FINANCE FOR NON-FINANCIAL MANAGERS

Welcome!
Introductions
Accounting Management Services : inspiring
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 The difference between good and
excellent companies is training.
 The only thing worse than training
employees and losing them, is not to
train them and keep them.’’ ...Zig
Ziglar
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Accounting Management Services
inspiring achievement
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 Which of the following financial
statements would you look at first?
 Income Statement (profit and loss
account) or
 Balance sheet
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OBJECTIVES
Upon completion of the workshop, participants
will be able to:
• Interrogate and ask pertinent financial
questions.
• Spot the key points in a financial statement
• Understand the numbers in order to help
them make sound business decisions
• Understand better the financial objectives of
their organization.
• Understand the financial implications of their
day-to-day decisions
• Make better use of the resources allocated to
their divisions Accounting Management Services : inspiring
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COURSE CONTENTS
1. TALK AND UNDERSTAND THE KEY BASIC ACCOUNTING
LANGUAGE
 Definitions - Terms – The accounting equation
 The Function of Accounting - Fundamentals of Accounting
Accounting for Business Transactions
2. UNDERSTANDING KEY ACCEPTED ACCOUNTING PRINCIPLES
 The Environment of Financial Accounting - Basic Accounting Principles
 Application of Accounting Principles - Structure of Financial Statements
3. HOW TO SPOT THE KEY POINTS IN A FINANCIAL STATEMENT
 Income Statement Analysis
 Balance Sheet Structure
 Cash Flow Analysis
 Ratio Analysis
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Introduction to Chart of Accounts
A chart of accounts is a listing of the names of the accounts that a company
has identified and made available for recording transactions in its general
ledger.
Within the chart of accounts you will find that the accounts are typically
listed in the following order:
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 Accounting is based on the fundamental equation:
 Total Assets = Total liabilities + Equity
 This means that the difference between what the
company owns (Assets) and what it owes ( liabilities) is
Equity.
 Equity can be defined as the business owner’s share of
the business at historical book value.
 Equity is made up of capital introduced into business
plus accumulated profits or losses.
 Thus the assets of a company can be financed in part
by liabilities and in part shareholder’s equity.
 Liabilities can be short-term (trade creditors) or long-
term (bank borrowing)Accounting Management Services :

 The matching concept relates to how the
company should record its revenue and
expenses.
 Expenses must be recognized (recorded) in the
same period as the revenue it relates to
regardless of when the actual expense has been
paid for.
 Eg if Rukore bakeries hires a truck to deliver bread
in March, but receives the invoice in April for the
March bread delivery, such expense should be
assigned to the month of March .
Accounting Management Services :

 Accrual basis accounting captures the financial
aspects of each economic event in the
accounting period in which it occurs,
regardless of when the cash changes hands
 Management should know what expenses
incurred and recorded and which were accrued
for (provisions).

 Revenue is earned and recognized upon
product delivery or service completion without
regard to the timing of cash flow.
 Suppose a store orders 500 wheelbarrows from
a wholesaler in March, receives them in April,
and pays for them in May.
 When does the wholesaler recognize the
revenue.

 The profit and loss account (statement) is now
called:
 The statement of comprehensive income.
 At certain periodic ends, each business wants to
know how well it is doing.
 Is it earning a profit?
 Is it losing money?
 Just how well is it doing compared to other firms?
 Is it likely to be able to earn a profit in the future?
 To answer these questions, it uses an Income
Statement.

 The Income Statement communicates the
inflow of revenue , and the outflow of
expenses , over a given period of time.
 Revenue is the income earned by the company
in return for services performed, or goods sold.
 Expenses are the obligations incurred while
generating revenue.
 The difference between these two is the Net
Income .
 An Income Statement therefore shows the
operating profit (or loss) , hence the name
Profit and Loss statement.

 Managers should understand key performance
indicators on the income statement.
 Gross profit
 Earning before interest and tax & amortization
(EBITA)
 Monitor expenditure via Variance analysis -compare
actual results with budget, forecast, prior year

 Understand your Gross Profit %.
 Gross profit is the sales minus cost of sales
 Gross profit is the profit left to finance the business operating
overheads.
 It must be enough to cover all operating expenses and leave a
profit.
 Continuously monitor gross margin ratio to be certain it
will result in a gross profit that will be sufficient to cover
sales and administrative expenses.
 Gross margin ratios vary between industries, compare your
company's gross margin ratio to companies within your
industry
 Compare to previous period and budget.
 Ask for a report on drivers of the major variances and
rectify.

 Earning before Interest and Tax is a key
statistic for any business.
 This is the profit generated by the business
from operations.
 Should be enough to cover borrowing costs, ie
interest and taxes leaving retained income.
 Retained Income is not synonymous to cash
 Get summary breakdown on significant increases in
operating expenses against the norm

 Revenue expenses and capital expenses
 Only revenue expenses are recorded in the
Income Statement
 Revenue expenses are expenses incurred
during the day to day trading activities
 Capital expenses are incurred not in the
generation of revenue but for the maintenance
of / or expansion of business earning power
 Flour for bread production : capital or revenue
expense?
 Bought delivery truck: Capital / revenue expense?

 Known as Statement of Financial Position
 The Balance Sheet is named as such because the
total of the assets must equal the total of the
liabilities and equity.
 What a company owns equals what it owes to
its creditors and owners
 Shows the financial health position of the
company
 Perpetual statement -ongoing for the life of the
organisation

31 Dec 2014 31 Dec 2013
CAPITAL EMPLOYED
- Share capital (15 000) (15 000)
- Distributable reserves (5 500) (2 500)
Total shareholders' funds (20 500) (17 500)
- Loans - bank (750) (1 500)
TOTAL CAPITAL EMPLOYED (21 250) (19 000)
EMPLOYMENT OF CAPITAL
Tangible fixed assets 19 000 18 400
Total Long Term Assets 19 000 18 400
Current Assets
- Stock 3 405 2 350
- Third party debtors 1 402 1 159
- Cash balances 1 500 1 081
Total Current Assets 6 307 4 590
Current Liabilities
- Third party creditors (3 002) (2 590)
- Provisions (450) (650)
- Taxation (605) (750)
Total Current Liabilities (4 057) (3 990)
Net current assets/(liabilities) 2 250 600
TOTAL EMPLOYMENT OF CAPITAL 21 250 19 000

 Get detailed ageing of debtors
 Get detailed ageing of creditors
 Get creditor reconciliation on major
creditors and overdue accounts

 Debtors days
 Creditors days
 Stock days
 Cash conversion circle (CCC)

 This looks at the number of days
needed to collect on credit sales
 Debtors days should be in line with
credit policy.
 Get reconciliation on past due debtor
balances
 Circularize debtors to confirm amount
outstanding

• This involves the company's payment of its
own bills .
• If this can be maximized, the company holds
onto cash longer, maximizing its investment
potential;
• therefore, a longer DPO is better
 Creditors days- effects of not paying creditors in time- loss
business
 Effect of strained supplier relations
 Misappropriated funds
 Services rendered for private business

 This addresses the question of how many days
it takes to sell the entire inventory.
 The smaller this number is, the better
 Care should be taken to keep optimal stock
holding
 Excessive stock holdings tie up cash

 The cash conversion cycle (CCC) attempts to
measure the time it takes a company to convert
its investment in inventory and other resource
inputs into cash
 The CCC is a combination of several activity
ratios involving debtors, creditors and
inventory turnover
 Generally, the lower this number is, the better
for the company

Item Fiscal Year 2013 Fiscal Year 2012
Revenue 9,000 Not needed
COGS 3,000 Not needed
Inventory 1,000 2,000
A/R 100 90
A/P 800 900
Average Inventory (1,000 + 2,000) / 2 = 1,500
Average AR (100 + 90) / 2 = 95
Average AP (800 + 900) / 2 = 850

 Formula
 The cash conversion cycle is calculated by
adding the days inventory outstanding to the
days sales outstanding and subtracting the
days payable outstanding.
 All three of these smaller calculations will have
to be made before the CCC can be calculated.


 A cash flow statement shows the source and
applications (uses) of funds / cash in the
business

 The sources of funds (cash) are from the:
 Operating activities
 Investing activities
 Financing activities
• The net movement from the three
activities will show cash generated
(positive) or cash used (negative) in the
period under review

 The operating activities are the day to day normal
business trading activities which could result in a
profit or loss after adjusting for non cash flow
activities such as depreciation
 To the above we add the working capital movement
which can be
 Increase / Decrease in stock
 Increase / Decrease in debtors
 Increase / Decrease in creditors
• The sum of the above will result in either cash
generation or cash utilization for the period under
review

 Investing activities are the actions of buying
and disposal of assets.
 These activities generate and or utilize cash.
 Examples:
 Bought a delivery van for $15,000
 Sold bakery oven for $4,500

 Source and or application of funds can arise out of
financing activities.
 These can be:
 Injection of additional capital into business
 Payment of dividend
 Long term loan borrowings
 Long term loan repayments
Withdrawals by a sole proprietorship will
affect the company's balance sheet through
the reduction of the asset withdrawn and a
reduction in owner's equity

 Generally, financial ratios are classified on
the basis of function or test, on the basis of
financial statements, and on the basis of
importance.
 These three classifications are briefly
discussed below:

 On the basis of function or test, the ratios are liquidity ratios,
profitability ratios, activity ratios and solvency ratios.
 Liquidity Ratios:
 Liquidity ratios measure the adequacy of current and liquid
assets and help evaluate the ability of the business to pay its
short-term debts.
 Short-term creditors like suppliers of goods and commercial banks
use liquidity ratios to know whether the business has adequate
current and liquid assets to meet its current obligations

 Four commonly used liquidity ratios are given below:
 Current ratio or working capital ratio
 Quick ratio or acid test ratio
 Absolute liquid ratio
 Current cash debt coverage ratio
 Unfortunately, liquidity ratios are not true
measure of liquidity because they tell about the
quantity but nothing about the quality of the
current assets and, therefore, should be used
carefully

 Profitability ratios measure the efficiency of
management in the employment of business
resources to earn profits.
 Some important profitability ratios are given below:
 Net profit (NP) ratio
 Gross profit (GP) ratio
 Expense ratio
 Return on capital employed ratio

 Activity ratios (turnover ratios) measure the efficiency
of a company in generating revenues by converting its
production into cash or sales.
 Activity ratios show how frequently the assets are
converted into cash or sales
 Some important activity ratios are:
 Inventory turnover ratio
 Receivables turnover ratio
 Average collection period
 Accounts payable turnover ratio

 The ratios are only as good as the data upon
which they are based and the information with
which they are compared.
 Based on historical cost, which can lead to
distortions in measuring performance
 Problem of achieving comparability among
firms in a given industry.

 Why pay for the overheads of your Accounting
consultants. Pay only for the service rendered.
 Come over to Accounting Management Services
Contact
Pedzisai Chiwota
+263 778 464 887
pchiwota@yahoo.com

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FINANCE FOR NON-FINANCIAL MANAGERS

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