Finance for Non-Finance People

Finance for Non-Finance People Better Together Breath School

 Overview of Finance Overview of Financial Management Financial Statements ( e.g. Balance Sheet, Cash Flows, Profit loss statement) Overview of Working Capital Overview of Accounting Break Even Point Capital Budgeting Investment Appraisal
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Meaning of Finance
Before we begin anything about finance, First of all lets understand the origin of word Finance.

The world finance was originally a French word. Which is adopted by English As The management of money. Basically, finance is an art of managing various available resources like money, assets, investments, securities etc. At present we can't imagine a world without finance. It is the soul of our economic activities.
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Definitions of Finance
In general Sense, Finance is the management of money and other valuable, which can be easily converted into cash. According Experts, Finance is a simple task of providing the necessary funds required by the business entities which are most favorable to achieve their economic objectives. According Entrepreneurs, finance is concerned with cash. And every business transaction involves cash directly and indirectly.
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Features of Finance
Investment Opportunities
Profitable Opportunities Optimal mix of funds

System of Internal Controls

Future Decision Making
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The financial management is the process of putting the available funds to the best advantage from the long term point of view of business objectives. Financial management means planning, organizing directing, and controlling the financial activities like procurement and utilization of funds of the enterprise.

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Functions of Financial Management

Estimation of capital requirements Management of cash

Choice of sources of funds

Investment of funds

Financial controls

Disposal of surplus

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Overview of financial statement

There are four financial statement a company uses to report its financial condition and operation for a period of time. Balance Sheet Income Statement

Statement of Shareholders equity

Statement of Cash flow

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Balance sheet
A balance sheet describes the financial situation of a company at a specific point in time. It has three parts. Assets: - In financial accounting, assets are economic resources. These are thing of value owned or controlled by a business. Liabilities: - Liabilities are amounts the business owes to other outside the business. Shareholders Equity: - The claims of owner are called shareholders equity.

Assets
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Liabilities

Owners Equity
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Assets can be classified into two Categories.

Current Assets: - Are those assets which are held for short time. E.g. Cash in hand, Cash at bank, debtors, bill receivable, stock, Prepaid expenses.
Non-Current Assets: - Are those assets which are acquired for long term in the business. Which are increase the profit earning capacity of the business. E.g. Land, Building, furniture, Machinery, and Vehicles etc.

Income statement is also known as statement of earnings, or the statement of operations, or the profit and loss statement. The Income Statement summarizes the results of a firms operation for a period of time. Four Major types of items appear on income statement: -

Revenue

Expenses

Gain

Loss

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ILLUSTRATION OF INCOME STATEMENT

Revenues Assets (cash or AR) created through business operations Expenses Assets (cash or AP) consumed through business operations Net Income or (Net Loss) Revenues - Expenses

Shows the results of a companys operations over a period of time. What goods were sold or

services performed that provided revenue for the company? What costs were incurred in normal operations to generate these revenues?
What are the earnings or

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AR:A/cs receivable; AP:A/cs payable

company profit?

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Cash Flow
Thus far, our focus has been on the two long-standing, conventional financial statements the balance sheet and the income statement. We now turn our attention to the statement of cash flows

The statement of cash flows is designed to provide information about a firms inflows and outflows of cash during a period of time

Working capital is the amount of money that a company has tied up in funding its day to day operations.

Stocks

Operating Cycle of Working Capital

Value Addition
Accounts Payable Finished Goods

Cash Accounts Receivable

Sales

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What is Accounting ?
Accounting is a Finance support system that records, classify and express the transaction in monetary terms. And helps to monitor financial performance & condition of the business.

In every business concern, We have to take so many decision. So We need to record all accounting information.
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Accounting Cycle
Balance sheet (Closing)

Profit & loss A/c

Transaction

Trading Account

Balance Sheet (Openin g)

Journal

Trial Balance

Ledger

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Accounting Equation
Each transaction that takes place in a business can be recorded in the accounting equation. Which is describes as: Assets = Liabilities + Shareholders Equity Balance Sheet

Contributed Capital

Retained Earnings

Shareholders Equity

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Beginning retained earning + Net Income - Dividends = Ending retained earnings

Income Statement

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Break Even Analysis

Definition: A technique used to examine the relationship between a firms sales, costs, and profits at various levels of output. It is sometimes termed cost-volume-profit Break Even Point = analysis Fixed cost + Target Profit Price Variable cost =(Targeted Volume)
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Break Even Point

TR TC

Revenue, Cost ($)

FC

+ EBIT (Operation profits)

- EBIT (operating loss)

Output, Q
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Capital Budgeting
Capital budgeting is the process by which the firm decides which long term investment to make. The decision to accept or reject a capital budgeting project depends on an analysis of the cash flow generated by the project and its cost. The following three capital Budgeting decision rules will be presented below: -

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Capital Budgeting decision rules

Net Present Value (NPV) Internal Rate of Return (IRR) Profitability Index (PI) Payback (PB) Period

NET PRESENT VALUE (NPV)

The NPV of a Capital budgeting project indicates the expected impact of the project on the value of the firm. The NPV is calculated as the present value of the projects cash inflows minus the present value of the projects cash outflows. NPV = (NCF)t/(1+k)t - NINV

Internal Rate of Return (IRR)

The internal rate of return (IRR) of a Capital budgeting project is the discount rate at which the NPV of a project equals zero. The IRR method indicate that a project whose IRR is greater than or equal to the firms cost of capital should be accepted.

Profitability Index (PI)

Profitability index is a index that attempts to identify the relationship between the costs and benefits of a proposed project through the use of a ratio calculated as: -

PV of Future Cash Flows Initial Investment A Project whose PI is greater than or equal to 1 is considered acceptable

Thank you