The document outlines the essential aspects of financial management for small to medium-sized enterprises (SMEs). It discusses the significance of effective management of funds, working capital, budgeting, and risk management while emphasizing the need for compliance with financial standards. Additionally, it highlights various techniques for financial analysis and the importance of accurate accounting and management information systems.

1. Financial Insights
For
SMEs Management
Financial Management
Knowledge Sharing Session
Srinivas
ACA, ACMA

2.  Financial management refers to the efficient and effective management
of money (funds) in such a manner as to accomplish the objectives of the
organization. It is the specialized function directly associated with the top
management. The significance of this function is not only seen in the 'Line'
but also in the capacity of 'Staff' in overall administration of a company. It
has been defined differently by different experts in the field. It includes how
to raise the capital, how to allocate it i.e. capital budgeting. Not only about
long term budgeting but also how to allocate the short term resources like
current assets. It also deals with the dividend policies of the share holders.
 Financial Management means planning, organizing, directing and
controlling the financial activities such as procurement and utilization of
funds of the enterprise. It means applying general management principles to
financial resources of the enterprise.
 FM means planning, directing, monitoring, organizing, and controlling of the
monetary resources of an organization.
WHAT IS FINANCIAL MANAGEMENT??
(DEFINITIONS)

3. TRADITIONAL BUSINESS
Management & Auditor handled entire business
Management
&
Auditor
Sales & Business
Banks
Government
Multi Branches
Family Finance
Foreign Exchange
Group Business

4. CURRENT DAY BUSINESS
Multiple professionals support one business
Core
Business
Call Centre
Auditor
IT Consultant
Secretarial Practice & Compliances
Consultants
& Training
Investment Advisor

5.  VUCA (Volatility, Uncertainty, Complexity & Ambiguity)
 Changing Global Market (Consumers)
 Investment from appropriate source
 Competition (Global & Young Indigenous Entrepreneurs)
 Human Resource
 Technology (ERP, MIS, etc)
 Risk Management
 Increased Statutory Compliance
MANAGEMENT CHALLENGES

6.  Finance Management:
 Working Capital/ Cash Management/ Forex
 Financial Statement Analysis
 Budgeting & Monitoring
 Costing & Management
 Accounting & MIS:
 Accounting Software
 Payroll & Other functional Areas
 Controls & Audits
 Internal Controls
 Risk Management
 Governance & Compliances:
 Financial Standards
 Statutory Compliance
 Income Tax & Secretarial Practices
CRUCIAL SPECTRUM OF
FINANCIAL MANAGEMENT

7. FINANCE
MANAGEMENT

8.  Working Capital means “the
money required to run the day-
to-day operations of business”
 Working Capital is a financial
metric which represents
operating liquidity available to
a business.
 The goal of working capital
management is to ensure that
the firm is able to continue its
operations and that it has
sufficient cash flow to satisfy
both maturing short-term debt
and upcoming operational
expenses.
WORKING CAPITAL
MANAGEMENT

9. EVENTS OF WORKING CAPITAL

10.  Manage external commitments with internal resources.
 Repetitive Decision Making: Continuous activity and not one
time.
 Cannot afford to ignore single aspect/ component of working
capital.
 Cost of working capital is higher.
 Mis-management of WC has risk of immediate negative effect on
the business.
 Current business environment is transparent to every customer/
vendor, leading to poor bargaining power for management.
 Stage & size of company is great challenge on WCM.
CHALLENGES IN WCM

11.  Cash Management:
 Cash budgeting involves estimating the requirements of cash by estimating all the fore
coming receipts and payments (Float Management – Reconcile with bank balance).
 Cash discounts: Both to accelerate collection and early payments.
 Maintain Optimum Cash (Not Less & Not More).
 Inventory Management:
 Fixing Inventory Levels by Classification based on value & volume (ABCD).
 Just in Time
 Enhanced forecast accuracy and demand planning.
 Debtors & Creditors Management:
 Early reminders/dunning cycles: Early reminders and short dunning cycles thus have a
direct impact on late payments.
 Back-to-back agreements Balancing the due dates of receivables and payables helps
to avoid excessive pre-financing of suppliers and can even lead to a positive cash
balance.
 Factoring/ Discounting.
 Disciplined credit policy (Payment & Collection).
 Customer/ Vendor evaluation.
 Variance Management – Review every event in WC to address the change.
 (As Warren Buffett told “Don’t lose money” “Don’t forget Rule No.1”).
TECHNIQUES TO MANAGE
WORKING CAPITAL

12.  Rule 1: Long term applications (LTA) are to be financed through
Long Term Sources (LTS) only.
 Rule 2: Long Term Applications (LTA) should not be financed
through Short Term Sources (STS).
 Rule 3: Short Term Applications (STA) should be funded through
Short Term Sources (STS).
 Short Term Applications (STA) can be funded by Long Term
Sources (LTS). (???)
Note: The above rules are applicable for funds generated externally &
internally.
RULES OF FINANCING

13.  Cost Accounting arose at the height of the industrial
revolution when businessmen wanted to know what was the
cost of producing a product or rendering a service.
 Objectives of Cost Accounting:
 Ascertainment of Cost (at all levels)
 Cost Control
 Cost Reduction
 Decision Making
 Pricing
 Methods of Ascertaining Cost:
 Traditional Costing Methods
 Modern Costing Methods
 Hybrid Method
COST MANAGEMENT

14.  Identify Product/ Unit cost taking into account administrative OH, Capacity
utilization, etc.
 Ascertain OH absorption if Standard Costing is followed and arrive at
variance.
 Product cost monitoring should be made every shorter time possible
(monthly, weekly, batch wise, etc).
 Monthly Costing P&L should be prepared.
 Costing should be separate function in the organization.
 Review of cost drivers and assumptions in costing on a reasonably
intervals.
 Cost comparison should be a continuous process (with historical cost,
competitor cost, industry cost, etc).
 Pricing & Costing Method Relationship (cost plus pricing, competitor
pricing, regulated pricing, etc).
ATTRIBUTES TO BETTER
COST MANAGEMENT

15.  Methodical control of an
organization's operations
through establishment of
standards and targets
regarding income and
expenditure, and a
continuous monitoring and
adjustment of performance
against them.
 Budgetary control is the way
of controlling organisation
in which different budgets
are made and with these
budgets, organisation finds
its weak points and then it
improves these weak points.
 Budget is Management’s
Commitment.
BUDGET & MONITORING

16. TYPES OF BUDGET
Project
Budget
Master
Budget
Flexible
Budget
Zero
Based
Budget
Responsibility
Accounting
Activity
Based
Budget

17. Mission
Vision
Corporate & Business
Strategy
Annual Goals & Objectives
Annual Budget
ALIGNING THE BUDGET

18.  Objective: Have to set the objective first
 Understanding of Cost Behavior : Need to understand
different elements of costs attached with
 Forecasting: Of market, customer preference, competitor,
Govt policies
 Coordination: Between each department, different level of
Mgt
 Communication & Reporting: Between divisional and
functional Manager
 Flexibility: Must have a scope for Adjustment based on
actual situation
 Accounting data support: Past data if available.
 Use appropriate budgeting method. If new, use Zero Base
Budgeting.
ESSENTIAL ELEMENTS OF
BUDGET

19.  The process of evaluating businesses,
projects, budgets and other finance-
related entities to determine their
suitability for investment. Typically,
financial analysis is used to analyze
whether an entity is stable, solvent,
liquid, or profitable enough to be
invested in.
 Some important ratios for analyzing
performance of a company:
 Operating profit margin
 Net profit margin
 Return on Capital Employed
 Current Ratio
 Debt Equity ratio
 Interest coverage ratio
 Earnings per share
 Price Earnings ratio
 Return on Net worth
FINANCIAL STATEMENT
ANALYSIS

20.  Operating profit margin
 Indicates the business profitability
 OPM = EBITDA / Operating Income (or Net Sales)
 Net profit margin
 Indicates the returns generated by the business for its owners
 NPM = PAT / Operating Income (or Net Sales)
 Return on Capital Employed
 Indicates true measure of performance of an enterprise
 The capital employed in business is Equity capital, reserves and surplus,
long term debt and short term debt.
 Returns generated for all these providers of capital is EBIT.
 ROCE = EBIT / (‘Networth’ + ‘Total Debt’)
 The ratio is independent of the industry, capital structure or asset
intensity.
 Interest coverage
 The ratio indicates the cushion the company has, to service its interest
 Interest coverage = EBITDA / Interest cost
 Higher the ratio, better it is for the lenders
 For healthy companies, Interest coverage ranges from 2.0x to 8.0x.
RATIOS

21.  Debt Equity ratio
 The ratio of borrowed funds to owners’ funds
 D:E ratio is also known as ‘gearing’, ‘leverage’ or ‘capital structure’
 Gearing = (Long term debt + Short Term debt)
(Equity capital + Reserves & Surplus)
 For most manufacturing companies, D:E less than 2.0x is considered
healthy.
 Current ratio
 This is a commonly used ‘liquidity ratio’, used by banks that lend for
‘working capital’
 Current ratio = Current Assets
Current liabilities + Short term debt
 The ratio indicates the ratio of short term assets to short term
liabilities.
 Indirectly, the ratio also indicates the proportion of long term assets
funded by long term liabilities.
 For solvent companies, current ratio ranges between 1.2x to 2.0x.
RATIOS

22.  Earnings Per Share (EPS)
 The Profit earned by the company for each share in the share capital
of the enterprise
 EPS = Profit After Tax
Number of Equity shares outstanding
 Price - Earnings Ratio (PE)
 The ratio of current market price of the equity share to the annual
earnings per share
 PE = Current Market Price per share
Earnings Per Share (EPS)
 PE is expressed in ratio or times.
 When EPS is negative, PE is meaningless.
RATIOS

23. ACCOUNTS & MIS

24.  At a fundamental level, there are two types of accounting
information:
 Financial Accounts
 Management Accounts
 Financial accounts are geared towards external users of
accounting information (i.e. investors, industry commentators
and government agencies), whereas management accounts are
geared towards internal users of accounting information.
 Profit & Loss Account
 Balance Sheet
 Cash Flow Statement
 Management Accounts are used to help management record,
plan and control the activities of a business and to assist in the
decision-making and decision taking processes. They can be
prepared for any period of time such as daily, weekly, monthly or
yearly.
ACCOUNTING OVERVIEW

25.  Objectives of MIS & Reports
 Efficient Decision Making
 Compile Information on a Timely basis
 Effective Tool for Planning
 Support of its business process and
operations
 Support strategies for competitive
advantage
 Means to create MIS & Reports
 Accounting Software/ ERP
 Separate MIS Software/ BI Tool
 Excel based reports
 MIS Process:
 Collection
 Organization
 Distribution
 Storage of wide information
 Managerial control & analysis of data
MIS & REPORTS

26. CONTROLS & AUDITS

27.  Business risks implies uncertainty in profits or danger of loss
and the events that could pose a risk due to some unforeseen
events in future, which causes business to fail.
 Business risks can be classified by the influence by two major
risks: internal risks (risks arising from the events taking place
within the organization) and external risks (risks arising from
the events taking place outside the organization).
 Major Types of Risk:
 Strategic Risk
 Financial Risk
 Operational Risk
 Compliance Risk
INTERNAL CONTROLS &
RISK MANAGEMENT

28. ERM PROCESS

29.  Techniques for Identifying Risks:
 Brainstorming
 Event inventories and loss event data
 Interviews and self-assessment
 Facilitated workshops
 SWOT analysis
 Risk questionnaires and risk surveys
 Scenario analysis
 Using technology
 Other techniques
 Risk handling can be classified into 4 ways:
 Avoid
 Transfer
 Mitigate
 Accept
RISK MANAGEMENT

30. GOVERNANCE &
COMPLIANCE

31. STATUTORY COMPLIANCE
I don’t know
which laws are
applicable
How to make
compliances
on time?
I am bored
of
Stereotyped
Compliance
system
Appoint
compliance
consultant for
HR,
Registrations,
VAT, ED, Tax,
etc.
Conduct yearly
audit to asses
the applicability
of compliances.
Direct
management
involvement
necessary.

32. COMPLIANCE HANDLING
DESIGNING
EFFECTIVE & USER FRIENDLY
COMPLIANCE MANAGEMENT SYSTEM
TO LAY DOWN STRONG FOUNDATION FOR
GOOD GOVERNANCE

33. CORPORATE GOVERNANCE
Clause 49 of Listing
Agreement:
“ The Board shall
periodically review
compliance
reports of all laws
applicable to the
company,
prepared by the
company as well as
steps taken by
the company to
rectify instances of
non-compliances.”
Product
Profile
Factory
Location
Sector
Segment
Transaction
Employees

34. COMPANY POLICIES
OPERATIONAL PLANNING AND EXECUTION
DIR A DIR B DIR C DIR D DIR E
BOARD OF
DIRECTORS
CORPORATE
PLANNING
LEGAL
FINANCE AND
ACCOUNTS
HUMAN
RESOURCES
CORPORATE
COMMUNICATION
PRODUCTION
AND OPERATIONS
MARKETING
INFORMATION
TECHNOLOGY
DEPARTMENTS IN A COMPANY
EXTERNAL STAKEHOLDERS
Company Secretary
INVESTORS
GOVERNMENT AND
REGULATORS
SOCIETY
SUPPLIERS
CUSTOMERS
LENDERS

35. GRC MANAGEMENT
MAXimizing Value
PROGOVERNANCE
SYSTEMATIC APPROACH
RISK MANAGEMENT

36. ANY QUESTIONS ???

37. THANK YOU
Contact for Financial Process Management
Srinivas
Chennai
srinivasbonline@gmail.com