Finance for non Finance Executives - Part 1 : Understanding Finance and Finance Terms

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Finance for non Finance Executives - Part 1 : Understanding Finance and Finance Terms

  1. 1. Why Finance for Non Finance Managers You can argue that everything a business does is somehow a financial activity You lose a customer… it impacts revenue You extend credit period to dealer… it increases working capital requirement….increases A/c Receivable Period. Non Financial Managers in organization can still benefit from understanding finance because.. They will be aware of how their decisions impact the overall financial health of organization.(C) Learning Made Simple (www.learningmadesimple.webs.com) Prepared by, Kaushal Mandalia (kaushalmandalia@gmail.com, +919825300447)
  2. 2. Three Basic Principles Investment Principle Every business invest in assets and incur debt Financing Principle Business can finance their operations with a mixture of tools that includes investments in assets or borrowing money such as loans Dividend Principle Successful business should return some money to its investor.(C) Learning Made Simple (www.learningmadesimple.webs.com) Prepared by, Kaushal Mandalia (kaushalmandalia@gmail.com, +919825300447)
  3. 3. Understanding Finance and Finance TermsMr. Kaushal Mandaliakaushal@insightHR.co.inwww.InsightHR.co.in+919825300447(C) InsightHR, www.insightHR.co.in Prepared by, Kaushal Mandalia (kaushal@insightHR.co.in, +919825300447)
  4. 4. What we cover in this module Understanding Balance Sheet, Assets – Liabilities Understanding PL Statement Shareholder’s Wealth Maximization Important Accounting Principals(C) InsightHR, www.insightHR.co.in Prepared by, Kaushal Mandalia (kaushal@insightHR.co.in, +919825300447)
  5. 5. Balance Sheet and PL Account Balance Sheet Company’s Financial Health Profit and Loss Account Company’s Performance and Achievements(C) InsightHR, www.insightHR.co.in Prepared by, Kaushal Mandalia (kaushal@insightHR.co.in, +919825300447)
  6. 6. Balance Sheet Financial Health refers to company’s ability to.. Secure adequate resources to finance its future. Maintain and Expand efficient operations. Properly support its marketing efforts Use technology to profitable advantages Successfully compete(C) InsightHR, www.insightHR.co.in Prepared by, Kaushal Mandalia (kaushal@insightHR.co.in, +919825300447)
  7. 7. Balance Sheet By Analyzing Balance Sheet, we can evaluate company’s asset management performance. This includes Inventory (Inventory Turnover Ratio) Customer Credit (Mgmt of Account Receivables) Total Asset Turnover (Capital Intensity and Mgmt Efficiency)(C) InsightHR, www.insightHR.co.in Prepared by, Kaushal Mandalia (kaushal@insightHR.co.in, +919825300447)
  8. 8. Book keeping (Accounting) Every time organization performs a transaction of any kind, it gets recorded in book… Accounting has very fundamental equation Total Assets = Total Liabilities + Equity Value of the Company is the difference between what company own and what it owes Equity = Total Assets – Total Liabilities Accounting has very fundamental equation(C) InsightHR, www.insightHR.co.in Prepared by, Kaushal Mandalia (kaushal@insightHR.co.in, +919825300447)
  9. 9. Recording Transactions Assets and Expense Account increases with debit and decreases with Credit Liability, equity and revenue account increases with credit and decreases with debit(C) InsightHR, www.insightHR.co.in Prepared by, Kaushal Mandalia (kaushal@insightHR.co.in, +919825300447)
  10. 10. Summarized Balance Sheet – TATA MOTORS Ltd Assets Liabilities(C) Learning Made Simple (www.learningmadesimple.webs.com) Prepared by, Kaushal Mandalia (kaushalmandalia@gmail.com, +919825300447)
  11. 11. Summarized Balance Sheet Summarized Balance Sheet – TATA MOTORS Ltd MOTORS Ltd(C) Learning Made Simple (www.learningmadesimple.webs.com) Prepared by, Kaushal Mandalia (kaushalmandalia@gmail.com, +919825300447)
  12. 12. Balance Sheet Three Sections Assets : The item of value owned by company Liabilities : The Company’s obligation, whether to pay for or provide goods or services at a future date. Equity : Amount of Net Assets(C) InsightHR, www.insightHR.co.in Prepared by, Kaushal Mandalia (kaushal@insightHR.co.in, +919825300447)
  13. 13. Balance Sheet - Assets Financial Representation of what company owns Cash Marketable Securities Account Receivables Inventory Current Assets Investments Fixed Assets(C) InsightHR, www.insightHR.co.in Prepared by, Kaushal Mandalia (kaushal@insightHR.co.in, +919825300447)
  14. 14. Balance Sheet - Liabilities Financial Representation of what company owes to others A/c Payable Long term Debt Other Current Liabilities and Provisions(C) InsightHR, www.insightHR.co.in Prepared by, Kaushal Mandalia (kaushal@insightHR.co.in, +919825300447)
  15. 15. Balance Sheet – Stockholder’s Equity Cumulative amount of money that all owners of the business have invested in the business. Preferred Stock Common Stock Retained Earnings(C) InsightHR, www.insightHR.co.in Prepared by, Kaushal Mandalia (kaushal@insightHR.co.in, +919825300447)
  16. 16. What Balance Sheet Tells You Summary of the organization’s assets and the claim against those assets as of a specific date. Information about the organization’s current ability to pay its current debt. How organization is positioned to keep going with the day to day business operations.(C) InsightHR, www.insightHR.co.in Prepared by, Kaushal Mandalia (kaushal@insightHR.co.in, +919825300447)
  17. 17. What Balance Sheet does not Tell You How any profits were made. Which assets creditors have claimed against. What kind of capital investment (Land, Building etc) was made. What value the business would have on the market place.(C) InsightHR, www.insightHR.co.in Prepared by, Kaushal Mandalia (kaushal@insightHR.co.in, +919825300447)
  18. 18. P&L Account – Income Statement It describes performance of the company over a period of time. It talks about company’s achievements (Revenue) and also the resources (Expenses) Elements Revenue : Incoming assets in return of sold goods or services Expenses : Outgoing assets or liabilities incurred Net Income : Difference between Revenue and Expense(C) InsightHR, www.insightHR.co.in Prepared by, Kaushal Mandalia (kaushal@insightHR.co.in, +919825300447)
  19. 19. Summarized Income Statement – TATA MOTORS Ltd(C) Learning Made Simple (www.learningmadesimple.webs.com) Prepared by, Kaushal Mandalia (kaushalmandalia@gmail.com, +919825300447)
  20. 20. Summarized Income Statement Summarized Income Statement TATA MOTORS Ltd TATA MOTORS Ltd(C) Learning Made Simple (www.learningmadesimple.webs.com) Prepared by, Kaushal Mandalia (kaushalmandalia@gmail.com, +919825300447)
  21. 21. Income Statement - Details Revenue Cost of Goods Sold Gross Margin General and Administrative Expense Depreciation expense Income before tax Tax Income After Tax Retained Earning Cash Dividend(C) InsightHR, www.insightHR.co.in Prepared by, Kaushal Mandalia (kaushal@insightHR.co.in, +919825300447)
  22. 22. What an Income Statement Tells You Main sources of Income Earned Secondary Sources of Income Earned Profitability of the Organization(C) InsightHR, www.insightHR.co.in Prepared by, Kaushal Mandalia (kaushal@insightHR.co.in, +919825300447)
  23. 23. What an Income Statement does not Tell You Any prediction for future net income The exact amount of net income that was generated during the period with reference to the business activities done in that particular year. Amount of Cash on Hand(C) InsightHR, www.insightHR.co.in Prepared by, Kaushal Mandalia (kaushal@insightHR.co.in, +919825300447)
  24. 24. Cash Flow Statement Cash Flow Cash Coming in Revenue, Other Income Cash Going out Expenses, Tax, Interest etc Cash Flow = Cash Coming in – Cash Going out Lets take an example(C) InsightHR, www.insightHR.co.in Prepared by, Kaushal Mandalia (kaushal@insightHR.co.in, +919825300447)
  25. 25. Cash Flow Statement Naveen Enterprise Initial investment = 100 million whereby 80 million on plant & Machineries and 20 million on net working capital. Project will be financed with Rs 45 million of equity, 5 million of preference share capital, 50 million of debt capital. Preference capital will carry dividend rate of 15%, debt capital carries interest of 15%. The life of the project is 5 years. At the end of 5 years, fixed assets will fetch a net salvage value of Rs 30 million whereas net working capital will be liquidated at its book value. The project is expected to generate revenue of 120 million per year. Expense is 80 million a year. Tax rate is 30% Depreciation schedule is as follows, 1st year = 20 million, 2nd year = 15 million, 3rd year = 11.25 million, 4th year = 8.44 million, 5th year = 6.33 million Estimate the Project Cash Flow(C) InsightHR, www.insightHR.co.in Prepared by, Kaushal Mandalia (kaushal@insightHR.co.in, +919825300447)
  26. 26. Cash Flow Statement(C) InsightHR, www.insightHR.co.in Prepared by, Kaushal Mandalia (kaushal@insightHR.co.in, +919825300447)
  27. 27. (C) InsightHR, www.insightHR.co.in Prepared by, Kaushal Mandalia (kaushal@insightHR.co.in, +919825300447)

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