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Final Finance for Non Financial Managers
Transcript of Final Finance for Non Financial Managers
Managing the company’s financial resources (“Finance”)
Recording and reporting all its financial transactions (“Accounting”).
Many companies don’t establish separate Finance and Accounting departments, so might instead have a chief financial officer who performs or oversees the company’s the finance functions & accounting activities. Just knowing where to begin is a challenge.
Maybe you should start by asking yourself below questions:
What do you need to spend (expenses)?
What you spent last year or last month?
What you hope you can get approval to spend?
Do you actually know what it will really cost? The accounting & financial managers have their own lingo (linguistic terms), it is very important to be familiar with to well understand the accounting &/or financial reports & sheets, specially the basic Financial Statements
- Assets Equity - Capital
- Expenses - Capital Assets
- Capital Budget -Current Assets
- Debt financing - Fixed Assets
- Liabilities - Operating Budget
- Revenue - ROI There is three basic fundamentals in the business finance:
The investment principle
The financing principle.
The dividend principle. There is three basic financial statements those appear in every annual report, & most of internal monthly financial report:
1. Balance Sheet
2. Cash flow.
3. Income statement.
Moreover there is a wide variety of other reports that may accompany the basic statements. Primary Financial Statements An itemized statement that summarized the assets & the liabilities of the business as of a given date, usually the end of a month, Quarter, or year Balance Sheet shows equal sides, as:
Assets = Liabilities + Equity.
(Owner Equity = Assets – Liabilities)
Assets = Liabilities + (Paid in Capital + Retained earnings) A report that shows the effect of all transactions that involved or influenced cash, but didn’t appear on income statement.
Also known as statement of cash flow. An accounting of revenue, expenses & profit for a given accounting period (usually month, quarter, or year).
Also the income statement known as Profit & Loss (P&L) statement, statement f income & expenses, and operating statement. Reports the results (inflow & outflows of revenues & expenses) of operating activities.
NET INCOME = REVENUES – EXPENSES. There is a wide variety of other reports that may accompany the basic statements, or separately prepared for special purpose.
Commonly these reports manage a specific area in the company’s finance. Accounting Systems 1. Cash Basis Accounting (Historical Reporting)
2. Accrual Accounting System. The cash basis accounting means a transaction is recorded only when cash changes hands Accrual basis accounting means transactions are recorded when an economic event (sales action) is deemed to have occurred. The Return on Investment (ROI) is a financial forecasting tool that assists the business manager in evaluating whether a proposed investment opportunity is worthwhile within the context of the company’s business objectives and financial constraints. Future Investment Analysis (Project appraisal) Investment decisions should be analyzed carefully to
Assist in the decision-making process.
Because the decisions are irreversible.
The decisions have long-term strategic implications
Financial exposure consideration. The investments to be analyzed have some of the following characteristics:
A major amount of money is involved.
The financial commitment is for more than one year.
Cash flow benefits are expected to be achieved over years.
The strategic direction of the company may be affected.
The company’s prosperity may be significantly affected if the investment is made or not made. There are three components:
Evaluation Techniques. Investment analysis Technique (Appraisal or Evaluation Techniques) Various methods are available, those classified to:
Those not involve discounting cash flows
Discounted cash flow methods (DCF) Calculate how quickly the cash flows generated by the project recover the initial outlay.
If the time is within or equal to the wanted time period (P*), the project is accepted.
If project of $10 million generates cash flow of $2.5 million, it will pay back the investment after 4 years. So the investment will be acceptable for a firm demanding payback with 5 years. Uses data on expected accounting profits generated by the project in relation to its capital requirements.
ARR = Account profit / Capital employed X 100
Account profit = Cash flow minus depreciation. Discounting cash flow methods (DCF) Method formed based on the concept of the time value of money (Discount Rate)
$1 received today is worth more than $1 received in one year time. Mathematical calculation done by using Excel sheet. CAP : certified public accountant.
GAAP : Generally accepted accounting principles. 1. Counting the Beans: How Critical Is Good Financial Information, Anyway?
2. MTD training. Finance for nonfinancial managers.
3. David A Palmer-2000, DAP 511, www.financialManagementDevelopment.com
4. Edward Fields, The Essentials of Finance & Accounting Management for Non-Finance Managers, AMCOM, 2002.
5. Gene Siciliano, Finance for The Non-Financial Managers, McGraw-Hill, 2003 Why Accounting & Finance For Business? Accounting Function. Finance Function in Organization. Budget Common Financial & Accounting Terms Finance Fundamentals Primary Finance Statements Balance Sheet Important Accounting Equation 2. Cash Flow Statement 3. Income statement (P&L) The income statements Other Report Formats The Return on Investment (ROI) Why should do investment analysis? The Components of investment analysis (Appraisal) What should be Analyzed? Accrual Accounting There is tow accounting systems the company use to prepare its financial Reports Cash Basis Accounting (Historical Reporting) Common terms 1. Net Present Value (NPV) References 2. Internal Rate of Return (IRR) 2. Average Rate of Return (ARR) Those not involve discounting cash flows Investment analysis Technique Thank You Finance For Non-Financial Managers 1. Pay back method: ..we take responsibility