ecured loan: ecured loan: 0000872872872872 LakhsLakhsLakhsLakhs

☯☯☯☯ Unsecured loan: Unsecured loan: Unsecured loan: Unsecured loan: 0249024902490249 LakhsLakhsLakhsLakhs

☯☯☯☯ Equity proportion: Equity proportion: Equity proportion: Equity proportion: 1716171617161716 LakhsLakhsLakhsLakhs

☯☯☯☯ Borrowed proportion: Borrowed proportion: Borrowed proportion: Borrowed proportion: 1121112111211121 LakhsLakhsLakhsLakhs

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Calculation showing whether Bharat Gears Ltd is Under capitalized or

Over Capitalized:

ParticularsParticularsParticularsParticulars Amount (Lakhs)Amount (Lakhs)Amount (Lakhs)Amount (Lakhs)

Total CapitalTotal CapitalTotal CapitalTotal Capital 2837.002837.002837.002837.00

Net Profit (2009 Net Profit (2009 Net Profit (2009 Net Profit (2009 ---- 2010201020102010)))) 146.00146.00146.00146.00

The rate of return in this company is 7%The rate of return in this company is 7%The rate of return in this company is 7%The rate of return in this company is 7%

Calculation Showing the NormCalculation Showing the NormCalculation Showing the NormCalculation Showing the Normal Capitalal Capitalal Capitalal Capital ::::

Normal Capital Normal Capital Normal Capital Normal Capital = = = = Net Profit X 100Net Profit X 100Net Profit X 100Net Profit X 100

Rate of returnRate of returnRate of returnRate of return

= = = = 146 X 100146 X 100146 X 100146 X 100

7777

= = = = 2085.712085.712085.712085.71

Normal Capital < Actual CapitalNormal Capital < Actual CapitalNormal Capital < Actual CapitalNormal Capital < Actual Capital

Therefore the company is overTherefore the company is overTherefore the company is overTherefore the company is over----capitalized.capitalized.capitalized.capitalized.

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MMMMANAGEMENT OF FIXED AANAGEMENT OF FIXED AANAGEMENT OF FIXED AANAGEMENT OF FIXED ASSETSSSETSSSETSSSETS &&&&

SSSSHARE HARE HARE HARE CCCCAPITALAPITALAPITALAPITAL

☯ MMMMANAGEMENT OF FIXED AANAGEMENT OF FIXED AANAGEMENT OF FIXED AANAGEMENT OF FIXED ASSETSSETSSETSSETSSSS

Every business requires fixed assets for the running of business

activities. Fixed assets are those which are fixed & permanent in

nature and they are used by business in its control operations.

Capital budgeting is a process of making decision regarding

investment in fixed assets. For this purpose, mgt is to decide whether

or not to acquire or add to replace fixed assets in the light of overall

objectives of the firm.

☯ MMMMANAGEMENT OF ANAGEMENT OF ANAGEMENT OF ANAGEMENT OF SSSSHARE HARE HARE HARE CCCCAPITALAPITALAPITALAPITAL

Public EquityPublic EquityPublic EquityPublic Equity 38.26%38.26%38.26%38.26%

Indian PromotersIndian PromotersIndian PromotersIndian Promoters 26.49%26.49%26.49%26.49%

ZF ZF ZF ZF Friedrichshafen AGFriedrichshafen AGFriedrichshafen AGFriedrichshafen AG 26%26%26%26%

Financial InstitutionsFinancial InstitutionsFinancial InstitutionsFinancial Institutions 9.25%9.25%9.25%9.25%

Finance Department

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DDDDEPRECIATION POLICYEPRECIATION POLICYEPRECIATION POLICYEPRECIATION POLICY

Depreciation is an expense item. It is charged on fixed assets. Fixed

assets are those which are of material value, not meant for resale and

having fairly long life and are used in the business.

Method of depreciationMethod of depreciationMethod of depreciationMethod of depreciation ::::

� Straight line method

� Diminishing balance method

� Annuity method

� Depreciation fund method

� Insurance policy method

� Depletion method

� Machine hour rate method

In Bharat Gears Ltd the depreciation on fixed assets is provided on

written down value method at the rate specified I.T. Act 1961.

The following are the all fixed assets or on which depreciation is

charged:- Plant & machinery Plant & machinery Plant & machinery Plant & machinery : 25%: 25%: 25%: 25%

FurnitureFurnitureFurnitureFurniture : 10%: 10%: 10%: 10%

FactoryFactoryFactoryFactory : 10%: 10%: 10%: 10%

Computer systemComputer systemComputer systemComputer system : 60%: 60%: 60%: 60%

Motor carMotor carMotor carMotor car : 20%: 20%: 20%: 20%

Diesel PokliftDiesel PokliftDiesel PokliftDiesel Poklift : 40%: 40%: 40%: 40%

BuildingBuildingBuildingBuilding : 10%: 10%: 10%: 10%

Total amount of all fixed assets depreciation is Total amount of all fixed assets depreciation is Total amount of all fixed assets depreciation is Total amount of all fixed assets depreciation is 8, 85, 00, 000/8, 85, 00, 000/8, 85, 00, 000/8, 85, 00, 000/---- Rs.Rs.Rs.Rs.

Finance Department

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MMMMANAGEMENT OF WORKINGANAGEMENT OF WORKINGANAGEMENT OF WORKINGANAGEMENT OF WORKING CAPITALCAPITALCAPITALCAPITAL

Working capital means current assets such as cash, accounts

receivable & inventory etc minus the current liabilities. The

management of current assets is as important as or rather more

important than the management of fixed assets because most of the

business very largely depends upon the manner in which their working

capital is managed.

Gross working capital in Bharat Gears Ltd is as follow:

Particulars Amount (lakhs)

Inventories 217.00

Sundry Debtors 479.00

Cash & Bank Balances 314.90

Loans & Advances 69.00

TOTAL 1079.90

Net working capital in Bharat Gears Ltd is as follows:


Current Assets 1079.90

Current Liabilities 279.58

Net Working Capital 800.32

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MMMMANAGEMENT OF ANAGEMENT OF ANAGEMENT OF ANAGEMENT OF IIIINVNVNVNVENTORY ENTORY ENTORY ENTORY &&&&

CCCCASHASHASHASH/B/B/B/BANKANKANKANK

☯☯☯☯ Inventory:Inventory:Inventory:Inventory:


Raw Material 107.00

Sundry Debtors 50.00

Cash & Bank Balances 60.00

TOTAL 217.00

☯☯☯☯ Cash / Bank Balances:Cash / Bank Balances:Cash / Bank Balances:Cash / Bank Balances:


Cash In Hand (including cheque) 79.65

Bank Balance 135.25

Deposits Balances 50.00

TOTAL 264.90

Finance Department

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MMMMANAGEMENT OF ANAGEMENT OF ANAGEMENT OF ANAGEMENT OF PPPPROFITSROFITSROFITSROFITS

The primary objective of running any business organization is to earn

profits. Profits determine the financial position, liquidity & solvency of

the company. They serve as a yard stick for judging the augmented by

profits and reduced by lasses.

The efficiency of a business enterprise is measured in terms profits

earned. A profit is the differences between revenues and expenses over

a period of time. A profit is the ultimate output of a company. Therefore

the financial manager should continuously evaluate the efficiency of its

company in terms of profits.

BBBBharat Gears Ltd has earned the Gross Profit of Rs: 5, 18, 00, 000 /harat Gears Ltd has earned the Gross Profit of Rs: 5, 18, 00, 000 /harat Gears Ltd has earned the Gross Profit of Rs: 5, 18, 00, 000 /harat Gears Ltd has earned the Gross Profit of Rs: 5, 18, 00, 000 /----

during the year during the year during the year during the year as compared toas compared toas compared toas compared to Rs:Rs:Rs:Rs: 4, 37, 00, 0004, 37, 00, 0004, 37, 00, 0004, 37, 00, 000 ////---- earned during earned during earned during earned during

previous year ending 31previous year ending 31previous year ending 31previous year ending 31stststst March 2009March 2009March 2009March 2009

Finance Department

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LLLLEVERAGE ANALYSISEVERAGE ANALYSISEVERAGE ANALYSISEVERAGE ANALYSIS

The term Leverage is generally used to utilize the liked cost assets or

funds to increase the return to shareholders and company.

Generally there are two types of Leverage:

1.Operating Leverage1.Operating Leverage1.Operating Leverage1.Operating Leverage

2.Financial Leverage2.Financial Leverage2.Financial Leverage2.Financial Leverage

☯☯☯☯ Operating Leverage:Operating Leverage:Operating Leverage:Operating Leverage:

Operating Leverage occurs in the industry is as under :

(((( Note : Note : Note : Note : Point FigurePoint FigurePoint FigurePoint Figures Are In Lakhs )s Are In Lakhs )s Are In Lakhs )s Are In Lakhs )

Change In EBITChange In EBITChange In EBITChange In EBIT = 100.00 X 4.100.00 X 4.100.00 X 4.100.00 X 4.00000000

153.00153.00153.00153.00

==== 2.61 %2.61 %2.61 %2.61 %

CCCChange In Saleshange In Saleshange In Saleshange In Sales ==== 100.00 X 235.00100.00 X 235.00100.00 X 235.00100.00 X 235.00

9004.009004.009004.009004.00

==== 2.60 %2.60 %2.60 %2.60 %

Operating LeverageOperating LeverageOperating LeverageOperating Leverage = = = = % change EBIT% change EBIT% change EBIT% change EBIT

% change in sales% change in sales% change in sales% change in sales

= = = = 2.612.612.612.61

2.602.602.602.60

= = = = 1.0031.0031.0031.003

Finance Department

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RRRRATIO ATIO ATIO ATIO AAAANALYSISNALYSISNALYSISNALYSIS

( Note:Point Figures Are In Lakhs )

☯☯☯☯ Current RatioCurrent RatioCurrent RatioCurrent Ratio

Current ratio expresses relationship between current assets &

current liabilities & can be calculated by dividing current assets by

current liabilities.

Current ratio = Current assets

Current liabilities

For For For For the the the the year year year year ‘‘‘‘2008200820082008----09090909’’’’

= = = = 827.50827.50827.50827.50

==== 325.27325.27325.27325.27

= = = = 2222....54545454:1:1:1:1

For For For For the the the the year year year year ‘‘‘‘2009200920092009----10101010’’’’

==== 904.75904.75904.75904.75

= = = = 352.86352.86352.86352.86

= = = = 2222....56565656:1:1:1:1

In a sound business a current ratio of 2:1In a sound business a current ratio of 2:1In a sound business a current ratio of 2:1In a sound business a current ratio of 2:1 is considered ideal one. is considered ideal one. is considered ideal one. is considered ideal one.

In Bharat Gears Ltd current ratio is more than ideal ratio so the In Bharat Gears Ltd current ratio is more than ideal ratio so the In Bharat Gears Ltd current ratio is more than ideal ratio so the In Bharat Gears Ltd current ratio is more than ideal ratio so the

financial position of company is very strong.financial position of company is very strong.financial position of company is very strong.financial position of company is very strong.

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☯☯☯☯ Net Profit RatioNet Profit RatioNet Profit RatioNet Profit Ratio

This ratio establishes relationship of Net profit with sales to measure

the operating efficiency of the term & to reflect its pricing policy. The

ratio is calculated by dividing the Net profit by sales.

Net ProfNet ProfNet ProfNet Profit ratio it ratio it ratio it ratio = = = = Net Profit X Net Profit X Net Profit X Net Profit X 100100100100

Total SalesTotal SalesTotal SalesTotal Sales

For the year ‘2008For the year ‘2008For the year ‘2008For the year ‘2008----09’09’09’09’

= = = = 142.00 X 100142.00 X 100142.00 X 100142.00 X 100

= = = = 9004.009004.009004.009004.00

= = = = 1.57 %1.57 %1.57 %1.57 %


= = = = 146.00 X 100146.00 X 100146.00 X 100146.00 X 100

= = = = 9239.009239.009239.009239.00

= = = = 1.58 %1.58 %1.58 %1.58 %

A high ratio is an indication of good management or a high selling

price of the product or low production cost. In Bharat Gears Ltd the

Net profit ratio is very high so the company’s management is very

efficient.

The ratio between the two years is very close to each other, which

implies that the management is very effective & efficient foe their

work.

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☯☯☯☯ Debt EquityDebt EquityDebt EquityDebt Equity RatioRatioRatioRatio

This ratio is the measure of relative claims of creditors & owners

against the firm assets this ratio is also know as debt to net worth

ratio.

Debt Equity ratio Debt Equity ratio Debt Equity ratio Debt Equity ratio = = = = Long Term LiabilitiesLong Term LiabilitiesLong Term LiabilitiesLong Term Liabilities

ShaShaShaShare Holders Fundre Holders Fundre Holders Fundre Holders Fund


= = = = 1121.001121.001121.001121.00

= = = = 1600.001600.001600.001600.00

==== 0.700.700.700.70

FFFFor the year ‘2009or the year ‘2009or the year ‘2009or the year ‘2009----10’10’10’10’

= = = = 1121.001121.001121.001121.00

= = = = 1716.001716.001716.001716.00

= = = = 0.650.650.650.65

A low debt equity ratio is considered favorable from management

point of view debt equity ratio is very low in Bharat Gears Ltd so it

is beneficial for the company in future.

Comparison shows that there is decrease in the ratio as compared

to the last year. So it is favorable for the company.

14. finance department

Education