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