Finance & non finance

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Finance & non finance

Transcript of Finance & non finance

  • 1.Finance for Non Finance Professionals

2. Agenda

  • Objective of the Webinar
  • Key takeaways
  • Purpose of existence of an economic entity
  • Financial statements construction and purpose
  • Understanding and interpreting Financial Statements
  • Financial analysis as a measurement tool
  • Purpose of analysis equity perspective, debt perspective
  • Ratio analysis
  • Explaining simple terms in Finance - ROI, IRR, Time Value of Money
  • Q&A

3. Objective

  • The webinar will help the participants
    • To gain an understanding of the basic principles of finance
    • To evaluate decisions related to finance more knowledgeably
    • To participate effectively in finance related discussions in their respective organisations
    • To gain basic understanding to pursue higher education / career in the field of finance
    • To follow recent economic events and its impact on corporate performance
    • To take informed decision related to personal finance and investing
    • To interact with financial department / finance professionals more knowledgeably

4. Key Take Aways

  • Key takeaways
    • Basic understanding of various forms of economic entities
    • Understanding financial statements and perform ratio analysis on published statements
    • Evaluate a corporate investing or financing decision meaningfully
    • Track financial performance of listed companies closely, to take well-informed investment decisions
    • Read / follow business newspapers / business channels with better understanding

5. Purpose of an economic entity

  • To do business is to create an economic entity with the purpose of
        • Wealth creation
        • Wealth management, and
        • Wealth distribution
    • Objective of an enterprise To create the
    • best possible values and share them in the
    • equitable manner among all the stakeholders

6. Purpose of an enterprise

  • Business as an economic entity exists to make profits:
    • Trading activity
    • Selling price > Cost of purchase
    • Manufacturing activity:
    • Selling price > Cost of purchase + conversion costs
    • Services
    • Price for service > Cost of providing the service

Buying Selling Selling Processing Buying Servicing 7. Stakeholders

  • We need various entities to come together to run an enterprise and generate returns. Who are the stakeholders in a business?
    • Investors
      • Equity holders majority holders, minority shareholders
      • Debt holders including banks and financial institutions
    • Management
    • Employees
    • Suppliers
    • Customers
    • Community, Taxman

8. Why Accounting?

  • Accounting forms the basis for measuring the performance of an enterprise
  • The performance determines which stakeholder gets what share of the business
  • Accounting also ensures equitable distribution of wealth generated, based on each persons contribution to the business
  • Few examples:
    • Taxmangets his share of the profits (currently 35% in India), which are determined based on prudent accounting practices
    • Employeesare typically rewarded based on their individual performance as well as the performance of the enterprise
    • Minority shareholdersget equal treatment compared to majority owners (equal dividend distribution)
    • Debt holdersare paid their due for contributing debt capital to the business (interest payment and principal repayment)
    • Key to understanding accounting principles is to view an enterprise as a separate legal entity, and all stakeholders as those contributing capital, labour or resources.

9. Various forms of enterprise Partnership Enterprise Closely held Company Proprietary Public Ltd. Private Ltd. Publicly held 10. Various forms of enterprise

  • Proprietary business owned by single owner
    • No difference between the obligations of the business and the obligations of the individual.
  • Partnership firm owned by two or more owners
    • No difference between the obligations of the business and the obligations of the individual partners except when it is Limited Liability Partnership (Registered)
  • Companyis an artificial person, created by law and has perpetual existence. Obligations of the company are separate from those of promoters and management.
    • Private limited company
      • Not more than 50 members
      • Shares are not freely transferable.
      • No invitation to public for subscription.
    • Public limited company
      • Closely held public limited company(Deemed)
      • Publicly held public limited company (Listed)

11. Financial statements

  • Financial statements report the state of financial affairs of an enterprise
  • These are made publicly available for widely held companies, usually free of cost ( www.bseindia.comandwww.nseindia.com)
  • For closely held public companies and private companies, the financial statements are reported to the Ministry of Company Affairs
    • Some of these are available for public viewing (both online as well as physically) for a small fee. ( http://www.mca.gov.in)
  • Three key financial statements are
    • Balance Sheet
    • Profit & Loss Account and
    • Cash flow statement

12. Construct of a Balance Sheet

  • Liabilities
  • Owners capital
    • Equity Capital
    • Reserves and Surplus
  • Borrowed funds
    • Long term debt
    • Short term debt
  • Working capital
    • Creditors
    • Current liabilities and Provisions
  • Assets
  • Fixed Assets
    • Land and building
    • Plant and Machinery
  • Investments
    • Investment made in shares, bonds, government securities, etc.
  • Working Capital
    • Raw Material
    • Work in progress
    • Finished goods
    • Debtors
    • Cash

13. Some observations on Balance Sheet

  • TheLiabilityside represent the varioussources of fundsfor an enterprise
    • These are the liability of the enterprise to the providers of these funds
  • TheAssetside represent the varioususes of fundsby an enterprise
    • These are the assets held by the enterprise, that are needed to operate the business (e.g. Office space, factory, raw material, etc.)
  • The Assets and Liabilities should ALWAYS match.
  • In the Liability side, the portfolio mix of the own funds and borrowed funds is called theCapital Structureof the company
  • Balance sheet is always presented ason a given day , say as at March 31, 2008.It presents a static picture of the assets and liabilities of the enterprise as on that date.

14. Some observations on Balance Sheet

  • Another way to look at the balance sheet is to match the sources and uses of funds, based on their tenure.
    • In Liability side, long term sources are
      • Equity capital
      • Reserves and Surplus
      • Long term borrowings