FNFP_Final_PPT.ppt
- 2. Lets understand Each other
- 3. • Child Like Attitude • Ask questions • Listen to learn • Respect others • Participate actively • Recharge / Refresh • Start and end on time Ground Rules
- 4. Program Objectives CONTENTS INTRODUCTION AND CONTEXT SETTING REVENUE AND EXPENSES TYPES UNDERSTANDING FINANCIAL STATEMENTS / INCOME STATEMENT AND ITS COMPONENTS CASH FLOWS ASSESING COMPANY’S HEALTH THROUGH VARIOUS FINANCIAL RATIOS BREAK EVEN ANALYSIS TIME VALUE OF MONEY
- 5. What is the GOAL of any organization ? ? ?
- 6. The Goal of any business is . . . To maximise Shareholders Wealth in more simple terms TO MAKE MONEY Or . .
- 7. When can an Organisation make MONEY ? ? ? WHEN THE ORGANISATION MAKES PROFIT
- 8. So lets understand Income / Profit and How to analyze and read the profitability statements 1. Cost & Expenses – Revenue and Capital expenditure 2. Income Statement and Components
- 9. Once upon a time in Ramgarh , Bala , a popular dosawala who prepared and sold mouth watering dosa outside a popular management college and was registering a large amount of sale as always . Then one day Bala’s luck struck and he got an appointment letter from the college which proposed him to offer 25000 per month as salary (Fixed) . Now he wants to understand whether his present revenue his better or the Salary is better ? The Story of Bala
- 10. Total Monthly Revenues of Bala Total Monthly Expenses of Bala Item Pieces Selling Price Total Revenue Cheese Dosa 240 22 5280 Plain Dosa 300 11 3300 Masala Dosa 280 20 5600 Total 820 14180 Item Pieces Cost Price Total Cost Dosa Plate 820 4 3280 Oil 820 1 820 Cheese 240 5 1200 Masala 280 7 1960 Rent - - 1000 Total 2160 8260
- 11. Total Revenues & Expenses of Bala Expenses Amount Revenues Amount Dosa Plates 3280 Cheese Dosa 5280 Oil 820 Plain Dosa 3300 Cheese 1200 Masala Dosa 5600 Masala 1960 Rent 1000 Profit 5920 Total 14180 Total 14180 Now we see that the total revenues listed on the right side come to 14180 and the total cost sum up to 8260 . The difference between the both is the profit for Bala which is 5920 is also known as Net Income and the statement that we saw is called as Income statement . Therefore , Bala Decides to move into new role as he is getting a substantial rise in his income
- 12. Importance of P&L Statement 1. It informs the stakeholders of the profits of the company for a particular Period 2. It offers a comparison with the performance in the past and informs them of the company’s progress 3. It helps them to predict the future profit of the company 4.It informs them of the profit margins maintained by the business 5.It tells them the composition of the expenses of the company and helps in identifying few cost cutting measures 6. It offers a comparison with other companies of the same industry
- 13. Revenue And Expenses Revenue is generated out of business income Revenue is related to a period generally 1 year – Accounting Period Revenue results in increase of owners equity. It is important to note that revenue should not be confused with profits or net income Any transaction which has the effect of reducing the assets or increasing the liabilities , results in decrease of owners equity . It is referred to as Expense Expense are incurred for the purpose of generating revenue or benefit It is related to a particular period . However the payments can be made before the recognition of the expense or afterward
- 14. The difference between capital expenditures and revenue expenditures is essentially the same as the difference between capital expenditures and operating expenses. Capital expenditures represent major investments of capital that a company makes to maintain or, more often, to expand its business and generate additional profits. Capital expenses are for the acquisition of long-term assets, such as facilities or manufacturing equipment. Because such assets provide income-generating value for a company for a period of years, companies are not allowed to deduct the full cost of the asset in the year the expense is incurred; they must recover the cost through year-by-year depreciation over the useful life of the asset. Companies often use debt financing or equity financing to cover the substantial costs involved in acquiring major assets for expanding their business. Revenue expenses are shorter-term expenses required to meet the ongoing operational costs of running a business, and thus are essentially the same as operating expenses. Unlike capital expenditures, revenue expenses can be fully tax- deducted in the same year the expenses occur. In relation to the major asset purchases that qualify as capital expenditures, revenue expenditures include the ordinary repair and maintenance costs that are necessary to keep the asset in working order without substantially improving or extending the useful life of the asset. Revenue expenses related to existing assets include repairs and regular maintenance as well as repainting and renewal expenses. Revenue expenditures can be considered to be recurring expenses in contrast to the one-off nature of most capital expenditures
- 15. Revenue Expenditure Vs Capital Expenditure Maninder Singh ( Refer To P.G.)
- 16. Other Key Related Terms 1.CoGS Cost of goods Sold . This includes all the cost incurred in manufacturing a product or service except the profit 2. Operating Expenses all the day to day expenses or indirect expenses . In other words , cost not related to product or service eg Administrative expenses , office rent if premises out of manufacturing unit 3. Operating Income Sales – variable Cost = Contribution ( Direct Expenses refers to variable Cost , contribution refers to production wise earning) Contribution – Fixed Cost ( except finance charges and taxes)= Operating Profit ( Earnings Before Interest and Taxes EBIT ) Also Referred to as Operating Profit or Income EBIT – Interest == Earnings before Tax EBT EBT- Tax = PAT Profit After Tax= Net Income
- 17. •5. Depreciation Shell Life of a machinery Straight Line Method is equal Division of machinery cost by no of years it will work and creating a provision for Depreciation in books •6.Finance Expenses Interest on Loans and debentures to be paid irrespective of profits and loss to business . Generally Long term in nature > 1 yr •7. Cash Flows The cash or the bank Balance inflow and outflow is Cash Flow statement It is result of 3 things •Operating Activities : Cash Transactions from all the activities pertaining to the product or service •Investing Activities : Profit on Sale of machinery or investing in some other company’s shares •Financing Activities : Debenture Interest , Dividend Interest , Buy back of Shares , Etc Other Key Related Terms
- 18. Preparation of Income Statement 3 Retained Earnings = Revenue – Expenses – Dividends and Drawings 2 Owners Equity = Owners Capital + Reserves and Surplus + Retained Earnings of the Co 1 Owners Equity + Liabilities = Assets
- 19. Ramsons Ltd P& L Account Realized Revenue 22000+7500=30000 Realized Revenue doesn’t takes into account whether cash is collected or not Cost of Good sold or expired cost of inventory = 20000 The portion of the cost incurred that expires in process of earning that revenue for the period is considered for calculation In this example , 20 units of inventory were parted with for earning the revenue . Thus 20000 the cost of 20 inventories is the expired cost or expense for that period
- 20. P & L Account of Ramsons Expenses Amount Revenues Amount Cost of Goods Sold 20000 Sales 30000 Profit For The period 10000 Total 30000 Total 30000
- 21. Mitu & Tikan Textiles Solution Particulars Amount Particulars Amount To Opening Stock 60000 By Sales During the Year 320000 To Purchases for The year 200000 By Discount Received 15000 To Discount Allowed 5000 By Closing Stock 15000 TO Salary 25000 To Advert Expenses 5000 To Profit For the year 55000 Total 350000 Total 350000
- 22. Various Types of Profits Gross Profit Less Operating Expenses Sales or Revenue Less Cost of Goods Sold Operating Profit Less Non Operating Expenses Profit Before Interest and Tax (PBIT) Less Interest Profit Before Tax (PBT) Less Tax Profit After Tax (PAT) Add Previous Years Balance of P& L Acc Profit Available for Distribution Less Appropriations Retained Earnings
- 24. Ratio Analysis Ratio Analysis is a tool for Performance Evaluation: Profitability Ratios Liquidity Ratios Leverage Ratios Return Ratios
- 25. Benchmark – Comparison with the competitors – Inter firm comparison Comparison with Other Divisions – Intra firm comparison Management expectations - Budgets Perspective – From the point of view of: Vendors, Lenders, Share holders, Investors Understanding - the knowledge of the industry is very important. Prerequisites for Ratio Analysis
- 26. Types of Ratios Profitability Ratio – Understanding behaviour of profits in relation to sales (known as Profit Margins); e.g. PBDIT / Sales (Profit before depreciation, interest & tax) PBIT / Sales (Profit before interest & tax) PBT / Sales (Profit before tax) PAT / Sales (Profit after tax) Margins shows the “Net Realisation” to the company doing business in adverse scenarios- - Withstanding events like competition on one hand & increasing cost of inputs on the other.
- 27. Profits in Relation to Investment – It indicates how efficiently company is using the funds. ROI = PBIT / Capital employed ROSE (Return on Shareholders Equity) = PAT / # Equity Shares (WACC – Weighted Average Cost of Capital = expectations of share holders) Earnings per share (EPS) = PAT / # equity shares. Types of Ratios
- 28. Types of Ratios Cost Ratio – Helps in explaining the behaviour of expenses: Different elements of cost Raw material cost as % of sales Employee cost as % of sales Marketing cost as % of sales
- 29. Types of Ratios Liquidity Ratio – CA/CL (Current Assets / Current Liabilities) • If you are a vendor to the company – higher the ratio better it is • If you are the company – lesser the ratio better it is • If the ratio is less than 1 – you get into negative working capital Leverage Ratio – • Debt Equity Ratio = Long Term Debt divided by Networth • Depends upon the country where the company is located Price Earning Ratio – • PE (Price Earning) = Market price divided by EPS (Earning per share)
- 30. 'Free Cash Flow For The Firm - FCFF' This is a measurement of a company's profitability after all expenses and reinvestments. It's one of the many benchmarks used to compare and analyze financial health. A positive value would indicate that the firm has cash left after expenses. A negative value, on the other hand, would indicate that the firm has not generated enough revenue to cover its costs and investment activities. In that instance, an investor should dig deeper to assess why this is happening - it could be a sign that the company may have some deeper problems
- 31. Break Even Analysis Break Even Point using concepts of fixed & variable costs Margin of Safety
- 32. Break-even point analysis is a measurement system that calculates the margin of safety by comparing the amount of revenues or units that must be sold to cover fixed and variable costs associated with making the sales. In other words, it’s a way to calculate when a project will be profitable by equating its total revenues with its total expenses.
- 33. Formula The break-even point formula is calculated by dividing the total fixed costs of production by the price per unit less the variable costs to produce the product. BEP = Fixed Cost / (Price Per Unit – VC per unit)
- 34. Present Value (Current Investment needed for a particular goal. Can also be understood as Single Premium) Future Value (Value of the investment in the future. Can also be understood as Maturity Amount) Payment (The value of investment required periodically to fulfill a particular goal. Can also be understood as mode of premium) Nper (Time required to meet a particular goal. Can also be understood as premium paying term) Interest (Return required to meet a particular goal) Effective Rate of Return IRR (Accrued return for the cash flow) NPV (Value of uneven cash flow today) Time Value of Money , IRR and NPV
- 35. Lets Practice
- 36. The payback period is the length of time required to recover the cost of an investment. The payback period of a given investment or project is an important determinant of whether to undertake the position or project, as longer payback periods are typically not desirable for investment positions. Calculated as: Payback Period = Cost of Project / Annual Cash Inflows Pay Back Period
- 37. Thank You