The document provides an overview of key finance concepts for non-finance business professionals. It discusses the different types of businesses, stakeholders, sources of funds including equity, debt, and reserves, uses of funds such as fixed assets and working capital. It also covers balance sheets, profit and loss statements, and definitions of related terms like depreciation, EBIT, PAT. The overall purpose is to introduce basic finance concepts in a simplified manner for non-specialists running a business.
The document provides an overview of key finance concepts for non-finance business professionals. It discusses the different types of businesses, stakeholders, sources of funds including equity, debt, and reserves, uses of funds such as fixed assets and working capital. It also covers balance sheets, profit and loss statements, and definitions of related terms like depreciation, EBIT, PAT. The overall purpose is to introduce basic finance concepts in a simplified manner for non-specialists running a business.
The document provides an overview of key finance concepts for non-finance business professionals. It discusses the different types of businesses, stakeholders, sources of funds including equity, debt, and reserves, uses of funds such as fixed assets and working capital. It also covers balance sheets, profit and loss statements, and definitions of related terms like depreciation, EBIT, PAT. The overall purpose is to introduce basic finance concepts in a simplified manner for non-specialists running a business.
The document provides an overview of key finance concepts for non-finance business professionals. It discusses the different types of businesses, stakeholders, sources of funds including equity, debt, and reserves, uses of funds such as fixed assets and working capital. It also covers balance sheets, profit and loss statements, and definitions of related terms like depreciation, EBIT, PAT. The overall purpose is to introduce basic finance concepts in a simplified manner for non-specialists running a business.
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Finance for non finance
Business Business as an economic entity Trading activity Buying Selling
Manufacturing activity Buying Processing Selling
Servicing activities Servicing Business Purpose of an economic entity Wealth creation Wealth management, and Wealth distribution
Objective To lead the revolution and create the
best possible values and share them in the equitable manner among all the stakeholders. Business Stakeholders in the Business Investors Equity holders Debt holders including banks and financial institutions Suppliers Distributors and retailers Employees Customers Community Business Proprietary business Single owner of the business. No difference between the obligations of the business and the obligations of the individual. Partnership firm Two or more owners of the business. No difference between the obligations of the business and the obligations of the individuals. Business Company: Is an artificial person, created by law and has the 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 Publicly held public limited company Business Closely held public limited company
Not a listed company.
No invitation to public for subscription.
Publicly held public limited company
A listed company. Held by large number of shareholders.
Shareholder have limited liability in Ltd. Companies.
What about the companies with unlimited liabilities on shareholders. Structure of the businesses
Business
Proprietary Company Partnership
Private Ltd. Public Ltd.
Closely held Publicly held
Sources of funds Long term funds Equity Long term Debts Short term funds Short term Debts Other short term borrowings
Portfolio mix of the long term and short term funds is
called the Capital Structure of the company. This forms the left hand side of the Balance Sheet. Uses of funds Fixed Assets Land and building Plant and Machinery Others Working Capital Raw Material Work in progress Finished goods Cash Investments Various avenues of investment Sources and uses of funds Match between the uses of funds and the sources of funds: Long term Long term funds investments
Long term funds
Short term Short term funds investments Long term investments must always be with long term funds. Financing long term assets with the short term funds creates risks mainly the refinancing one. Short term investments may be financed with long term or short term funds. It depends on the attitude of the business managers. Funds management
Management of the funds
Mobilization of the funds Utilization of the funds
Quantum Source Cost time
Fixed assets Work. Cap. Investments
A typical balance sheet Assets Liabilities Fixed Assets Capital Authorized Land and building Issued capital Machinery Paid up capital Others
Working Capital Preference share capital Raw Material Long term Work Debts in progress Other shortgoods Finished term borrowings Cash Reserves and surplus Investments Current Deferred liabilities revenue expenses Intangible assets like goodwill, human resources, brands etc. Accumulated losses Balance sheet Assets would always be equal to the liabilities. Balance sheet would always match (Result of double accounting rule). It provides readers with the static picture of the business on a specific day. Is it possible to engineer balance sheet to present misleading picture of the state of affairs of business. Some Balance Sheet items Accumulated losses Intangibles like Goodwill, value of Human Resources and brands etc.
For intangibles, equal values are added to
the Liability side, in the form of Capital Reserves, to match both the sides of the balance sheet. Sources of funds - Equity Equity capital is the risk capital, which facilitates the wider dissemination of the risk and rewards of the business.
Can voting rights be different for the different
share holders. Why the equity capital is shown as a liability in the books of the company. Important terms linked to equity Market value per share and Market capitalization Book value per share = Net worth/ number of outstanding shares. New worth is equal to the share capital + reserves and surplus other than the Capital Reserves. Earning per share (EPS) = Profit after tax / number of outstanding shares. Dividend per share (DPS) Price earning ratio (P-E ratio) = Market price/ EPS Sources of funds - Preference shares Preference shares are called quasi equity. They behave partly like shares and partly like debt instruments. Preference share holders have : Dividend, which is fixed and paid before anything is paid to equity holders. Capital appreciation, if any. Voting right No voting right originally. But acquire the voting rights in certain circumstances. Important terms linked to preference shares Claim over the residual assets, at the time of liquidation of the company, before the equity holders and after the debt holders. They behave like debt instruments because they carry fixed dividend rates. They behave like equity instruments because they offer the dividend to the share holders without any obligation on the company. Sources of funds - Debt Debt provides the business with the capital bearing the fixed cost. Debt owners have : Fixed Interest Payment of interest is an obligation on the company. No voting right Claim over the assets of the company before the equity holders. Short term financing instruments Short term bank loans Commercial papers Issued at discount Unsecured in nature Public deposits Generally issued at par Unsecured in nature Inter-corporate deposits Bill discounting Financing against the commercial bills. Factoring Sell of the commercial bills. Forfaiting Sell of the export bills. Major providers of debt finance Individual investors Banks Financial institutions Specialized institutions Reserves and Surplus General reserves Created out of retained profits. Share premium reserve premium on allocation of securities is credited to this account. Capital reserves Also called the revaluation reserves. Sinking fund account to meet the specific requirements/obligations of the business. Main items of the revenues Sales revenue Other income Dividends and interest Sales of the assets Lease charges Main items of the expenses Cost of goods sold. Salary Other expenses A typical profit and loss account Revenues from the business Less Cost of goods sold and other expenses Less Depreciation Earning before interest and taxes (EBIT) Less Interest payment Earning before taxes (EBT) Less Taxes Earning after the tax (EAT/PAT) Items from profit and loss account Depreciation A view of profit and loss account Cash expenses Raw material, salary and other administrative expenses Non cash expenses Depreciation
