Finance Simplified.....Finance Basics for Managers

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Key Learnings

Basics of Financial management

Understanding Financial Statements

Financial Analysis & Decision Making

Projecting Financial Scenarios for Project

Management

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Basics of Financial management

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Business Transactions

An economic event 

Event

Money

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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.

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Book keeping Process (Recording)

Vouchers

Primary Books (Day Book, Cash Book, Journal)

Secondary Book (Ledgers)

Trial Balance (Ledger Summary)

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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

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Who uses these financial statements

Managers

Shareholders

Prospective Investors 

Financial Institutions 

Suppliers

Customers 

Employees

Competitors 

General Public 

Governments 

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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

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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

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Key Learning - Basics of Financial management

“Managerial Decisions

can be more

Accurate, Precise & informed

With reasonable

Understanding & Analysis of

Financial Statements”

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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

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Understanding Financial Statements

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Balance Sheet

Owner’s Fund (Equity)

Working Capital

Fixed Asset

Loan Fund

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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'.

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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.

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Profit & Loss Account

Gross Receipts/ Revenues

Less: Manufacturing & operating Expenses

Operating Profit

Less: Depreciation

Profit before Interest & Tax

Less: Interest

Profit before Tax

Less: Tax

Profit after Tax

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Profit & Loss Account

Profit after Tax

Add/ Less: Prior period adjustments

Add/ Less: Extra Ordinary Items

Profit available for appropriations

Add/ Less: Appropriations

Add/ Less: Dividend

Add/ Less: Dividend Distribution Tax

Add/ Less: General Reserve

Surplus carried to Balance Sheet

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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.

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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)

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Cash Flow Statement

Opening Cash & Cash Equivalents Closing Cash &

Cash Equivalents

Changes Due to

Operating Activity

Financing Activity

Investing Activity

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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.

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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.

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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”

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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.

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Q & A

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Financial Analysis &Decision Making

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Interpreting the Numbers

Liquidity position Profitability Solvency & Security of the loans Financial Stability Management Efficiency

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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

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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.

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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.

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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

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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.

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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.

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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

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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.

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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/ TA

An 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.

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Management Efficiency

Debtors Turnover = Average Debtors/ Turnover

Efficient business operation or tight credit policies

Creditors Turnover = Average Creditors/ Credit Purchase

How 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/ Turnover

how many times the entire inventory of a company has been sold during an accounting period

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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 

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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”

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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

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ProjectingFinancial Scenarios forProject Management

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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.

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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.

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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

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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".

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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".

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Project Analysis

Profitability Life CycleTo achieve maximum profit for an investment in the

long run

The 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.

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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.

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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”

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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

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Thank You