This document provides an introduction to a course on financial management. It outlines the syllabus which will cover topics such as financial statements, ratio analysis, working capital management, time value of money, capital budgeting, and cost of capital. The document explains what will be included in each section of the syllabus. It also presents some introductory information on key financial concepts like the balance sheet, income statement, assets, liabilities, and cash flow statements. Rules for the course emphasize the importance of group work and that the lecturer acts as a facilitator rather than teacher.

1. WELCOME
TO
THE COURSE ON FINANCIAL
MANAGEMENT
BY
T.VENKATARAMANAN.FICWA.FCS.
1

2. Your syllabus
 Financial statements –
nature,limitations,analysis and
tools&techiniques
 Ratio analysis
 Cash and fund flow statements.
 Theory and plg. Of working capital-working
capital financing
2

3. Syllabus –continued.
 Cash management
 Inventory management
 Receivables management
 Time value of money.
 Capital BUDGETING
 Cost of capital.
3

4. Rules of the game
 There is no gain with out pain.
 Use it or lose it
 Many heads are better than one.Relie on group
discussions.
 The lecturer is only facilitator of the groups and
not a teacher, only a guide and a coordinator
,aid and not an assistant ,rendering a service
and not selling a product.
4

5. INTRODUCTION
 THE TERM FINANCIAL STATEMENTS
 STANDS FOR
 THE BALANCE SHEET
 THE INCOME STATEMENT /
 THE PROFIT AND LOSS A/C AND
 THE CASH FLOW STATEMENTS
5

6. THE BALANCE SHEET
 WHAT IT IS?
 BRIEFLY STATED IT IS A STATEMENT OF
ASSETS AND LIABILITIES OF A
 BUSINESS ORGANISATION ON A GIVEN
POINT OF TIME
 IT IS A SNAP SHOT OF THE FINANCIAL
POSITION OF AN ORGANISATION
6

7. ASSETS
 WHAT ARE THEY ?
 THEY ARE THE RIGHTS AND PROPERTIES
OWNED BY THE BUSINESS.
 IT REFERS TO THE RESOURCES ACQUIRED
BY THE BUSINESS THROUGH THE FUNDS
PROVIDED BY THE SHARE HOLDERS AND
THE CREDITORS
 IT APPEARS ON THE RIGHT HAND SIDE OF
THE BALANCESHEET.
7

8. LIABILITIES
 LIABILITIES REFER TO THE CLAIMS
AGAINST THE COMPANY INCLUDING THAT
OF THE SHARE HOLDERS AND
OUTSIDERS.
 IT IS WHAT THE COMPANY OWES TO
SHARE HOLDERS AND CREDITORS.
 IT APPEARS ON THE LEFTHAND SIDE OF
THE BALANCE SHEET.
8

9. Classification of assets
 Assets are classified into
 Fixed assets-like land, building ,plant &machinery
etc.These are not meant for resale and intended for long
term use.
 Current assets are those which are acquired for resale –
finished goods
 Or for conversion and resale-raw materials
 And others like sundry debtors,bills,cash and bank
balances
 In short current asset means cash and other resources
easily convertible into cash consumed in the normal
operating cycle of business.
9

10. Classification of liabilities
 Long term liabilities-Also known as fixed
liabilities; which do not become due for payment
in one year and which do not involve current
assets for their payment, includes share capital
and long term debts.
 Current liabilities are what the company owes to
outsiders and which may become payable with
in one year out of the sale of current assets,
example: accounts payable, sundry creditors,
etc.

10

11. Income statement
or
profit&loss account
 Depending upon the type of the organisation ,
inorder to ascertain the financial out
come,periodically or as and when required , a
statement of income and expenditure , or
receipt and payment a/c or manufacturing,
trading , and profit and loss a/c is prepared.
11

12. Funds & Fund flow
statement
 The international accounting std. no.7
recognises the absence of a single, generally
accepted definition of fund. According to the
standard , the term fund generally refers to cash
cash equivalents or working capital.
 There are two concepts of working capital –the
gross concept and the net concept. The term
funds are generally used in the latter sense.
12

13. Fund flow stt.continued
 Fund flow statements can be prepared from
balance sheet as total resource basis and may
be prepared on amplified basis.
 Fund flow statement on working capital basis
presents1)sources of working capital 2)uses of
working capital and 3) the net changes in
working capital or “as a statement showing the
changes in working capital”
13

14. Cash flow statement
 Cash flow statement which is also known as
“wgwgs”-where got where gone statement
depicts the flow of cash in an organisation from
different activities and used for various
purposes.
 In India the cash flow statement of listed
companies will have to be prepared as per the
indirect method prescribed in AS-3.

14

15. FINANCIAL
MANAGEMENT
MODULE-II
Ratio analysis
15

16. MEANING OF FINANCIAL
ANALYSIS
 FINANCIAL ANALYSIS LITERALLY MEANS
BREAKING THE VARIOUS STATEMENTS
INTO SMALLER MANAGEABLE
INDEPENDENT PARTS FOR THE PURPOSE
OF EXAMINING THE DATA WITH A VIEW
TO ASSESS THE PROFITABILITY,
SOLVENCY, LIQUIDITY,VIABILITY AND
STABILITY OF A BUSINESS ENTITY.
16

17. Ratios :Definition
 What is a ratio?
 Ratio is an indicated quotient of two
mathematical expressions.
 It is a number which expresses the relationship
between two or more things.
 A financial ratio is a number which expresses
the relationship between two financial figures
 It can be a % or a decimal or a fraction also.
17

18. Who uses?
 Share holders.
 Creditors.
 Investors.
 Financial institutions.
 Bankers.
 Investigators and researchers.
18

19. What are the five major categories of
ratios?
What questions do they answer?
 Liquidity: Are we in a position to make required
payments in time in the current period?
 Asset management: Right amount of assets vs sales.
 Debt management: Right mix of debt and equity.
 Profitability:do sales price exceed cost of sales and
sales high enough as reflected in PM, ROE, and ROA ?
 MARKET VALUES: Do investors like what they see as
reflected in P/E, and M/B ratios ?
19

20. Classification of ratios
 1)Traditional classification :
 A) Profit & Loss a/c Ratios
 B ) Balance Sheet Ratios
 C) Composite ratios
20

21. Groups of ratios.Functional point of
view
 Liquidity ratios
 Solvency ratios
 Profitability ratios
 Turn over ratios
 Capital structure or stability ratios
 Coverage ratios
21

22. Liquidity Ratios/profitability
ratios
 Current ratio = current assets / current
liabilities
 Acid test ratio = Liquid assets / current
liabilities
 Gross profit to sales
 Net profit to sales
 Return on assets = net profit after tax/ total
assets
 Return on capital employed= NPAIT/ Total
capital employed
22

23. Solvency & turn over ratios
 solvency ratio = debt equity ratios
 = long term debt/ shareholders equity
 Capital gearing ratio = fixed interest bearing
capital/ shareholders funds
 Turn over ratios
 Inventory turn over ratio= cost of goods sold
/average inventory
 Debtors turn over ratio = net credit sales /
average debtors
23

24. Coverage ratios
 Interest cover = E BI&T/ INTEREST
 DIVIDEND COVER = E AT/dividend on
preference shares.
 Total coverage = EBI& T/TOTAL FIXED
CHARGES
24

25. Yard sticks:
 Ratios express only positions , to assess
whether it is good, bad , or in between require
some yardsticks or benchmarks.
 Some bench marks which are commonly used
are i) absolute standards –common to all
entities ii) historical standards-past-best
applicable to that unit iii) horizontal standards-
best of comparable entities. iv) budgetary
standards based on ideal working
conditions,based on budgets
25

26. ILLUSTRATION -I
 FOLLOWING IS THE BALANCE SHEET AND
PROFIT AND LOSS ACCOUNT OF
ABC.LTD.COMPUTE ABOVE RATIOS .
26

27. BALANCE SHEET AS AT 31/03/2007
OF ABC.LTD
 LIABILITIES.RS LAKHS
 SHARE CAP
1350
 RESERVES&
 SURPLUS 1000
 SEC-LOAN
500
 S.CRS. 300
 PRO.DIVIDEND 150
 Total 3300
 ASSETS
 LAND 100
 BUILDINGS 650
 PLANT&M/C 1100
 OTHERS 200
 CURRENT ASSETS
 INVENTORY 510
 S.DRS. 540
 CASH 200
 TOTAL 3300
27

28. TRADING ACCOUNT
 TO,OP.STOCK
360
 TO, PUR 1750
 TO,GROSS P/L
900
 TOTAL 3010
 BY,SALES
2700
 CLOSING STK
310
 TOTAL 3010
28

29. PROFIT AND LOSS ACCOUNT
 TO,ESTT.EXP 90
 TO,ADMN EXP 270
 TO,SELLING EXP 100
 TO,INT –DEB 70
 TO,INCOME TAX 90
 TO,NET PROFIT 280
 TOTAL 900
 BY,GP 900
 TOTAL 900
29

30. Profit &LOSS APPROPRIATION
ACCOUNT
 PRO.DVD 150
 BALANCEC/D 350
 TOTAL 500
 BY,N.P.B/D 280
 PROFIT.P.Y 220
 TOTAL 500
30

31. Illustration -ii
 From the following data pertaining to xyz ltd.,
draw up the companies balance sheet:
 1)current ratio: 2.5 2)liquid ratio 1.5
 3) net working capital Rs 3,00,000
 4)cost of sales /closing stock=6
 5) G.P.ratio= 20 %
 6)FA/TO=2 based on cost of sales.
 7)average debt collection period 2 months
8)FA/SHAREHOLDERS FUNDS=0.80
 9)Reserves and Surpluses/eq=0.50
 10)B.R & B.P. Rs 100,000. EACH
31

32. THE TOOLS AND
TECHNIQUES
 THE TOOLS AND TECHNIQUES OF
ANALYSIS FALL UNDER THE FOLLOWING
CATEGORIES:
 A)VERTICAL ANALYSIS
 B)HORIZONTAL ANALYSIS
 C)BALANCE SHEET ANALYSIS
 D)P&L ANALYSIS
 E)COMPOSITE DATA ANALYSIS
32

33. TOOLS CONTINUED
 F)COMPARATIVE BALANCE SHEETS
 G)COMMON SIZE BALANCE SHEETS
 H)RATIOS
33

34. THE PROCEDURE
 NORMALLY STARTS WITH A STUDY OF
RELATIONSHIP AMONG VARIOUS
FINANCIAL FACTORS IN A SINGLE SET OF
STATEMENTS AND A STUDY OF THE TREND
OF THESE FACTORSAS SHOWN IN A
SERIES OF STATEMENTS.
 IT INVOLVES A PROCESS OF SELECTION OF
FIGURES ,STUDY OF THEIR RELATIONSHIP
AND EVALUATION
34

35. COMPARATIVE BALANCE
SHEET
 BHEL 2006
 SHARE CAP
24476
 RES&SUR
705662
 SEC LOAN 50000
 UNSEC-L
5824
 TOTAL 785962
 BHEL 2005
 SHARE CAP
24476
 RESER 578213
 SEC LOAN
50000
 UNSEC-L
3698
 TOTAL
656387
35

36. APPLICATION OF FUNDS
 2006
 NET F.A.
98228
 CAPITAL WORKS
18457
 INVESTMENTS
829
 DEFER.TAX
67372
 C.A. 1633078
 -C.L. -1032002
 NET.C.A. 601076

 2005
 104424
 9532
 895
 51827
 1334298
 -C.L.
-844589
 489709
 656387
36

37. COMMONSIZE BALANCE
SHEETS
 INSTEAD OF ABSOLUTE
FIGURES,REDUCE THE CONSTITUENTS
INTO %S TAKING THE TOTAL AS 100
 THE PREVIOUS SLIDE FIGURES WILL
APPEAR AS UNDER:
 YEAR 2005 2006
 SHARE+RES 88.5% 93%
 LOANFUNDS 11.5% 7%
37

38. CONCLUSION
 WE HAVE TAKEN A SIMPLIFIED VERSION
INBOTH CASES .
 THE COMPARISON FACILITATES
UNDERSTANDING THE GROWTH OF THE
CURRENT YEAR OVER THE PREVIOUS
YEAR
 THE COMMON SIZE BALANCE SHEETS
QUANTIFY THE RATE OF GROWTH
 OTHER TOOLS –NEXT MODULE. BYE.
38

39. MODULE 3:
COMPARITIVE P & L
QUESTIONS
39

40. PROFIT & LOSS A/C
 2001 RS
 SALES 15,25,000
 INT&DIV 7,500
 PROFIT ON
 SALE–LAND 6000
 TOTAL 15,38,500
 COST OF
 GOODS 9,00,000
 2002 RS
 17,00,000
 6,200
 8,000
 TOTAL17,14,200
 9,50,000
40

41. P & L CONTINUED
 2001 RS
 ADMN EXP 93250
 S&DN EXP 190000
 INT 8000
 LOSS ON
 SALE-M/C 2500
 TAX 85000
N.P 259750
 TOTAL 1538500
 2002 RS
 95980
 209000
 7000
 800
 168000
 283420
 1714200
41

42. COMPARE &
COMMENT
ON THE P & L ACCOUNTS
42

43. MODULE 5
FUND FLOW
STATEMENTS
problems
43

44. Summarized balance sheet
of Atlas cycles for 31/12/02
liabilities 31/12/20031/12/200
11
31/12/20031/12/200
22
assetsassets 31/12/200131/12/2001 31/12/200231/12/2002
S.CS.C 500000500000 500000500000 F.A.F.A. 450000450000 370000370000
RES&SRES&S 300000300000 310000310000 INVESINVES 5000050000 6000060000
P&LP&L 5600056000 6800068000 STOCSTOC
KK
240000240000 210000210000
CRS.CRS. 168000168000 164000164000 DRS.DRS. 210000210000 455000455000
SEC.LOSEC.LO ------------------ 270000270000 CASHCASH 149000149000 197000197000
PRO-PRO-
TAXTAX
7500075000 1000010000
TOTALTOTAL 10990001099000 12920001292000 10990001099000 12920001292000
44

45. ADDITIONAL INFORMATION
 1)INVESTMENTS COSTING RS 8000/=SOLD
DURING THE YEAR 2002 FOR RS8500
 2)PROVISION FOR TAX IN 2002 RS 9000/=
 3)FIXED ASSETS SOLD RS 12000/=BOOK
VALUE RS10000/=PROFIT CREDITED TO P&L
 4)DIVIDEND PAID RS 40,000/=
 5)FROM THE ABOVE PREPARE A
STATEMENT OF SOURCES AND
APPLICATION OF FUNDS.
45

46. FINANCIAL
MANAGEMENT
MODULE-VI
Fund Flow statements
46

47. Fund
 Meaning of fund:
 What is it?
 Cash and cash equivalent?
 Investments of and/ or claims?
 Of a business entity
 Defining funds as “cash and cash equivalent “is
somewhat limiting
 Broadening the definition to include investments
and claims against those investments-is a better
definition.
47

48. Fund Flow statement
 Is it sources and application of funds?
 Does balance sheet satisfy the definition?
 No.balance sheet shows the financial position
as on a given date .It is a snapshot, static
statement.
 Flow is a dynamic concept, it traces the path
,the source and its flow , where it gets
invested.It is a wgwgs –where got where gone
statement
 Balance sheet is stock of funds.changes in
balance sheets –two-is the net flow.
48

49. Fund flow –from balance sheets
 Source of funds
 Any decrease in
asset item
 Any increase in
claims(liability)
 Uses of funds
 Any increase in
asset item.
 Any decrease in
claims
49

50. Tips- tips -tips
AssetAsset liabilityliability
sourcesource __ ++
usesuses ++ __
50

51. Some questions?
 Is increase in cash a source or an application?
 Bonus issue of shares ?
 Retained earnings?
51

52. Classification of ratios
 Structural point of view :
 Balance sheet ratios: debt equity ratio, current
ratio, quick ratio
 Profit and Loss ratios: G.P. Ratio, N.P.
Ratio ,turn over ratios
 Composite ratios :ROE, RONW, ROCE,
ROTA, TOTA, TOFA, TOWC, TODR,
TOSTOCK,
52