Careers in the Finance

Function

Presentation By :
Ashok Bhansali , B.Com (Honours)
Chartered Accountant.
 The Finance Function
 The Finance Function in any organization
can be conveniently divided into two sub-
functions,viz. accounting & treasury
function.
 The two groups of tasks are by no means
independent.Decisions taken by the
treasurer have implications for the
controller and vice versa
The Finance Function
 TREASURER  CONTROLLER
- Financial Planning - External Reporting
Analysis. - Financial & Management
- Fund acquisition Accounting
- Cash Management - Tax Planning.
- Investment Decisions - Budget,Planning and
- Investment Financing Control
- Management Information
- Risk Management
systems.
- Accounts Receivable.
The Finance Function ( Contd)
 Tasks relating to accounting,reporting and
internal control are the domains of the
controller.
 Financial analysis ,planning,acquisition of
funds and deployment of funds are the
responsibilities of the treasurer.
 A related but a very important aspect is the
management of risk in consonance with the
Company’s risk-reward profile.
The Finance Function ( Contd)
 Acquisition and allocation of financial
resources so as to minimise the cost and
maximise the return,consisitent with the
level of financial risk acceptable to the firm
is the core of treasury management.
External Environment
 Domains : Domestic /Global.
 Forms of Business Organization.
 Regulatory Framework.
 Financial System ( Financial markets &
Intermediaries).
 Taxation Aspects.
Nature and purpose of
accounting
Nature and purpose of accounting
 Quantitative information is information that is expressed
in numbers.
 Non-quantitative info are visual expressions,
conversations , t . v programs and newspaper stories.
 Accounting information is primarily concerned with
Quantitative information.
 Accounting information is distinguished from the other
types in that it usually is expressed in monetary terms.
 Financial Reports also contain non-monetary data e.g
Sales and production quantities which is generally the
exception rather than the rule.
Nature and purpose of
accounting
 Accounting is aptly called the language of business
 Accounting is the process of identifying, measuring
and communicating economic information to permit
informed judgments and decisions by users of the
information.
 Accounting can be approached from either of two
directions :
* From the viewpoint of the Accountant
* From the viewpoint of the User of Accounting
Information
 Information ( The key to analysis )
 Operating Information.
 Financial Accounting Information.*
 Management Accounting Information.
 Tax Accounting Information.

* Our sessions will deal only with Financial

Accounting Information.
Financial Statements

 One of the most important Corporate

Communications to all stakeholders.

 Report card of the Organization.

The Profession of Accounting
 In most organizations the Accounting group comprises of the
largest “ staff ” unit i.e the largest group other than the “line”
activities of production and marketing.
 The accounting group comprises of essentially two types of
people:
1) Bookkeepers and other data entry employees who maintain
the detailed operating records.
2) Staff Accountant who decides how items should be
reported, prepare the reports, interpret these reports , prepare
special analyses, design & operate the systems through which
information flows, and ensure that the information is accurate.
The Profession of Accounting ( Contd)

 Although accounting is a staff function

performed by accounting professionals
within an organization, the ultimate
responsibility for the generation of
accounting information whether financial or
managerial, rests with management.
 The paradigm of Financial Management is
much larger than Accounting.
Management Accounting
 The accounting information specifically
prepared to aid MANAGERS is termed as
Management Accounting which is widely
used in three management functions :

* Planning.
* Implementation
* Control
Management Accounting
 Management accounting provides information to internal users
within the organization. Financial accounting provides
information to external users outside the organization. Therefore
management accounting is reckoned to be internal accounting and
financial accounting is reckoned to be external accounting.
 Perhaps, the management accountant is not concerned with the
calculation of dividend per share and the financial accountant is not
concerned with the variances between budgeted and actual sales
revenue.
Relationship of management functions
Financial Accounts / Management Accounts

 Financial Accounts deal with the  The period of analysis is not defined or
financial performance of the specific and data is analysed for period or
company during a specific period, and periods as required. Generally, reports
the financial position as at the end of may be prepared at daily, weekly,
monthly, quarterly, half-yearly or annual
the defined period usually twelve
intervals.
months also termed as the financial
year.

 Preparation of management accounts is

 All corporate enterprises (limited entirely optional and there is no statutory
companies) are required by statute obligation. Information is generated
(written law) to prepare financial provided the benefit of preparing the
statements. management accounts exceeds the costs of
preparing the same.

 The format of management accounts is

optional, need based: therefore is
 The format of published financial determined by internal reporting
accounts is prescribed by law. requirements.
Financial Accounts / Management Accounts
 Financial accounts relates to past  Management accounting deals with
performance, therefore portrays what both past performance data and
has happened. future projections.
 Financial accounts must conform to  The emphasis is not on Generally
the accounting principles and Accepted Accounting Principles but
standards promulgated by the the focus is on preparing reports
regulatory bodies. This ensures which meet the internal requirements
uniformity and consistency in arising from planning and controlling
capturing the business data in the functions.
financial statements.  Management accounts are prepared
 Generally, financial accounts are and evaluated by incorporating
prepared using monetary measures. monetary as well as non-monetary
 Financial accounts focus and measures.
report on the business on an  Management accounting may
aggregate basis covering the business focus on specific areas of an
as a whole. organization.
 Stakeholders
 Shareholders
 Customers
 Employees
 Managers
 Bankers
 Vendors
 Lenders / Long term creditors
 Regulatory authorities
Stakeholders (Continued)
 Government
 Professional bodies
 Non-profit Organisations
 Environmental Organizations/Groups
  Competitors
 Trade organisations
  Community
The Financial Accounting Framework
 Useful Info / Log /Scorecard (e.g Captain of a ship)
 Based on rules and basic concepts of accounting referred to as principles.The word
principle is here used in the sense of a general law or rule to be used as a guide to action.
 The general acceptance of an accounting principle usually depends on how well it meets the
three criteria :
* Relevance.
* Objectivity.
* Feasibility.
 Information that is meaningful and useful is Relevant.
 Objectivity means that the info is not influenced by the personal bias or judgement.
 Feasibility means that it can be implemented without undue complexity or cost.
Source of Accounting Principles
 Generally Accepted Accounting Principles or GAAP ( The
Indian GAAP,US GAAP, International GAAP).These are
the basic ground rules governing Financial Accounting.

 Indian Accounting Standard Board /Institute of Chartered

Accountants of India ( www.icai.org.in) which promulgates
the various Accounting Standards.

 Company Law .(“ The Indian Companies Act,1956 ”). The

format of Balance Sheet (Schedule VI),Rates of
Depreciation ( Schedule XIV), CARO,Director’s Report etc..
Financial Statements
 Balance Sheet i.e a statement of the
financial position ( Snapshot / Stock/status).

 An income statement e.g.Profit and Loss

Account ( Video/Flow).

 Cash Flow ( Flow)

The Balance Sheet
 Liabilities and Owner’s equity are the two
general types of sources of funds.
 Assets are valuable resources owned by the
entity.This signifies the utilisation of the
funds.
 Dual Aspect Concept.
Claims = Assets
Owner’s Equity +Liabilities = Assets
Understanding Financial Statements

 Company’s provide additional information besides

the three financial statements.
 Listed Companies are required to provide :
 Auditor’s Report
 Director’s report
 Report on Corporate Governance
 Management’s Discussion & Analysis.
 Consolidated Financial Statements.
Bookkeeping

General Prionciples
Bookkeeping and accounting.
 Bookkeeping and accounting is
analyzing,recording,classifying,in terms of
money of financial transactions and events,
in a systematic manner by following certain
principles and rules

This definition raises certain questions

which are :
Questions which arise from accounting
 What is a record ?  Record is something in
writing.
 Is it any record we are
referring to ?  No. we are concerned with
only those records which
are of financial matters.

 Transactions of financial
 What to record ?
nature are to be recorded
Questions which arise from accounting
 Why to record ?  To get information
which helps in
managing day to day
affairs of the entity
and in taking
important decisions &
also to comply with
the statutory /taxation
requirements.
Questions which arise from accounting
 What is a record ?  Record is something in
writing.
 Is it any record we are
referring to ?  No. we are concerned with
only those records which
are of financial matters.

 Transactions of financial
 What to record ?
nature are to be recorded
Questions which arise from accounting
 Whose transactions ?  Transactions of the entity

 Record in a systematic
manner by following
 How to record ? Double entry principles of
accounting.
 Where to record ?
Record in the Books of
Account I.e. Book of entry
and Ledger
Traditional Classification of
Accounts
 Personal Accounts  These accounts relate to natural
persons, artificial persons and
representative persons.

 These accounts relate to

tangible and intangible
 Real Accounts assets.

 Expenses, Losses,
 Nominal Accounts  Profits and Gains.
Traditional classification of accounts
Types of accounts Meaning Examples

Personal These accounts relate to natural Natural - Ram’s a/c

persons, artificial persons and Artificial – Shyam & co.
representative persons. Representative account – Outstanding
sale.

Real Assets – tangible and intangible Tangible – Land a/c

Intangible – Goodwill a/c

Nominal Accounts Relates to expenses,losses,incomes and Exp – Purchase accounts,Loss- Loss by

gains. fire,Sales,gains.
The Context of Financial/Economic
Analysis
 Economic & Competitive Environment.
 Data Sources.
 Analytical Framework and tools .
* Investment effectiveness.
* Financing effectiveness.
* Operating effectiveness.
Three Basic Questions in
Finance.
 First,what long term assets should the firm invest
in ?
 This is the capital budgeting decision.

 Second, How can the cash be raised for the

required investments?
 This is the Financing decision also known as the
capital structure decision.
Three Basic Questions in Finance

Contd…

 Third,How will the firm manage its day to day

cash.
 This is the short term finance and concerns
working capital.
Sole Proprietorship
 Advantages  Disadvantages
 Limited life
 Easy and  Unlimited laibility
inexepnsive  Limited financial
 Few govt regulations fund raising
potential
 No firm tax  High income tax
Partnership
 Advantages  Disadvantages
 Like sole  Life of the firm
proprietorship dependent on
formation easy and AGREEMENT.
inexpensive  Possible conflict –
 Relatively free from threat to existence
govt regulations  Unlimited liability
 Pooling of expertise  Ability to raise funds
and experience of limited.
partners
Sole Proprietorship/Partnership
 Unlimited Liability
 Limited Existence
 Transfer of ownership

LEADS TO DIFFICULTY IN RAISING

FUNDS THEREBY LIMITING THE
ABILTY TO RAISE FUNDS.
Company/ Corporate Enterprise.
 Artificial Person – Separate from its owners
 Distinct Legal Entity
 Limited Liability
 Transfer of ownership –virtually infinite.
 Securities of Listed Companies –Liquid.
Company/Corporate Enterprise.
 Limited Liability
 Ease of ownership
 Perpetual Succession.

LEADS TO ENHANCED /UNLIMITED

ABILITY TO RAISE FUNDS.
The Basic Function of any Manager

 To enhance shareholder value.

 When is value created ?

Value is created by managers when any
organization acquires physical and financial
resources from the environment earns a
return on its investment in excess of the
cost of capital.
The job of a Financial Manager
 The most important job of a Financial
Manager is to create value from the firm’s
capital budgeting,financing and liquidity
activities.
 Therefore the ultimate goal of the Finance
Manager is to enhance shareholder value.
How do Finance Manager’s
create value ?
 They have to buy assets which generate
more cash than they cost.
 The firm should sell equity
shares,debentures and other financial
instruments that raise more cash than they
cost.
 Thus the manager must ensure that they
create more cash flow than it uses.
Finance Function
 Treasury Management  Accounting and
 Acquisition and Control.
allocation of financial  The controller handles
resources so as to the accounting
minimize the cost and function,which
maximize the includes taxes,cost and
return,consistent with financial accounting
the level of acceptable and information
financial risk systems.
Topics of Discussion
 Financial Statements – their utility
 And Interpretation to different users.
 Profit and Loss Account.
 Balance Sheet.
 Common Size Balance Sheet.
Business Analysis & Valuation.

 Business Strategy Analysis.

 Accounting Analysis.

 Financial Analysis.

 Prospective Analysis.
Business Strategy Analysis.
 To identify the company’s key profit
drivers and business risks.
 Involves analyzing a firm’s industry and its
strategy to create sustainable competitive
advantage.
 Enables subsequent accounting and
financial analysis better.
Business Strategy Analysis.
 A firm’s value is determined by its ability to
earn a return on its capital in excess of its
cost of capital.
 Cost of capital depends upon the Money
market.
 Profit potential is determined by :
- Choice of industry.
- Competitive positioning (cost leadership
or differentiation.
Business Strategy (Contd..)
 Cost leadership implies supply of the same
product or service at a lower cost.

 Differentiation implies supply of a unique

product or service at a cost lower than the
price premium customers will pay.
Accounting Analysis.
 The purpose is to evaluate the degree to
which a firm’s accounting captures business
reality.
 Methodology involves identifying places
where there is accounting flexibility,and by
evaluating the firm’s policies and estimates.
 Assess the degree of distortion in a firm’s
accounting numbers.
Accounting Analysis.
 Building Blocks of accrual accounting.
 Generally Accepted Accounting Principles.
 Delegation of reporting to management.
 External auditing.
 Legal liability.
Building Blocks of Accrual Accounting
 Fundamental feature of Corporate Financial Reports is that
they are prepared using accrual rather than cash accounting.
Unlike cash accounting, accrual accounting distinguishes
between the recording of costs and benefits associated with
economic activities and the actual payment & receipt of cash.
Net income is the primary periodic performance index under
accrual accounting. To compute net income, the effects of
economic transactions are recorded on the basis of expected,
not necessarily actual, cash receipts and payments. Expected
cash receipts from the delivery of products or services are
recognized as revenues, and expected cash outflows
associated with these revenues are recognized as expenses.
Potential Red flags
 Unexplained changes in accounting,especailly
when performance is poor.
 Unexplained transactions that boost profits
 Unusual increases in accounts receivable that
boost profits
 Unusual increases in inventories in relation to
sales increases
 An increasing gap between a firm’s reported
income and its cash flow from operating activities.
 Large fourth – quarter adjustments
Potential Red flags – continued.
 An increasing gap between a firm’s reported income
and its tax income.
 Unexpected large asset write-offs
 A tendency to use mechanisms like researh and
development partnerships and the sale of receivables
with recourse.
 Related party transactions or transactions with related
entities.
 Qualified audit opinions or changes in independent
auditors that are not well justified.-These may indicate
a firm’s aggressive attitude to “opinion shop. ”
Financial Analysis
 The goal of financial analysis is to use
financial data to evaluate the current and
past performance of an organization and to
assess its sustainability.
 Two most common tools of analysis.
- Ratio Analysis (Performance & policies)
- Cash Flow Analysis(liquidity &
flexibility)
Financial Analysis – Ratio
Analysis
 In ratio analysis we compare ratios for a
firm over several years ( a time series
comparision).
 Compare ratios for the firm and other firms
in the industry (cross – sectional
comparision)
 Compare ratios to some absolute
benchmarks.
Prospective Analysis.
 Focuses on forecasting a firm’s future.

 Financial Statement forecasting.

 Valuation.
Inference
 Financial management is one of the wheels of the
management vehicle.
 The four equally important wheels are :
-Personnel Function.
-Production Function.
-Marketing Function
-Finance Function.
Effective and harmonious integration of these functions
determines the success in any organization.
THANK YOU.