FINANCE MANAGERS FOR NONFINANCIAL. Finance Beginner s Handbook

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Mervyn Shawn Kelley
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2 FINANCE FOR NONFINANCIAL MANAGERS Finance Beginner s Handbook

3 How can you benefit from this book? This book is a quick reference finance handbook to help you understand and manage the financial accounting side of your business or job responsibilities. Enable you ask informed questions when studying financial reports - Monthly MIS, Quarterly Financial Performance reports or Audited Financial reports. Your core competence is IT, Production, Business Development, or Marketing and your responsibility includes financial performance measure; then this book is for YOU! Topics are around your demand for knowledge in managing your business or division in terms of financial performance. This book will empower you to interpret financial statements and take day-to-day business decisions with financial focus. Kindly be aware that this book will not make you at par with a qualified and experienced financial professional. You are not going to compete with a finance person in his trade; the finance person is going to complement your strength. Always take advice from professionals for decisions having longterm financial implications. Budding finance professionals can benefit from select topics MIS Reports, working capital management, budgeting and break-even analysis.

4 How to use this book Chapters I to IV covers the finance basics. Chapter V onwards we strive to cover, in simple language, finance topics essential for managers. If something is not clear in the first reading, please read again. You are welcome to write to me, to my mail id given here under and at the end of this book. I would love to assist you. What this book is NOT This book is NOT for share market investments or personal finance. About the Author Author of this book is a Chartered Accountant from India. He has over three decades experience in Finance & Accounts. You can contact the author of this book at mailto: murugesan0202@yahoo.com or mailto:admin@ sapficouser.com. For updates on new release, please subscribe to SAP FICO USER News Letter visiting

5 Table of Contents Chapter I Financial Accounting, an Introduction 1. Financial Accounting basics 2. Glossary of terms 3. Financial Statements Chapter II Balance Sheet 1. Balance Sheet Presentation Format 2. Assets 3. Equity 4. Liabilities 5. Depreciation 6. Amortization 7. Balance Sheet model Chapter III Profit and Loss Account 1. Profit and Loss Account Model 2. Revenue 3. Direct Cost 4. Gross Profit 5. Other Income 6. Admin and General Expenses 7. Financing Cost 8. Net Profit /(Loss) 9. How to use Profit and Loss account Chapter IV Cash Flow Statement

6 1. Cash from Operations 2. Cash Flow from Investments 3. Cash Flow from Financing Activities 4. Model Cash Flow Statement Chapter V How to Read Financial Statements 1. How Financial Statements are related 2. How each value relates with other values 3. Business Perspective Chapter VI MIS Reports 1. How to Read Profit and Loss in MIS Reports 2. Choosing between Different Methods Chapter VII Ratio Analysis 1. Profitability Ratios 2. Working Capital Management Ratios 3. Liquidity Ratios 4. Return on Capital Employed (ROCE) 5. Key points in Ratio Analysis Chapter VIII Working Capital Management 1. Why is Working Capital Management crucial? 2. Managing Working Capital 3. Financing Working Capital 4. Working Capital for a Growing Business Chapter IX Budgeting 1. Key benefits of Budget 2. Prerequisites for Budgeting

7 3. Approaches to Budget 4. Types of Budget 5. How Budget is made 6. Who makes the Budget 7. Budget Approval 8. Assumptions in Budgeting Chapter X Break-Even Analysis 1. Cost Behavior -Variable and Fixed costs 2. Break-Even Analysis Model 3. Multiple Product Scenario 4. When can you apply break-even analysis? Chapter XI Capital Expenditure Planning 1. Payback Period 2. Net Present Value (NPV) 3. Internal Rate of Return (IRR) Chapter XII How to borrow from Banks 1. Types of Borrowing 2. How much can you Borrow? 3. Long-term debt 4. EMI Explained 5. What you need to get the loan 6. Ratios related to Borrowings Get your copy:

8 Chapter I Financial ial Accounting,, an Introduction What you do today can improve all your tomorrows -Ralph Marston YOU are promoted! Now your responsibilities include decision making that has financial implications. You are an entrepreneur, your business growth makes you feel, the finance matters are becoming kind of a puzzle; Or, You simply want to learn finance, as you know that will change your profile and takes you to greater heights in the corporate ladder. All right, let us begin so finance is no more a puzzle; no more a complex subject but something you can deal with it with comfort. Kindly be forewarned! Some finance jargons are used in this book. They are essential and explained well! Are you ready? Here we go 1. Financial Accounting basics Financial Accounting seeks to record, classify, process and present transactions of a company that have either present or future financial implications. We will cover certain Accounting principles knowledge of which is essential for correct interpretation of financial information as extracted from Accounting. These principles include: Cash basis accounting Accrual basis accounting

9 Matching principle Going Concern Cash Basis Accounting Under cash method of accounting, cash payments including an advance are accounted as expense and cash receipts including advance received against future sales are accounted as income. Any unpaid expense or future obligation is not an expense. Similarly, sales against future payment are not income. In simple words, cash accounting method reflects cash receipts as income and cash payments as expense. Where Cash Basis Accounting may be used There is uncertainty about collecting the billed amount, say in a small consulting business. Not-for-profit organization where income constitutes, mainly donations and expenses are towards welfare expense and charities. Micro level business can also use cash method of accounting. In few cases non-core operations of a larger business, cash accounting method is used. Example Gate pass income of a Sea Port, receipts for selling gate pass tickets for one year treated as income when the tickets are sold against cash payment. Except for the cases as above, cash-basis accounting is not recommended due to inaccuracies in net profit or loss computations under this method, which we will discuss next. Advantage & Disadvantage of Cash basis It is very simple to understand and apply.

10 Due to its extreme simplicity, cash basis accounting does not reflect the correct profit or loss of the company for a given period. Accrual Basis Accounting Accrual principle is the fundamental accounting principle that recognizes the timing difference between earning revenue and receiving money and expending and paying money. Under Accrual principle of Accounting, once earned it is income irrespective of receipt. Every cost incurred to earn that income is an expense to be accounted whether or not paid. An example will make this clear. Sales for the month of, say Jan 2015 is accounted as the Revenue. Then all Jan 2015 expense need to be accounted to arrive at Net Income / Net Profit. Please note such expense may have been paid OR to be paid OR paid in advance. Expenses paid in the same month include salaries & wages paid at the end of the month. Expenses paid in advance include Office & show room rent paid for one year in advance. Expenses to be paid in future include Staff Bonus paid at the end of the year or the following year. Going Concern Financial Accounting assumes the business will continue to be carried-on in the future. The importance of the above statement would be clear if we consider the value of the assets as recorded in the Accounts. Consider the value of stock. When a business is live, the

11 inventory is expected to be sold in the normal course at prices as determined. However, if the business is to be wound up, then there is distress sale. Under these circumstances, the value that is expected to be realized from selling or disposing of inventory can be significantly lower than what is recorded in Accounts as the value of inventory. Our discussion in this book is based on going concern assumption and accrual accounting method. 2. Glossary of terms Fund, Money, Cash The terms fund, money and cash are used in this book interchangeably. However, there is a fine difference; cash denotes currency notes and coins, while fund is used in a wider meaning to include other forms of cash like customer outstanding. While money is used in non-commercial language like, you lend money to your friend; fund is often used in commercial transactions like funding the working capital. Sales and Revenue Sales and Revenue are used interchangeably to denote net earnings of a company from sales that is total sales amount less value of trade discounts and value of goods returned. Please note, income from non-core operations of a company is not included within the meaning of Revenue. Please refer to Other Income. Inventory and Stock Inventory and stock are used interchangeably to denote value of goods purchased, goods under production and finished goods with a company. Inventory includes materials required for maintenance, viz., consumables.

12 In the case of a trading company, goods purchased for sales are the inventory. Activity Level Activity level refers to capacity utilization or sales levels in quantity or Dollars or quantum of service as it relates with type of business. Example, a company s production unit may be operating at 80% of its capacity. This is referred to as activity level in budgeting to describe flexible budgeting and in breakeven analysis. Company, organization The terms company and organization are used interchangeably. Company used to represent the sum total of resources like human, material and other resources and the organization system designed to pursue a mission and vision. 3. Financial Statements Now we understand essential accounting concepts and methods. Let us now move on to Financial Statements.

13 Financial statements are reports from financial accounting consisting of Balance Sheet (Chapters II & V) Profit & Loss Account (Chapters III & V) Cash Flow Statement (Chapters IV & V) We will cover in the next three chapters, the contents of Balance Sheet, Profit and Loss account and Cash Flow Statement. --End of preview-- To order a copy, please follow the link:

PAPER 7 : FINANCIAL MANAGEMENT

Level of Knowledge: Working knowledge PAPER 7 : FINANCIAL MANAGEMENT (60 Marks) Learning Outcome: To gain knowledge of various aspects of Financial Management and the ability to apply such knowledge in