presentation

1. Finance for Non-Financial Persons
By Otto Tawanda Chisiri

2. Why it is important to understand Finance
 Every activity that you do is connected with Finance . You will be at edge if you
understand and assess the financial implications before you take a decisions.
 It is the language that is discussed in the Board rooms. Hence, by knowing Finance
you will at advantage in your career ahead.
 Inside Edge – the more you know about finance, the more insights you will get
about the Business.
 You can understand better the accountant’s language when you deal with them day
to day.
 If you understand finance better, you can relate to your area of Business and
question the sanctity of the numbers prepared by finance deptt.
 When you know the drivers of financial performance, you will drive the respective
Business activities in order to achieve better performance.

3. Outline
 Accounting is the language of business
 Key Financial statements- Income statement Analysis
 Key Financial statements -Balance sheet analysis
 Key Financial statements -Cash flow Analysis
 Financial Health check
 Reading Company annual report
 Key decisions of Financial Management
 Investment appraisal
 Working capital Management
 Cost Accounting for decision making
 PBF as a planning and controlling tool.

4. The balance sheet always balances
Debt
Inv
AR A/P
Cash Equity
Assets = Liabilities + Equity + Reserves & surplus

5. Long term and short term balances
How can you increase the assets with out corresponding
increase in liabilities ???

6. Financial health checkup
Profitability
Sales growth – price/volume
Contribution Margin ratio
Operating Margin
Net profit margin
All the above ratios are
calculated on sales revenue.
Helps gauge the Margins
that the Company is
generating
Solvency
Current ratio = CA/CL
Quick ratio = CA-INV/CL
Debt ratio
= Long term debt/total
assets
Helps understand the
liquidity position and capital
structuring
Efficiency
Revenue/ Total assets
Inventory Turnover
= Avg Inventory / COGS
Avg Inventory holding days
= Avg Inventory/COGS*365
Avg receivable days
=Avg Receivables/Credit
Sales*365
Payable days = Avg
Payables/Credit
purchases*365

7. Finance for Non-Financial
Managers I
Review of Basic Terms
• Asset/liability: An asset is an economic resource that a company owns. A liability
is a resource that the company owes.
• Book value/market value: Book value is the amount of an asset or liability shown
on the companies’ official financial statements based on the historical, or original,
cost. Market value is the current value of the asset or liability. In most cases, book
value does not equal market value.
• Capital goods: These are machines and tools used to produce other goods.
• Depreciation/amortization: Depreciation is a system that spreads the cost of a
tangible asset, such as machinery, over the useful life of the asset. Amortization is
a system that spreads the cost of an intangible asset, such as a patent, over the
useful life of the asset.
• Fiscal year: A company’s financial reporting year. In most cases the fiscal year is
not the same as the calendar year.
• Profit margin: This is profit—what the company’s owners keep after paying all the
bills—a percentage of sales or revenues.
• Receivables/payables: Receivables are money owed to the company. Payables
are money the company owes to others.
• Revenue/expenses: Revenue is income that flows into a company. Revenue
includes sales, interest, and rents. Expenses are costs that are matched to a
specific time period.

8. Finance for Non-Financial
Managers I
Managerial and Financial Accounting
Managerial
accounting provides
information for
managers of an
organization who
direct and control its
operations.
Financial accounting
provides information
to stockholders,
creditors and others
who are outside the
organization.

9. Cash vs. Accrual Methods of
Accounting
January Expenses
Rosie sells three Spouse Houses at $1,500 each, for cash.
She purchases the three Spouse Houses from Fred’s Sheds for $900 each. She pays
him for two of the Spouse Houses ($1,800) and promises to pay him for the third
one on February 5.
She pays $800 for her office ($400 for January rent and $400 as a security deposit).
She pays $150 to purchase a telephone and $30 for service during January.
She pays $300 for advertising in a newspaper.
On February 5, she receives an electric bill for electricity used in January for $100.
She charges the January rent of the automobile ($280) to her credit card, which she
does not pay until February 15.
Finance for Non-Financial Managers I

10. Finance for Non-Financial
Managers I
Cash Accounting
Basic Concept (Cash Accounting and Accrual Accounting)
Report Version 1 (Cash Basis)
January Report
Cash Receipts
Sale of 3 spouse houses $4,500
Cash Disbursements
Purchase of 2 spouse houses $1,800
Office deposit and rent 800
Telephone purchase 150
Telephone service 30
Advertising 300
Total Cash Disbursements $3,080
Excess of receipts over disbursements $1,420

11. Finance for Non-Financial
Managers I
Accrual Accounting
Basic Concept (Cash Accounting and Accrual Accounting)
Report Version 2 (Accrual Basis)
January Report
Revenues
Sale of 3 spouse houses $4,500
Less Cost of Good Sold (3 Spouse Houses @ $900 each) (2,700)
Gross profit 1,800
Expenses
Office rent $400
Telephone service 30
Automobile rent 280
Electricity 100
Advertising 300
Total Cash Disbursements $1,110
Excess of receipts over disbursements $690

12. Finance for Non-Financial
Managers I
Gross Profit (Margin)
Selling price, each Spouse House
Subtract cost of each Spouse House
Gross profit (margin)
Gross profit (margin) percentage ($600/$1,500)
Markup percentage ($600/$900)
$1,500
(900)
$600
40%
67%

13. Finance for Non-Financial
Managers I
The Importance of Timing
• Matching principle: The accrual method
matches revenues with associated expenses.
• Timing: The accrual method records revenue
that has been earned but not paid and
expenses owed but not paid.
• Cash flow: The accrual method does not track
cash inflows and outflows.

14. Finance for Non-Financial
Managers I
Types of Sales
• Cash sales
• Credit sales
• Consignment (sale?)
• Secured sales
• Floor plan sales
• Sales of services
• Long-term contracts

15. Finance for Non-Financial
Managers I
Reduction of Sales
• Bad debts
• Sales returns
• Sales allowances
• Warranties
• Cash discounts

16. Finance for Non-Financial
Managers I
Allowance for Bad Debt
Year Sales Expenses
Bad Debt
Incurred
Accumulated
Allowance for
Bad Debt
1 $250,000 $10,000 $10,000.00
2 650,000 26,000 36,000.00
3 1,500,000 60,000 $1,800 94,200.00
4 2,000,000 80,000 174,200.00
5 2,500,000 100,000 3,600 270,600.00
6 3,500,000 140,000 410,600.00
7 4,000,000 160,000 450,000 120,600.00

17. Finance for Non-Financial
Managers I
Cost of Sales
• Cost of Goods Sold (COGS)
• Inventory
• Freight on Purchases
• Discounts
• Cost of Services

18. Finance for Non-Financial
Managers I
Inventory Value
• FIFO
• LIFO
• Average Cost

19. Finance for Non-Financial
Managers I
FIFO vs. LIFO
November--First In, First Out (FIFO)
Sales of 10 Spouse Houses @ $1,500 15,000
$
Subtract Cost of Goods Sold:
Inventory at beginning of November
(4 houses @ $900 each) 3,600
$
Purchase 15 houses @ $1,000 each 15,000
19 houses available for sale 18,600
$
Subtract remaining inventory:
9 houses (purchased in November)
@ $1,000 each 9,000
Cost of Spouse Houses sold 9,600
Gross profit 5,400
$

20. Finance for Non-Financial
Managers I
FIFO vs. LIFO
November--Last In, First Out (LIFO)
Sales of 10 Spouse Houses @ $1,500 15,000
$
Subtract Cost of Goods Sold:
Inventory at beginning of November
(4 houses @ $900 each) 3,600
$
Purchase 15 houses @ $1,000 each 15,000
19 houses available for sale 18,600
$
Subtract remaining inventory:
9 houses, 5 @ $1,000 5,000
4 @ $900 each 3,600
Cost of Spouse Houses sold 10,000
Gross profit 5,000
$

21. Finance for Non-Financial
Managers I
FIFO vs. LIFO
Inventory
available
for sale
(at cost) FIFO LIFO
1,000
$ 1,000
$
1,000
$ 1,000
$
1,000
$ 1,000
$
1,000
$ 1,000
$
Purchased 1,000
$ Left at end Sold during 1,000
$
in November 1,000
$ of November (9) November (10) 1,000
$
1,000
$ $9,000 $10,000 1,000
$
1,000
$ 1,000
$
1,000
$ 1,000
$
1,000
$ 1,000
$
1,000
$ 1,000
$
1,000
$ 1,000
$
1,000
$ Sold during Left at end 1,000
$
1,000
$ November (10) of November (9) 1,000
$
1,000
$ $9,600 $8,600 1,000
$
900
$ 900
$
Purchased 900
$ 900
$
in October 900
$ 900
$
900
$ 900
$
Total Inventory $18,600 $18,600

22. Finance for Non-Financial
Managers I
Average Cost Method
November--Average Cost Method
Sales of 10 Spouse Houses @ $1,500 15,000
$
Subtract Cost of Goods Sold:
Inventory at beginning of November
(4 houses @ $900 each) 3,600
$
Purchase 15 houses @ $1,000 each 15,000
19 houses available for sale 18,600
$
Subtract remaining inventory:
9 houses @ $979
($18,600/19 = $979) 8,811
Cost of Spouse Houses sold 9,789
Gross profit 5,211
$

23. Finance for Non-Financial
Managers I
Projected Sales
Spouse House Company
Projection of Operating Report
March 2011
Projected Sales = 20 30 40
Sales of Spouse Houses 1,500
$ 30,000
$ 45,000
$ 60,000
$
Variable Expenses
Cost of goods sold 60.00% 18,000 27,000 36,000
Sales commissions 5.00% 1,500 2,250 3,000
Delivery 3.33% 1,000 1,500 2,000
Bad debt expense 4.00% 1,200 1,800 2,400
Warranty expense 2.00% 600 900 1,200
Liability insurance 0.24% 73 110 147
Product liability insurance 0.51% 153 230 307
Supplies, warehouse 0.31% 93 140 187
Business license 0.51% 153 230 307
Total variable expenses 22,773 34,160 45,547
Fixed Expenses
Executive salary 2,000 2,000 2,000
Administrative salaries 1,500 1,500 1,500
Warehouse and repair salaries 2,000 2,000 2,000
Advertising 2,000 2,000 2,000
Automobile 430 430 430
Worker's compensation insurance 110 110 110
Fire and casualty insurance 100 100 100
Rent 1,000 1,000 1,000
Supplies, office 30 30 30
Property taxes 130 130 130
Payroll taxes 550 550 550
Telephone 150 150 150
Total fixed expenses 10,000 10,000 10,000
Total expenses 32,773 44,160 55,547
Net income (loss) before income tax (2,773)
$ 840
$ 4,453
$
Income tax 0 210 1,113
Net income (loss) (2,773)
$ 630
$ 3,340
$

24. Finance for Non-Financial
Managers I
Break Even
Spouse House Company
Projection of Variable Expenses per Spouse House
March 2011
Projected Sales 20 30 40
Total variable expenses 22,773
$ 34,160
$ 45,547
$
Variable expense per house sold 1,139 1,139 1,139
Using the information from the previous slide, compute the variable cost
per house:
Each house sells for $1,500
Subtract variable cost per house 1,139
Contribution toward fixed expenses $361
Divide the fixed cost by the contribution margin to determine how
many houses must be sold to break even -- $10,000/361 = 27.7 or 28
houses (since you can’t sell .7 house).

25. Finance for Non-Financial Managers I
Payback Method
Spouse House’s clients want three windows put in their houses. Assume it
costs $300 per house for the supplier to install the windows. Spouse House
could purchase an Automatic Window Machine that would cost $55,000 and
would require the following expenses:
Salary for a carpenter for 1 hour $12
Benefit costs for the carpenter 8
Lumber and glass 65
Maintenance 10
Electricity 5
Total cash expenses $100
Depreciation expense 15
Total expenses $115

26. Finance for Non-Financial Managers I
Payback Method (cont.)
The computation of cash flow from the Automatic Window Machine from the
previous slide is:
If Spouse House used the service of the supplier to
install the windows, it would cost (per house) $300
If Spouse House used the Automatic Window Machine,
the cash expense would be (per house) 100
The amount saved per house $200
Multiplied by the number of house sold annually x 100
Annual cash saved by purchasing the Automatic
Window Machine $20,000
The payback, assuming no interest on a loan and $5,000 salvage value of the
equipment would be 2.50 years ($50,000/$20,000).

27. Finance for Non-Financial
Managers I
Time Value of Money
Interest earned on a $55,000 investment that can
earn 10% interest
Initial investment (present value) 55,000
$
Interest, first year 5,500
Balance, end of first year 60,500
Interest, second year 6,050
Balance, end of second year 66,550
Interest, third year 6,655
Balance, end of third year 73,205
Interest, fourth year 7,321
Balance, end of fourth year 80,526
Interest, fifth year 8,053
Balance, end of fifth year 88,578
or, using a future value table, 55,000
$ x 1.6105 = 88,578
$

28. Finance for Non-Financial
Managers I
Cash Flow from Purchase of Equipment
Cash Flow from Purchase of Copy Machine
Existing cost (local printer) 5,000
$
Subtract cash expenses if copy
machine is purchased:
Paper 500
$
Maintenance 1,500
Supplies 300
Electricity 100
Machine operator 1,000
Total cash expense 3,400
Cash flow 1,600
$
Cost of machine 3,000
$
Payback period (machine cost ÷ cash flow) = 1.88 years

29. Finance for Non-Financial
Managers I
Repair or Replace
Cash Flow Analysis--Repair or Replace
New
Machine
Refurbish
Old
Alternative cost (printer) 5,000
$ 5,000
$
Subtract cash expenses:
Paper 500 500
Maintenance 2,000 1,750
Supplies 500 500
Electricity 100 100
Machine operator 500 1,000
Total cash expenses 3,600 3,850
Cash flow 1,400
$ 1,150
$
Cost of machine 5,000
$ 2,800
$
Payback, in years 3.57 2.43
Internal rate of return 12.4% 30.0%

30. Reading Company annual report
Main sections in an Annual report
Chairman message to the shareholders
Business Portfolio
Board of Directors
Board Committees
Corporate Information
Directors report
Corporate Governance
Management discussion and analysis
Financial statements
Auditor’s report
Notes to accounts
Notice of the AGM
Any other details

31. Key decisions of Financial Management
Investment decisions
- New projects / expansion
- Acquisition of another entity
- Investment in working capital
Financing decisions
(Proper balance between equity & debt at lower cost )
-Money Market for short term funds – CPs, BOE,CDS,Inter-company loans etc
-Capital Market - IPO, rights issue
- Debt – Bonds, Term loans from banks,
- Bank term loans, Mezzanine finance, leasing, Hire purchase, venture capital etc
- Reserves
Dividend decisions
-Whether to pay dividend or retain for future growth
- How much to be paid and how frequently.
Retain when a Company has positive NPV projects and pay 100% dividend when they do not.
Risk and Return tradeoff
Time value of money

32. Working capital management
Working Capital - (Current assets – Current liabilities) Exceeds current operating assets
(Inventory+Receivables-Payables)The Company has a cash surplus usually represented by a
Bank deposits and investments. Otherwise, it has a deficit usually represented by a bank
loan and / or overdraft
Financing decision
Conservative policy - Both non-current + permanent part of current assets +some portion
of fluctuating current assets financed by long term finance
Aggressive policy - short term financing for all fluctuating + some part of permanent
portion of current assets
Moderate policy – matches the short term finance to fluctuating current assets and long
term finance for permanent portion of current assets
The operating cycle in a typical mfg industry
Raw material days + Time taken to produce the goods + the time goods remain in the
finished inventory + the time taken by the customers to pay for the goods- the period of
credit taken from the customers
-Reduce RM stock holding, obtain more finance from suppliers, reduce WIP & FG, reduce
customer credit

33. Cost accounting for decision making
The purpose of Cost Accounting - strictly for insiders (That’s way it’s also called
Management Accounting- a tool of every CEO of a Company)
Product costing and calculating COGS and protecting the GROSS MARGIN while
maintaining the quality of the product or service levels at acceptable level is the
subject of Cost accounting. (allocate costs between COGS and Inventory)
Many companies don’t really know whether or not they’re making a gross profit on
many of the products they sell.
Segregation of costs into variable & fixed -All costs are fixed in the short term and all
costs are variable in the long term.
Controllable and uncontrollable costs - All costs are uncontrollable in the short term; all
costs are controllable in the long term
Costing Techniques - Relevant costing, Standard costing , Marginal costing and break
even analysis, Activity Based Costing, target costing, life cycle costing, Pricing decisions
and profitability analysis.

34. Decision Making
Relevant costing (Incremental cashflows)
Special pricing orders (below the Market prices) – Proposed price less than the order
cost. Study of the cost estimates reveals that in the next qtr there are some overheads
which will not change irrespective of this order, hence those costs are not relevant for
calculating the profit.
Product Mix decisions when capacity constraint exists- Limiting factor (raw materials,
machine hrs, labour Hrs, market etc) – In this case, produce those products which
contribute more per limiting factor.
Replacement of equipment – The irrelance of past/ sunk costs
Outsourcing and make or buy decisions – At first instance it appears that the component
be outsourced since the pruchase price is less than cost of Mfg.However, the unit costs
include some costs that will be unchnaged. These are not relevant costs.
Discontinue decisions – if the incremental costs are more than incremental revenues
shutdown.

35. PBF as a planning and controlling tool
Strategic plan A type of business plan designed to define the overall vision and mission
of a business, its strategy and long-term objectives. It does not contain lot of details
about implementation.
Operating plan A detailed description of what the company will do to pursue the
objectives of its strategic plan for the next operating period, usually one year. It will
contain enough detail that the operating managers of the company can use it to guide
their daily and monthly activities.
Exercise budgetary control Once the budgets are prepared and approved by the CEO,
then the monthly actual results will be compared with the budgets and necessary
actions will be taken based on variance analysis.
Monthly & quarterly forecasts to capture the downsides and upsides of the budget, a
monthly/quarterly estimates will be prepared to know how the year is going to end .

36. The myths of Business planning
The Myth The Reality
1. Planning is a lot of Planning actually saves work and time, by
work; busy managers helping managers to avoid doing more work
don’t have time for than is necessary to reach their goals.
still another task.
2. Plans are obsolete as Plans are dynamic and ever evolving as the
soon as they’re done. business evolves. The best ones get
reviewed and modified regularly.
3. Plans must always be Plans need not be any more detailed than
long and detailed to the company needs to guide its activities.
be of any value. Some very focused plans for small business
will fit on a single page.
4. Business moves too The speed of business is a big reason why
fast to be held back plans are important, because we can go very
by a plan. far off the mark in a short time. Plans don’t
hold managers back; rather, they guide
managers’ forward movement.
5. Planning is not as Planning makes what we do more productive
important or valuable by enabling us to avoid doing things that
as doing something don’t contribute to our productivity as
productive. measured by end results.
6. We should leave the Plans done without the substantial
planning to the planners involvement of the managers who are
and let the managers making the decisions are largely useless,
do their work. because they don’t reflect reality.

37. Mission and
Objectives
Corporate
Appraisal
Position
Audit
Environmental
Analysis
Strategic Option
Generation
Strategy
Evaluation
and Choice
Review and
Control
Strategy
Implementatio
n
Rational Model of Strategy
Strategic Planning

38. How To Prepare Budget
Definition of Budget
a plan expressed in money terms

39. How To Prepare Budget
An Overview Of Budgeting As A Tool For Controlling Activities:
PLANNING
MONITORING
DECISION MAKING
CONTROL

40. How to prepare budget
Benefits of Budgets:
• Think Ahead
• Specify Targets & Priorities
• Determine Resources To Achieve Targets
• Promote Accountability For Resources &
Performance
• Allocation Of Limited Resources Across
Divisions

41. How to prepare budget
Challenges Associated with Budgeting:
• Collating historical information & analysing
them
• Forecasting future events outside your control
• Working collaboratively with other teams to
understand the impact of your activities &
actions on theirs

42. How to prepare budget
Challenges Associated with Budgeting:
• Putting aside time to produce a robust budget
• Limited expertise on the part of non-finance
managers
• Lack of common understanding &
assumptions

43. How to prepare budget
Alternative
Approaches
Incremental
Zero base
Top down
Bottom up

44. Planning And Producing Your
Budgets
Best Practice Approach:
Budget setting process
starts four – five
months before the
start of the budget
period
Appointment of budget
committee
Committee agrees
budget timetable and
assumptions

45. Any questions

46. Thank you