TOBORAG CONSULTING
TRAINING. CONSULTING. FINANCIAL SERVICES.
IMPROVING YOUR FINANCIAL
MANAGEMENT AND WORK SKILLS
DAY 2
FACILITATOR:
Learning Objectives
At the end of the session, participants
should among other things be able to:
 Understand the concept of time management
in carrying out your job functions and
executing tasks
 The role of communication and attributes of
good leadership in running the business
activities and realization of set goals and
objectives of an enterprise.
3/20/2018
3
Contents
• Time Management.
• Communication.
• Leadership development., Theories and
Practice
• Feedback mechanism.
• Functional self-check/constant
review/correction to guard against errors
and mistakes.
09-Jun-20
Contents
• Financial Statement Analysis
• Statutory compliance:
Industrial Training Fund (I.T.F)
Value Added Tax (V.A.T)
Withholding Tax
Pay-As- You-Earn (P.A.Y.E)
Staff Pension
Tax Clearance Certificates
• Conclusion
09-Jun-20
TIME MANAGEMENT
• Time management is the process of planning
and controlling how much time to spend on
specific activities.
• Good time management allows an individual
to complete more in a shorter period of time,
lowers the amount of stress, and leads to
career success.
TIME MANAGEMENT
• “Time management is the process of planning and
exercising conscious control over the amount of time spent
on specific activities, especially to
increase effectiveness, efficiency or productivity. It is a
juggling act of various demands of study, social life,
employment, family, and personal interests and
commitments with the finiteness of time. Using time
effectively gives the person “choice” on spending/
managing activities at their own time and expediency.”
• What’s important to understand is that time management
is a skill.
• And like any other skill, it is something you must practice
and improve on, to become proficient.
TIME MANAGEMENT
Relevant considerations for effective time
management:
• Creating and keeping deadlines.
• Delegation more often
• Goal setting and meeting goals.
• Decision making.
• Stop Procrastination
• Managing appointments.
• Team management.
• Making schedules
TIME MANAGEMENT
Relevant considerations for effective time
management:
• Know your goals and make sure you engage in
activities that support your business goals,
both short- and long-term.
• Prioritize wisely. (Things which matter most
must not be at the mercy of things which
matter least)
• Plan ahead and start early
• Eliminate distractions.
TIME MANAGEMENT
Bad time management
• Procrastination is the most obvious result of poor
time management. Students who don't
have control over their time end up letting tasks sit
until the last minute – and then they feel a lot of
stress when they try to play catch up. If you've let too
many tasks sit, you might miss deadlines entirely
• Good time management allows you to accomplish
more in a shorter period of time, which leads to
more free time, which lets you take advantage of
learning opportunities, lowers your stress, and helps
you focus, which leads to more career success. Each
benefit of time management improves another
TIME MANAGEMENT
• The ’Stephen Covey’ time management grid is
an effective method of organizing your
priorities.
• As you can see from the grid below, there are
four quadrants organized by urgency and
importance. Quadrant I is for the immediate
and important deadlines. Quadrant II is for
long-term strategizing and development.
TIME MANAGEMENT
The Four Quadrants of Time Management
• Important and Urgent – Crises and
Emergencies.
• Important but Not Urgent – Prevention,
Planning, and Improvement.
• Not Important but Urgent – Interruptions and
Busy Work.
• Not Important and Not Urgent – Time
Wasters.
TIME MANAGEMENT
What is ‘’putting first things first’’?
• Putting first things first means having selfawareness and knowing yourself – your
priorities, values, mission, vision, dreams and
taking actions towards those each day.
• The framework to help you put first things
first, is called the Time Management Matrix
from Stephen Covey
• ‘’The key is not to prioritize what you have on
your schedule but to schedule your priorities’’
TIME MANAGEMENT
TIME MANAGEMENT
TIME MANAGEMENT
COMMUNICATION
• Communication is simply the act of transferring
information from one place, person or group to
another.
• Every communication involves (at least) one sender, a
message and a recipient. This may sound simple, but
communication is actually a very complex subject.
• The transmission of the message from sender to
recipient can be affected by a huge range of things.
These include our emotions, the cultural situation, the
medium used to communicate, and even our location.
• The complexity is why good communication skills are
considered so desirable by employers around the
world: accurate, effective and unambiguous
communication is actually extremely hard.
COMMUNICATION
• As this definition makes clear, communication is
more than simply the transmission of information.
The term requires an element of success in
transmitting or imparting a message, whether
information, ideas, or emotions.
• A communication therefore has three parts: the
sender, the message, and the recipient.
• The sender ‘encodes’ the message, usually in a
mixture of words and non-verbal communication. It
is transmitted in some way (for example, in speech or
writing), and the recipient ‘decodes’ it.
COMMUNICATION
• Of course, there may be more than one recipient,
and the complexity of communication means that
each one may receive a slightly different message.
Two people may read very different things into the
choice of words and/or body language. It is also
possible that neither of them will have quite the
same understanding as the sender.
• In face-to-face communication, the roles of the
sender and recipient are not distinct. The two roles
will pass back and forwards between two people
talking.
COMMUNICATION
• Both parties communicate with each other, even if in
very subtle ways such as through eye-contact (or lack
of) and general body language. In written
communication, however, the sender and recipient
are more distinct.
Categories of Communication
• There are a wide range of ways in which we
communicate and more than one may be occurring
at any given time.
The different categories of communication include:
• Spoken or Verbal Communication, which includes
face-to-face, telephone, radio or television and other
media.
COMMUNICATION
• Non-Verbal Communication, covering body
language, gestures, how we dress or act, where we
stand, and even our scent. There are many subtle
ways that we communicate (perhaps even
unintentionally) with others. For example, the tone
of voice can give clues to mood or emotional state,
whilst hand signals or gestures can add to a spoken
message.
• Written Communication: which includes letters, emails, social media, books, magazines, the Internet
and other media. Until recent times, a relatively
small number of writers and publishers were very
powerful when it came to communicating the
COMMUNICATION
• The process of interpersonal communication cannot
be regarded as a phenomena which simply
'happens'. Instead, it must be seen as a process that
involves participants who negotiate their roles with
each other, whether consciously or unconsciously.
• A message or communication is sent by the sender
through a communication channel to one or more
recipients.
• The sender must encode the message (the
information being conveyed) into a form that is
appropriate to the communication channel, and the
recipient then decodes the message to understand
its meaning and significance.
COMMUNICATION
• Misunderstanding can occur at any stage of the
communication process.
• Effective communication involves minimising
potential misunderstanding and overcoming any
barriers to communication at each stage in the
communication process.
• An effective communicator understands the
audience, chooses an appropriate communication
channel, hones their message for this particular
channel and encodes the message effectively to
reduce misunderstanding by the recipient(s).
COMMUNICATION
• They will also seek out feedback from the recipient(s)
to ensure that the message is understood and
attempt to correct any misunderstanding or
confusion as soon as possible.
• Receivers can use techniques such
as Clarification and Reflection as effective ways to
ensure that the message sent has been understood
correctly.
COMMUNICATION
The Communication Process
• A message or communication is sent by the sender
through a communication channel to a receiver, or to
multiple receivers.
• The sender must encode the message (the
information being conveyed) into a form that is
appropriate to the communication channel, and the
receiver(s) then decodes the message to understand
its meaning and significance
COMMUNICATION
Communication channels:
• This the term given to the way in which we
communicate. It is therefore the method used to
transmit our message to a recipient, or to receive a
message from someone else.
• There are multiple communication channels available
to us today. These include face-to-face conversations,
telephone calls, text messages, email, the Internet
(including social media such as Facebook, Whatzapp
and Twitter), radio and TV, written letters, brochures
and reports.
• Choosing an appropriate communication channel is
vital for effective communication. Each
COMMUNICATION
• For example, broadcasting news of an upcoming
event via a written letter might convey the message
clearly to one or two individuals. It will not, however,
be a time- or cost-effective way to broadcast the
message to a large number of people.
• On the other hand, conveying complex, technical
information is easier via a printed document than a
spoken message. The recipients are able to
assimilate the information at their own pace and
revisit anything that they do not fully understand.
• Written communication is also useful as a way of
recording what has been said, for example by taking
minutes in a meeting.
LEADERSHIP DEVELOPMENT
• Leadership development expands the
capacity of individuals to perform
in leadership roles within organizations.
• Leadership roles are those that facilitate
execution of a company's strategy through
building alignment, winning mindshare and
growing the capabilities of others.
•
LEADERSHIP DEVELOPMENT
• Leadership development expands the capacity of
individuals to perform in leadership roles within
organizations.
• Leadership roles are those that facilitate
execution of a company's strategy through
building alignment, winning mindshare and
growing the capabilities of others.
• Teaching of leadership qualities, including
communication, ability to motivate others, and
management, to an individual who may or may
not use the learned skills in a leadership position.
LEADERSHIP DEVELOPMENT
How do you demonstrate leadership?
Highlighting Your Leadership Skills
• Lead by example. Any attempt to rule with an iron
fist will go down like a lead balloon – after all, your
coworkers don't report to you.
• Talk less, listen more.
• Don't play favorites.
• Do your fair share.
• Be yourself.
• Take responsibility.
• Develop your leadership chops.
LEADERSHIP DEVELOPMENT
Essential Qualities of a Great Leader
• Clarity. They are clear and concise at all times--there
is no question of their vision and what needs to be
accomplished.
• Decisiveness. Once they have made up their mind,
they don't hesitate to commit--it's all hands on deck.
• Courage.
• Humility.
LEADERSHIP DEVELOPMENT
• Strong Communication. Without a doubt, being an
effective communicator is a top attribute of a
strategic leader. ...
• Passion & Commitment. Enthusiasm for your mission
or project will get others excited because they can
see and feel your dedication.
• Positivity. (A positive attitude is contagious).
• Innovation.
• Collaboration.
•
LEADERSHIP DEVELOPMENT
•
•
•
•
•
•
•
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Honesty and Integrity.
Inspire Others.
Commitment and Passion.
Good Communicator.
Decision-Making Capabilities.
Accountability.
Delegation and Empowerment.
Creativity and Innovation
FEEDABACK MECHANISM
Feedback in Communication.
• Receivers are not just passive absorbers of
messages; they receive the message and
respond to them.
• This response of a receiver to sender's
message is called Feedback and this
represents your audience's response; it
enables you to evaluate the effectiveness of
your message.
FEEDABACK MECHANISM
Role of feedback in communication.
• Communication is the exchange and flow of
information and ideas from one person to
another.
• Effective communication occurs only if the
receiver understands the exact information or
idea that the sender intended to transmit.
Positive feedback in communication
• An important part of a manager's job is
delivering feedback to employees.
FEEDABACK MECHANISM
Role of feedback in communication.
• Feedback helps to improve performance, ensure
standards are met and communicate important
business objectives. .These forms are positive
feedback and negative feedback
Purpose of feedback:
• Before giving feedback, remind yourself why you are
doing it. The purpose of giving feedback is to improve
the situation or the person's performance. You won't
accomplish that by being harsh, critical or offensive.
You'll likely get much more from people when your
approach is positive and focused on improvement.
FUNCTIONAL SELF CHECK
• Functional self-check/constant review/correction to
guard against errors and mistakes.
Need for self assessment
• In social psychology, self-assessment is the process of
looking at oneself in order to assess aspects
that are important to one's identity. It is one of the
motives that drive self-evaluation, along with selfverification and self-enhancement.
•
FINANCIAL STATEMENT ANALYSIS
MEANING OF FINANCIAL STATEMENTS
What is a financial statement?
• A Financial statement (or financial report) is
a formal record of the financial activities
and position of a business, person, or any
entity usually prepared at the end of a
financial period usually a year.
• Relevant financial information is presented
in a structured manner reflecting the assets,
liabilities, capital, income, expenses among
others in a standard or prescribed form easy
to understand by users of such statements.
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MEANING OF FINANCIAL STATEMENTS
• A balance sheet or statement of financial
position, reports on a
company's assets, liabilities, and owners
equity at a given point in time.
• An income statement or statement of
comprehensive income, statement of revenue
& expense, Profit or Loss report, reports on a
company's income, expenses, and profits over
a period of time.
• A profit or loss statement provides information
on the operations of the enterprise which
include sales and the various expenses incurred
during the stated period.
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MEANING OF FINANCIAL STATEMENTS
• A Statement of changes in equity or equity
statement or statement of retained earnings,
reports on the changes in equity of the
company during the stated period.
• A cash flow statement reports on a
company's cash flow activities, particularly its
operating, investing and financing activities.
• Notes to financial statements are considered
an integral part of the financial statements
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PURPOSE OF FINANCIAL STATEMENTS
• Purpose for business entities
"The objective of financial statements is to provide
information about the financial position, performance and
changes in financial position of an enterprise that is useful to
a wide range of users in making economic
decisions."[ Financial statements should be understandable,
relevant, reliable and comparable. Reported assets, liabilities,
equity, income and expenses are directly related to an
organization's financial position.
Financial statements are intended to be understandable by
readers who have "a reasonable knowledge of business and
economic activities and accounting and who are willing to
study the information diligently."[ Financial statements may
be used by users for different purposes:
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PURPOSE OF FINANCIAL STATEMENTS
Purpose for business entities
Owners and managers require financial statements
to make important business decisions that affect its
continued operations. Financial analysis is then
performed on these statements to provide
management with a more detailed understanding of
the figures. These statements are also used as part of
management's annual report to the stockholders.
Employees also need these reports in
making collective bargaining agreements (CBA) with
the management, in the case of labor unions or for
individuals in discussing their compensation,
promotion and rankings.
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PURPOSE OF FINANCIAL STATEMENTS
Purpose for business entities
Prospective investors make use of financial
statements to assess the viability of investing in a
business. Financial analyses are often used by
investors and are prepared by professionals (financial
analysts), thus providing them with the basis for
making investment decisions.
Financial institutions (banks and other lending
companies) use them to decide whether to grant a
company with fresh working capital or extend
debt securities (such as a long-term bank
loan or debentures) to finance expansion and other
significant expenditures.
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INTERPRETATION OF FINANCIAL
STATEMENTS
ACCOUNTING RATIOS AND INVESTMENTS DECISIONS
Knowing how to work with the numbers in a
company's financial statements is an essential skill for stock
investors. The meaningful interpretation and analysis of
balance sheets, income statements and cash
flow statements to discern a company's investment qualities is
the basis for smart investment choices.
What is 'Ratio Analysis'
A ratio analysis is a quantitative analysis of information
contained in a company’s financial statements.
Ratio analysis is based on line items in financial statements like
the balance sheet, income statement, and cash flow statement;
the ratios of one item – or a combination of items - to another
item or combination are then calculated. Ratio analysis is used
to evaluate various aspects of a company’s operating
and financial performance such as its efficiency, liquidity,
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profitability and solvency.
INTERPRETATION OF FINANCIAL
STATEMENTS
The trend of these ratios over time is studied to check whether
they are improving or deteriorating.
Ratios are also compared across different companies in the same
sector to see how they stack up, and to get an idea of
comparative valuations. Ratio analysis is a cornerstone
of fundamental analysis.
While there are numerous financial ratios, most investors are
familiar with a few key ratios, particularly the ones that are
relatively easy to calculate. Some of these ratios include
the current ratio, return on equity, the debt-equity ratio, the
dividend payout ratio and the price/earnings (P/E) ratio.
For a specific ratio, most companies have values that fall within a
certain range. A company whose ratio falls outside the range may
be regarded as grossly undervalued or overvalued, depending on
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INTERPRETATION OF FINANCIAL
STATEMENTS
• As well, ratios are usually only comparable across companies in the
same sector, since an acceptable ratio in one industry may be
regarded as too high in another. For example, companies in sectors
such as utilities typically have a high debt-equity ratio, but a similar
ratio for a technology company may be regarded as unsustainably
high.
• Ratio analysis can provide an early warning of a potential
improvement or deterioration in a company’s financial situation or
performance.
• Successful companies generally have solid ratios in all areas, and
any hints of weakness in one area may spark a significant sell-off in
the stock. Certain ratios are closely scrutinized because of their
relevance to a certain sector, as for instance inventory turnover for
the retail sector and days sales outstanding (DSOs) for technology
companies.
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LIQUIDITY AND PROFITABILITY
Profitability is a major objective why people invest in
business and it is quite possible for a business to operate
in the short run without profit and the business will still
continue.
However, it is doubtful if any business can survive
without cash for as long as it will survive without profit,
otherwise the business may be tending towards
insolvency and this may on the long run pose a threat to
the going concern status of the business. This shows the
importance of liquidity in the life of a business.
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LIQUIDITY AND PROFITABILITY
Liquidity : Is the ability of an organization to pay its shortterm obligations as they fall due without default. Cash flow
planning is very essential in achieving this objective.
Profitability : Is the ability of an organization to consistently
make and maximize its profits amidst challenges of running
the business. This is a key area of interest and satisfaction to
the business owners (shareholders) and are important for
long term sustainability.
In order to guaranty the long term stability of an organisation,
it becomes imperative that the business remains both
profitable to meet the returns expectation of the investors
and also be liquid enough to be able to pay as they fall due.
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LIQUIDITY RATIOS
Liquidity ratios analyze the ability of a company to pay off
both its current liabilities as they become due as well as their
long-term liabilities as they become current. In other words,
these ratios show the cash levels of a company and the ability
to turn other assets into cash to pay off liabilities and other
current obligations.
Liquidity is not only a measure of how much cash a business
has. It is also a measure of how easy it will be for the company
to raise enough cash or convert assets into cash. Assets like
accounts receivable, trading securities, and inventory are
relatively easy for many companies to convert into cash in the
short term. Thus, all of these assets go into the liquidity
calculation of a company.
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LIQUIDITY RATIOS
Liquidity ratios measure a company's ability to pay debt
obligations and its margin of safety through the calculation of
metrics including the current ratio, quick ratio and operating cash
flow ratio. Current liabilities are analyzed in relation to liquid
assets to evaluate the coverage of short-term debts in an
emergency. Analysts use liquidity ratios to evaluate going concern
issues, as liquidity measurement ratios indicate cash flow
positioning.
Liquidity ratios are most useful when they are used in comparative
form. This analysis may be performed internally or externally. For
example, internal analysis regarding liquidity ratios involves
utilizing multiple accounting periods that are reported using the
same accounting methods. Comparing previous time periods to
current operations allows analysts to track changes in the
business. In general, a higher liquidity ratio indicates that a
company is more liquid and has better coverage of outstanding 51
LIQUIDITY RATIOS
Alternatively, external analysis involves comparing the
liquidity ratios of one company to another company or entire
industry. This information is useful to compare the company's
strategic positioning in relation to its competitors when
establishing benchmark goals. Liquidity ratio analysis may not
be as effective when looking across industries, as various
businesses require different financing structures. Liquidity
ratio analysis is less effective for comparing businesses of
different sizes in different geographical locations.
Solvency Versus Liquidity
Solvency relates to a company's overall ability to pay debt
obligations and continue business operations, while liquidity
focuses more on current financial accounts. A company must
have more total assets than total liabilities to be considered
solvent and more current assets than current liabilities to be
considered liquid. Although solvency is not directly correlated
to liquidity, liquidity ratios present a preliminary expectation
regarding the solvency of a company.
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LIQUIDITY RATIOS
(WORKING CAPITAL TOOLS)
• The most basic liquidity ratio or metric is the calculation of
working capital, and it represents the excess of current
assets over current liabilities. It is also referred to as net
current assets or net liquid assets of a business organization
and it is also a part of the measures of determining the
liquidity position of a business.
• If current assets are less than current liabilities, an entity has
a working capital deficiency, also called a working
capital deficit. In other words, If a business has a positive
working capital, this indicates it has more current assets than
current liabilities and in the event of an emergency, the
business can pay all of its short-term debts. A negative
working capital indicates that a company is illiquid.
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LIQUIDITY RATIOS
CURRENT ASSET AND CURRENT LIABILITIES (WORKING CAPITAL
TOOLS)
• Working capital is used to cover all of a company's short-term
expenses, including inventory, payments on short-term debt and
operating expenses. Basically, working capital is used to keep a
business operating smoothly and meet all its financial
obligations within the coming year.
• The current ratio divides total current assets by total current
liabilities. This ratio provides the most basic analysis regarding
the coverage level of current debts by current assets. The quick
ratio expands on the current ratio by only including cash,
marketable securities and accounts receivable in the numerator.
The quick ratio reflects the potential difficulty in selling inventory
or prepaid assets in the result of an emergency.
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LIQUIDITY RATIOS
QUICK RATIO
• The quick asset ratio or acid test ratio or liquid ratio is
a liquidity ratio that measures the ability of a company
to pay its current liabilities when they come due with
only quick assets. Quick assets are current assets that
can be converted to cash within 90 days or in the
short-term. Cash, cash equivalents, short-term
investments or marketable securities, and current
accounts receivable are considered quick assets. Stock
is deducted in its computation as it is not always easy
to turn stock quickly into cash in some companies
while creditors must always be paid.
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LIQUIDITY RATIOS
QUICK RATIO
• The quick ratio is often called the acid test ratio in reference to
the historical use of acid to test metals for gold by the early
miners. If the metal passed the acid test, it was pure gold. If
metal failed the acid test by corroding from the acid, it was a
base metal and of no value.
• The acid test of finance therefore shows how well a company
can quickly convert its assets into cash in order to pay off its
current liabilities. It also shows the level of quick assets to
current liabilities. In other words, it measures the ability of a
company to use its near cash or quick assets to extinguish or
retire its current liabilities immediately. Quick assets include
those current assets that presumably can be quickly converted
to cash at close to their book values.
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LIQUIDITY RATIOS
QUICK RATIO
• The quick ratio is calculated by adding cash, cash
equivalents, short-term investments, and current
receivables together then dividing them by current
liabilities.
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LIQUIDITY RATIOS
QUICK RATIO
• Sometimes company financial statements don’t give a
breakdown of quick assets on the balance sheet. In this case, you
can still calculate the quick ratio even if some of the quick asset
totals are unknown. Simply subtract inventory and any current
prepaid assets from the current asset total for the numerator.
Here is an example.
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LIQUIDITY RATIOS
QUICK RATIO
• The acid test ratio measures the liquidity of a
company by showing its ability to pay off its current
liabilities with quick assets. If a firm has enough quick
assets to cover its total current liabilities, the firm
will be able to pay off its obligations without having
to sell off any long-term or capital assets.
• Since most businesses use their long-term assets to
generate revenues, selling off these capital assets will
not only hurt the company it will also show investors
that current operations aren’t making enough profits
to pay off current liabilities.
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LIQUIDITY RATIOS
QUICK RATIO
• Higher quick ratios are more favorable for companies
because it shows there are more quick assets than
current liabilities. A company with a quick ratio of 1
indicates that quick assets equal current assets. This also
shows that the company could pay off its current
liabilities without selling any long-term assets. An acid
ratio of 2 shows that the company has twice as many
quick assets than current liabilities.
• Obviously, as the ratio increases so does the liquidity of
the company. More assets will be easily converted into
cash if need be. This is a good sign for investors, but an
even better sign to creditors because creditors want to
know they will be paid back on time.
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LIQUIDITY RATIOS - QUICK RATIO
• Example: Let’s assume Carole’s Clothing Store is applying for a
loan to remodel the storefront. The bank asks Carole for a
detailed balance sheet, so it can compute the quick ratio.
Carole’s balance sheet included the following accounts:
• Cash: $10,000
• Accounts Receivable: $5,000
• Inventory: $5,000
• Stock Investments: $1,000
• Prepaid taxes: $500
• Current Liabilities: $15,000
• The bank can compute Carole’s quick ratio like this.
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LIQUIDITY RATIOS - QUICK RATIO
As you can see Carole’s quick ratio is
1.07. This means that Carole can pay off
all of her current liabilities with quick
assets and still have some quick assets
left over.
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LIQUIDITY RATIOS - QUICK RATIO
Now let’s assume the same scenario except Carole did not
provide the bank with a detailed balance sheet. Instead
Carole’s balance sheet only included these accounts:
• Inventory: $5,000
• Prepaid taxes: $500
• Total Current Assets: $21,500
• Current Liabilities: $15,000
• Since Carole’s balance sheet doesn’t include the
breakdown of quick assets, the bank can compute her
quick ratio like this:
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LIQUIDITY RATIOS - CURRENT RATIO
• The current ratio is a liquidity and efficiency ratio that
measures a firm’s ability to pay off its short-term liabilities with
its current assets. The current ratio is an important measure of
liquidity because short-term liabilities are due within the next
year. Standard is 2:1
• This means that a company has a limited amount of time in
order to raise the funds to pay for these liabilities. Current assets
like cash, cash equivalents, and marketable securities can easily
be converted into cash in the short term. This means that
companies with larger amounts of current assets will more easily
be able to pay off current liabilities when they become due
without having to sell off long-term, revenue generating assets.
• The current ratio is calculated by dividing current assets by
current liabilities. This ratio is stated in numeric format rather
than in decimal format. Here is the calculation:
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LIQUIDITY RATIOS - CURRENT RATIO
Analysis
• The current ratio helps investors and creditors understand the
liquidity of a company and how easily that company will be
able to pay off its current liabilities. This ratio expresses a
firm’s current debt in terms of current assets. So a current
ratio of 4 would mean that the company has 4 times more
current assets than current liabilities.
• A higher current ratio is always more favorable than a lower
current ratio because it shows the company can more easily
make current debt payments.
• If a company has to sell of fixed assets to pay for its current
liabilities, this is usually means the company isn’t making
enough from operations to support activities and this is not
good at all and this may sometimes be as a result of poor
collections of accounts receivable.
• The current ratio also sheds light on the overall debt burden 65
LIQUIDITY RATIOS - CURRENT RATIO
Example
• Charlie’s Skate Shop sells ice-skating equipment to local hockey
teams. Charlie is applying for loans to help fund his dream of
building an indoor skate rink. Charlie’s bank asks for his balance
sheet so they can analyze his current debt levels. According to
Charlie’s balance sheet he reported $100,000 of current liabilities
and only $25,000 of current assets. Charlie’s current ratio would be
calculated like this:
• As you can see, Charlie only has enough current assets to pay off 25
percent of his current liabilities. This shows that Charlie is highly
leveraged and highly risky. Banks would prefer a current ratio of at
least 1 or 2, so that all the current liabilities would be covered by
the current assets. Since Charlie’s ratio is so low, it is unlikely that
he will get approved for his loan.
66
LIQUIDITY RATIOS - CURRENT RATIO
Analysis and Interpretation
• Since the working capital ratio measures current assets as a
percentage of current liabilities, it would only make sense that a
higher ratio is more favorable. A WCR of 1 indicates the current
assets equal current liabilities. A ratio of 1 is usually considered the
middle ground. It’s not risky, but it is also not very safe. This means
that the firm would have to sell all of its current assets in order to
pay off its current liabilities.
• A ratio less than 1 is considered risky by creditors and investors
because it shows the company isn’t running efficiently and can’t
cover its current debt properly. A ratio less than 1 is always a bad
thing and is often referred to as negative working capital.
• On the other hand, a ratio above 1 shows outsiders that the
company can pay all of its current liabilities and still have current
assets left over or positive working capital.
67
LIQUIDITY RATIOS - CURRENT RATIO
Analysis and Interpretation
• Since the working capital ratio has two main
moving parts, assets and liabilities, it is important
to think about how they work together. In other
words, how does the ratio change if a firm’s
current liabilities increase while the current assets
stay the same? Here are the four examples of
changes that affect the ratio:
• Current assets increase = increase in WCR
• Current assets decrease= decrease in WCR
• Current liabilities increase = decrease in WCR
• Current liabilities decrease = increase in WCR
68
LIQUIDITY RATIOS - CURRENT RATIO
Cautions and Limitations
Positive vs. Negative Working Capital status
• Positive working capital is a status to be pursued always
because it means that the business is able to meet its
short-term obligations and bills with its liquid assets. It also
means that the business should be able to finance some
degree of growth without having to acquire any outside
loan or raise funds with a new stock issuance.
• Negative working capital, on the other hand, means that
the business doesn’t have enough liquid assets to meet its
current or short-term obligations. This is often caused by
inefficient asset management and poor cash flow. If the
business does not have enough cash to pay the bills as they
become due, it will have to borrow more money, which will 69
in turn increase its short-term obligations.
LIQUIDITY RATIOS - CURRENT RATIO
Cautions and Limitations
Positive vs. Negative Working Capital status
Is Negative Working Capital Bad?
• Negative working capital is never a sign that a company is
doing well, but it also doesn’t mean that the company is
failing either. Many large companies often report negative
working capital and are still doing well, e.g Wal-Mart.
• Companies, like Wal-Mart, are able to survive with a
negative working capital because they turn their inventory
over so quickly; they are able to meet their short-term
obligations. These companies purchase their inventory
from suppliers and immediately turn around and sell it at a
small margin
70
STATUTORY COMPLIANCE
Industrial Training Fund (I.T.F)
Value Added Tax (V.A.T)
Withholding Tax
Pay-As- You-Earn (P.A.Y.E)
Staff Pension
Tax Clearance Certificates
STATUTORY COMPLIANCE
Industrial Training Fund (I.T.F) Established in 1971, has operated within the context of
its enabling laws Decree 47 of 1971 as Amended in the 2011 ITF ACT
 The purpose of the Act was to establish a Fund – The Industrial Training Fund(ITF) to be utilized to promote and encourage the acquisition of skills in industry or
commerce in Nigeria with a view to generating a pool of indigenous trained
manpower sufficient to meet the needs of the economy
ITF ACT SECTION 6 (1 – 3)
• 1. Every employer having either 5 or more employees in its establishment, or
having less than 5 employees but with a Turnover of N50m and above per annum,
shall, in respect of each calendar year and or the prescribed date, contribute to
the Fund one per centum of its total annual payroll.
2. Any Supplier, contractor or consultant bidding or soliciting contracts, businesses,
goods and services from any Federal Government Ministry, Department, Agency,
commercial, industrial and private entity shall fulfil the statutory obligations of its
employees with respect to payment of Training Contribution to the Fund.
3. Any liable organization, public or private including companies situate in the Free
Trade Zone requiring approval for expatriate quota and/or utilizing custom services
in matters of export and import, must show proof of compliance with this Act in
respect of payment of training contribution of its employees and all regulatory
agencies of the Federal Government shall ensure compliance with Section 6(1) –
CONCLUSION
• Sound financial management is indeed the bedrock of a
successful and growing organization.
• The roles of finance and financial management towards
generating consistent liquidity and profitability are very
crucial.
• Financial statement, analysis and its interpretation using
the various accounting and financial ratios remain useful
tools for decision making by various users of the financial
statements.
• Managers should therefore be prepared to harness all
resources in such a manner that will guaranty continuous
profitability and also deliver maximum returns to the
investors from time to time.
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