Consmech

 

Financial Management

First of all I am grateful to all the higher forces in whose help I am able to pass this knowledge.

I am also grateful to the teachers of Palmbeach school and my mother who had taught me accounts in my school day.

I am also grateful to teaching staff of SVNIT under whom I learnt operational management

Now when we talk about financial management we think of banking instituitions and stock exchange and wonder how it can be implemented in our life.

Whereas finances are a part of our normal life and implementable in our daily life.

They are learnt in three stages. They are as follows.

In the first stage you do data entry of your transactions i.e in your book of accounts ie what transactions are taking in your daily life where you have gained/paid money or you are liable to gain/pay money

In the next stage you should try to find out how much money who have to pay/take from others .your savings etc? In the final stage you should try to make investments to reduce costs or increase your income.

Now in any organization all entries have to be made systematic and we do data entry in the following manner based on the three golden rule of accounting

Debit what comes in(Credit what goes out)

Debit all expenses (Credit all incomes)

Debit the receiver(credit the giver)

It might be noted that an average student will try to ask what is debit or credit in accounts. It is equivalent to positive /or negative of engineering terms. It is basically conventions to be followed in accounting terms.

Now we need to make all entries in journal format?On close observation one will find that each and every transactions of accounts have equal amount of debit and credit. Say I have purchased a pen for Rs10 then my stationary exp is Rs 10 (expenses of Rs10 =debit) and I have to give cash (Rs10 goes out= credit) or I have taken it from credit form ABC store. (ABC=giver=credit). The journal entry will be as follows Or
HeadDebitCredit
Stationery expenses10
Cash10
HeadDebitCredit
Stationery expenses10
ABC Stores10

Now in the next stages I am going to discuss about my transactions with ABC stores.

I have purchased stationery worth 100 Rs on credit on 1st june.

I have paid Rs50 to him on 5th june.

I have purchased stationery again on 15th june worth Rs200

I have given him Rs175 on 20th june. Find out how much I owe him on 30th june assuming that I do not owe him neither he owed me on 1st june and no transactions took place between 20th to 30th june. Now we know the answer to this question =100-50+200-175=300(100+200)-225(50+175)=75Rs. But how to enter into accounting formats. So I write as follows Total
DateAccount InfoDebitCredit
1st juneStationery expenses100
5TH junecASH50
15TH juneStationery expenses200
20TH junecASH175
15TH juneStationery expenses200
30TH juneBALANCE CF300
300300

Now my stationery expenses in the above case would be Rs 300 (assuming I did not purchased any stationery. However they would be shown in accounts as <Total
DateAccount InfoDebitCredit
1st juneStationery expenses100
5th juneStationery expenses100
15th juneStationery expenses100
30TH juneBALANCE CF75
300300

Now I am looking at cash transactions of mine (during the same period.

Say in the above period I had Rs500 on 1st june.

I had paid Rs200 for my telephone exp on 2nd.

I had paid conveyance of Rs200 on 3rdjune.

I had paid to ABC store Rs50 on 5th june

I had withdrawn Rs 300 from bank on 10th june.

I had paid to ABC Rs175 on on 15th june. Find out my cash balance on 30th june.

My cash balance would be Rs500-200-200-50+300-175=800-625=175 However in my accounts I would be showing
DateAccount InfoDebitCredit
1st juneBalance500
2nd juneTelephone Exp200
2nd juneConveyance Exp200
5th juneABC Store50
10th juneBank300
15th juneABC Store175
30th juneBalance175
Total800800

Now for those who do not accounts I have shown what a ledger of stationery exp, ABC store and cash balance would look like.

Now let there be noted at the staring of period I had a capital of Rs500 in cash, Rs1000 bank (say), my friend XYZ owes me (says) Rs 100 , shares worth Rs1000 and an income of Rs 700 while working and Rs50 from shares. Hence my total capital is 2600. Hence my bank balance towards the end would be 1000+700+50-300=1350.

Now my trial balance(which is final balance of ledger at end of period) at the end of period would be <
Sl No.Account InfoDebitCredit
1Capital2600
2Cash175
3Bank1450
4Shares1000
5XYZ100
6Income700
7ShareIncome50
8Stationary Exp300
9ABC Store75
10Telephone Exp200
11Conveyance Exp200
Total34253425

Now let us find out my savings for month of june. The answer is 700+50-200-200-300=50.But let me show you in accounts. <
Sl No.Account InfoDebitCredit
1Income700
2Share Income50
3Stationary exp300
4Telephone exp200
5Conveyance exp200
6sAVING50
Total800800

This is equivalent to profit in profit and loss accounts.

Now let me find my capital for next month. So on one side I will my assets and ppl who me money and on other side I will my capital, my liability and ppl whom I owe money <
Sl No.Account InfoDebitCredit
1cAPITAL(2600+50)2650
2cASH175
3abc sTORE75
4BANK1450
5SHARES1000
6XYZ1000
Total27252725

This is equal to balance sheet of an organization.

In the third stage of accounts we analyze how to reduce cost and increase revenue?.Now this is done with the help of ratios for eg decrease of gross profit margin means decrease in sales or increase in manufacturing cost?similarly decrease in net profit margin but constant gross profit margin means increase in non-manufacturing cost

Here are some of the ratios

Inventory turnover=Cost of goods sold/Average inventory

Net receivables=Net revenue/Average receivables

Payables turnover=Purchases/Average payables

Asset turnover=Net revenues/Average total assets

Debt to assets ratios=Total liability /total assets

Debt to capital ratios=total debt/(total debt +shareholders equity)

Debt to equity ratios=total debt/total shareholders equity

Current ratios=Current assets/Current Liability

Quick ratios=(Cash+short term marketable securities+accounts receivable)/current liability

Cash ratios=(Cash+short term marketable securities)/current liability

Interest coverage ratios=earning before interest and taxes/interest payments

Gross profit margin=gross income/net revenue

Operating profit margin=operating income/net revenue

Net profit margin=net income/net revenue

Return on assets=net income/total assets

Return on capital=net income/total capital