The presentation is for the senior engineers of GENCOs. it describes the basics of the business, financial statements, the balance sheet and the profit and loss account. The presentation covers also the measures of performance, the cash flow, the liquidity and the sample balance sheet of GENCO for the year 2004-05

1. FINANCE MANAGEMENT
For
SENIOR ENGINEERS OF
MAHAGENCO
By
total output power solutions
Discussed with Balance Sheet of 2004-05
and estimates of 2005-06

2. Business – A perspective
TO UNDERSTAND
HOW A BUSINESS
FUNCTION
IT IS NECESSARY TO HAVE
AN UNDERSTADING OF ITS
COMPONENT PARTS
THE PROBLEM IS NOT AS FORMIDABLE AS IT APPEARS
Much of the subject is already known to Managers
through the work they perform
Out of hundreds of components, there are relatively
few numbers of vital ones.
Even though the subject is complicated, it is based on
Common Sense and can be reasoned out once the
ground rules have been established

3. Business – A perspective
WHY IS THERE A GENERAL LACK OF BUSINESS UNDERSTANDING ?
Understanding of Business through logic is often
obscured by language.
Lots of Business jargons are useful shorthand way of
expressing ideas.
However they tend to create an impenetrable wall
around the subject that excludes or puts off the non-
specialists
The aim of this Session is to show Common Sense and Logic
that underlies the apparent Complexity of Business
Therefore…..

4. Financial Statement
FUNDAMENTAL TO UNDERSTANDING BUSINESS IS THE RECOGNITION
THAT IN FINANCE THERE ARE THREE …
AND ONLY THREE….
DOCUMENTS FROM WHICH WE OBTAIN DATA FOR ANALYSIS OF
BUSINESS
THE BALANCE SHEET
THE PROFIT AND LOSS ACCOUNT
THE CASH FLOW STATMENT
B/S B/S
P&L A/c
Cashflow

5. BALANCE SHEET

6. Financial Statements
BALANCE SHEET
Its an instant snapshot of the assets used in the
business and the funds that are related to those
assets.
PROFITABILITY STATEMENT
Measures the Income and Expenditure for a
defined period and gives the profitability
CASH FLOW STATEMENT
Analyses the Receipts and Payments of Cash
for a defined period and evaluated the Cash
adequacy or inadequacy in the Business
The three Statement are linked to each other and together give a
picture of financial affairs of a business

7. Balance Sheet
MATCHING CONCEPT
LIABILITY + CAPITAL = ASSETS
LIABILITIES
THINGS OWED
ASSETS
THINGS OWNED
LIABILITIES
WHERE
MONEY
OBTAINED
ASSETS
WHERE MONEY
SPENT

8. Balance Sheet
FIVE BOX LAYOUT OF B/S
OWNERS
FUND
(OF)
FIXED ASSETS
(FA)
LONG
TERM
LIABILITIES
(LTT)
CURRENT
CURRENT ASSETS
LIABILITIES (CA)
(CL)

9. Balance Sheet
FA NFA L&B, P&M etc
LTI Shares, Debentures
Intangibles Goodwill, Patents, Licenses
CA Inventory RM, WIP, FG, Spares
Receivables Sundry Debtors
Cash Cash, Bank, STD
Misc. Prepayments, Advances etc
CL Payables Creditors
STL Bank O/D, WCL
Misc. Accrued payments, Tax, Div due
LTT All Term Loans Debts with term > 1 year
Medium 3-5 yrs.
Long 6-20 yrs.
OF Issued Common Stock
Capital Reserves
Revenue Reserves/ General Reserves/ RE

10. Balance Sheet
FIVE BOX LAYOUT OF B/S
OWNERS
FUND
(OF)
FIXED ASSETS
(FA)
LONG
TERM
LIABILITIES
(LTT)
CURRENT
CURRENT ASSETS
LIABILITIES (CA)
(CL)
TA = CA + FA
TA = OF + LTT + CL
TOTAL ASSETS (TA)

11. Balance Sheet
FIVE BOX LAYOUT OF B/S
OWNERS
FUND
(OF)
(FA)
LONG
TERM
LIABILITIES
(LTT)
(CL) (CA)
CE = OF + LTT
CE = FA + CA - CL
CAPITAL EMPLOYED (CE)

12. Balance Sheet
FIVE BOX LAYOUT OF B/S
OWNERS
FUND
(OF)
(FA)
(LTT)
(CL)
(CA)
NW = TA - CL - LTT
NW = FA + CA - CL - LTT
NET WORTH (NW)

13. Balance Sheet
FIVE BOX LAYOUT OF B/S
OWNERS
FUND
(OF)
FIXED ASSETS
LONG
TERM
LIABILITIES
(LTT)
CURRENT
CURRENT ASSETS
LIABILITIES (CA)
(CL)
WC = CA - CL
WC = OF + LTT - FA
WORKING CAPITAL (WC)

14. PROFIT & LOSS ACCOUNT

15. Labour
O&MAdmin
Material
Revenue From Sale Other Income
SALES
Operating Cost
PBDIT
Depreciation
PBIT
Interest
PBT
Tax
PAT
Div
RE
Revenue/Cost/Profitability

16. MEASURES OF PERFORMANCE

17. Return On Investment
RETURN ON TOTAL ASSETS - ROTA
RETURN ON CAPITAL EMPLOYED - ROCE
RETURN ON EQUITY - ROE

18. P&L A/c B/S
Sales 1120 FA OF
Operating Cost 1008
360
PBIT 112 LTL
Interest 20 480
PBT 92 200
Tax 32 CA
PAT 60 CL
Dividends 24 320 240
RE 36 800 800
P&L Account Balance Sheet
PBIT 112 TA 800
PBT 92 CE 560
PAT 60 NW 360
ROTA
Return On Total Assets
PBIT / TA x 100 = 14%

19. Return On Capital Employed
P&L A/c B/S
Sales 1120 FA OF
Operating Cost 1008
360
PBIT 112 LTL
Interest 20 480
PBT 92 200
Tax 32 CA
PAT 60 CL
Dividends 24 320 240
RE 36 800 800
P&L Account Balance Sheet
PBIT 112 TA 800
PBT 92 CE 560
PAT 60 NW 360
ROCE PBT / CE x 100 = 16%

20. P&L A/c B/S
Sales 1120 FA OF
Operating Cost 1008
360
PBIT 112 LTL
Interest 20 480
PBT 92 200
Tax 32 CA
PAT 60 CL
Dividends 24 320 240
RE 36 800 800
P&L Account Balance Sheet
PBIT 112 TA 800
PBT 92 CE 560
PAT 60 NW 360ROE
RETURN ON EQUITY
PAT / NW x 100 = 17%

21. Components Of ROTA
ROTA = Profit Margin x Asset Turnover
PBIT/ TA = PBIT/ Sales x Sales / TA
112 / 800 = 112 / 1120 x 1120 / 800
14 % = 10 % x 1.4 times
ROTA 14%
Sales Margin 10% Asset Turnover 1.4
D
R
I
V
E
R
S
The drivers of this
ratio are the cost
items in the profit
and loss account
The drivers of this
ratio are the
separate assets in
the balance sheet

22. P&L A/c B/S
Sales 1120 OF FA
Operating Cost
Materials 426 Intangibles 0
Labor 291 Net Fixed 440
Factory OH 168 360 Investments 40
Admin/ Selling 123 LTL 480
Total Operating Cost 1008 CA
200
PBIT 112 CL Inventory 128
Interest 20 Receivables 160
PBT 92 Cash 20
Tax 32 Misc. 12
PAT 60 240 Cash 320
Dividends 24 800 800
RE 36
ROTA 14%
Sales Margin 10%
Material / Sales
426 / 1120 = 38%
Labor / Sales
291/ 1120 = 26%
Fac. OH / Sales
168 / 1120 = 15%
Adm./Selling / Sales
11%
Sales
Turnover
1120 / 800 1.4
Sales/ FA
1120 / 440
2.5 times
Sales/
Inventory
1120 / 128
8.7 times
Sales/
Receivables
1120/ 160
7 times
Components Of ROTA

23. CASH FLOW

24. Labour
Other Exp. Depreciation
RoEAccounts Payable
Raw Material Work-in-Progress
Finished Goods
CASH
Accounts Receivable
Cash Flow Cycle Of Business
With each full circuit
from Cash
to accounts payable
to inventory
to accounts receivable
to Cash,
the amount in circulation is increased by profit/RoE and Depreciation.

25. Labour
Other Exp. Depreciation
RoEAccounts Payable
Raw Material Work-in-Progress
Finished Goods
CASH
Accounts Receivable
Interest
Cash Flow Cycle Of Business

26. Labour
Other Exp. Depreciation
RoEAccounts Payable
Raw Material Work-in-Progress
Finished Goods
CASH
Accounts Receivable
Interest
Short Term Loan
Cash Flow Cycle Of Business

27. Labour
Other Exp. Depreciation
RoEAccounts Payable
Raw Material Work-in-Progress
Finished Goods
CASH
Accounts Receivable
Interest, Tax, New Long term
Dividends Loans
Loan New Equity
Repayment
Capital
Expenditure
Short Term Loan
Cash Flow Cycle Of Business

28. LIQUIDITY

29. Short term Liquidity
Short term liquidity position of Business is
measured by comparing the values of
Current Assets with its Current Liabilities
Current Ratio
Quick Ratio
Working Capital to Sales Percentage
Interest Cover

30. Current Ratio
Current Assets / Current Liabilities
Cash or near Cash
assets available to the
business
This is the indication of the
upcoming cash requirements
of the business
Any Value comfortably in excess of 1 should do for a
business. The ideal Ratio would be 1.25 to 2
The current ratio is to be viewed in the wide diversity of
conditions that exists in different business. Some
Companies have to carry large stocks, have long production
cycles, give long credit and so on, while other business carry
almost no stock and receive more credit that they carry.

31. Quick Ratio
(Current Assets – Inventory) / Current Liabilities
The ideal Ratio would be 1
A constant Current Ratio, but falling Quick Ratio would be dangerous. It
tells us that Inventory is building up at the expense of cash
Liquidity of Inventory could be a problem hence excluded for Quick Ratio
In calculating quick ratio only those assets are considered which can be
quickly converted into cash if the need were to arise.
A cargo of crude oil in port has a high liquidity value whereas a stock of
fashion garment in a warehouse probably has a low one.
Though both ratios are very widely used, they are
Static and reflect values at a point of time

32. W.Cap to Sales Ratio
(C A – C L) / Sales
It is possible to have a stable current ratio & quick ratio while
this ratio is falling. This is a condition know as Overtrading
which indicates that there are not sufficient resources in the
B/S to carry the level of existing business.
Whereas the previous ratios use B/S figures only, this ratio relates the
short term surplus liqudity to the annual operating cash flow from P&L
account. Thus it will highligh a trend which the other ratios may miss
This would call for injection of long term liquid funds.

33. Working Capital Days
Goods are
recd. On
day 0
Goods are
sold on
day 44
Payment
recd. on
day 85
Cash paid
to Supplier
on day 26
Cash recd
from
customer
on day 85
Acconts payable
Days 26
Inventory
Days 44
Acconts Receivable
Days 41
Time gap cash-out/cash-in
The funding requirement
on the company is 59 days

34. Interest Cover Ratio
Shows Company’s ability to service the borrowings
PBIT Interest cost
= number of times cover
PDBIT Debt Service
= number of times cover

Interest
+
Loan
Repayment

35. Debt to Equity Ratio
Most fundamental measure in Corporate Finance
Test of Financial Strength of a Company
The purpose of the ratio is to measure the
mix of funds in the balance sheet and to
make a comparison between those funds
that have been supplied by owner and
those which have been borrowed .
Different meanings given to term Debt
• Long term loans only
• Long term & Short term loans
• Long term loans plus all Current Liabilities
The ideal mix is 70 : 30, but can differ for each Industry

36. Debt/Equity why important
Debt increases both Profit and Risk
If it goes wrong, the Co. has a real long term
problem; one which may become terminal
Companies in business with very predictable
income streams e.g. property leasing have
high level of debts, whereas Companies in
highly volatile sectors e.g. mine exploration
fund mainly from equity

37. Leverage
Option Equity Debt
1 100 0
2 80 20
3 60 40
4 50 50
5 40 60
6 20 80
7 10 90
Degree of leverage and impact on RoE
Rs Crs.
* Tax is ignored
PBIT - Rs 15 Crs
Interest rate - 10 % p.a.
PBIT Interest PBT RoE *
15 0 15 15.00%
15 2 13 16.25%
15 4 11 18.33%
15 5 10 20.00%
15 6 9 22.50%
15 8 7 35.00%
15 9 6 60.00%

38. Long & Short Analysis
Balance Sheet 2004 2005 Sources Use
Fixed Assets 22500 32500 10000
Current Assets
Inventory 12500 14350 1850
Debtors 15000 16000 1000
Cash 1750 0 1750
Total Assets 51750 62850
Liabilities
Capital 18000 18000
Reserves 9500 10750 1250
Long term loan 8000 9000 1000
Current Liabilities
Creditors 13750 17000 3250
Short term loans 0 5100 5100
tax due 2500 3000 500
Total Liabilities 51750 62850 12850 12850
Reserves 1250
Long term loan 1000
2250
Short term loans 5100
Creditors 3250
tax due 500
Cash 1750
10600
Fixed Assets 10000
10000
Inventory 1850
Debtors 1000
2850
12850
Sources
Use
L
O
N
G
L
O
N
G
S
H
O
R
T
S
H
O
R
T

39. Fund flow Analysis
2850
2250
7750
10000
2850
Sources Use
L
O
N
G
S
H
O
R
T
2250
10600
Sources Use
L
O
N
G
S
H
O
R
T
Ideal
Pattern
Of Cash
Flow

40. Perspective For Future
Share Values
Market Capitalisation
Earning per Share
Dividend per Share
Dividend Cover
Payout Ratio
Price Earning Ratio
Dividend Yield
Business Valuation

41. NET WORTH
LONG TERM LIABILITY
CURRENT LIABILITY
FIXED ASSETS
CURRENT ASSETS
Equity 2691
Reserves 0
2691
GoM Loans 0
PFC Loans 722
Other Term Loans 582
1305
1280
Short term loans 0
Accounts Payable 1279
Net Fixed Assets 3903
Assets under Const. 185
Intangible Assets 10
4098
1177
5275 5275
RS CRORES
Cash & Bank 15
Stock 531
Other receivables 633
31st March 2004
Balance Sheet of Genco

42. Rs Crores
SR. ITEM 2004-05
NO. Provisional
A INCOME
1 Electricity Sales 6435.00
2 Miscellaneous Revenue 25.00
TOTAL A 6460.00
B EXPENSES
1 Fuel 4930.00
2 Operation & Maintenance 356.00
3 Establishment Expenses 363.00
4 Administration & General 28.00
5 Depreciation 447.00
6 Interest 345.00
7 Others 14.00
8 Expenses of prior period 85.00
9 Expenses capitalised -45.00
TOTAL B 6523.0
C NET SURPLUS (A-B) -63.00
Results – 2004-05

43. NET WORTH
LONG TERM LIABILITY
CURRENT LIABILITY
FIXED ASSETS
CURRENT ASSETS
Equity 2691
Reserves -63
2628
GoM Loans 0
PFC Loans 1049
Other Term Loans 493
1542
1331
Short term loans 0
Accounts Payable 1331
Net Fixed Assets 3593
Assets under Const. 665
Intangible Assets 8
4267
1235
5502 5502
RS CRORES
Cash & Bank
Stock
Other receivables
31st March 2005
Balance Sheet of Genco

44. Rs Crores
SR. ITEM 2005-06
NO. Estimatel
A INCOME
1 Electricity Sales 6500
2 Miscellaneous Revenue 15
TOTAL A 6515
B EXPENSES
1 Fuel 5037
2 Operation & Maintenance 404
3 Establishment Expenses 359
4 Administration & General 35
5 Depreciation 447
6 Interest& Fin charges 123
TOTAL B 6405
C NET SURPLUS (A-B) 110
4/6/05 to
31/3/06
5416
13
5429
4197
337
299
29
373
102
5337
92
Revenue Budget 2005-06

45. Fuel 5037
Employee Claims 359
Administration expenses 35
Interest & Finance
charges 159
Repaymet of Loans 228
Repairs & Maintenance 404
TOTAL 6222
Revenue from sale of
power 6500
MiscellaneousRevenue 15
TOTAL 6515
Estimated Cash Surplus 293
PAYMENTS
RECEIPTS Rs Crores 2005-06
Proportion of cashflow
O&M Expenses
6%
Admin, General
1%
Loan Repayment
3%
Finance Charges
0%
Generation Costs
78%
Employee Cost
6%
Surplus
4%
Interest
2%
Cash flow Projection

46. 31.3.04 31.3.05
TOTAL DEBT 1305 1542
EQUITY 2691 2691
DEBT EQUITY RATIO 33: 67 36 : 64
IDEAL DEBT EQUITY MIX IS 70 : 30
Rs Crores
Existing Equity proportion being very high, it can be leveraged
by debts manifold. But the problem is of getting 100% debt
finance for projects. Hence we have to rely on internal
accruals upto 20% of project cost for new projects.
Debt Equity Ratio

47. 31.3.04 31.3.05
CURRENT ASSETS 1177 1235
CURRENT LIABILITIES 1280 1331
CURRENT RATIO 0.92 0.93
IDEAL CURRENT RATIO IS 2:1
Rs Crores
Current Ratio

48. 2005 2006
REVENUE 6435 6500
INTEREST COST 345 94
Percentage of Revenue 5.36 1.45
Decrease in this ratio indicates efficiency in cost of funding.
Rs Crores
Impact of FRP
Interest Turnover

49. DSCR INDICATES THE PROPORTION OF CASH AVAILABLE WITH AN
ENTITY FOR SERVICING THE DEBTS.
IDEAL DSCR IS 1.1 TO 1.25
A DSCR OF LESS THAN 1 INDICATES CASH DEFICIT
2005 2006
INTEREST & FINANCE
CHARGES (A) 345.03 159
LOAN REPAYMENT (B) 342.60 228
TOTAL DEBT
SERVICING (A) +B) 687.64 387
SURPLUS (C) 728.56 679.70
(Before Interest &
Depreciation)
DEBT SERVICE
COVERAGE [C/(A+B)] 1.06 1.76
Rs Crores
Debt Service Cover