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FINANCE FOR NON-FINANCIAL MANAGERS

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FINANCE FOR NON-FINANCIAL MANAGERS

  1. 1. Welcome! Introductions Accounting Management Services : inspiring achievement
  2. 2.  The difference between good and excellent companies is training.  The only thing worse than training employees and losing them, is not to train them and keep them.’’ ...Zig Ziglar Accounting Management Services : inspiring achievement
  3. 3. Accounting Management Services inspiring achievement Accounting Management Services : inspiring achievement
  4. 4.  Which of the following financial statements would you look at first?  Income Statement (profit and loss account) or  Balance sheet Accounting Management Services : inspiring achievement
  5. 5. OBJECTIVES Upon completion of the workshop, participants will be able to: • Interrogate and ask pertinent financial questions. • Spot the key points in a financial statement • Understand the numbers in order to help them make sound business decisions • Understand better the financial objectives of their organization. • Understand the financial implications of their day-to-day decisions • Make better use of the resources allocated to their divisions Accounting Management Services : inspiring achievement
  6. 6. COURSE CONTENTS 1. TALK AND UNDERSTAND THE KEY BASIC ACCOUNTING LANGUAGE  Definitions - Terms – The accounting equation  The Function of Accounting - Fundamentals of Accounting Accounting for Business Transactions 2. UNDERSTANDING KEY ACCEPTED ACCOUNTING PRINCIPLES  The Environment of Financial Accounting - Basic Accounting Principles  Application of Accounting Principles - Structure of Financial Statements 3. HOW TO SPOT THE KEY POINTS IN A FINANCIAL STATEMENT  Income Statement Analysis  Balance Sheet Structure  Cash Flow Analysis  Ratio Analysis Accounting Management Services : inspiring achievement
  7. 7. Introduction to Chart of Accounts A chart of accounts is a listing of the names of the accounts that a company has identified and made available for recording transactions in its general ledger. Within the chart of accounts you will find that the accounts are typically listed in the following order: Accounting Management Services : inspiring achievement
  8. 8.  Accounting is based on the fundamental equation:  Total Assets = Total liabilities + Equity  This means that the difference between what the company owns (Assets) and what it owes ( liabilities) is Equity.  Equity can be defined as the business owner’s share of the business at historical book value.  Equity is made up of capital introduced into business plus accumulated profits or losses.  Thus the assets of a company can be financed in part by liabilities and in part shareholder’s equity.  Liabilities can be short-term (trade creditors) or long- term (bank borrowing)Accounting Management Services : inspiring achievement
  9. 9.  The matching concept relates to how the company should record its revenue and expenses.  Expenses must be recognized (recorded) in the same period as the revenue it relates to regardless of when the actual expense has been paid for.  Eg if Rukore bakeries hires a truck to deliver bread in March, but receives the invoice in April for the March bread delivery, such expense should be assigned to the month of March . Accounting Management Services : inspiring achievement
  10. 10.  Accrual basis accounting captures the financial aspects of each economic event in the accounting period in which it occurs, regardless of when the cash changes hands  Management should know what expenses incurred and recorded and which were accrued for (provisions). Accounting Management Services : inspiring achievement
  11. 11.  Revenue is earned and recognized upon product delivery or service completion without regard to the timing of cash flow.  Suppose a store orders 500 wheelbarrows from a wholesaler in March, receives them in April, and pays for them in May.  When does the wholesaler recognize the revenue. Accounting Management Services : inspiring achievement
  12. 12.  The profit and loss account (statement) is now called:  The statement of comprehensive income.  At certain periodic ends, each business wants to know how well it is doing.  Is it earning a profit?  Is it losing money?  Just how well is it doing compared to other firms?  Is it likely to be able to earn a profit in the future?  To answer these questions, it uses an Income Statement. Accounting Management Services : inspiring achievement
  13. 13.  The Income Statement communicates the inflow of revenue , and the outflow of expenses , over a given period of time.  Revenue is the income earned by the company in return for services performed, or goods sold.  Expenses are the obligations incurred while generating revenue.  The difference between these two is the Net Income .  An Income Statement therefore shows the operating profit (or loss) , hence the name Profit and Loss statement. Accounting Management Services : inspiring achievement
  14. 14.  Managers should understand key performance indicators on the income statement.  Gross profit  Earning before interest and tax & amortization (EBITA)  Monitor expenditure via Variance analysis -compare actual results with budget, forecast, prior year Accounting Management Services : inspiring achievement
  15. 15.  Understand your Gross Profit %.  Gross profit is the sales minus cost of sales  Gross profit is the profit left to finance the business operating overheads.  It must be enough to cover all operating expenses and leave a profit.  Continuously monitor gross margin ratio to be certain it will result in a gross profit that will be sufficient to cover sales and administrative expenses.  Gross margin ratios vary between industries, compare your company's gross margin ratio to companies within your industry  Compare to previous period and budget.  Ask for a report on drivers of the major variances and rectify. Accounting Management Services : inspiring achievement
  16. 16.  Earning before Interest and Tax is a key statistic for any business.  This is the profit generated by the business from operations.  Should be enough to cover borrowing costs, ie interest and taxes leaving retained income.  Retained Income is not synonymous to cash  Get summary breakdown on significant increases in operating expenses against the norm Accounting Management Services : inspiring achievement
  17. 17.  Revenue expenses and capital expenses  Only revenue expenses are recorded in the Income Statement  Revenue expenses are expenses incurred during the day to day trading activities  Capital expenses are incurred not in the generation of revenue but for the maintenance of / or expansion of business earning power  Flour for bread production : capital or revenue expense?  Bought delivery truck: Capital / revenue expense? Accounting Management Services : inspiring achievement
  18. 18. Accounting Management Services : inspiring achievement
  19. 19.  Known as Statement of Financial Position  The Balance Sheet is named as such because the total of the assets must equal the total of the liabilities and equity.  What a company owns equals what it owes to its creditors and owners  Shows the financial health position of the company  Perpetual statement -ongoing for the life of the organisation Accounting Management Services : inspiring achievement
  20. 20. 31 Dec 2014 31 Dec 2013 CAPITAL EMPLOYED - Share capital (15 000) (15 000) - Distributable reserves (5 500) (2 500) Total shareholders' funds (20 500) (17 500) - Loans - bank (750) (1 500) TOTAL CAPITAL EMPLOYED (21 250) (19 000) EMPLOYMENT OF CAPITAL Tangible fixed assets 19 000 18 400 Total Long Term Assets 19 000 18 400 Current Assets - Stock 3 405 2 350 - Third party debtors 1 402 1 159 - Cash balances 1 500 1 081 Total Current Assets 6 307 4 590 Current Liabilities - Third party creditors (3 002) (2 590) - Provisions (450) (650) - Taxation (605) (750) Total Current Liabilities (4 057) (3 990) Net current assets/(liabilities) 2 250 600 TOTAL EMPLOYMENT OF CAPITAL 21 250 19 000 Accounting Management Services : inspiring achievement
  21. 21. Accounting Management Services : inspiring achievement  Get detailed ageing of debtors  Get detailed ageing of creditors  Get creditor reconciliation on major creditors and overdue accounts
  22. 22.  Debtors days  Creditors days  Stock days  Cash conversion circle (CCC) Accounting Management Services : inspiring achievement
  23. 23.  This looks at the number of days needed to collect on credit sales  Debtors days should be in line with credit policy.  Get reconciliation on past due debtor balances  Circularize debtors to confirm amount outstanding Accounting Management Services : inspiring achievement
  24. 24. • This involves the company's payment of its own bills . • If this can be maximized, the company holds onto cash longer, maximizing its investment potential; • therefore, a longer DPO is better  Creditors days- effects of not paying creditors in time- loss business  Effect of strained supplier relations  Misappropriated funds  Services rendered for private business Accounting Management Services : inspiring achievement
  25. 25.  This addresses the question of how many days it takes to sell the entire inventory.  The smaller this number is, the better  Care should be taken to keep optimal stock holding  Excessive stock holdings tie up cash Accounting Management Services : inspiring achievement
  26. 26.  The cash conversion cycle (CCC) attempts to measure the time it takes a company to convert its investment in inventory and other resource inputs into cash  The CCC is a combination of several activity ratios involving debtors, creditors and inventory turnover  Generally, the lower this number is, the better for the company Accounting Management Services : inspiring achievement
  27. 27. Item Fiscal Year 2013 Fiscal Year 2012 Revenue 9,000 Not needed COGS 3,000 Not needed Inventory 1,000 2,000 A/R 100 90 A/P 800 900 Average Inventory (1,000 + 2,000) / 2 = 1,500 Average AR (100 + 90) / 2 = 95 Average AP (800 + 900) / 2 = 850 Accounting Management Services : inspiring achievement
  28. 28.  Formula  The cash conversion cycle is calculated by adding the days inventory outstanding to the days sales outstanding and subtracting the days payable outstanding.  All three of these smaller calculations will have to be made before the CCC can be calculated.  Accounting Management Services : inspiring achievement
  29. 29. Accounting Management Services : inspiring achievement
  30. 30.  A cash flow statement shows the source and applications (uses) of funds / cash in the business Accounting Management Services : inspiring achievement
  31. 31. Accounting Management Services : inspiring achievement
  32. 32.  The sources of funds (cash) are from the:  Operating activities  Investing activities  Financing activities • The net movement from the three activities will show cash generated (positive) or cash used (negative) in the period under review Accounting Management Services : inspiring achievement
  33. 33.  The operating activities are the day to day normal business trading activities which could result in a profit or loss after adjusting for non cash flow activities such as depreciation  To the above we add the working capital movement which can be  Increase / Decrease in stock  Increase / Decrease in debtors  Increase / Decrease in creditors • The sum of the above will result in either cash generation or cash utilization for the period under review Accounting Management Services : inspiring achievement
  34. 34. Accounting Management Services : inspiring achievement
  35. 35.  Investing activities are the actions of buying and disposal of assets.  These activities generate and or utilize cash.  Examples:  Bought a delivery van for $15,000  Sold bakery oven for $4,500 Accounting Management Services : inspiring achievement
  36. 36.  Source and or application of funds can arise out of financing activities.  These can be:  Injection of additional capital into business  Payment of dividend  Long term loan borrowings  Long term loan repayments Withdrawals by a sole proprietorship will affect the company's balance sheet through the reduction of the asset withdrawn and a reduction in owner's equity Accounting Management Services : inspiring achievement
  37. 37.  Generally, financial ratios are classified on the basis of function or test, on the basis of financial statements, and on the basis of importance.  These three classifications are briefly discussed below: Accounting Management Services : inspiring achievement
  38. 38.  On the basis of function or test, the ratios are liquidity ratios, profitability ratios, activity ratios and solvency ratios.  Liquidity Ratios:  Liquidity ratios measure the adequacy of current and liquid assets and help evaluate the ability of the business to pay its short-term debts.  Short-term creditors like suppliers of goods and commercial banks use liquidity ratios to know whether the business has adequate current and liquid assets to meet its current obligations Accounting Management Services : inspiring achievement
  39. 39.  Four commonly used liquidity ratios are given below:  Current ratio or working capital ratio  Quick ratio or acid test ratio  Absolute liquid ratio  Current cash debt coverage ratio  Unfortunately, liquidity ratios are not true measure of liquidity because they tell about the quantity but nothing about the quality of the current assets and, therefore, should be used carefully Accounting Management Services : inspiring achievement
  40. 40.  Profitability ratios measure the efficiency of management in the employment of business resources to earn profits.  Some important profitability ratios are given below:  Net profit (NP) ratio  Gross profit (GP) ratio  Expense ratio  Return on capital employed ratio Accounting Management Services : inspiring achievement
  41. 41.  Activity ratios (turnover ratios) measure the efficiency of a company in generating revenues by converting its production into cash or sales.  Activity ratios show how frequently the assets are converted into cash or sales  Some important activity ratios are:  Inventory turnover ratio  Receivables turnover ratio  Average collection period  Accounts payable turnover ratio Accounting Management Services : inspiring achievement
  42. 42.  The ratios are only as good as the data upon which they are based and the information with which they are compared.  Based on historical cost, which can lead to distortions in measuring performance  Problem of achieving comparability among firms in a given industry. Accounting Management Services : inspiring achievement
  43. 43.  Why pay for the overheads of your Accounting consultants. Pay only for the service rendered.  Come over to Accounting Management Services Contact Pedzisai Chiwota +263 778 464 887 pchiwota@yahoo.com Accounting Management Services : inspiring achievement
  44. 44. THE END: THANK YOU Accounting Management Services : inspiring achievement

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