FINANCE

FOR NONFINANCIAL

MANAGERS

Finance Beginner’s Handbook

How can you benefit from this book?

This book is a quick reference finance handbook to help you

understand and manage the financial accounting side of your

business or job responsibilities.

Enable you ask informed questions when studying financial

reports - Monthly MIS, Quarterly Financial Performance reports

or Audited Financial reports.

Your core competence is IT, Production, Business Development,

or Marketing and your responsibility includes financial

performance measure; then this book is for YOU!

Topics are around your demand for knowledge in managing your

business or division in terms of financial performance.

This book will empower you to interpret financial statements and

take day-to-day business decisions with financial focus. Kindly

be aware that this book will not make you at par with a qualified

and experienced financial professional. You are not going to

compete with a finance person in his trade; the finance person is

going to complement your strength.

Always take advice from professionals for decisions having long-

term financial implications.

Budding finance professionals can benefit from select

topics– MIS Reports, working capital management, budgeting

and break-even analysis.

How to use this book

Chapters I to IV covers the finance basics. Chapter V onwards we

strive to cover, in simple language, finance topics essential for

managers.

If something is not clear in the first reading, please read again.

You are welcome to write to me, to my mail id given here under

and at the end of this book. I would love to assist you.

What this book is NOT

This book is NOT for share market investments or

personal finance.

About the Author

Author of this book is a Chartered Accountant from India. He has

over three decades experience in Finance & Accounts.

You can contact the author of this book at mailto:

murugesan0202@yahoo.com or mailto:admin@

sapficouser.com. For updates on new release, please subscribe to

SAP FICO USER News Letter visiting http://sapficouser.com.

∞∞

Table of Contents

Chapter I Financial Accounting, an Introduction

1. Financial Accounting basics

2. Glossary of terms

3. Financial Statements

Chapter II Balance Sheet

1. Balance Sheet Presentation Format

2. Assets

3. Equity

4. Liabilities

5. Depreciation

6. Amortization

7. Balance Sheet model

Chapter III Profit and Loss Account

1. Profit and Loss Account Model

2. Revenue

3. Direct Cost

4. Gross Profit

5. Other Income

6. Admin and General Expenses

7. Financing Cost

8. Net Profit / (Loss)

9. How to use Profit and Loss account

Chapter IV Cash Flow Statement

1. Cash from Operations

2. Cash Flow from Investments

3. Cash Flow from Financing Activities

4. Model Cash Flow Statement

Chapter V How to Read Financial Statements

1. How Financial Statements are related

2. How each value relates with other values

3. Business Perspective

Chapter VI MIS Reports

1. How to Read Profit and Loss in MIS Reports

2. Choosing between Different Methods

Chapter VII Ratio Analysis

1. Profitability Ratios

2. Working Capital Management Ratios

3. Liquidity Ratios

4. Return on Capital Employed (ROCE)

5. Key points in Ratio Analysis

Chapter VIII Working Capital Management

1. Why is Working Capital Management crucial?

2. Managing Working Capital

3. Financing Working Capital

4. Working Capital for a Growing Business

Chapter IX Budgeting

1. Key benefits of Budget

2. Prerequisites for Budgeting

3. Approaches to Budget

4. Types of Budget

5. How Budget is made

6. Who makes the Budget

7. Budget Approval

8. Assumptions in Budgeting

Chapter X Break-Even Analysis

1. Cost Behavior -Variable and Fixed costs

2. Break-Even Analysis Model

3. Multiple Product Scenario

4. When can you apply break-even analysis?

Chapter XI Capital Expenditure Planning

1. Payback Period

2. Net Present Value (NPV)

3. Internal Rate of Return (IRR)

Chapter XII How to borrow from Banks

1. Types of Borrowing

2. How much can you Borrow?

3. Long-term debt

4. EMI Explained

5. What you need to get the loan

6. Ratios related to Borrowings

Get your copy: http://bit.ly/finance-for-managers

Chapter IChapter IChapter IChapter I FinancFinancFinancFinancialialialial AccountingAccountingAccountingAccounting, an, an, an, an IntroductionIntroductionIntroductionIntroduction

What you do today can improve all your tomorrows -Ralph Marston

∞

YOU are promoted! Now your responsibilities include decision

making that has financial implications. You are an entrepreneur,

your business growth makes you feel, the finance matters are

becoming kind of a puzzle; Or, You simply want to learn finance,

as you know that will change your profile and takes you to

greater heights in the corporate ladder.

All right, let us begin so finance is no more a puzzle; no more a

complex subject but something you can deal with it with comfort.

Kindly be forewarned! Some finance jargons are used in this

book. They are essential and explained well!

Are you ready? Here we go…

1. Financial Accounting basics

Financial Accounting seeks to record, classify, process and

present transactions of a company that have either present or

future financial implications.

We will cover certain Accounting principles knowledge of which

is essential for correct interpretation of financial information as

extracted from Accounting.

These principles include:

• Cash basis accounting

• Accrual basis accounting

• Matching principle

• Going Concern

Cash Basis Accounting

Under cash method of accounting, cash payments including an

advance are accounted as expense and cash receipts including

advance received against future sales are accounted as income.

Any unpaid expense or future obligation is not an expense.

Similarly, sales against future payment are not income.

In simple words, cash accounting method reflects cash receipts

as income and cash payments as expense.

Where Cash Basis Accounting may be used

There is uncertainty about collecting the billed amount, say in a

small consulting business.

Not-for-profit organization where income constitutes, mainly

donations and expenses are towards welfare expense and

charities.

Micro level business can also use cash method of accounting.

In few cases non-core operations of a larger business, cash

accounting method is used. Example Gate pass income of a Sea

Port, receipts for selling gate pass tickets for one year treated as

income when the tickets are sold against cash payment.

Except for the cases as above, cash-basis accounting is not

recommended due to inaccuracies in net profit or loss

computations under this method, which we will discuss next.

Advantage & Disadvantage of Cash basis

It is very simple to understand and apply.

Due to its extreme simplicity, cash basis accounting

does not reflect the correct profit or loss of the

company for a given period.

Accrual Basis Accounting

Accrual principle is the fundamental accounting principle that

recognizes the timing difference between earning revenue and

receiving money and expending and paying money.

Under Accrual principle of Accounting, once earned it is income

irrespective of receipt. Every cost incurred to earn that

income is an expense to be accounted whether or not paid.

An example will make this clear. Sales for the month of, say Jan

2015 is accounted as the Revenue. Then all Jan 2015 expense

need to be accounted to arrive at Net Income / Net Profit.

Please note such expense may have been paid OR to be

paid OR paid in advance.

Expenses paid in the same month include salaries & wages

paid at the end of the month.

Expenses paid in advance include Office & show room rent

paid for one year in advance.

Expenses to be paid in future include Staff Bonus paid at the

end of the year or the following year.

Going Concern

Financial Accounting assumes the business will continue to be

carried-on in the future.

The importance of the above statement would be clear if we

consider the value of the assets as recorded in the Accounts.

Consider the value of stock. When a business is live, the

inventory is expected to be sold in the normal course at prices as

determined. However, if the business is to be wound up, then

there is ‘distress sale’. Under these circumstances, the value that

is expected to be realized from selling or disposing of inventory

can be significantly lower than what is recorded in Accounts as

the ‘value of inventory’.

Our discussion in this book is based on ‘going concern’

assumption and ‘accrual accounting method’.

2. Glossary of terms

Fund, Money, Cash

The terms fund, money and cash are used in this book

interchangeably. However, there is a fine difference; cash

denotes currency notes and coins, while fund is used in a wider

meaning to include other forms of cash like customer

outstanding. While money is used in non-commercial language

like, you lend money to your friend; fund is often used in

commercial transactions like funding the working capital.

Sales and Revenue

Sales and Revenue are used interchangeably to denote net

earnings of a company from sales that is total sales amount less

value of trade discounts and value of goods returned. Please

note, income from non-core operations of a company is not

included within the meaning of ‘Revenue’. Please refer to ‘Other

Income’.

Inventory and Stock

Inventory and stock are used interchangeably to denote value of

goods purchased, goods under production and finished goods

with a company. Inventory includes materials required for

maintenance, viz., consumables.

In the case of a trading company, goods purchased for sales are

the inventory.

Activity Level

Activity level refers to capacity utilization or sales levels in

quantity or Dollars or quantum of service as it relates with type

of business. Example, a company’s production unit may be

operating at 80% of its capacity. This is referred to as activity

level in budgeting to describe flexible budgeting and in break-

even analysis.

Company, organization

The terms company and organization are used interchangeably.

Company used to represent the sum total of resources like

human, material and other resources and the organization

system designed to pursue a mission and vision.

3. Financial Statements

Now we understand essential accounting concepts and methods.

Let us now move on to Financial Statements.

Financial statements are reports from financial accounting

consisting of

• Balance Sheet (Chapters II & V)

• Profit & Loss Account (Chapters III & V)

• Cash Flow Statement (Chapters IV & V)

We will cover in the next three chapters, the contents of Balance

Sheet, Profit and Loss account and Cash Flow Statement.

--End of preview--

To order a copy, please follow the link:

http://bit.ly/finance-for-managers

∞∞