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) FirmShareholder Investment opportunities (financial assets) InvestAlternative: 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.

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