Finance for Business Leaders : An Introduction

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Finance for Business Leaders :
An Introduction

July 8,
2011

By A.V. Vedpuriswar

The Financial System

Financial Institutions

Commercial Banks

Insurance Companies


Mutual Funds

Provident Funds

Non
-
Banking Financial
Companies

Suppliers of Funds

Individuals

Businesses

Governments

Demanders of
Funds

Individuals

Businesses

Governments

Financial Markets

Money Market

Capital Market

Funds

Deposits / Shares

Funds

Securities

Funds

Securities

Funds

Loans

Ref:
Prasanna

Chandra, “ Financial management”


Classification of Financial Markets

Nature of claim

Debt market

Equity Market

Maturity of claim

Money Market

Capital Market

Seasoning of claim

Primary Market

Secondary market

Timing of claim

Cash or Spot Market

Forward or Futures Market

Organizational structure

Exchange
-
traded Market

Over
-
the
-
counter Market

Ref :
Prasanna

Chandra, “ Financial Management”

Role of The Financial Manager

Financial

manager

Firm's

operations

Financial

markets

(1)

(2)

(3)

(4a)

Ref:
Brealey

and Myers
-

Principles of Corporate finance

(4 b)

How Finance adds value for shareholders


Cash

Investment
opportunity (real
asset)

Firm

Shareholder

Investment
opportunities
(financial assets)

Invest

Alternative:
pay dividend
to
shareholders

Shareholders
invest for
themselves

Key Financial Decisions


Get the highest return on investments


Allocate scarce financial resources


Reduce costs


Maximise

value for shareholders


Shareholders
vs

Stakeholders


The Financial Lifecycle


Every company has a financial life cycle.



It involves :


obtaining money


using the money to run and grow the business


returning money to shareholders.


The lifecycle can be divided into :


financing phase


investing phase


operating phase,


returning phase,

Finance conveys performance of business at a glance

8


Financial statements represent reality.


But they are not the reality.


Finance / Accounting are both art and science.

The heart of Finance

9


Assets ( what the company owns)


Liabilities ( what the company owes)


Revenues ( money generated by the business)


Expenses ( money spent on the business)


Inflows and outflows of cash ( a measure of liquidity)

Generally Accepted Accounting Principles


The Business Entity Principle


The Cost Principle


The Objectivity Principle


The Continuing
-
concern Principle


The Stable Dollar Principle


Applying GAAP


Expense booking


Sales booking


Book neither too early nor too late.


What matters is not the actual collection or payment


What matters is whether the revenue can be
recognised

and whether the expense must be booked.

The Income Statement


Revenue:

This is earned money.


Expense:

This is the cost of doing business.


Gross profit :
Revenues


Expenses


Operating profit :
Gross Profit
-

S
elling and general
admn

expenses, depreciation expenses,


Net Profit
: Operating profit


Interest


Taxes


The Revenues and expenses always balance. The balancing
entry is the profit/loss made.


What we can learn from the income
statement



Sales, costs and profits


Specific unexpected expenditures


Whether the business is profitable


Drill deeper into individual segments


The Balance Sheet


A "snapshot" of a company's financial position at a moment
in time.


What a company owns (assets) and what it owes (liabilities)


The difference between the two is the shareholder equity.


The Balance Sheet always balances.

What we can learn from the Balance Sheet


Basis for computing



rates of return,



measuring exposure to debt


Evaluating capital structure and assessing liquidity and
financial flexibility.


What assets does the company hold?


How much debt does it owe?


Is there enough cash to manage its inventory and pay its creditors?


How financially sound is the company?


Can it handle the normal fluctuations of revenues and expenses?



The Cash Flow statement


Operating cash flows:
Cash in
-
flows and out
-
flows for
a business on account of its day
-
to
-
day operations.


Financing cash flows :

Cash flows from "raising"
money for a company's business.


Investing cash flows :
Using cash for the purchase of
plant, property, and equipment, and for long
-
term
investments and receiving cash out of their sales.

Sources and Uses of Funds



Sources


Earnings


Depreciation


Bank notes


Accounts payable

Uses


Fixed assets


Accounts Receivable


Inventory


Investments

What we can do with the cash flow statements


Forecast cash requirements


Identify financing needs


Locate cash drains


Identify problems in the cash budgeting process


The Connection between Income statement and
Balance Sheet

19


Profits not distributed come back as Retained Earnings on
Balance Sheet.


Expenses incurred but not paid come back as Accrued
expenses on Balance Sheet.


Expenses incurred for benefits not yet received come back
as Pre paid assets on Balance Sheet.


Depreciation and other non cash expenses incurred appear
in both statements.

Thank You

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