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    8.1: Introduction and Objective of Finance Department

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    Harsh Siddhapura
    The finance department manages the company's money through activities like planning, accounting, auditing, and controlling finances. It focuses on addressing financial problems and raising adequate funds at minimum cost to use effectively. Some key functions include analyzing financial statements, managing receivables and payables, and budgeting through budgetary control. The document provides an example structure of a finance department and analyzes financial ratios like current ratio, gross profit ratio, and liquid ratio to evaluate the company's financial performance and position.

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    8.1: Introduction and Objective of Finance Department

    Uploaded by

    Harsh Siddhapura
    97 views10 pages
    The finance department manages the company's money through activities like planning, accounting, auditing, and controlling finances. It focuses on addressing financial problems and raising adequate funds at minimum cost to use effectively. Some key functions include analyzing financial statements, managing receivables and payables, and budgeting through budgetary control. The document provides an example structure of a finance department and analyzes financial ratios like current ratio, gross profit ratio, and liquid ratio to evaluate the company's financial performance and position.

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    The finance department manages the company's money through activities like planning, accounting, auditing, and controlling finances. It focuses on addressing financial problems and raising adequate funds at minimum cost to use effectively. Some key functions include analyzing financial statements, managing receivables and payables, and budgeting through budgetary control. The document provides an example structure of a finance department and analyzes financial ratios like current ratio, gross profit ratio, and liquid ratio to evaluate the company's financial performance and position.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    97 views10 pages

    8.1: Introduction and Objective of Finance Department

    Uploaded by

    Harsh Siddhapura
    The finance department manages the company's money through activities like planning, accounting, auditing, and controlling finances. It focuses on addressing financial problems and raising adequate funds at minimum cost to use effectively. Some key functions include analyzing financial statements, managing receivables and payables, and budgeting through budgetary control. The document provides an example structure of a finance department and analyzes financial ratios like current ratio, gross profit ratio, and liquid ratio to evaluate the company's financial performance and position.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
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    of 10

    Chapter: 8

    Finance Department

    8.1: INTRODUCTION AND OBJECTIVE OF FINANCE


    DEPARTMENT
     Introduction

    The part of an organization that manages its money. The business functions of
    a finance department typically include planning, organizing, auditing,
    accounting for and controlling its company’s finances.

    Money is the life-blood at modern business. Money is required to purchase


    expensive machinery, and day to day expenses on raw materials, labor, and
    operational and administrative needs at business, execution at expansion.

     Objective

     To focus of financial problem of business organization.


     To rising of adequate funds at the minimum cost and using them effectively.

     Definition of finance

    “Finance management is an area of financial decision making, harmonizing


    individual motives and enterprise goals”

    8.2: STRUCTURE OF FINANCE DEPARTMENT


    Finance
    manager

    Chartered
    account

    Assistant
    manager

    [Structure of finance department in ATUL BAKERY]


    8.3:ANALYSIS OF FINANCIAL STATEMENTS WITH THE
    HELP OF RATIOS

    Trading for the period 01/04/2017 to 31/03/2018

    Trading income Rs.


    Opening stock 5863728.32
    Indirect income trading 62656.78
    Sales 89527638.86
    Closing stock 5041589.44
    Total of trading income 100495613.40
    Trading expense
    Opening stock 6006259.04
    Purchase 67020878.29
    MFG.Expense 9294214.29
    Gross Profit 18174261.78
    Total of trading expense 100495613.40

    Profit and loss for the period 01/04/2017 to 31/03/2018


    Income Rs.
    Gross profit 18174261.78
    Indirect income 9228648.61
    Total income 27402909
    Expenses
    Salary account 5239000
    Electricity account 922750
    Donation A/C 65588.25
    Indirect expense 11102182.52
    Total of expenses 17329520.77
    Net profit 10073388.23

    Balance sheet of the company


    Balance sheet as at 2017-2018 Rs
    Equity & liabilities:
    Owner capita 14118487
    Net profit
    Current liabilities 15524155
    Non-current assets:
    Interest bearing loans and borrowings 11123757
    Account payables 4578603
    Provisions 2262393
    Deferred tax liabilities 1117231
    Total capita and liabilities 48724626
    Assets:
    Non current assets
    Property,plant and equipment 23691916
    Investment property 5083393
    Other financial assets 2979636

    Current assets
    Cash 2559288
    Debtors 2859839
    Bill receivable 3904546
    Stock 7646008
    Total assets 48724626

    Ratio analysis:

    A. Current Ratio
    = Current assets/Currents liabilities
    = 16969681/15524155
    =1.09

    INTERPRETATION:
     Ideal current ratio is 2:1
     company current ratio is 1.09 that indicate current liabilities should be equal to
    current assets so that company borrowing money from bank, financial
    institutes etc.
     So Company’s does not ability to pay its day to day financial obligations.

    B. Gross profit
    = Gross profit/Sales *100
    = 18174261.78/89527638.86*100
    =20.30%

    INTERPRETATION:

     Gross profit is very important to judge the manufacturing efficiency of the


    business.
     Gross profit is trading margin ratio.
     It is a test profitability and efficiency of management.

    C. Net profit
    = Net profit / Net sale *100
    =10073388.23/89527638.86*100
    =11.25%

    INTERPRETATION:

     Higher ratio indicates more operational efficiency of the business.


     Net profit ratio throws light on the overall performance of the business
     Higher ratio better for the company.

    D. Operating ratio
    = cost of goods sold + operating expense/sales*100
    = 71353377.08+6161750.10/89527638.86*100
    = 86.58%
    INTERPRETATION:
     86.58% Operating expense of the company and remain is profitability of the
    company.
     It is an expense ratio.
     lower ratio is better for the company.

    E. Operating profit ratio:


    = 1 – operating ratio
    = 1 – 0.8658
    = 0.13

    INTERPRETATION:

     13% profitability of the company.

    F. Return on assets ratio


    =Net profit /total assets*100
    =10073388.23/48724626*100
    =20.67%

    INTERPRETATION:

     20.67% return on investment of the company.


     It measures the profitability of the business investment.

    G. Stock turnover ratio


    =cost of goods sold/average stock
    = 7135335.12/9733585
    = 7.3 times

    H. Assets turnover ratio


    = net sales / total assets
    = 89527638.86/48724626
    =1.83
    INTERPRETATION:
     Stock ratio is more indicate that the stock gets converted into cash quickly and
    is a good sign of the business.
     Ratio is helpful in determine policies related to inventory and management.

    I. Debtors turnover ratio


    = credit sales / debtors + bill receivable
    = 89527638.86/2859839+3904546
    = 13 times

    INTERPRETATION:
     It is desirable that the debtors should be converted into cash as quickly as
    possible and hence higher the ratio is better.
     It indicates numbers of times in a year that debtors pay off their dues.
     It is also called receivables ratio.

    J. Stock velocity
    = 12month/stock turnover ratio
    = 12month/7.3
    = 9.2

    INTERPRETATION:
     Stock velocity is denoting in month or day it indicates the duration of
    operating cycle.

    K. Liquid ratio
    = current assets-stock/current liabilities
    =16969681-7646008/15524155
    = 0.60
    Quick Ratio also termed as Acid Test or Liquid Ratio. It is supplementary to the
    current ratio. The acid test ratio is a more severe and stringent test of a firm's ability to
    pay its short-term obligations 'as and when they become due. Quick Ratio establishes
    the relationship between the quick assets and current liabilities.
    INTERPRETATION:
     Quick ratio is 0.60 it indication that the firm has not better position to meet its
    current obligation in time.
     The ideal Quick Ratio of 1:1 is considered to be satisfactory.

    8.4 SOURCES AND APPLICATION OF FUND

     Sources of fund
     Funds from business operations.
     Sales of noncurrent assets.

     Application of fund
     Purchase of non-current assets
     Payment of income tax

    8.6 MANAGEMENT OF PAYABLE AND RECEIVABLE

     Accounts payable are liabilities.


     Account receivable are assets.
     Payables and receivable is the medium of exchange which allows management to carry on
    the various activities of the business on day to day basis.
     When the customer purchases any machine at that time the terms & conditions are decided
    and according to that the payment is decided.
     Customers pay money by cheques.
     Management of receivables and payables is not just about saving money. It’s about
    improving overall business performance.

    8.7 BUDGETING AND BUDGETARY CONTROL


     Budgetary control technique whereby actual or results are compared with
    budget. Compels to managements for think about the future for budgetary
    planning and set the targets and plans. Improves the allocation of scarce
    resources.

    8.8 WORKING CAPITAL MANAGEMENT OF THE COMPANY

     Working capital management is the functional area of finance that covers all the
    current account of the firm.
     It is concerned with management of the level of individual current assets as well
    as the management of total working capital.
     Working capital refers to the fund invested in current assets, i.e. Investment in
    stocks, sundry debtors, cash and other current assets.
     Current assets are essential to use fixed asset profitability.
     For example, a machine cannot be used without raw material.
     The investment on the purchase of raw material is identified as working capital.

    Working capital management includes the management:

    Working capital finance

    Management of inventory

    Management of cash

    A. Working capital finance


     Sources of working capital
     Short term loan
     Trade credit

    B. Management of inventory
     To maintain investment in inventory at the lowest level.
     To supply the product to its user as per their requirement at right time.
     To keep inactive, waste, scrape, and obsolete items at the minimum level.
     To minimum holding replacement and shortage cost of inventory at
    minimum level.

    C. Management of cash
     Cash is the medium of exchange which allows management to carry on the
    various activities of the business on day to day basis.

     Four facets of cash management:

    Cash planning

    Managing the cash flow

    Optimum cash level

    Investing surplus cash

    8.8 WORKING CAPITAL MANAGEMENT OF COMPANY

    Net Working Capital= Currents Assets – Currents Liabilities


    PARTICULAR AMOUNT
    Current assets 16969681
    Stock 7646008
    Debtors 2859839
    Bill receivable 3904546
    Cash 2559288
    Currents liabilities 15524155
    creditors 6209662.11
    Loan 9314493.31
    Working capital 1445526

    8.9 DIVIDEND DECISION OF COMPANY

     Dividend policy determine the division of earning between payment to


    shareholders and retained earning.
     Long term financing decision
     Wealth maximization decision
     The dividend policy of a firm refers to the views and practices of the
    management with regard to distribution of earning to the shareholders in the
    form of dividends.
     Dividends are paid out of profits.
    8.10 IMPACT OF BUDGET ON COMPANY
     Exemption of service tax on freight charges for goods transport agencies
    for Essential items such as flour, jiggery, sugar, salt, milk and edible oil
    could reduce the freight cost for large bakeries.
     Freight surcharge on goods transported through railway could lead to some
    price increase on bulk ingredients.

    8.11 SUGGESTION

     The company needs to maintain good inventory turnover ratio by


    increasing the sales.
     The company needs to increase the working capital turnover ratio for
    efficiency utilization of working capital.

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