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Financial Intelligence for Entrepreneurs - TiE Mumbai (Part 2)
- 1. Groups of Claimants who will be asking a share of Revenue • Employees, the vendors, the landlord, the u<lity suppliers, the printer, the sta<oner, the travel agent and so on. This group represents Opera<ng Expenses • Shareholders or owners • Government • Lenders
- 2. Order of Payments • Opera0ng Expenses • Lenders • Government • Shareholders or Owners
- 3. Profit & Loss A/c Sales Less: Cost of Sales or Direct Expenses Gross Profit Less: Administrative and Selling & Distribution Expenses or Indirect Expenses Profit before Interest, Depreciation and Tax Less: Depreciation Profit before Interest or Operating Profit Less: Interest Profit Before Tax Less: Provision for Taxation Profit After Tax Less: Dividends Transferred to Reserves
- 4. Journey of a Business Idea Capital Money Infrastructure InvestmentOperating Cycle Cash Raw MaterialsSales Debtors Creditors Other Expenses
- 5. WORKING CAPITAL • GROSS WORKING CAPITAL • NET WORKING CAPITAL • CURRENT ASSETS FUNDED BY CURRENT LIABILITIES • CURRENT ASSETS INCREASE REQUIREMENT OF CASH • CURRENT LIABILITIES DECREASE REQUIREMENT OF CASH • CHEAPEST SOURCE OF FUND -‐ Creditors
- 6. CASH BILLS PAYABLE/ CREDITORS RAW MATERIALS FINISHED GOODS OTHER EXPENSES BILLS RECEIVABLES/ DEBTORS Purchase of Raw Materials Produc0on Collec0on Credit Sales OPERATING CYCLE
- 7. The Profit that never Was!
- 8. Sales 50,000 Less: Expenses 30,000 Profit 20,000 Tax 6,000 PAT 14,000 Sources of Funds Amt. Applica<on of Funds Amt. Owner's Capital 36,000 Cash 36,000 36,000 36,000 Cash 36,000 Less: Expenses 30,000 Less: Tax Paid 6,000 Balance 0 Sources of Funds Amt. Applica<on of Funds Amt. Owner's Capital 36,000 Cash -‐ +Profit 14,000 Debtors 50,000 50,000 50,000
- 9. Case Study on Bad Inventory Management Hindi Movie – Manufacturing Collars
- 10. Sources of Funds Amt. Applica0on of Funds Amt. Amt. Owner's Capital 8 Plant & Machinery 8 Current Assets Inventory Raw Materials 5 Work-‐in-‐Progress 0 Finished Goods 0 Cash and Bank 12 Debtors 0 Total Current Assets 17 Less: Current Liabili0es Creditors 17 Net Current Assets 0 Total 8 Total 8
- 11. Sources of Funds Amt. Applica<on of Funds Amt. Amt. Owner's Capital 8 Plant & Machinery 8 Current Assets Inventory Raw Materials 0 Work-‐in-‐Progress 17 Finished Goods 0 Cash and Bank 0 Debtors 0 Total Current Assets 17 Less: Current Liabili<es Creditors 17 Net Current Assets 0 Total 8 Total 8
- 12. Sources of Funds Amt. Applica<on of Funds Amt. Amt. Owner's Capital 8 Plant & Machinery 8 Current Assets Inventory Raw Materials 0 Work-‐in-‐Progress 17 Finished Goods 0 Cash and Bank 15 Debtors 0 Total Current Assets 32 Less: Current Liabili<es Creditors 32 Net Current Assets 0 Total 8 Total 8
- 13. Cash Conversion Cycle Inventory Period Collec<on Period Payment Period Cash Conversion Cycle Raw Materials Purchased Sales Cash Received From Customer Start of Credit Period Payment Made to Vendor
- 14. Prac0cal Applica0ons – Accounts Receivables • How Sa0sfied is your Customer? – Are you selling to Customers who pay bills on 0me? – Do you have Customer In0macy to talk about Payment Terms? – Do you provide Excellent Customer Service so as to enable your Customers to pay on 0me? – Is the product free of defects? – Are invoices accurate? – Does the mailroom send invoices on a 0mely basis? – Is the recep0onist helpful?
- 15. Prac0cal Applica0ons • Inventory – Engineering – do you request special products all the 0me? – Opera0ons – Are you fond of keeping lots of Stock? • Expenses – Do you defer Expenses? – Do you consider Timing of Cash Flows when purchasing? • Giving Credit – Do you give credit to poten0al customers too easily? – Do you withhold credit when you should give it?
- 16. Mistakes • Focus on Profits only • Rewarding the sales force for growth alone • Applying Current and Quick Ra0os • Benchmarking Compe0tors
- 17.
- 18. Return on Equity/C.E. Sources Of Funds Amt. Amt. Shareholder’s Funds Share Capital Equity Share Capital 100 Preference Share Capital 100 Total Share Capital (A) 200 Reserves & Surplus Profit & Loss A/c 100 Share Premium 100 Other Reserves 100 Total Reserves and Surplus (B) 300 Networth (A+B) 500 Loan Funds Secured Loans 100 Unsecured Loans 100 200 Total 700 Application Of Funds Sales Less: Cost of Sales (Opening Stock+Purchases-‐Closing Stock) Manufacturing Expenses Gross Profit Less: Administra0ve and Selling & Distribu0on Expenses Profit before Interest, Deprecia<on and Tax Less: Deprecia0on Profit before Interest Less: Interest Profit Before Tax Less: Provision for Taxa0on Profit ANer Tax
- 19. Equity (Shares of Rs. 10/-‐ Each) 100,000 1,900,000 Debt 1,900,000 100,000 Total Capital Employed 2,000,000 2,000,000 Sales 5,000,000 5,000,000 Less: Opera0ng Expenses 90% 4,500,000 4,500,000 Opera0ng Profit (PBIT) 10% 500,000 500,000 Less: Interest 15% 285,000 15,000 PBT 215,000 485,000 Tax 30% 64,500 145,500 PAT 150,500 339,500 Return on Equity 151% 18% Return on Capital Employed 25% 25% Earnings Per Share (Rs.) 15.05 1.79 Trading on Equity
- 20. Trading on Equity Equity (Shares of Rs. 10/-‐ Each) 100,000 1,900,000 Debt 1,900,000 100,000 Total Capital Employed 2,000,000 2,000,000 Sales 5,000,000 5,000,000 Less: Opera0ng Expenses 94% 4,700,000 4,700,000 Opera0ng Profit (PBIT) 6% 300,000 300,000 Less: Interest 15% 285,000 15,000 PBT 15,000 285,000 Tax 30% 4,500 85,500 PAT 10,500 199,500 Return on Equity 11% 11% Return on Capital Employed 15% 15% Earnings Per Share (Rs.) 1.05 1.05
- 21. Trading on Equity Equity (Shares of Rs. 10/-‐ Each) 100,000 1,900,000 Debt 1,900,000 100,000 Total Capital Employed 2,000,000 2,000,000 Sales 5,000,000 5,000,000 Less: Opera0ng Expenses 95% 4,750,000 4,750,000 Opera0ng Profit (PBIT) 5% 250,000 250,000 Less: Interest 15% 285,000 15,000 PBT (35,000) 235,000 Tax 30% (10,500) 70,500 PAT (24,500) 164,500 Return on Equity -‐25% 9% Return on Capital Employed 13% 13% Earnings Per Share (Rs.) (2.45) 0.87