Finance & Costing

Financial Management

When we Start/ Run a company - We need ?

1 Money – Called Sources of Funds

Owners, Partners, Share Holders, Banks, Financial Institutions

2 Buy Assets – Called Application of Funds

Land, Building, Factory, Machines, Tools, Furniture

Manpower, Raw Materials, Power, Water, Material Handing Equipments

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 Finance & Costing
Financial Management

Sources of Funds (Liabilities) – 2 types

1 Long Term Funds – Long Term Liabilities
2 Short Term Funds – Short Term Liabilities (Current Liabilities)

Applications Of Funds (Assets) – 2 Types

1 Long Term Applications – Long Term Assets
2 Short Term Applications – Short Term Assets (Current Assets)

….

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 Finance & Costing
Financial Management

Liability - Company debts that need to be repaid:

• Current Liabilities within a year

• Long Term Liabilities any time after year
• Repay How ? Through the Assets Company owns
• Current Assets should repay Current Liabilities
• Long Term Assets should repay Long Term Liabilities + portion of unpaid
Current Liabilities

In a running Company, Company needs to repay:

a) all Current Liabilities within a year

b) only that part of Long Term Liabilities that falls/ are due for repayments
during the year
c) Through Profits earned during the year
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 Finance & Costing
Financial Management
Assets - Company uses to produce goods & services for customers:

• Current assets consumed/ utilized within a year- Raw Mat, WIP, FG, Accounts
Receivables: These are consumed to manufacture Finished Goods, Spare parts &
generate Services

• Long Term Assets remains in the company for more than one year – Buildings,
Factories, machineries, material handling equipments, furniture, fixtures etc: Means /
instrumental to facilitate the production of Finished Goods & Services.

• Current Assets consumed are directly reflected as Variable Costs of production for
each item/ entity produced – RM costs, machine costs, labor costs, consumables etc

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• Other indirect costs are reflected as Overheads cost incurred to facilitate

Production, Sales & Post Sales Services of goods & services generated during
the year

• Sales (revenue) is generated when goods and services are sold for money –
on cash payment or credit payment (accounts receivables).

• Dynamic Scenario of all Sales & Costs during the year is Reflected in a
statutory Report called Profit & Loss Statement for year 2007-08 – A Legal
Document also known as: Income & Expenditure Statement for year 2007-
08

• Snap Shot Scenario of the composition of all / various classes of Assets and
Liabilities are Reflected in another Statutory Report known as on a particular
date – Balance Sheet as on date dd mm yy

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 Finance & Costing
Financial Management
Company has many stake holders:

• Share Holders – Good Market Capitalization, Good Dividends & Bonus Shares etc
• Financial Institutions – Interest/ repayment of Loans in Time etc
• Banks – repayment of Interests and Loans in time etc
• Employees – Careers, Salaries, Well Being & Statutory dues etc
• Customers – Good Quality Products & Timely Services at Reasonable prices etc
• Vendors – Business Growth opportunities, Payments in time etc
• Government – Pay Statutory dues on time, Obey Legal framework etc
• Society – Clean pollution free Business processes, Social Responsibilities: education, hygiene,
employment opportunities etc

These are Sustainable only when company performs well during the year:
Revenue (Sales) > Total Expenses = Good Profits
Company operates as an Independent Entity:
Accountable for Assets/ Liabilities & finally PROFITS

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Finance & Costing
Balance Sheet as at/ on date: dd mm yy

Long Term Liabilities Long Term Assets

Land, Building & Factories
Equity Share Capital
Plants & Machineries
Preference Share Capital
Movable/ Mobile Assets
Reserves & Surplus
Furniture & Fixtures
Long Term Borrowings
Debentures
Concessional Long-Term Loans Short Term Assets
Raw Material/ Maintenance Spares
Short Term Liabilities WIP & Product Spares parts
Loans & Advances Finish Goods
Sundry Creditors/ ST Borrowings Accounts Receivables

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 Finance & Costing
Profit & Loss Account for period: date dd mm yy to dd mm
• Income from Sales:
Sales from Operations
+ (plus)
Sales Other than Operations

- (minus)

• Expenses for the period:

Sales and Administration Expenses
+ (plus)
Miscellaneous Expenses
+ (plus)
Operating Expenses: (Direct Manufacturing Costs
+ (plus)
Indirect/ Overhead Costs)
= Profit

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Golden Rules to post Financial Transaction
 For Personal Accounts:
Debit: The Receiver
Credit: The Giver

For Real Accounts:

Debit : What comes in
Credit: What goes out

For Nominal Accounts:

Debit: All Expenses and Losses
Credit: All Incomes and Gains

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Golden Rules to post Financial Transaction

Application of above rules in business transactions:

Scenario: Expenditure towards Purchase of Stationery for Office Use

Accounting Entry will be:

 If Cash Purchase is made:
Debit: Expenses A/c. - Printing & Stationery A/c.
Credit: What goes out - Cash A/c

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Golden Rules to post Financial Transaction

If Credit Purchase is made: 2 entries are passed at different stages as under:

Stage 1 - when the expenditure is incurred & liability is booked

Debit: Expenses A/c. - Printing & Stationery A/c.
Credit: The giver - Supplier or Vendor A/c

Stage 2 - when the liability is discharged:

Debit: Supplier or Vendor A/c.
Credit: Bank A/c.

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 Finance & Costing
Golden Rules for posting Financial Transaction

• We realize: every Liability/ Asset/ Exp/ Sales to be entered in Finance.

• This will happen in a Double entry Book Keeping method
• Every credit will have an equal and opposite entry as debit
• Different account heads in terms of GL accounts and Reconciliation accounts will
have to be created (Chart of Accounts)
• These accounts will be grouped into a summary account to represent one
amount for a particular class of account/ similar accounts
• These grouped accounts will represent one figure per account type in Balance
sheet
• Some of these accounts will carry summary totals/ figures to the Profit & Loss
Statement and Balance Sheet for a particular period

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 Finance & Costing
Financial Management – Budgeting

• Let us consider an example of a running company

• The company plans: Anticipated Return on Investments
• This means that company has to plan for achieving anticipated Sales Turnover
• Company also plans the anticipated costs associated to Achieve Anticipated/
planned Sales Turnover.
• Company also plans an anticipated Profit margin on the Sales
• Company also plans an anticipated product mix in the Sales Turnover
• There is a buy in of these final anticipated target figures by all the departments:
Production, Sales, Finance, Plant Maintenance, Costing etc
• These figures then form a part of the Planned budget for the year – annual
Budget

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• For close monitoring - Annual budget is broken down to monthly / weekly

budgets

• The actually achieved figures are mapped/ compared with the planned monthly/
weekly figures – helps course correction in mid stream/ operations

• This mapping highlights performance on each of the budget heads

• Since these budget figures map all elements/ activities of business – Good/
important feel against anticipated performance/ profitability figures

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Financial Management – Operational Scenarios

• Funds Flow Budgets – Funds Flow Analysis (Sources and Application of Funds)
contains Cash Flow + Non Cash Flow requirements during the year)

• Cash Flow Budgets – Needs that address Cash requirements on a daily/ weekly/
Monthly basis

• Gross Working Capital Requirements = Current Assets

• Net Working Capital = Current Assets – (minus) Current Liabilities

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Financial Management – Operational Performance Measurements
(Ratio Analysis)
• Return On Investment = Net Profit/ Capital Employed
• ROI = (Sales – All Costs)/ (Long Term Assets + Current Assets)
• ROI = {(Sales – All Costs)/ Sales)} X {(Sales)/ (LT Assets + Current Assets)} Entity
Sales a0utomatically gets cancelled in equation above.

• ROI = (Sales Margin) x (Capital Turnover Ratio)

• Sales Margin – Management by strict Controls – Manage Sales & Costs as per
Budget or even better than budgets
• Capital Turnover Ratio (N) means: Sales figure = N times Capital Employed

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• Creditor days = (vendors’ Credit balances) X (365)/ (Total purchase value for
accounting year)

• Debtor Days = (Customers’ Receivable balances) X (365) / (Total Sales value for
accounting year)

There are many more ratios of this type to indicate company performance

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Cost Performance Measurements
• Cost Elements: power, water, security, fuel, canteen, labor cost elements,
materials etc means each element needs to be tracked/ accounted separately
• This explains the factor called “WHAT” reason for cost
• Cost Centers – Departments where these costs are incurred/ accumulated/
collected.
• This explains the factor called “WHERE” costs are collected
• When, Why, Who, How much costs incurred are indicated during budgeting &
sanctioning process for these expenditures (costs)
• Profit Centers – Department responsible for running company Profitably
• Achievements of Sales Targets
• Absorb / accept Business Costs from respective Cost Centers
• Deliver Profits as budgeted or Better than Budgeted

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Costing Methods

• Standard Costing: Fixed cost/ item for a period. Changed on review

• Weighted Moving Average Costing: Average cost evaluated by taking earlier Qty
+ New receipt qty & Value of Earlier qty + Value of New Qty
• Project Costing for Mile Stone Billing / periodic Billing
• Marginal Costing: Contribution = (Unit Sales Price – Unit Variable Cost)
Helpful to arrive/ determine Break Even Point (No loss no Profit)
• First In First Out Costing: Cost of Items received first is issued first for Production
& Cost booking at/ to Cost centers
• Last In First out Costing: Cost of Items received last is issued first for Production
& Cost booking at/ to Cost centers – done under inflationary Conditions

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