Finance for Non-finance

ABOUT MYSELF • Name

:

• Qualifications

: 1. B.Com.(Hons) 2. Post-graduate Commerce. 3. M.Phil (Commerce) 4. Ph.D. (Commerce) submitted. : Joined University of Delhi as Lecturer in Commerce in 2001 and continued till 2005 and then joined Army Institute as Senior Faculty, Finance Area prior to current appointment at NICMAR.

• Experience

Sarbesh Mishra.

Need of Knowing Finance – A Managerial Perspective

by

Mr. Sarbesh Mishra, Assistant Professor, Finance Area. National Institute of Construction Management & Research (NICMAR)

COVERAGE UNDER THIS TOPIC • INTRODUCTION • BASIC CONCEPTS • LEGAL FRAMEWORK & BRIEF REVIEW OF PROVISIONS • THE BALANCE SHEET & ITS KEY ELEMENTS • THE PROFIT & LOSS A/C & ITS KEY ELEMENTS

Qs:- If I have no intention of becoming a financial manger, why do I need to, understand financial applications / Analyse of Financial statements?

• The successful manager will need to be much more of a team player that has the knowledge and ability to move not just vertically within an organization but horizontally as well.

Developing cross-functional capabilities will be the rule, not the exception.

Contd…. • The mastery of basic financial management skills is key ingredient that will be required in the work place of yours not in too distant future. • Finance is the study of money management, the acquiring of funds (cash) and the directing of these funds to meet particular objectives. Good financial management helps businesses to maximize returns while simultaneously minimizing risks.

Hierarchy of Finance in any Project • Technical Appraisal • Financial Appraisal

Goal Of The Firm

Goal

“STAKEHOLDER WEALTH MAXIMISATION”

Goal Of The Firm Creating the Firm EQUITY

DEBT

ASSETS

Goal Of The Firm

Building Up The Firm ASSETS

SALES

Goal Of The Firm

Building Up The Firm

ASSETS

SALES

EARNINGS

Goal Of The Firm

Building Up The Firm INTEREST

ASSETS

SALES

EARNINGS

DIVIDEND

Goal Of The Firm The Key Links * INTEREST

ASSETS

A T/O *

SALES

NPM *

EARNINGS

* Payout

DIVIDEND

Rate???

Goal Of The Firm Dividend Policy And Re-investment Rate: The Critical Factor INTEREST

ASSETS

A T/O *

SALES

NPM *

EARNINGS

* Payout

DIVIDEND

At what rate / cost ???

Finance Measures  Cost  Revenue  Profit  ROI  EVA

UNDERSTANDING FINANCE & ACCOUNTS

What is the NEED for this ?

MANAGERS, SHAREHOLDERS, CREDITORS, ETC. WANT TO KNOW :

• WHAT IS THE FINANCIAL POSITION OF THE FIRM AT A GIVEN POINT OF TIME ?

• ANSWER GIVEN BY THE FIRM’S BALANCE SHEET

• HOW HAS THE FIRM PERFORMED FINANCIALLY OVER A GIVEN PERIOD OF TIME ?

• ANSWER GIVEN BY THE FIRM’S PROFIT & LOSS ACCOUNT

BASIC CONCEPTS UNDERLYING FINANCIAL ACCOUNTING • • • • • • • • • •

ENTITY CONCEPT GOING CONCERN CONCEPT MONEY MEASUREMENT CONCEPT COST CONCEPT CONSERVATISM CONCEPT DUAL ASPECT CONCEPT ACCOUNTING PERIOD CONCEPT REALIZATION CONCEPT MATCHING CONCEPT MATERIALITY CONCEPT

LEGAL FRAMEWORK WITHIN COMPANIES’ ACT, 1956 : • Compulsory for Cos. to keep proper books of accounts & to prepare annual statements in the prescribed form & time. (Secs.209-223)

BRIEF REVIEW OF PROVISIONS • PREPARATION OF FINAL STATEMENTS (Sec.210) : - To present B/S & P&L A/c at every AGM. - Period for A/cs is “Financial Year”. - Responsibility fixed on co.’s Directors. - Punishment laid down for non-compliance. • FORM & CONTENTS OF P&L A/C & B/S (Sec.211) : - To give a TRUE & FAIR view of state of affairs. - B/s to be in form set out in Sch.VI or as near thereto. - Slightly diff. forms for banking, insurance & electricity companies governed by special statutes. • REPORTS REQUIRED TO BE ATTACHED WITH B/S : - Auditor’s (including special or supplementary,if any) - Directors’.

BRIEF REVIEW (Contd.) • AUTHENTICATION OF B/S & P&L A/C (Sec.215) : - Reqd. to be signed by atleast 2 Directors (including MD, if there is one) & Secretary. • FILING OF ACCOUNTS (Sec.220) : - 3 sets of final accounts & other documents to be filed with the Registrar of Companies within 30 days of annual general meeting.

BALANCE SHEET Sec 211 : Form to be as prescribed in Part I of Schedule VI - Horizontal form - Vertical form

HORIZONTAL FORM OF B/S LIABILITIES • • • • •

Share Capital Reserves and Surplus Secured Loans Unsecured Loans Current Liabilities and Provisions

ASSETS • Fixed Assets • Investments • Current Assets, Loans and Advances • Misc. Expenditures and Losses

SIS LTD. ANNUAL ACCOUNTS BALANCE SHEET (Figs. in Rs./Lacs) Sources of Funds 1.

2.

Shar ehold ers’ Funds (i) Capital (ii) Reserves And Surplus Loan Funds (i) Secured Loans (ii) Unsecured Loans

as at 30th Sep., 2004

as at 30th Sep., 2003

736.95 14,856.94 15,593.89

736.95 14,464.92 15,201.87

2,107.36 2,976.21 5,083.57

1,321.86 3,063.95 4,385.81

14. Current Liabilities & Provisions (i) Current Liabilities 9,118.41 (ii) Provisions 1,947.67 11,066.08 TOTAL

31,743.54

7,484.91 863.30 8,348.21 27,935.89

Application of Funds 1.

Fixed Assets (i) Gross Block Less : Depreciation Net Block (ii) Capital Work in Progress

as at 30th Sep.,2004

(Figs. in Rs./Crores) as at 30th Sep., 2003

9,175.71 5,809.88 3,365.83 97.13

8,647.11 5,341.47 3,305.64 16.52

a

3,462.96

3,322.16

b

7,989.60

8,375.57

3. Current Assets, Loans & Advances (i) Inventories 6,823.34 (ii) Sundry Debtors 8,880.50 (iii) Cash & Bank Balances 754.80 (iv) Loans And Advances 3,832.34 Sub-total c 20,290.98

5,686.30 5,803.17 283.25 4,465.44 16,238.16

Sub-total 2. Investments

TOTAL

a+b+c =

31,743.54

27,935.89

Liabilities (or Equities) = What the Business Owes Others • Share Capital

Equity Theoretical owners of co. Capital No fixed rate of dividend. Risk capital.

Preference Capital

• Reserves

Dividend payable at fixed rate

Revenue Reserves - general reserve - capital redemption reserve, etc.

Capital Reserve - share premium a/c - assets revaluation res

& Surplus

Bal. of P&L A/c (not appropriated)

Note : Share Capital + Reserves & Surplus = Owners’ Equity

OTHER LIABILITIES • Secured Loans : (i.e. borrowings against specific securities)

1) Debentures, 2) Loans from Financial Institutions and 3) Loans from Commercial Banks.

• Unsecured Loans: 1) Fixed Deposits, 2) Loans & Advances from (i.e. borrowings without Promoters, 3) Inter-corporate Borrowings and 4) any specific securities) Short-term Loans & Advances from Banks. • Current Liabilities & Provisions : 1) Bills Payable, 2) Payments (obligations maturing Received in Advance, 3) Accrued Expenses, 4) within the next 1 year) Unclaimed Dividends & 5) Provisions for Taxes, Insurance Premia, Pensions, Dividends, etc.

ASSETS • Fixed Assets :

Used over relatively long periods for the business Ordinarily not meant for resale e.g. Land, Buildings, Plant & Machinery, Patents & Copyrights, Goodwill, etc.

• Investments :

Financial securities owned by the firm e.g. Investments in govt. securities, equity shares of other companies, debentures, etc.

• Current Assets, Loans: Resources convertible into cash during and Advances operating cycle of firm Receivable) Expenses.

e.g. Cash in hand or bank, Sundry Debtors (Bills Inventories, Loans & Advances and Prepaid

• Miscellaneous Expenditures and Losses : e.g. Preliminary or Pre-operative Expenses not written off, Commission/ Brokerage on underwriting or subscription of shares/debentures, Net Loss carried forward from P&L A/c.

PROFIT & LOSS ACCOUNT (Also known as INCOME STATEMENT) ⇒ NO STANDARD OR SPECIFIED FORMAT UNDER

INDIAN COMPANIES ACT. However, as per Part II of Schedule VI, any format must disclose the following : ⇒ ⇒ ⇒ ⇒ ⇒ ⇒ ⇒ ⇒ ⇒ ⇒ ⇒

Net Turnover or Sales Cost of Goods Sold Gross Profit Operating Expenses Operating Profit Non-operating Surplus/Deficit Profit Before Interest and Tax (PBIT) Interest Profit Before Tax (PBT) Tax Profit After Tax (PAT)

FORMAT OF A TYPICAL P&L A/C EXPENSES • • • • • • • • • • • •

Raw Materials Consumed Salaries & Wages Power, Fuel & Water Repairs & Maintenance Insurance Depreciation Miscellaneous Expenses Profit Before Interest & Tax Interest Profit Before Tax Provision for Tax Profit After Tax (i.e. Net Profit)

INCOME • Sales • Other Income

PROFIT & LOSS A/C INCOME

(Figs. in Rs.lakhs) For the year ended 30th Sep., 30th Sep., 2004 2003

6. Sales 2. Other income Total Income

28,420.39 2,137.68

23,868.13 1,539.64

30,558.07

25,407.77

EXPENDITURE 1. 2. 3. 4. 5.

For the year ended 30th Sep., 30th Sep., 2004 2003

Cost of Goods for Resale 6,702.12 Manufacturing Expenses 15,279.08 Employee Cost 4,059.15 Admn. & Selling Exp. 2,204.27 Depreciation 593.71 Total Expenditure 28,838.33 PBIT Interest

8,150.64 10,623.13 2,756.30 2,231.06 562.21 24,323.34

1,719.74 743.91

1,084.43 530.52

Profit before Tax Tax

975.83 375.49

553.91 (-)995.92

Profit after tax

332.88

1,549.83

DETAILS OF CONTENTS OF P&L A/C • Net Sales : Sales - Sales Inwards (i.e. Returns) - Sales Discounts • Cost of Goods Sold : Sum of costs incurred for manufacturing

the goods SOLD during the accounting period. Consists of DIRECT MATERIAL COST, DIRECT LABOUR COST and FACTORY OVERHEADS. • GrossProfit : Net Sales - Cost of Goods Sold

• Operating Expenses : - General Administrative Expenses - Selling & Distribution Expenses - Depreciation

• Operative Profit : Gross Profit - Operating Expenses • Non-operating Surplus/Loss : Gains/Losses Sources Other

Than Normal Business of the Co. e.g. income/loss from investments, disposal of assets, etc.

DETAILS OF P&L A/C (Contd.) • PBIT (or EBIT) : Operating Profit + Non-operating Surplus • Interest : Expense incurred for borrowed funds like Long-term Loans, Debentures, Public Deposits & Working Capital Advances.

• • • • •

PBT : = PBIT - I Tax : Income Tax payable on the taxable profit of the year. PAT : = PBT - T Dividends : Amount earmarked for distribution to shareholders. Retained Earnings : = PAT - Dividends

TO ASSESS THE FINANCIAL HEALTH OF ANY COMPANY, ONE REQUIRES A GOOD UNDERSTANDING OF THE FINANCIAL STATEMENTS OF THE COMPANY