Finance for Business Leaders :
An Introduction
By A.V. Vedpuriswar
July 8, 2011
The Financial System
Funds
Funds
Deposits / Shares
Financial Institutions
Commercial Banks
Insurance Companies
Mutual Funds
Provident Funds
Non-Banking Financial
Companies
Loans
Suppliers of Funds
Individuals
Businesses
Governments
Demanders of
Funds
Individuals
Businesses
Governments
Financial Markets
Funds Money Market
Securities Capital Market
Ref: Prasanna Chandra, “ Financial management”
Funds
Securities
Classification of Financial Markets
Nature of claim
Maturity of claim
Seasoning of claim
Timing of claim
Organizational structure
Debt market
Equity Market
Money Market
Capital Market
Primary Market
Secondary market
Cash or Spot Market
Forward or Futures Market
Exchange-traded Market
Over-the-counter Market
Ref : Prasanna Chandra, “ Financial Management”
Role of The Financial Manager
(2)
(1)
Financial
manager
Firm's
operations
(3)
(4a)
(4 b)
Ref: Brealey and Myers- Principles of Corporate finance
Financial
markets
How Finance adds value for shareholders
Cash
Investment
opportunity (real
asset)
Firm
Invest
Shareholder
Alternative:
pay dividend
to
shareholders
Investment
opportunities
(financial assets)
Shareholders
invest for
themselves
Key Financial Decisions
 Get the highest return on investments
 Allocate scarce financial resources
 Reduce costs
 Maximise value for shareholders
 Shareholders vs Stakeholders
The Financial Lifecycle
 Every company has a financial life cycle.
 It involves :
obtaining money
 using the money to run and grow the business
 returning money to shareholders.
 The lifecycle can be divided into :
 financing phase
 investing phase
 operating phase,
 returning phase,

Finance conveys performance
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of business at a glance
 Financial statements represent reality.
 But they are not the reality.
 Finance / Accounting are both art and science.
The heart of Finance
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 Assets ( what the company owns)
 Liabilities ( what the company owes)
 Revenues ( money generated by the business)
 Expenses ( money spent on the business)
 Inflows and outflows of cash ( a measure of liquidity)
Generally Accepted Accounting Principles
 The Business Entity Principle
 The Cost Principle
 The Objectivity Principle
 The Continuing-concern Principle
 The Stable Dollar Principle
Applying GAAP
 Expense booking
 Sales booking
 Book neither too early nor too late.
 What matters is not the actual collection or payment
 What matters is whether the revenue can be recognised
and whether the expense must be booked.
The Income Statement
 Revenue: This is earned money.
 Expense: This is the cost of doing business.
 Gross profit : Revenues – Expenses
 Operating profit : Gross Profit - Selling and general
admn expenses, depreciation expenses,
 Net Profit : Operating profit – Interest – Taxes
 The Revenues and expenses always balance. The balancing
entry is the profit/loss made.
What we can learn from the income
statement
 Sales, costs and profits
 Specific unexpected expenditures
 Whether the business is profitable
 Drill deeper into individual segments
The Balance Sheet
 A "snapshot" of a company's financial position at a moment
in time.
 What a company owns (assets) and what it owes (liabilities)
 The difference between the two is the shareholder equity.
 The Balance Sheet always balances.
What we can learn from the Balance Sheet
 Basis for computing
 rates of return,
 measuring exposure to debt
 Evaluating capital structure and assessing liquidity and
financial flexibility.





What assets does the company hold?
How much debt does it owe?
Is there enough cash to manage its inventory and pay its creditors?
How financially sound is the company?
Can it handle the normal fluctuations of revenues and expenses?
The Cash Flow statement
 Operating cash flows: Cash in-flows and out-flows for
a business on account of its day-to-day operations.
 Financing cash flows : Cash flows from "raising"
money for a company's business.
 Investing cash flows : Using cash for the purchase of
plant, property, and equipment, and for long-term
investments and receiving cash out of their sales.
Sources and Uses of Funds
Sources
Uses
Earnings
Fixed assets
Depreciation
Accounts Receivable
Bank notes
Inventory
Accounts payable
Investments
What we can do with the cash flow statements
 Forecast cash requirements
 Identify financing needs
 Locate cash drains
 Identify problems in the cash budgeting process
The Connection between Income statement and
Balance Sheet
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 Profits not distributed come back as Retained Earnings on
Balance Sheet.
 Expenses incurred but not paid come back as Accrued
expenses on Balance Sheet.
 Expenses incurred for benefits not yet received come back
as Pre paid assets on Balance Sheet.
 Depreciation and other non cash expenses incurred appear
in both statements.
Thank You
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