financial management part 1 icri

04/15/2023 FINANCIAL MANAGEMENT BY DEVANSH MEHTA | ICRI, DELHI 1

WELCOME TO WORLD OF

FINANCIAL MANAGEMENT

MONEY GETS MONEY


Finance is much concerned with the effective utilization of funds.

• It’s focused on the arrangement of funds at the right time in order that the determined tasks may be carried out satisfactorily.

• Financial management plays a vital role; on account of which the liquidity position of a business is affected.

• The term liquidity refers to the ability of an organization to pay its current liabilities as they come due.



• Not only does financial management aim at the effective utilization but also at money management.

• If sufficient funds are available at the time when needed, a company can clear its short term debts; its operations can be maintained effectively and so the working capital financing lends a hand for a business to do well.



• Working Capital is defined as, “The administration of the firm’s current assets and financing needed to support current assets.”

• The term working capital is used for day-to-day requirement of funds for a business.

• The concept of working capital should be easily understandable since it is very much connected with our personal lives as well. In the sense, sufficient money is needed for our cost of living.


Basic Understanding of Finance

• Current assets of a business are those that will be converted in to cash in twelve months period. They are: Cash, Receivables, inventories, marketable securities and prepayments. Current liabilities are those that are to be settled in twelve months period. Current liabilities are: Accounts payable, unearned revenues and wages payable.


Basic Understanding of Finance !

• “Cash is king” - despite the fact that the cash has its own costs. Cash is the most liquid asset to be presented commonly on the balance sheet as the first item. Management of cash is of great essence for a company. If adequate cash is not available as and when it is needed, the situation leads to bankruptcy. Management of cash and liquidity involves providing sufficient funds to the business for meeting various requirements at the right time, such as, repayment of bank loans, payment of taxes, payment of wages, purchases of raw materials and inventory etc. Moreover, holding the cash entails a precautionary motive in order to meet unforeseen events. Therefore, the cash must be managed properly and provided for arising contingencies. Apart from these, cash management also involves speeding cash inflows and slowing cash outflows. The former case indicates making collections as soon as they come due for collection while the latter indicates the payments to be made as close to the cut-off-date as possible – but it is not be taken in isolation – as it is likely to lose the facility of availing the discounts. So, the payments are to be made close to the cut-off-date while utilizing the discounts if any. In this manner, in the former case, the discount is offered for early payment –togenerate the revenue quickly. In the latter case, the discount is availed – to clear the debts and using the facility of discount. This is how the two-fold benefit may be obtained


THINK OF MANAGING YOUR OWN LIFE

THINK OF MANAGING YOUR BUSINESS


Finance is “Everywhere”,& Its Core, Like Blood


* 1494: First Published Accountancy Work

Roman writing tablet from the Vindolanda Roman fort of Hadrian's Wall, in Northumberland (1st-2nd century AD) requesting money to buy 5,000 measures

First Accountancy Work in 1494


1700: Industrial Revolution

Created Need For Sophisticated techniques that can Handle LargeQuantities Of Goods & Services

N o r m a l B o o k Ke e p i n g ( B h i K h a t a ) A c c o u n t a n c y


Financial Terminologies

• Account a record of financial transactions; usually refers to a ‐‐specific category or type, such as travel expense account or purchase account.

• Accountant a person who is trained to prepare and maintain ‐‐financial records.

• Accounting a system for keeping score in business, using Rupees.‐‐


• Accounting period the period of time over which profits are ‐‐calculated. Normal accounting periods are months, quarters, and years (fiscal or calendar).

• Accounts payable amounts owed by the company for the goods or ‐‐services it has purchased from outside suppliers.

• Accounts receivable amounts owed to the company by its ‐‐customers.



• Aging a process where accounts receivable are sorted out by age ‐‐(typically current, 30 to 60 days old, 60 to 120 days old, and so on.) Aging permits collection efforts to focus on accounts that are long overdue.

• Amortize to charge a regular portion of an expenditure over a fixed ‐‐period of time. For example if something cost $100 and is to be amortized over ten years, the financial reports will show an expense of $10 per year for ten years. If the cost were not amortized, the entire $100 would show up on the financial report as an expense in the year the expenditure was made. (See entries on Expenditure and Expense.)




• Appreciation an increase in value. If a machine cost $1,000 last year ‐‐and is now worth $1,200, it has appreciated in value by $200. (The opposite of depreciation.)

• Assets things of value owned by a business. An asset may be a ‐‐physical property such as a building, or an object such as a stock certificate, or it may be a right, such as the right to use a patented process



• Fixed Assets cannot be quickly turned into cash without interfering with business operations. Fixed assets include land, buildings, machinery, equipment, furniture, and long term investments.‐

• Intangible Assets are items such as patents, copyrights, trademarks, licenses, franchises, and other kinds of rights or things of value to a company, which are not physical objects. These assets may be the most important ones a company owns. Often they do not appear on financial reports.



• Bond a written record of a debt payable more than a year in the ‐‐future. The bond shows amount of the debt, due date, and interest rate.

• Book value total assets minus total liabilities.‐‐

• Book value also means the value of an asset as recorded on the company's books or financial reports. Book value is often different than true value. It may be more or less.



• Breakeven point the amount of revenue from sales which exactly ‐‐equals the amount of expense. Breakeven point is often expressed as the number of units that must be sold to produce revenues exactly equal to expenses. Sales above the breakeven point produce a profit; below produces a loss.

• Capital money invested in a business by its owners. (See equity.) On ‐‐the bottom or right side of a balance sheet. Capital also refers to buildings, machinery, and other fixed assets in a business. A capital investment is an investment in a fixed asset with a long term use.‐



• Cash money available to spend now. Usually in a checking account.‐‐

• Cost of sales, cost of goods sold the expense or cost of all items ‐‐sold during an accounting period. Each unit sold has a cost of sales or cost of the goods sold. In businesses with a great many items flowing through, the cost of sales or cost of goods sold is often computed by this formula: Cost of Sales = Beginning Inventory + Purchases During the Period Ending Inventory.‐


• Credit an accounting entry on the right or bottom of a balance ‐‐sheet. Usually an increase in liabilities or capital, or a reduction in assets. The opposite of credit is debit. Each credit in a balance sheet has a balancing debit. Credit has other usages, as in "You have to pay cash, your credit is no good." Or "we will credit your account with the refund.“

• Debit an accounting entry on the left or top of a balance sheet. ‐‐Usually an increase in assets or a reduction in liabilities. Every debit has a balancing credit.



• Depreciation an expense that is supposed to reflect the loss in ‐‐value of a fixed asset. For example, if a machine will completely wear out after ten year's use, the cost of the machine is charged as an expense over the ten year life rather than all at once, when the ‐machine is purchased. Straight line depreciation charges the same amount to expense each year. Accelerated depreciation charges more to expense in early years, less in later years. Depreciation is an accounting expense. In real life, the fixed asset may grow in value or it may become worthless long before the depreciation period ends.



• Dividend a portion of the after tax profits paid out to the owners of ‐‐ ‐a business as a return on their investment.

• Double entry a system of accounting in which every transaction is ‐‐recorded twice as a debit and as a credit.‐‐

• Equity the owners' share of a business‐‐



• Goodwill in accounting, the difference between what a company ‐‐pays when it buys the assets of another company and the book value of those assets. Sometimes, real goodwill is involved a company's ‐good reputation, the loyalty of its customers, and so on. Sometimes, goodwill is an overpayment.

• Journal a chronological record of business transactions.‐‐

• Ledger a record of business transactions kept by type or account. ‐‐Journal entries are usually transferred to ledgers.



• Liabilities amounts owed by a company to others. Current liabilities ‐‐are those amounts due within one year or less and usually include accounts payable, accruals, loans due to be paid within a year, taxes due within a year, and so on. Long term liabilities normally include ‐the amounts of mortgages, bonds, and long term loans that are due ‐more than a year in the future.

• Liquid having lots of cash or assets easily converted to cash.‐‐



• Net worth total assets minus total liabilities. Net worth is seldom the true value ‐‐of a company.

• Overhead a cost that does not vary with the level of production or sales, and ‐‐usually a cost not directly involved with production or sales. The chief executive's salary and rent are typically overhead.

• Present value a concept that compares the value of money available in the ‐‐future with the value of money in hand today. For example, $78.35 invested today in a 5% savings account will grow to $100 in five years. Thus the present value of $100 received in five years is $78.35. The concept of present value is used to analyze investment opportunities that have a future payoff.


Q: How can One Ensure Efficient & Effective Financial Management

Q: What are The Characteristics of Such a system

Q: Does F.M. solely depends on Past Data


Accountancy : Definition & Types

• Defined As : The system of recording and summarizing business and financial transactions and analyzing, verifying, and reporting the results; also : the principles and procedures of accounting.

• Types : Financial Accounting & Managerial Accounting !


Fundamentals of Accounting

• The Business is Known As Entity separate from the Owners. Business Entity Concept.

• Assumptions are that Business will remain forever. Going concern concept.

• Transactions form the core of Thing to be called Accounts Or trigger Accounting.

• Accounting assumtions and procedures should conform and bear Consistency with those followed in earlier years.


Fundamentals of Accounting

• Accounting should catch the real substance behind a transaction & should not merely reflect its legal form. Known as Principle of Substance over form.

• Accounting should represent All relevant & material information that is necessary in order not to be misleading.

• A transaction is recorded in the accounts at its Historical Cost.


FINAL ACCOUNTS STATEMENTS

• Where have the funds come from ????

• Where are they invested ???

• How Well are the funds invested??

and

• How has the Investment Grown ????


B. S & P & L Statements !

• Balance Sheet : Answers Where have the funds come from and Where are they invested ??

• Profit & Loss Statement : Anwers, How well are the funds invested ??? & How has the Investment grown ???


Balance Sheet

A statement of the financial position of a company at a single specific time (often at the close of business on the last day of the month,

quarter, or year.) The balance sheet normally lists all assets on the left side or top while liabilities and capital are listed on the right side or

bottom. The total of all numbers on the left side or top must equal or balance the total of all numbers on the right side or bottom. A balance sheet balances according to this equation: Assets = Liabilities + Capital.


'PROFIT AND LOSS STATEMENT - P&L'

A financial statement that summarizes the revenues, costs and expenses incurred during a specific period of time - usually a fiscal quarter or year.

These records provide information that shows the ability of a company to generate profit by

increasing revenue and reducing costs. The P&L statement is also known as a "statement of profit and loss",

an "income statement" or an "income and expense statement".


WHAT ARE “the” DIFFERENCES

BETWEEN BALANCE SHEET &

PROFIT & LOSS STATEMENT


Difference Between B.S / P & L Statement

Balance Sheet Profit & Loss Statement

From Where have the funds come from and how much from each Source

Profit/Loss is nothing else but the difference between Revenue and Expenses for a particular period

The sources from which the funds have come from are shown on one side of the Balance sheet, Known as Liability side

The Profit /Loss Account gives the breakup of all Revenues on one side and the breakup of all expenses on the other side.

Where these funds are invested and how much in each application, These are shown on the Other side of the Balance sheet, popularly known as the Asset Side

Revenue is more popularly known as Income. E.g. Goods sold, services offered, Also includes, Interest earned, Rent received, Dividends earned.

One Can prepare a Balance sheet as on Any day The Profit and Loss statement (or Profit & Loss account) is prepared for a particular period of time, usually it is One year.


Difference between B.S. & P/L Statement

Balance Sheet Profit & Loss Statement

Balance sheet, Can be Prepared at point of time of the year.

Profit & Loss statement, are prepared, for a particular financial year, or Annual year, for a year.

Balance Sheet maintains Accounts in terms of Liabilities and Assets.

P/L sheet maintains the account statement in terms of Revenue and Expenses.


Part 2


Capital & Reserves put Together

• Net Worth Or Owners Equity.!

• The Assets will always be equal to the liabilities & vice-versa.

• The net balance of the Profit & Loss Appropriation statement.

• Is Surplus Or deficit that belongs to the Owners and is Shown in the Balance-Sheet along with the Owners capital.


Examples

• When Mr. X buys goods worth Rs. 5000 on cash terms,

• Cash will go down by Rs. 5000.• Inventory will go up by Rs. 5000.

• When Mr. X sells the same goods for Rs. 6000 cash, as we can immediately know, there is a profit of Rs. 1000.

• In accounting terms, a. Cash will go up by Rs. 6000• Inventory will go down by Rs. 5000• Mr. X equity will go up by Rs.1000.


Thus,

• Each transaction will have two effects within these permutation an combinations to ensure that in the end, summation of assets equal summation of liabilities.


Dr (Debit) Cr (Credit)

10 1000

20 2000

20 220

(Ledger )Liabilities / Revenue (P & L statement)

(Ledger)Assets / Expenses (P & L statement)

Dr (Debit) Cr (Credit)

1000 100

2000 200

2000 2200

If total of LHS is Greater, its called, Debit balance ; If total of RHS is Greater, its called, Credit Balance.

financial management part 1 icri

Presentations & Public Speaking

management of cash

cash management

money management

financial management

cash outflows

adequate cash

devansh mehta icri

sufficient funds