Download - Finance for non finance
Finance Simplified.....Finance Basics for Managers
P 2
Key Learnings
Basics of Financial management
Understanding Financial Statements
Financial Analysis & Decision Making
Projecting Financial Scenarios for Project
Management
P 3
Basics of Financial management
P 4
Business Transactions
An economic event
Event
Money
P 5
Book keeping Vs Accounting
Accounting is the systematic recording, reporting, and analysis of financial transactions of a business.
Bookkeeping is the recording of financial transactions. Transactions include sales, purchases, income, receipts and payments by an individual or organization.
P 6
Book keeping Process (Recording)
Vouchers
Primary Books (Day Book, Cash Book, Journal)
Secondary Book (Ledgers)
Trial Balance (Ledger Summary)
P 7
Financial Statements (Reporting)
State of Affairs (popularly known as Balance Sheet)
Income Statement (popularly known as Profit & Loss Account)
Cash Flow Statement
Allied Information, Notes & Statements
P 8
Who uses these financial statements
Managers Shareholders Prospective Investors Financial Institutions Suppliers Customers Employees Competitors General Public Governments
P 9
Decision making (Analysing)
Why there are no excess funds available? Is the entity financially sound? Would it be possible to make further loans? Is the entity having positive growth trends? How efficiently the management is working? Will available cash generating be sufficient to
provide in the anticipated demand? Whether company is in a sound position to take
up new project
P 10
Financial Management
Planning Organizing directing and controlling
Such as procurement and utilization of funds of the enterprise. It means applying general management principles to financial resources of the enterprise.
Business Transactions
P 11
Key Learning - Basics of Financial management
“Managerial Decisionscan be more
Accurate, Precise & informedWith reasonable
Understanding & Analysis of Financial Statements”
P 12
Action Plan
Facilitating Accounts Department in collecting them full & correct information about business transactions.
Provide full documents for each business transaction
Being Careful while signing on any Accounting voucher
Asking for appropriate Report while taking any business/ project decision
P 13
Understanding Financial Statements
P 14
Balance Sheet
Owner’s Fund (Equity)
Working Capital
Fixed Asset
Loan Fund
P 15
What a Balance Sheet says
Detailed summary of the assets and claims against those assets, as at a particular date.
Financial position of the company with regard to its ability to pay current debts. By comparing the current assets to the current liabilities,
Company’s financial position to carry on its business operations. The fixed-asset section indicates how many resources the company has working for it to assist in revenue generation.
Strength of the owner's claim against the assets. however, this claim is residual, or remaining claim after the creditors'.
P 16
What a Balance Sheet does not say
Details of how the profits were made. That information comes from the Income Statement.
Claims of the creditors and the owner(s) against a specific asset. The claims are against the assets in general.
The word 'Capital' under owner's equity must not be interpreted as cash. Capital means investment not cash.
Market value, current value, or worth of a business. Many readers believe the total assets represent a bundle of future cash reserves. Assets are reported at historical cost, and their purpose is to assist revenue generation.
P 17
Profit & Loss Account
Gross Receipts/ RevenuesLess: Manufacturing & operating Expenses
Operating ProfitLess: Depreciation
Profit before Interest & TaxLess: Interest
Profit before TaxLess: Tax
Profit after Tax
P 18
Profit & Loss Account
Profit after Tax Add/ Less: Prior period adjustments Add/ Less: Extra Ordinary Items
Profit available for appropriationsAdd/ Less: AppropriationsAdd/ Less: Dividend Add/ Less: Dividend Distribution TaxAdd/ Less: General Reserve
Surplus carried to Balance Sheet
P 19
What an Income Statement says
Main and any secondary sources of income.
The terms used to describe the revenue will provide a clue about the nature of the organization.
The items listed as expenses are expired, meaning they have no useful value left.
The result of matching the revenues and expenses yields the Net Income or Net Earnings.
P 20
What an Income Statement does not say
Does not predict the future income or Expenses; Since the future is full of uncertainty, historical Income Statement can't be relied on the reported results of any single period for an indication of future results.
Does not provide an exact measurement of net income for the accounting period.
An Income Statement does not report True Profit, which is the difference between total funds invested over the life of the company and funds realized from the sale of the company.
Net Income does not mean cash! Always keep in mind that net income is the excess revenue over related expenses. (Accrual)
P 21
Cash Flow Statement
Opening Cash & Cash Equivalents Closing Cash &
Cash Equivalents
Changes Due to
Operating Activity
Financing Activity
Investing Activity
P 22
What a Cash Flow says
Cash flow is the movement of money
A positive cash flow is the ideal outcome; this means positive cash flow is king; but not always.
Cash flow is unlike Profit & Loss Statement; it records transactions only when it happens actually.
P 23
What a Cash Flow does not say
cash flow statement does not reveal a profit or a loss
Just because your business has a positive cash flow, it didn't necessarily generate more income from operating activities
Without digging into the reasons straight forward decision making is not worthy.
P 24
Key Learning - Understanding Financial Statements
“Financial statements allow you to assess
a company’s current financial strength, &
determine its profitability and
creditworthiness, along with a
background to make
smart decisions for Future Plans”
P 25
Action Plan
Observe, Read & Assess different Financial Statements and discuss your observation with your Accountant
Think of your every decision that where in financial statement it would affect.
Try to reduce costs and thereby help your company in improving its bottom line.
P 26
Q & A
P 27
Financial Analysis &Decision Making
P 28
Interpreting the Numbers
Liquidity position Profitability Solvency & Security of the loans Financial Stability Management Efficiency
P 29
Ratio Analysis
Ratios recognise the symbiotic relationships of various items of the Financial Statements.
Ratios also allow for better comparison through time or between companies
Ratios analysis is just a suggestive factor and not a conclusive evidence
Effective financial analysis begins with analyzing the industries to which the firm belongs and the firm’s strategies to create a sustainable advantage
P 30
Liquidity position
Current Ratio = CA / CLcompany's ability to pay back its short-term liabilitiesStandard = 2Less than 1 is alarmingHigher current ratio is not necessarily mean better
liquidity
Quick Ratio = (CA – Inventory) / CL�The higher the current or quick ratios are, the more
comfortable a company should be taking on new debt to finance expansion or new development efforts. Decide whether to proceed with debt-based financing of a new project, or to work harder to create more revenue first.
Increase revenue by either repositioning your products, increasing their exposure or adding features.
P 31
Liquidity position
Cash Ratio = Cash / CLMost stringent and conservativeOften seen as poor asset utilization for a company to
hold large amounts of cash
NWC to Total Assets = NWC / TACash management and the management of
operating liquidity is important for the survival of the business firm. A firm can make a profit, but if they have a problem with their cash position, they won't survive.
P 32
Liquidity position
Defensive Interval = CA / Average daily �operating costs
It is not a replacement to the other ratios, but a complement
The defensive interval, determines how long a company would be able draw on quick assets to meet its day to day expenses
Ideally should be between 30 and 90 days
P 33
Profitability
Operating Profit Margin = Operating Income / Sales
Return achieved from standard operations and does not include unique or one time transactions
Also called return on sales marginShows the efficiency of a company in controlling the
costs and expenses associated with business operations
Profit Margin = Net Income / SalesIndicator of how efficient a company is and how well
it controls its costs. The higher the margin is, the more effective the company is in converting revenue into actual profit.
P 34
Profitability
Return on Assets (ROA) = Net Income / Total Assets
Create a plan to increase overall income if these ratios are too low, as this shows that you are not achieving enough return on your assets or your investors' money.
Incentivize your team to increase sales by increasing commission percentages or adding other rewards.
Return on Equity (ROE) = Net Income / Avg. �Equity
The return on equity figure takes into account the retained earnings from previous years, and tells investors how effectively their capital is being reinvested. Thus, it serves as a far better gauge of management's fiscal adeptness than the annual earnings per share.
P 35
Solvency & Security of the loans
Total Debt Ratio = (TA – TE) / TAindicates what proportion of debt a company has
relative to its assets. The measure gives an idea to the leverage of the company along with the potential risks the company faces in terms of its debt-load.
Long-term debt ratio = LTD / (LTD + TE)The greater a company's leverage, the higher the
ratio. Generally, companies with higher ratios are thought to be more risky because they have more liabilities and less equity.
Times Interest Earned = EBIT/ Net Interest Expense
also known as interest coverage ratio, indicates how well a company can cover its interest payments on a pre-tax basis
P 36
Solvency & Security of the loans
Debt Service Coverage Ratio = NOP/ Total Debt Service
Measures the company's ability to pay their debtsIncrease or decrease of the DSCR over time a
company can determine if they are building liquidity or losing
Debt/Equity = TD / TE Indication of the gearing level of a company; A high
ratio means that a company may be over-leveraged with debt
Equity Multiplier = Avg. TA/ Avg. Stockholders' Equity
If the equity multiplier ratio contains a high amount of debt or leverage then this means the firm may be reaching distress costs. High levels might also mean that the company has an inability to gain further financing to push into new markets.
P 37
Financial Stability
Free Cash Flow = CF(Op) – Cap Exp. It measures a company’s ability to generate
internal growth and to return profits to shareholders.
Working Capital to Total Assets = NWC/ TAAn increasing Working Capital to Total Assets
ratio is usually a positive sign, showing the company's liquidity is improving over time.
Book Value per share of common stock = TNW-PC/No. of Shares
How much shares are worth on the books after all debt is paid off.
P 38
Management Efficiency
Debtors Turnover = Average Debtors/ TurnoverEfficient business operation or tight credit
policies Creditors Turnover = Average Creditors/ Credit
PurchaseHow a company manages paying its own bills.
A higher ratio is generally more favourable as payables are being paid more easily
Stock Turnover = Average Stock/ Turnoverhow many times the entire inventory of a
company has been sold during an accounting period
P 39
Management Efficiency
Fixed Asset Turnover Ratio = Turnover/ Avg. FAMeasures how well a company is using its fixed assets
to generate revenues. The higher the fixed asset turnover ratio, the more effective the company's investments in fixed assets
Working Capital Turnover Ratio = Turnover/ Avg. WC
how effectively a company is using its working capital to generate sales.
Total Assets Turnover Ratio = Turnover/ Avg. Total Asset
The lower the total asset turnover ratio as compared to historical data for the firm and industry data, the more sluggish the firm's sales. This may indicate a problem with one or more of the asset categories
P 40
Key Learning - Financial Analysis &Decision Making
“Study of relationships among and
between various figures of financial
statement explains important facts that
help us in Financial Planning & Decision
Making”
P 41
Action Plan
Taking decisions for the purpose of project management & Financial Planning.
Managing Projects more vigilantly as far as financial aspects are concerned
Taking part in management meetings more actively and coming out with innovative comments
P 42
ProjectingFinancial Scenarios forProject Management
P 43
Go Beyond the Income Statement
Financial forecasting is as much art as it is science
Assumptions & Projections goes side by side
It’s best to be realistic in your projections
Keep in mind the difference between fixed and variable costs; differentiate where appropriate.
P 44
Cost Benefit Analysis
A cost benefit analysis finds, quantifies, and adds all the positive factors. These are the benefits. Then it identifies, quantifies, and subtracts all the negatives, the costs. The difference between the two indicates whether the planned action is advisable.
P 45
Project Analysis
Net Present ValueNPV can be described as the “Difference Amount”
between the sums of discounted; cash inflows and cash outflows. It compares the present value of money today to the present value of money in future, taking inflation and returns into account
Return on Investment A performance measure used to evaluate the efficiency
of an investment or to compare the efficiency of a number of different investments
P 46
Project Analysis
Payback Analysis Refers to the period of time required for the return on
an investment to "repay" the sum of the original investment.
Payback period is usually expressed in years.It does not account for the time value of
money, risk, financing or other important considerations, such as the opportunity cost
Total Cost OutlayAny concrete costs that can be identified in the past,
present or future. Also referred to as "explicit costs".
P 47
Project Analysis
Cash Flow Analysisstudy of the cycle of your business' cash inflows and
outflows, with the purpose of maintaining an adequate cash flow for your business, and to provide the basis for cash flow management.
Break Even Pointthe point at which cost or expenses and revenue are
equal: there is no net loss or gain, and one has "broken even".
P 48
Project Analysis
Profitability Life CycleTo achieve maximum profit for an investment in the
long runThe LCP analysis is often executed as a comparison
between investment A and alternative B. The alternative with the highest LCP will be chosen.
Sunk CostThese are the costs (in time, money, mental and
emotional energy spent, etc.) incurred in the past as a result of a decision made long ago. It's now impossible to recover these retrospective costs.
P 49
Project Analysis
Opportunity CostThese are the immediate costs of not taking the next
best alternative or, in economics speak, of not putting a resource to its best use.
Marginal CostDerivative of total production costs with respect to
the level of output.
P 50
Key Learning – Project Management
“Role of Financial Analysis in Project Management and its importance in Project appraisal, Planning and Feasibility
Analysisof the project prior to implementation”
P 51
Action Plan
Taking decisions with regard to project initiation.
Asking for Cost benefit Analysis before starting any new project.
Appraising Managerial Decisions in sync with corporate targets
P 52
Thank You