Finance Simplified.....

Finance Basics for Managers

 Key Learnings

 Basics of Financial management

 Understanding Financial Statements

 Financial Analysis & Decision Making

 Projecting Financial Scenarios for Project

Management

P2
 Basics of Financial
management

P3
 Business Transactions

An economic event

 Event

 Money

P4
 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.

P5
 Book keeping Process (Recording)

 Vouchers

 Primary Books (Day Book, Cash Book, Journal)

 Secondary Book (Ledgers)

 Trial Balance (Ledger Summary)

P6
 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

P7
 Who uses these financial statements

 Managers
 Shareholders
 Prospective Investors
 Financial Institutions
 Suppliers
 Customers
 Employees
 Competitors
 General Public
 Governments
P8
 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

P9
 Financial Management

 Planning
 Organizing Business
 directing and controlling Transactions

Such as procurement and utilization of funds of the

enterprise. It means applying general management
principles to financial resources of the enterprise.

P 10
 Key Learning - Basics of Financial management

“Managerial Decisions
can be more
Accurate, Precise & informed
With reasonable
Understanding & Analysis of
Financial Statements”

P 11
 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 12
 Understanding Financial
Statements

P 13
 Balance Sheet

Owner’s Fund (Equity) Fixed Asset

Loan Fund Working Capital

P 14
 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 15
 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 16
 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

P 17
 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

P 18
Surplus carried to Balance Sheet
 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 19
 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 20
 Cash Flow Statement

Changes Due to

Operating Activity

Opening Cash & Cash Financing Activity Closing Cash & Cash
Equivalents
Equivalents
Investing Activity

P 21
 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 22
 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 23
 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 24
 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 25
 Q&A

P 26
 Financial Analysis &
Decision Making

P 27
 Interpreting the Numbers

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

P 28
 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 29
 Liquidity position

 Current Ratio = CA / CL
company's ability to pay back its short-term liabilities
Standard = 2
Less than 1 is alarming
Higher 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 30
•
 Liquidity position

 Cash Ratio = Cash / CL

Most stringent and conservative
Often seen as poor asset utilization for a company to hold
large amounts of cash

 NWC to Total Assets = NWC / TA

Cash 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 31
 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 32
 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 margin
Shows the efficiency of a company in controlling the costs
and expenses associated with business operations
 Profit Margin = Net Income / Sales
Indicator 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 33
 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 34
 Solvency & Security of the loans

 Total Debt Ratio = (TA – TE) / TA

indicates 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 35
 Solvency & Security of the loans

 Debt Service Coverage Ratio = NOP/ Total Debt Service

Measures the company's ability to pay their debts
Increase 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 36
 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.

P 37
 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
P 38
 Management Efficiency

 Fixed Asset Turnover Ratio = Turnover/ Avg. FA

Measures 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 39
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 40
 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 41
 Projecting
Financial Scenarios for
Project Management

P 42
 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 43
 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 44
 Project Analysis

 Net Present Value

NPV 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 45
 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 Outlay

Any concrete costs that can be identified in the past, present or
future. Also referred to as "explicit costs".

P 46
 Project Analysis

 Cash Flow Analysis

study 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 Point

the point at which cost or expenses and revenue are equal:
there is no net loss or gain, and one has "broken even".

P 47
 Project Analysis

 Profitability Life Cycle

To 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 Cost
These 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 48
 Project Analysis

 Opportunity Cost
These 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 Cost
Derivative of total production costs with respect to the level
of output.

P 49
Key Learning – Project Management

“Role of Financial Analysis in

Project Management and its importance in
Project appraisal, Planning and Feasibility Analysis
of the project prior to implementation”

P 50
 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 51
 Thank You

P 52