1. Finance for Non-Financial Managers
By Paramesh Alisetti, ACMA

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. 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. 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 measurement
7) 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. Income statement of Model Ltd
Particulars Notes 31.3.2012 31.3.2011
Rs mln Rs mln
Revenue from Operations 23 14,076 14,011
Other Income 24 63 59
Total Revenue 14,139 14,070
Expenses:
Land purchase cost 25 1,686 1,297
Material & Labour cost 26 5,010 6,700
Contribution 7,443 6,073
53% 43%
Employee benefit expense 27 1,267 1,035
Other expense 28 1,775 1,479
EBITDA 4,401 3,559
31% 25%
Finance costs 29 1,061 845
EBIT 3,340 2,714
24% 19%
Depreciation and Amortisation expense 30 387 278
PBT 2,953 2,436
21% 17%
Tax expense 31 944 611
PAT 2,009 1,824
14% 13%
EPS 20 19
Share price 320 284
P/E ratio 16 15

6. The balance sheet always balances
Inv Debt
AR Cash A/P Equity
Assets = Liabilities + Equity + Reserves & surplus

7. Long term and short term balances
How can you increase the assets with out corresponding
increase in liabilities ???

8. Balance sheet of Model Ltd
As at As at
Particulars Notes
31-Mar-12 31-Mar-11
Rs.mln Rs.mln
Equity and Liabilities :
1. Shareholder's 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 1,236 904
Total Liabilities 40,714 38,035
Assets
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 2,830
Total Assets 40,714 38,035

9. Cash flow statement of Model Ltd
S.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. Financial health checkup
Profitability Solvency Efficiency
Sales growth – price/volume Current ratio = CA/CL Revenue/ Total assets
Contribution Margin ratio Quick ratio = CA-INV/CL Inventory Turnover
EBITDA Margin Interest cover = Avg Inventory / COGS
Operating Margin = EBIT/Interest Exp
Net profit margin ROCE = EBIT/ Capital
Gearing Ratio employed
All 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 ratio
Helps gauge the Margins = Long term debt/total Avg receivable days
that the Company is assets =Avg Receivables/Credit
generating Sales*365
Helps understand the
liquidity position and capital Payable days = Avg
structuring Payables/Credit
purchases*365

11. Reading Company annual report
Main sections in an Annual report
Chairman message to the shareholders
Business Portfolio
Board of Directors
Board Committees
Corporate Information
Directors report
Corporate Governance
Management discussion and analysis
Financial statements
Auditor’s report
Notes to accounts
Notice of the AGM
Any other details

12. Key decisions of Financial Management
Investment decisions
- New projects / expansion
- Acquisition of another entity
- Investment in working capital
Financing 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
- Reserves
Dividend 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 tradeoff
Time value of money

13. Investment appraisal
Investment 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 $809,253
IRR 17.10%
Discounted Payback (years) 6.6
IRR rule : Choose a project if and only If the IRR > cost of
capital

14. Working capital management
Working Capital - (Current assets – Current liabilities) Exceeds current operating assets
(Inventory+Receivables-Payables)The Company has a cash surplus usually represented by a
Bank deposits and investments. Otherwise, it has a deficit usually represented by a bank
loan and / or overdraft
Financing decision
Conservative policy - Both non-current + permanent part of current assets +some portion
of fluctuating current assets financed by long term finance
Aggressive policy - short term financing for all fluctuating + some part of permanent
portion of current assets
Moderate policy – matches the short term finance to fluctuating current assets and long
term finance for permanent portion of current assets
The operating cycle in a typical mfg industry
Raw material days + Time taken to produce the goods + the time goods remain in the
finished inventory + the time taken by the customers to pay for the goods- the period of
credit taken from the customers
-Reduce RM stock holding, obtain more finance from suppliers, reduce WIP & FG, reduce
customer credit

15. Cost accounting for decision making
The purpose of Cost Accounting - strictly for insiders (That’s way it’s also called
Management Accounting- a tool of every CEO of a Company)
Product costing and calculating COGS and protecting the GROSS MARGIN while
maintaining the quality of the product or service levels at acceptable level is the
subject of Cost accounting. (allocate costs between COGS and Inventory)
Many companies don’t really know whether or not they’re making a gross profit on
many of the products they sell.
Segregation of costs into variable & fixed -All costs are fixed in the short term and all
costs are variable in the long term.
Controllable and uncontrollable costs - All costs are uncontrollable in the short term; all
costs are controllable in the long term
Costing Techniques - Relevant costing, Standard costing , Marginal costing and break
even analysis, Activity Based Costing, target costing, life cycle costing, Pricing decisions
and profitability analysis.

16. Decision Making
Relevant costing (Incremental cashflows)
Special pricing orders (below the Market prices) – Proposed price less than the order
cost. Study of the cost estimates reveals that in the next qtr there are some overheads
which will not change irrespective of this order, hence those costs are not relevant for
calculating the profit.
Product Mix decisions when capacity constraint exists- Limiting factor (raw
materials, machine hrs, labour Hrs, market etc) – In this case, produce those products
which contribute more per limiting factor.
Replacement of equipment – The irrelance of past/ sunk costs
Outsourcing and make or buy decisions – At first instance it appears that the component
be outsourced since the pruchase price is less than cost of Mfg.However, the unit costs
include some costs that will be unchnaged. These are not relevant costs.
Discontinue decisions – if the incremental costs are more than incremental revenues
shutdown.

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. 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. The myths of Business planning
The Myth The Reality
1. Planning is a lot of Planning actually saves work and time, by
work; busy managers helping managers to avoid doing more work
don’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 the
soon 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 than
long 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 why
fast to be held back plans are important, because we can go very
by 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 productive
important or valuable by enabling us to avoid doing things that
as doing something don’t contribute to our productivity as
productive. measured by end results.
6. We should leave the Plans done without the substantial
planning to the planners involvement of the managers who are
and let the managers making the decisions are largely useless,
do their work. because they don’t reflect reality.

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. Any questions

22. Thank you