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Finance for non financial managers ppt by paramesh a

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Finance for non financial managers ppt by paramesh a

  1. 1. Finance for Non-Financial Managers By Paramesh Alisetti, ACMA
  2. 2. Why it is important to understand Finance Every activity that you do is connected with Finance . You will be at edge if you understand and assess the financial implications before you take a decisions. It is the language that is discussed in the Board rooms. Hence, by knowing Finance you will at advantage in your career ahead. Inside Edge – the more you know about finance, the more insights you will get about the Business. You can understand better the accountant’s language when you deal with them day to day. If you understand finance better, you can relate to your area of Business and question the sanctity of the numbers prepared by finance deptt. When you know the drivers of financial performance, you will drive the respective Business activities in order to achieve better performance.
  3. 3. Outline Accounting is the language of business Key Financial statements- Income statement Analysis Key Financial statements -Balance sheet analysis Key Financial statements -Cash flow Analysis Financial Health check Reading Company annual report Key decisions of Financial Management Investment appraisal Working capital Management Cost Accounting for decision making PBF as a planning and controlling tool.
  4. 4. Accounting is the language of business 2) Human resources & 2)Payroll & infrastrucur admin e accounting 3) 1) Initial Acquisition capital – of land & 1)Accounting 3)Accountin equity/debt approvals for for equity & g for land & construction debt develoment Business cycle 4) Performance Procureme measurement7) Sales & nt of 4)collections 7) Sales & material & Payables CRM storage Accounting 6)Advertis 5) 5) ement and Constructi 6)Accounti Accounting promotion on of flats ng for for promotion constructio s n costs
  5. 5. Income statement of Model Ltd Particulars Notes 31.3.2012 31.3.2011 Rs mln Rs mlnRevenue from Operations 23 14,076 14,011Other Income 24 63 59Total Revenue 14,139 14,070Expenses:Land purchase cost 25 1,686 1,297Material & Labour cost 26 5,010 6,700Contribution 7,443 6,073 53% 43%Employee benefit expense 27 1,267 1,035Other expense 28 1,775 1,479EBITDA 4,401 3,559 31% 25%Finance costs 29 1,061 845EBIT 3,340 2,714 24% 19%Depreciation and Amortisation expense 30 387 278PBT 2,953 2,436 21% 17%Tax expense 31 944 611PAT 2,009 1,824 14% 13%EPS 20 19Share price 320 284P/E ratio 16 15
  6. 6. The balance sheet always balances Inv Debt AR Cash A/P Equity Assets = Liabilities + Equity + Reserves & surplus
  7. 7. Long term and short term balancesHow can you increase the assets with out correspondingincrease in liabilities ???
  8. 8. Balance sheet of Model Ltd As at As at Particulars Notes 31-Mar-12 31-Mar-11 Rs.mln Rs.mlnEquity and Liabilities : 1. Shareholders Fund I. Share Capital 3 980 980 II. Reserves & Surplus 4 19,024 17,585 2. Share application Money pending Allotment 5 5 1 3. Non-current liabilities I. Long-term borrowings 6 244 20 II. Trade payables 7 177 165 III. Deferred tax liability (net) 8 330 - III. Long-term provisions 9 21 26 4. Current liabilities I. Short-term borrowings 10 1,973 3,251 II. Trade payables 11 3,358 2,841 III. Other current liabilities 12 13,366 12,262 IV. Short-term provisions 13 1,236 904Total Liabilities 40,714 38,035Assets 1. Non Current assets I. Fixed Assets 14 a. Tangiable Assets 2,740 1,366 b. Intangible Assets 58 6 C. Capital Work in progress 13 647 2,811 2,019 II. Non-current Investments 15 1,539 506 III. Deferred Tax Assets 16 - 74 IV. Long-term loans and advances 17 5,501 4,582 V. Other non current assets 18 144 104 2. Current assets I. Current Investments 19 - 10 II. Inventories 21 14,352 9,707 III. Receivables 1,117 1,044 IV. Cash and Bank balances 22 533 217 V. Short-term loans and advances 23 12,573 16,943 VI. Other current assets 24 2,145 2,830Total Assets 40,714 38,035
  9. 9. Cash flow statement of Model LtdS.No Particulars 31.3.2012 31.3.2011 Rs.mln Rs.mln A. Cash Flow from operating Activites Net Profit (loss) before Tax 2,952 2,436 Share of profit from investment in a partnership firm (73) (77) Profit on sale of fixed assets (1) (3) Depreciation & other writeoffs 388 278 Provision for doubtful debts & advances 94 0 Interest Expense 976 769 Interest Income (34) (16) 4,301 3,387 Changes in Working Capital: Increase / Decrease in Current Liabilities / Provisions / Long-term liabilities 1,360 839 Increase / Decrease in Current Assets / Other long-term assets* 140 204 5,802 4,430 Less : Taxes Paid (net of refunds) (498) (299) Net Cash flow from Operating Activities 5,303 4,131 B. Cash flow from Investing activities Purchase of Fixed Assets (1,021) (218) Proceeds from sale of fixed assets 2 5 Purchase of non-current investments (986) Purchase of current investments (10) Proceeds from sale of current investments 10 Investments in Bank deposits (141) (62) Interest Received 34 16 Net Cash flow from Investing Activities (2,102) (268) C. Cash flow from Financing activities Proceeds from Long Term Borrowings 7,083 2,956 Repayment of Long Term Borrowings (6,657) (5,949) Proceeds from Short Term Borrowings - 1,021 Repayment of Short Term Borrowings (1,278) (459) Dividend paid on equity shares (294) (245) Tax on equity dividend paid (48) (42) Interst Paid (gross) (1,810) (1,732) Net Cash flow from Financing Activities (3,004) (4,450) NET INCREASE IN CASH & CASH EQUIVALENTS (A+B+C) 197 (587) CASH & CASH EQUIVALENTS AT THE BEGINNING OF THE PERIOD 161 748 CASH & CASH EQUIVALENTS AT THE END OF THE PERIOD 358 161
  10. 10. Financial health checkupProfitability Solvency EfficiencySales growth – price/volume Current ratio = CA/CL Revenue/ Total assetsContribution Margin ratio Quick ratio = CA-INV/CL Inventory TurnoverEBITDA Margin Interest cover = Avg Inventory / COGSOperating Margin = EBIT/Interest ExpNet profit margin ROCE = EBIT/ Capital Gearing Ratio employedAll the above ratios are = Long term debt/calculated on sales revenue. Shareholders funds+Long Avg Inventory holding days term debt = Avg Inventory/COGS*365 Debt ratioHelps gauge the Margins = Long term debt/total Avg receivable daysthat the Company is assets =Avg Receivables/Creditgenerating Sales*365 Helps understand the liquidity position and capital Payable days = Avg structuring Payables/Credit purchases*365
  11. 11. Reading Company annual reportMain sections in an Annual reportChairman message to the shareholdersBusiness PortfolioBoard of DirectorsBoard CommitteesCorporate InformationDirectors reportCorporate GovernanceManagement discussion and analysisFinancial statementsAuditor’s reportNotes to accountsNotice of the AGMAny other details
  12. 12. Key decisions of Financial ManagementInvestment decisions- New projects / expansion- Acquisition of another entity- Investment in working capitalFinancing decisions(Proper balance between equity & debt at lower cost )-Money Market for short term funds – CPs, BOE,CDS,Inter-company loans etc-Capital Market - IPO, rights issue- Debt – Bonds, Term loans from banks,- Bank term loans, Mezzanine finance, leasing, Hire purchase, venture capital etc- ReservesDividend decisions-Whether to pay dividend or retain for future growth- How much to be paid and how frequently.Retain when a Company has positive NPV projects and pay 100% dividend when they do not.Risk and Return tradeoffTime value of money
  13. 13. Investment appraisalInvestment in an Annual Marketing programme Cash Present Recovery Year Flows Value Payback Capital rationing – 0 (4,000,000) (4,000,000) select projects with 1 1,200,000 1,081,081 (2,918,919) highest NPV or higest 2 1,100,000 892,785 (2,026,134) profitability index 3 1,000,000 731,191 (1,294,943) 4 900,000 592,858 (702,085) 5 800,000 474,761 (227,324) 6 700,000 374,249 146,925 <= payback 7 600,000 288,995 435,920 8 500,000 216,963 652,883 9 400,000 156,370 809,253 Net Present Value 809,253 Cost of capital 11.00%Net Present Value $809,253IRR 17.10%Discounted Payback (years) 6.6IRR rule : Choose a project if and only If the IRR > cost ofcapital
  14. 14. Working capital managementWorking Capital - (Current assets – Current liabilities) Exceeds current operating assets(Inventory+Receivables-Payables)The Company has a cash surplus usually represented by aBank deposits and investments. Otherwise, it has a deficit usually represented by a bankloan and / or overdraftFinancing decisionConservative policy - Both non-current + permanent part of current assets +some portionof fluctuating current assets financed by long term financeAggressive policy - short term financing for all fluctuating + some part of permanentportion of current assetsModerate policy – matches the short term finance to fluctuating current assets and longterm finance for permanent portion of current assetsThe operating cycle in a typical mfg industryRaw material days + Time taken to produce the goods + the time goods remain in thefinished inventory + the time taken by the customers to pay for the goods- the period ofcredit taken from the customers-Reduce RM stock holding, obtain more finance from suppliers, reduce WIP & FG, reducecustomer credit
  15. 15. Cost accounting for decision makingThe purpose of Cost Accounting - strictly for insiders (That’s way it’s also calledManagement Accounting- a tool of every CEO of a Company)Product costing and calculating COGS and protecting the GROSS MARGIN whilemaintaining the quality of the product or service levels at acceptable level is thesubject of Cost accounting. (allocate costs between COGS and Inventory)Many companies don’t really know whether or not they’re making a gross profit onmany of the products they sell.Segregation of costs into variable & fixed -All costs are fixed in the short term and allcosts are variable in the long term.Controllable and uncontrollable costs - All costs are uncontrollable in the short term; allcosts are controllable in the long termCosting Techniques - Relevant costing, Standard costing , Marginal costing and breakeven analysis, Activity Based Costing, target costing, life cycle costing, Pricing decisionsand profitability analysis.
  16. 16. Decision MakingRelevant costing (Incremental cashflows)Special pricing orders (below the Market prices) – Proposed price less than the ordercost. Study of the cost estimates reveals that in the next qtr there are some overheadswhich will not change irrespective of this order, hence those costs are not relevant forcalculating the profit.Product Mix decisions when capacity constraint exists- Limiting factor (rawmaterials, machine hrs, labour Hrs, market etc) – In this case, produce those productswhich contribute more per limiting factor.Replacement of equipment – The irrelance of past/ sunk costsOutsourcing and make or buy decisions – At first instance it appears that the componentbe outsourced since the pruchase price is less than cost of Mfg.However, the unit costsinclude some costs that will be unchnaged. These are not relevant costs.Discontinue decisions – if the incremental costs are more than incremental revenuesshutdown.
  17. 17. Break even analysis. Model speciality Pens No.of sales 9,259 18,519 27,778 37,073 Unit sale price 27 27 27 27 Variable cost /Pen 19 19 19 19 Contribution/Pen 8 8 8 8 Fixed costs 80,000 80,000 80,000 80,000 Profit (2,502) 75,004 152,502 230,301 Break even point Fixed costs/ Contribution 9,558 Pens
  18. 18. PBF as a planning and controlling tool Strategic plan A type of business plan designed to define the overall vision and mission of a business, its strategy and long-term objectives. It does not contain lot of details about implementation. Operating plan A detailed description of what the company will do to pursue the objectives of its strategic plan for the next operating period, usually one year. It will contain enough detail that the operating managers of the company can use it to guide their daily and monthly activities. Exercise budgetary control Once the budgets are prepared and approved by the CEO, then the monthly actual results will be compared with the budgets and necessary actions will be taken based on variance analysis. Monthly & quarterly forecasts to capture the downsides and upsides of the budget, a monthly/quarterly estimates will be prepared to know how the year is going to end .
  19. 19. The myths of Business planning The Myth The Reality1. Planning is a lot of Planning actually saves work and time, bywork; busy managers helping managers to avoid doing more workdon’t have time for than is necessary to reach their goals.still another task.2. Plans are obsolete as Plans are dynamic and ever evolving as thesoon as they’re done. business evolves. The best ones get reviewed and modified regularly.3. Plans must always be Plans need not be any more detailed thanlong and detailed to the company needs to guide its activities.be of any value. Some very focused plans for small business will fit on a single page.4. Business moves too The speed of business is a big reason whyfast to be held back plans are important, because we can go veryby a plan. far off the mark in a short time. Plans don’t hold managers back; rather, they guide managers’ forward movement.5. Planning is not as Planning makes what we do more productiveimportant or valuable by enabling us to avoid doing things thatas doing something don’t contribute to our productivity asproductive. measured by end results.6. We should leave the Plans done without the substantialplanning to the planners involvement of the managers who areand let the managers making the decisions are largely useless,do their work. because they don’t reflect reality.
  20. 20. Strategic Planning Position Review and Audit Control Mission and Corporate Strategic Option Strategy Objectives Appraisal Generation Evaluation and Choice Environmental Strategy Analysis Implementatio n Rational Model of Strategy
  21. 21. Any questions
  22. 22. Thank you

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