A MBA in marketing later, I was still meandering about my financial ABC’s. Most of us are usually foxed by balance sheets, income statements and break even analysis. And yet if you want to be a store owner, or run a technology firm, it’s important to have basic skills in finance to survive business cycles. It is just as important for professionals from other streams to understand what finance and accounting departments do, understand the cash turnaround of a particular product or service. Understand them and you will make better decisions while investing your money. Cooked up balance sheets have seen many a corporation falling. Budgeting, basic financial analyses are considered a basic skill set for newbie and CEO’s alike.

Budgeting for a task or monthly household expenditure; Budgeting for a product launch or a capital expenditure, you need to know your financial ABC’s.

Typically a Finance department has two key areas. Finance undertakes the task of managing the company’s resources and Accounting reports the financial transactions of the firm. In smaller companies a few people may handle both, while in a large firm it may be headed by two different departments. Mergers and acquisitions, attracting investor capital, and managing IPO’s fall under the purview of the Finance department.

The Accounting department is responsible for recording all financial transactions and preparing reports that help the company, investors and government agencies understand them from a financial standpoint. These transactions are recorded and reported in a standardised format that varies from country to country. America for instance follows GAAP or Generally Accepted Accounting Principles. Now International Financial Reporting Standards (IFRS) is becoming popular all across the world. Since a one rule fits all does not work for diverse industries, these principles  help  maintain  recording and reporting standards, allowing room for manoeuvre for industry specific details.

The key functions of the Finance and Accounting Departments include:
<ul>
	<li>Safeguard a company’s resources</li>
	<li>Institute and monitor internal controls</li>
	<li>Collect and organize all financial transactions of the company.</li>
	<li>Prepare budgets and monitor expenditure against it</li>
	<li>Prepare reports (Balance sheets, Income Reports) that can be used by other departments, investors, analysts, bankers etc.</li>
</ul>
It would not be incorrect to compare the finance department to the safe keeper of resources and monitor of financial transactions within the company.

Finance and Accounting: The Why and What

Though it is said organisations have an indefinite life, in reality they do have a particular life cycle. These are birth, growth, plateau and finally no growth or decline. This is not unlike a product life cycle. In periods of slow growth, product extensions are introduced to increase its life span. Similarly, companies need to make changes, adapt to new technologies and economic scenarios to survive and earn profits. Some companies are bought over, and while their names stay, the businesses change dramatically.

So Corporations that have lasted a long time (e.g. Coke, IBM, Unilever, Microsoft) have perfected to a great degree to adapt rapidly to changes in the marketplace and stay ahead in the game. Apple is an excellent example of a company that reinvented itself, introduced a slew of new products that redefined the market. It is easy for companies to get complacent and be immune to changes in the industry. Companies need to reassess their processes from time to time to stay efficient and increases profitability.

Financial reports play an important role in helping monitor an organisations health, attract investors and keep stake holders. The information needs to be accurate and relevant. Consistent practices tend to lead to accurate reports which are useful and relevant to the user. Regular cycles of these processes lead to capturing of accurate information. Say, a weekly analysis of financial reports.

In any business, transactions happen through the day. Purchases and sales of goods or services happen. The workforce produces an output. The various departments go about their business. Usually in most companies, a monthly review of performances is conducted. Income statement and cash flow statement if prepared on a monthly basis help capture those months’ transactions. A review of these reports helps analyse the transactions on a more detailed basis. The accountants with their financial expertise look at the data from different perspectives and arrive at conclusions.

One of the most important parts of accounts is capturing information. This is usually done in specific formats. For examples, all goods sold are done using an invoice. So all expenses, and sales are classified into different compartments. An organised list of the same is called a chart of accounts. So when a data is given, it is stored in that relevant compartment with a title. Then using accounting practices these compartments are arranged to produce monthly sheets, which can be analysed.

These compartments are stored in a general ledger which serves as a primary source of information for the preparation of other financial reports. Some examples of compartment names are assets, liabilities, income, and operating expenses. Further divisions in these compartments are for instance accounts payable, accrued payroll, long-term notes payable (come under assets).

So the purchase of a machine would come under assets. To balance it on the liability side they would note the loan taken to purchase the machine under liabilities.

Three key financial statements that form an important part of any annual statement are the balance sheet, income statement and statement of cash flow.

<img class="aligncenter size-full wp-image-1588" title="Financial Statements" src="https://financetrain.com/wp-content/uploads/2010/12/fin-statements.gif" alt="Financial Statements: Income Statement, Balance Sheet, and Statement of Cash Flows" width="456" height="468" />

Specific and detailed reports under any heading can be made, using the primary source of data.

The primary source of data is the General Ledger. Traditionally it was a large book, now the same is maintained in a computer.  The Ledger is always kept in balance, since when something is added, another is subtracted.

Customized reports are easily available quickly, thanks to the maintenance of reports in computers. A variety of reports suiting your financial assessment need can be easily generated to monitor your business.

Financial Statements: Structures and Relationship

Choco-Bloc Company makes chocolate for retail and takes custom orders. To understand a balance sheet better, let us take a look at the elements of their balance sheet.
<img class="size-full wp-image-1592 alignnone" title="bs1" src="https://financetrain.com/wp-content/uploads/2010/12/bs1.gif" alt="" width="175" height="203" />
<img class="aligncenter size-full wp-image-1593" title="bs2" src="https://financetrain.com/wp-content/uploads/2010/12/bs2.gif" alt="" width="575" height="499" />
Current Assets: These are assets that are cash or cash like. They provide liquidity. Cash is the most liquid of assets. The company’s current account, cash reserves form its current assets. Cash reserves could be in the form of savings account, bank certificates, short-term assets .If the need arises these assets can be spent immediately.

Accounts Receivable: These monies are due from customers. These are amounts due from customers as a result of sales made on credit. Usually these amounts are due within 30 to 60 days of the sale. This is why they are considered current. Some businesses have longer credit periods. Six to nine months are the credit period in seasonal products. While credit periods are pre-agreed on, they usually extend beyond the term. This needs to be factored in during cash flow planning.

Allowance for Bad Debts: In some cases companies do not get paid for their purchases. Sometimes customers go under, withhold or deduct payments for quality issues. A reserve is made for this. This reserve usually absorbs the cost of bad debt and does not affect day to day functioning. This reserve enables a write off to expense. This allows for the bad debt to become a valuation adjustment.

Inventory: This is a term used for material held by the company. In the case of Chocó-bloc it would be coca, milk solids and so on would be part of the raw material inventory. Finished Chocolate bars and other products would be the finished goods inventory. Some part of the inventory would not be raw material but not yet finished goods. This would be part of the work-in-progress inventory. In the case of Choco’-blocs resellers and distributors only the finished products that they receive would be their inventory.

Pre-paid Expenses: Premium payments made in advance form part of pre-paid expenses. Tax payments made in advance is another pre-paid expense.

Fixed Assets: Physical assets of the company such as the factory, equipment within it are its fixed assets. They are not ‘liquid’ in nature. In the sense that they will not be converted to cash anytime soon. Fixed assets also depreciate in value over time, especially in the case of equipment. The land cost itself will appreciate over time.

Other Assets: are all elements of assets that do not fall under fixed or current assets. Investments in other firms, which do not directly impact Choco’-blocs business, come under this category.

Current Liability: This falls under the Liabilities side of the Balance Sheet. These are debts that need to be paid off in the next twelve months. When payments are received, these debts are paid.

Accounts Payable: This is the amount due to suppliers and service providers. This element generally forms the biggest item in current liabilities.

Accrued Payroll: The money earned by employees but not yet paid to them comes under this heading.

Other Accrued Liabilities: Sometimes companies incur expenses which are not invoiced. But so that the expense may be recorded it is put under this title.

Notes Payable and Other Bank Debt: Loans from banks and others come under this heading. They are not clubbed under accounts payable, since the terms are usually quite different. For example banks usually have conditions such as that Chocó-bloc must furnish its financial statements annually. Choco’-bloc cannot take other lines of credit. In some cases the property is given as collateral to the bank. This does not happen with suppliers, which is why they are kept under another category.

Long Term Liabilities has the following liabilities listed under it.

Lease Contracts: Machinery at Choco’ Bloc was taken on a lease basis. A lease contract is drawn out. If it is on a rental contract no transfer of ownership is shown. If the lease is drawn out like a purchase contract the asset and liability are recorded on the lessees books as if it were a purchase.

Long –Term Debt: Some Capital expenditure requires loans with long tenures. These loans are paid over a few or many years and are treated as long term debt. The portion of payment payable for a given year is shown under current t Liabilities.

Loans from Stockholders: Company stakeholders sometimes put in money in a crunch and pull it out when the need is over. Sometimes this takes longer than expected and is therefore put under this title.

Retained Earnings: Choco’ Bloc recorded profits in some years of its operation and losses in some. Profits were added to retained earnings and losses deducted from it. Since it recorded overall profit, it has substantial retained earnings. This was paid out as dividends so as to not attract taxes. In a Corporation retained earnings are not taxed. The company may pay the owners cash dividends over time. These accumulated earnings are listed as retained earnings.

Earnings are also retained by the company to protect itself against buy outs, ensure working capital, protect itself against any mishaps or buy other companies. A negative in retained earnings mean an overall loss. This therefore is a good element to watch when you buy a stock.

The Balance sheet is undoubtedly one of the most important financial reports that speak of a company’s health.

Understanding Balance Sheets

A lot of things hinge on a company’s profit. Profits determine bonuses, dividends to share holders, timely repayments to banks and an important measure to attract investors.

How is the income statement made?

<img class="alignnone size-full wp-image-1600" title="bs1" src="https://financetrain.com/wp-content/uploads/2010/12/bs11.gif" alt="" width="175" height="203" />

<img class="aligncenter size-full wp-image-1601" title="income-statement" src="https://financetrain.com/wp-content/uploads/2010/12/income-statement.gif" alt="" width="357" height="394" />

By sales we mean the revenue the company makes by selling its products or services in the market.

Cost of Sales: This is the cost accrued to make the sale. This would include the cost of making the product sold, packaging cost, installation cost, sales training (to sell the product) and sales commission costs.

Gross Profit: The revenue a company earns minus the cost of sales is gross profit. The gross profit is used to pay operating expenses.

To arrive at gross profit:

<img class="aligncenter size-full wp-image-1602" title="gross_profit" src="https://financetrain.com/wp-content/uploads/2010/12/gross_profit.gif" alt="" width="576" height="343" />

Operating Expenses: All costs incurred to sell and produce the products are called operating expenses. These include:
<ul>
	<li>Manufacturing and Research costs</li>
	<li>Sales and Marketing</li>
	<li>General and administrative expenses</li>
	<li>Research and Development</li>
</ul>
Manufacturing and Research Cost: Let us take the example of the cement manufacturing company Grasim Cements. Every year, Grasim invests to develop new qualities of cement. Quick setting concrete is an innovation. Since one of their plants was in the vicinity of several thermal plants, they developed a new type of pvc cement incorporating fly ash in it. This turned out to be a big hit in the marketplace. Sometimes this exercise is also called product development. Grasim does this to introduce new variants in the market and differentiate itself from its competitors. The PVC variant commanded higher margins in the market.

Although all R&amp;D does not always yield such successes it is an important tool of innovation that leads to profitability. The adage innovates or die holds true.

Sales and Marketing Expenses: In a newer fragmented market, customers are becoming more discerning in their purchases. So customers seek more information before a purchase. Grasim launched a mobile lab, which educated users by making site visits. This free service led to leads being generated and sales being made. Though this did not directly related to making a sale. Collecting information about the market through market research, test marketing, brand developments are other examples of marketing expenses.

Selling expenses include direct costs that help get the sale.

Tele-calling, trade shows, brochure distribution, advertising all form part of the sales costs.

General and Administrative Expense: Rent, staff salaries, employee welfare costs and other administrative costs form part of this title.

Operating Income: The earnings before interest or taxes is called the operating income. This is an important measure of profitability of the business. It is the difference between operating revenue and operating expenses. In the case where it does not include non-operating or non-business revenue, it is also called operating profit. A company’s earning potential before taxes, depreciation and amortization is called EBIT or EBITDA. It is a measure of the ‘pure’ profit of a company.

A business has other non-business related expenses. Interest expenses, loss or gain of revenue from its investments and sale of equipment.

In cases where profit margins from the core business is low, these ‘other expenses’ are an important element that affects profit. If this income is very large, it will be labelled as ‘extraordinary income’

Net income is calculated by taking revenues and adjusting for the cost of doing business, depreciation, interest, taxes and other expenses. Often referred to as "the bottom line" since net income is listed at the bottom of the income statement. In the U.K., net income is known as "profit attributable to shareholders.

In the case of publicly traded companies investors look for the net income per share, or Earning Per Share (EPS).When the net income is divided by the total number of shares, we get the value per share. This little number is used by investors and industry watchers a quick indicator of the company’s performance. Sometimes, when employees have stock options, they may choose to exercise them at a certain time, leading to the further division of the net income. This needs to be reported, so that prospective and current investors are aware there is a possibility of dilution of the EPS.

Companies use net income to measure their monthly performance against their budgets. This helps assess their performance and make required changes.

Understanding Income Statements

The cash flow statement of a business tells us about the movement of cash in the business based on the changes in the balance sheet and income accounts. The cash flow provides a good indication of the financial health of the company. By looking at the cash flow statement, the management can identify issues with the business such as how efficiently they are running the operations, their credit terms, etc. By looking at these issues they can make changes to improve the business policies.

There are direct and indirect methods of reporting cash flows. In the direct method, it shows major gross receipts and gross cash payments, summarizing inflows and outflows of cash. In the indirect method the statement begins with net income and adjusts for changes in account balances that affect cash on hand.

<img class="aligncenter size-full wp-image-1607" title="cash-flow" src="https://financetrain.com/wp-content/uploads/2010/12/cash-flow.gif" alt="" width="327" height="496" />

Net Income is the starting block of the cash flow statements to which adjustments are made to arrive at its cash flow statement.

Depreciation Added Back: While no cash changes hands, over time the value of equipment comes down. This is usually set at a fixed rate is. It is a non-cash item.

Increase in Accounts Receivable: Sales + (Beginning accounts receivable-ending accounts receivable) = cash collections. If the company sold more that it collected, the amount would be negative. This says that the company’s working capital is stuck in the hands of customers. This will affect its future performance. You can think of this as an interest free loan you have provided customers.

Decrease in Prepaid Expenses: Some annual commitments are paid up front, and accounted for month by month. These charges do not require any extra income. This is an amortization adjustment.

Decrease in Inventory: The income statement includes the cost of inventory sold during the month.

An inventory adjustment is needed if:
<ul>
 	<li>The beginning inventory balance changed at the end of the month, indicating company purchased inventory it bought that it did not sell during the month.</li>
 	<li>The beginning inventory balance changed at the end of the month, indicating company sold from  inventory it bought that it did not buy  during the month</li>
</ul>
Any cash cost of inventory added to the beginning of inventory must be deducted. This would be a negative adjustment. A positive cash flow adjustment would need to be done if the company sold  goods out of the beginning inventory and did not replace them with cash.

Increase in Accounts Payable: Payment of liabilities requires cash. Any change means it has either paid a liability not included in the income statement or increased money owned to creditors, increasing borrowing from creditors.

If the company uses cash to pay balances, the accounts payable balance is reduced and net income is adjusted downward. The adjustment is negative as it has reduced cash. In the case of increased accounts payable it is positive. The difference in accounts payable from the beginning to the end of the month tells us if cash availability has increased or decreased.

Capital Expenditures: Expenditure made on assets such as purchase of equipment are not charged to income. The cash paid out for them is shown as a reduction in cash.

Short-term Investments Sold: Extra cash in hand is put in short term investments to make the money work. These could be bank certificates or securities. These can be sold when cash is required. This helps idle cash earn some profit.

Other Investments: Companies sometimes do other investments. These include:
<ul>
 	<li>Acquiring or selling their subsidiaries or other companies</li>
 	<li>Purchasing Land</li>
 	<li>Buying or selling long term investment assets</li>
</ul>
Increase in Bank Debt: Sometimes companies use short term debt to make purchases or pay other loans. This will reduce cash.

Net Reduction in Long term Debt: If the company makes payments, while making no new borrowing in this category, it would lead to a reduction of long term debt.

Dividends Paid to Stockholders: Profits made are distributed among stockholders. This can happen in the form of dividends. They are paid in cash and appear on the cash flow statement.

Net Cash Flow: This is the difference in cash balances from the beginning to the end of the period of the report. This final step of the cash flow statement is added to the beginning balance of cash on the balance sheet of the month that is getting reported.

The cash flow statement helps understand and track the cash related activities of the company, be it purchase of assets, payouts to stock holders, short term investments or borrowings.

Understanding Cash Flow Statement

If a company has a high demand for its product, the product has high margins, makes purchases and pays on time, shows an increasing trend in profits, the business is a hit, right? Well, not always.

In most business’ cash is used to buy raw materials, produce value added goods, buy assets and turn it back into more cash than when they started. A newly set up company is more likely to use its cash in setting-up: renting its facilities, and installing utilities, all of which are made in cash. Parallel to this they acquire assets to begin operations. Staff hiring etc are not always done by using cash on hand, but through bank finance. This means cash is going out.

<img class="alignleft size-full wp-image-1622" title="cashflow" src="https://financetrain.com/wp-content/uploads/2010/12/cashflow.gif" alt="" width="248" height="226" />Production, where raw materials are purchased, labour comes at a cost, taxes are all a further drain on the business. Other costs include marketing, sales and distribution costs. Even before the first product rolls out, the company incurs all these expenses and purchases. Cash is yet to come in. Once the product comes out, most businesses offer them on credit and not ‘cash and carry’. Till this money is collected it is cash in the customer’s hand. Till this happens it is not cash back in the hands of the company.

Every company must keenly note its cyclic process of cash to increased cash. That is, it must track its working capital needs carefully. This involves a process of clearly understanding the company’s cash needs, forecasting any delays and finally contingency plans for additional cash.

Some of the factors companies can control to keep their cash flow smooth include:

Pricing: Accounting for all costs direct and indirect related to the product. Filing taxes may not be a direct cost, but hiring a chartered account who does the same needs to be factored in.

Accounts receivable cycle: Bill discounting, factoring and other accounts receivable techniques help better cash flow.

Contingency plan: A reserve fund raised from angle investors would help in a situation of tight cash flow. Further costly loans could be paid off with loans from friends and family, freeing cash.

Forecasting: proper forecasting of orders would reduce inventory build-up and thus cash. A forecast of cash needs in the investment heavy period leads to better flow of cash and therefore profits.
<h3>How does each transaction affect profit and net cash flow?</h3>
Transactions can:
<ul>
	<li>Increase profits but not give cash until later</li>
	<li>Decrease profits but not reduce cash until later</li>
	<li>Put cash in the bank but affect profits</li>
	<li>Take away cash but may or may not affect profits</li>
</ul>
Transactions that increase but not give cash until later: When a sale is made on credit, while you record the sale, the cash flows in later. This sale shows a profit currently, but does not immediately translate into cash. So between the sale and till you receive cash you must arrange for cash to take care of operating expenses.

Transactions that decrease profits but not reduce cash until later: When raw materials are purchased on credit, no cash outflow occurs. These materials are used typically before they are paid for. The resulting sale may have recorded a profit, but leads to a reduction of cash when the credit period is over.

Transactions that put cash in the bank but affect profits: A loan taken from a bank shows increase in cash balance. Put to productive revenue generating options this will lead to profits, else reduction .If the borrowing is used to purchase equipment it will lead to increased profits later. Further, this borrowing needs to be paid back at some later point of time.

Transactions that take cash but may or may not affect profits: Pre-paid expenses, repayments of borrowings on assets all do not directly affect profits. In these cases there is a time difference between expense and cash flow. This can lead to a shortfall in cash if not carefully planned.

It is important that managers do not overlook the importance of timing in cash flow management. This is especially important in the short term when most of the financial planning is done.

The Significance of Cash Flow

A company’s numbers can be analysed and help assess its performance from more than one dimension. When compared against a benchmark it can be seen if a company is doing well or not.

These performance metrics help measure:
<ul>
	<li>Financial Status and Net Worth</li>
	<li>Profitability</li>
	<li>Financial Leverage</li>
	<li>Productivity</li>
</ul>
The measure of Financial Condition and Net Worth include current ratio, quick ratio, day sales outstanding (dso) and Inventory turnover.

Current Ratio:

Current Ratio =(Current Assets) ÷ (Current Liabilities)

This ratio where current assets are divided by current liabilities, help assess the liquidity of the company. This helps assess it’s ability to generate cash for operations. Current assets are cash or cash like debtors who will pay in the next 12 months. Likewise current liabilities are debts that must be paid within the next 12 months. Current assets include accounts receivable and inventory. Eventually some of these will become bad debts and some of it dead stock. So current assets must be more than equal of the current liabilities. Banks like to see a ratio of 2:1 or more. Industry standards vary. This ratio reflects the company’s cash reservoir to clear its liabilities.

Quick Ratio

This ratio sees current assets after inventory is removed. This is more liquid current assets.

Quick Ratio = (Current Assets-Inventory)  ÷ (Current Liabilities).

In the case of firms with large inventories, banks and investors seek out the quick ratio. In a company with a 2:1 current ratio, a 1.4:1 quick ratio is adequate.

Day Sales Outstanding

The day sales outstanding are the number of days of average sales yet uncollected in accounts receivable.

Day Sales Outstanding = (Accounts Receivable) ÷ (Average Revenue per Day)

This number tells us how much the company adheres to it’s collection terms .A company with a 30 day credit period does not ideally get it in this time frame. A 40-50 day range is normal.

Inventory Turnover

A quicker turnaround of inventory indicates a lower chance of dead stock piling up. High turnover in inventory means how quickly inventory is leaving the plant and being replaced.

Inventory Turnover =(Annual Cost of Gods Sold)÷ (Average Inventory)

Measures of Profitability include Gross Profit Margin ,Net Profit Margin and Cost per Sales Dollar.

Gross Profit Margin 

Gross Profit Margin = (Gross Profit) ÷ (Gross Sales)

Gross profit margin measures gross profit as a percentage of gross revenue. This helps capture profit as a percentage of revenue, and helps assess components that affect profitability.

Net Profit Margin 

Net Profit Margin = (Net Profit) ÷ (Gross Sales)

When net profit or the bottom line, profit after subtracting all costs is shown as a percentage of gross sales we call it net profit margin. This margin varies from industry to industry. For example a 5-6%  profit in the  steel manufacturing industry is considered very good,but poor for the pharmaceutical industry. It also needs to be considered with that firm’s historical performance.

Cost per Sales Dollar 

Cost per Sales Dollar = (Sales and Marketing costs) ÷ (Gross Sales)

This helps estimate sales and marketing as a percentage of Gross Sales. This helps in cost control.

Financial Leverage Measures include debt to equity ratio, Interest coverage and return on equity.

Debt to Equity Ratio

Debt to Equity Ratio = (Total debt) ÷ (Total Equity)

This ratio shows the extent the company is leveraged. If the company has too much debt, any dip in business may result in the owner losing it’s equity or put the company in a position wherein itcannot serviceits  debt.Alternatively, if the debt quotient is small, it probably means the company is not putting enough capital to work.

Factors that effect this ratio are:
<ul>
	<li>Additional working capital can be put to use to increase profits</li>
	<li>Component of debt if it is short term or long term.This will determine the payback period.</li>
	<li>Interest rate of the debt. Short term creditor debt is low compared to long term debt.</li>
	<li>Level of profitability in the industry. A low margin industry cannot afford high cost debt, unlike a high profit margin industry.</li>
</ul>
Interest Coverage

Interest Coverage = (EBITDA) ÷ (Interest Expense)

This performance indicator is used by banks to measure a company’s ability to pay the interest of the debt taken from it.

Return on Equity

Return on Equity = (Net Income –annualized)  ÷ (Stockholders Equity)

This ratio measures the rate of return on the stockholders cumulative investment in the company.

This is a measure of a company’s earning power.It is often used while selecting stocks.

Price Earnings Ratio or PE ratio

PE = (Stock Price) ÷(Earning).

This is a critical ratio of the stock’s price performance. This ratio is usually measured against a benchmark. It gives you quick information about the company’s earning, without reading a detailed income report.

Measuresof Productivity

To assess if resources are being used adequately, we look at measures of productivity.

Backlog of firm orders

Backlog of orders = all firm orders received-all orders shipped and invoiced

If the backlog reduces overtime, it shows sales is unable to bring in new orders. This might be due to a recession or poor execution of past orders. In the converse situation where backlog is more, this due to orders rushing in or an inadequate completion of orders.

In a good organisation backlog is considered a result of good sales and marketing.

Order Processing Time 

It is important to assess average time to process an order.If the turnaround time is very long,the company will lose customers. Shorter process times indicate better utilisation of resources and better customer satisfaction levels. This will translate into newer orders.

Sales per Employee 

The sales per employee helps measure the productivity of the sales force. It also helps in deciding if a new employee is to be taken on board, or the existing ones suffice.

Sales per customer

In cases where costs of producing are fixedprofits can be increased by increasing average buy per user.

So we see how all these indicators assess use of resources in different areas of an organisation. They are quick and useful ratios in tracking its well-being.

Key Performance Indicators of a Business

To understand if a product is truly profitable all costs have to be accounted for. Every cost accounted for shows if a profit is made in that product line. More often than not, companies look at making profit through volume sales. This is a fallacy. If a detailed costing is not undertaken it may give an inaccurate picture of profits. Special emphasis is therefore made on capturing all costs involved in the process.

Let us revisit Choco-bloc our chocolate producing company.

The basic tools to capture data at Chocobloc are:
<ul>
	<li>Bill of material</li>
	<li>Timecard</li>
	<li>Materials requisition form</li>
	<li>Job cost sheet</li>
</ul>
The bills of material lists the items quantity wise required to produce the finished product.

Time cards help capture the following information:

Time and raw materials they will use on a job.

Time as a cost factor in production, i.e., total time taken to complete the job

The material requisition list helps capture all materials actually used to complete the job. This will include damaged chocolates as well that will be a cost in that job.

The job cost sheet is the paper trail that follows the flow of jobs through the factory. Here actual production costs are noted.

Challenges include letting workers know they are not being monitored through timecards and job cost sheets, preparing reports with adequate level of cost reporting and auditing the processes from time to time.

What cost is fixed and what cost is variable?

All costs can be broadly divided into fixed or variable costs. Some variable costs have a fixed element.

Costs that remain unchanged with increasing or decreasing volume of costs are called fixed costs. Rent, salaries, depreciation are examples of fixed cost.

Costs that vary with any increase in sales volume is called a variable cost. Direct materials, direct labour, packaging costs are examples of variable costs.

Costs that increase with slabs are called semi-fixed or semi-variable costs. For example if costs of transportation stay fixed for a certain volume, but vary after a slab they are called semi-fixed costs. These costs increase with sales at a slower pace.

Financial cost reports are useful if they are given on time. A month or two late may be of little use to a manager. Budget variances, cost control measures can be analysed and implemented with timely reports that measure costs correctly. In order to do this costs are captured as close to real time as possible. Real time accounting systems capture live all the time and cost factors.

Alternatively standard costing methods are used. In place of actual costs, standard costs incurred over a period of time are used to develop these reports. These costs can be assessed on a yearly basis. This helps preparing budgets on a timely basis.

Based on these reports a monthly variance analysis can be undertaken. Here it is analysed how much and why actual costs have varied from budgeted costs. It is a kind of course correction, wherein over time cost control is achieved, thus increasing profits per unit.

Variances are of two kinds’ price and usage. In price variance it is seen why the projected costs of materials vary from actuals-the how and why. In usage variances differences’ between projected quantity of material required and actuals are assessed.

Cost Accounting

Planning is an important part of doing business. At the outset it may seem time consuming and not entirely useful. Good planning often leads to effective management of resources since everything is taken thought of ahead.

Plans can change from time to time, with changing business environment. They help us navigate, when the business starts growing. This all helps all members of the team like the CEO, managers see if they are on the same page. Planning as an important business activity helps bring clarity to future action. It also helps give everyone an idea where they are headed in terms of individual goals. In addition to short-term targets plans give businesses the long-range vision that helps them aspire for more.

Plans can be strategic or operational. Strategic plans list the statement of goals .It helps guide the broad direction of the company, and the strategies it hopes to use to achieve this. This is final goal and first step the company needs to achieve and take. It is small on details and big on broad objectives such as the mission statement. Strategic goals are the course setter, which the ship uses to travel. Here the market is marked, goals set and key objectives laid down.

Short-term goals are set in the Operating Plan. Long term goals or strategic goals are achieved through smaller more implement driven plans. These plans are usually a year old. They are arrived at with the inputs of multiple departments (finance/manufacturing/sales/marketing). These plans by departments usually have goals, facilities, budget and challenges.

The Production plan will include monthly production targets based on sales forecasts. It will include possible downtimes; materials required and inventory level maintenance. The team will assess challenges it may have. For example supplier related issues. The plan must include such challenges to arrive at a realistic plan.

Sales and Marketing Plan will aim at maximising sales through its direct and indirect sales efforts. Sales team management with targets, key customer management targets all form part of this team‘s planning efforts.

Financial Plan will look at budget outlays for each department. It will also show goals and revenue targets.

Research and Development Department will usually focus on new product development. This is true of companies that deal with proprietary products. In other cases, they look at improving existing products or handle product related queries. The associated costs will be listed in the plan. New product developments for the coming year will also be outlined in the plan.

All goals need to achievable, measurable, relevant and trackable. This will help the company achieve its strategic goals.

Plan your Business

Here's the thing. You're doing great in your career and by looking at your performance your boss has promoted you to be the manager for your unit. You've got a great salary hike but it has also resulted in a whole lot of added responsibility. Now, you're not just an employee who had to prove his skills and ability. You are now responsible for managing teams, and projects. Your new deliverables include increased profitability within project budgets.

The challenge this opportunity brings is great. The hitch however is that your finance fundamentals are quite shaky. This gets you wondering on how and where to start.

This article will help you get started on these questions. It will discuss the three most essential financial concepts that a business manager must know to get the job done well in today's business environment.
<img class="aligncenter wp-image-7630" title="accounting-skills" src="https://financetrain.com/wp-content/uploads/meeting.jpeg" alt="" width="512" height="342" />
Budgeting

Budgeting is the outcome of planning and understanding the costs of the project you are going to undertake. Sure, you can ask your finance department to make the budget. The problem with that approach is that if the finance department makes the budget, then it will be their budget not yours.

A budget is your understanding of the resources required, and therefore the cost, be it regarding materials, people or time. It is important therefore that you as a manager must know how to prepare a budget. No matter how good your finance people are, they will not be fully cognizant of project requirements and goals. Budgets have a nasty habit of overshooting themselves, so it is important to keep space for contingencies and delays. Budgets are also an important tool in post project assessment. A budget therefore is a very useful tool for planning and project assessment for every effective manager.

Reading Financial Statements

Every company publishes its financial position in the form of key financial statements. These are: balance sheet, income statement, and statement of cash flows. Having the ability to read these statements and gather the key financial information from them is an essential skill for every manager. The benefits of this skill are unlimited. It helps you understand the financial health of your own company; it also helps you gauge your competitors or prospective customers while bidding for new projects. If you want your company to make a capital investment, the financial statements can provide you a good picture of whether your company can afford it. This is one skill that can contribute more to your success than anything else.

Return on Investment: This again is an important concept for every business manager. Before taking up a new project it is important to evaluate the viability of the project. Since the company is going to invest money in the project, you need to be able to evaluate how much return you will be able to get from that investment. There are various tools such as NPV and IRR that can be used to check whether it is worth investing in the project. A related concept is that of opportunity cost. Opportunity cost is the cost of choosing one option over the other.

While there are many other finance concepts that you should know as a manager, these three are key and you should get them right as early as possible.

Finance Must Knows is an online training program on "Finance for Non-finance Managers". It is designed to help you become proficient with the key financial concepts that you must know as a non-finance professional.

[Image by <a href="http://www.flickr.com/photos/28242329@N00/1439750542">Alex Barth</a>]

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Three Finance Concepts Every Manager Should Know

Irrespective of whether you are a big corporation or a small start-up, your marketing efforts will determine how much your market grows. It is critical therefore to be prudent about where you put your marketing dollars. If the going is good, it’s important your consumers know about your deals and choose you over other products. When the going is tough, it’s going to be doubly tough to ask consumers to spend their scarce dollars on your offering. Marketing your product or service effectively is important at all times.

That said marketing teams in companies are never given a free hand regarding the marketing budget. They usually have to justify every dollar they ask for, and show results for the same. Increasingly companies are harnessing the power of the Internet’s networking platforms to reach out to customers. This however does not mean the power of print/radio and television has reduced in letting customers know about you. These options however are not cost effective for smaller players.

Answers to questions about customer, company and competition can give you a good idea at how to market and therefore the budget you need for it.

Who is your customer? What are his needs? How does your product/s help her? In terms of company you need to answer questions about where your company is right now. If it is young and growing, you probably need to create greater awareness and touch base with your prospective customers at various platforms.

A well-established company may need to let customers know about new offerings or promotions. Finally, you need to look about your competitive environment and see how you can convey to your customers that your offering has distinctive advantages over the others.

Marketing budgets can vary between 1-15% of sales. Laura Lake, marketing columnist advices 20% of a marketer’s time and money needs to be the marketing budget.

According to the CMO survey February 2012, the percentage of marketing budget of the total by economic sector was as follows:
<table class="mytable">
<tbody>
<tr>
<td valign="top" width="213">
Economic Sector
</td>
<td valign="top" width="213">
Marketing Percentage of Firm Budget
</td>
</tr>
<tr>
<td valign="top" width="213">
B2B product
</td>
<td valign="top" width="213">
8.7%
</td>
</tr>
<tr>
<td valign="top" width="213">
B2B service
</td>
<td valign="top" width="213">
8.2%
</td>
</tr>
<tr>
<td valign="top" width="213">
B2C product
</td>
<td valign="top" width="213">
16.1%
</td>
</tr>
<tr>
<td valign="top" width="213">
B2C service
</td>
<td valign="top" width="213">
16.8%
</td>
</tr>
</tbody>
</table>
If we look at the figures of marketing percentage of firm budgets by company sales revenue they look like this:
<table class="mytable">
<tbody>
<tr>
<td valign="top" width="213">
Company Sales Revenue
</td>
<td valign="top" width="213">
Marketing Percentage
</td>
</tr>
<tr>
<td valign="top" width="213">
&lt;$25 million
</td>
<td valign="top" width="213">
10.7%
</td>
</tr>
<tr>
<td valign="top" width="213">
$26-99 million
</td>
<td valign="top" width="213">
12.3%
</td>
</tr>
<tr>
<td valign="top" width="213">
$100-499 million
</td>
<td valign="top" width="213">
13.5%
</td>
</tr>
<tr>
<td valign="top" width="213">
$500-999 million
</td>
<td valign="top" width="213">
4.7%
</td>
</tr>
<tr>
<td valign="top" width="213">
$1-9.9 billion
</td>
<td valign="top" width="213">
6.7%
</td>
</tr>
<tr>
<td valign="top" width="213">
&gt;$10billion
</td>
<td valign="top" width="213">
8.8%
</td>
</tr>
</tbody>
</table>
Apart for marketing, communications, research, licensing, collateral development, trade shows all fall under the ambit of budgeting.

It is important therefore to allocate the marketing budget based on current needs as well as market growth requirements. Periodical assessments that look at whether the budget spend is helping reach targets is important. Realignment of the budget can be done based on the results.

Companies are increasingly going digital in trying to understand what customers really want. The digital medium is currently less expensive, but more difficult to make an impact on. The results if used optimally are manifold.

The marketing budget’s relevance starts and ends with its meeting business objectives. Every marketer worth his salt needs to get more bang for every dollar of her budget that will increase her company’s value and keep customers engaged and loyal.

Building a Marketing Budget

Finance for Non-finance Managers

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Finance for Non-finance Managers

Lessons

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