Applications of fund Purchase of fixed assets – leads to outflow of funds, but at the same time adding assets to your organization always improves the financial position of your firm. You can also use these assets as “collaterals” for availing loans in banks. Redemption of preference shares – you have to apportion your operating profit in order to satisfy the preference share holders with interest. This will give you a clear idea of the earnings available for the equity share holders.     Fund that is lost during business operations – Due to wrong investments and credit policies, sometimes your funds get sticky and recovery becomes next to impossible. Repayment of loans – although the fund goes out, you free yourself from further interest burden and reduce your credit limit with the bank. Remember,it is better to repay the loans from your profit. Redemption of debentures – It is easy to raise money from debentures, because people are rest assured of their payment at a fixed date. But the cost of servicing the debt might sometime exceed the concessional advantages on raising such securities. https://gumroad.com/l/wqbu A systematic study of fund flow facilitates in ascertaining the soundness of your firm’s financial condition and it also helps to formulate the right kind of dividend policies. Net working capital is the life line of a firm’s day-to-day operations and we can surely say that a company is prosperous if it has a surplus of net working capital at any given point of time. The financial manager of your company should have the vision to predict changes in the stock market and play the cards accordingly. It needs an in-depth understanding and analysis of the market conditions with a wider...

What is fund ? Cash, total current assets, net current assets and net working capital are also interpreted as fund. So, it is necessary to clearly define the meaning of fund and demarcate its scope and function. To put it precisely, fund is nothing but, net working capital of a firm. The flow of fund occurs when a business transaction takes place that leads to an increase or decrease in the amount of fund. Firms prepare fund flow statement to explain the sources and applications of fund, which also serves as a technical tool to ascertain the financial condition of a business enterprise.   Balance Sheet In a business firm, everyday numerous financial transactions take place. These are summarized into a balance sheet that gives an idea about the assets and liabilities at a specific point of time. When two balance sheets of consecutive periods are compared, we come to know about the inflow and outflow of funds and thereby the net working capital available is ascertained. This is step one.   Profit and Loss Statement The next step would be to prepare an adjusted profit and loss account to determine fund inflow or fund lost from business operations. Accounts have to be prepared to ascertain hidden information (for all non-current items of assets and liabilities). Finally fund lost or gained from operations is arrived at and presented in a statement form. It is not that, only accountants could understand these operations and adjustments. Any person with logical reasoning and business acumen can understand the nuances of accounting, of course with some guidance. Few points that highlight the ways in which funds flow outside and inside a business enterprise will give you a better idea on the nature of fund flow: Sources of fund: Sale of fixed assets – sale of land, building, machinery, furniture etc. But you have to take into consideration a factor called “depreciation“. It is nothing but the wear and tear of the assets due to continuous usage, reduction in market value over a period of time, obsolescence, accidents etc. Remember, land is a non-depreciable asset in developing countries like India, whereas it may not be so in certain developed countries where the real estate values are nose diving. Issue of Equity shares – To raise capital free of interest, many big corporate firms go for equity capital from the general public. But the firms should make it a point to declare dividends if it happens to reap enormous profit to retain their market share. Their main aim should be to protect the interests of the equity share holders who are also the owners. Fund that comes into the firm through business operations – through sale of goods and services. Here the firm has to factorise its cost of production and economy of scale in order to make it cost-effective and fix a feasible profit margin. Borrowing of loans from banks and other financial institutions – Although it is a quick way of raising fund, care should be exercised in that, you should be in a comfortable position to “service the debt“. If not, there lurks the danger of bankruptcy where the firm might become insolvent, if it is unable to repay the interest and principal over a period of time. Issue of debentures – Debentures are also a form of equity but it comes with a price. The firm has to pay a percentage as interest on debentures and repayment period is also fixed in advance. The only solace for the firms would be the tax rebate that can be availed on loans and...

Debtor Management or Receivables Management Profit is directly proportional to the volume of sales, provided all your business transactions are cash based. Is it possible for a manufacturer, wholesaler or retailer to carry on his business without offering credit in this competitive business environment? The answer is a definite “no”, because extension of credit improves your sales and thus your profit. Problems arise only when a firm is not able to recover the debt within the stipulated period of time from the customers. What is receivables management or debtors’ management? It covers two aspects- one, the kind of money that is being invested in debt rotation; second, the risk factor which includes loss of money or the opportunity cost foregone by the organisation. Had these funds not been tied in receivables, the firm would have invested the same elsewhere and earned income thereon. A transaction entirely through cash is definitely a possible option, but whether it is lucrative in the long run must be subject to consideration. When customers are not offered credit, they choose concerns that extend credit facilities and thus you may lose your earlier customers and also exposed to the risk of declining sales proportions. Credit Sales In credit sales, the supplier offers credit for a specific time period, which is an investment from the angle of supplier and largest single source of short term financing from the angle of the customer. The supplier should be able to recover the amount of interest on the credit investment he has made. How? Recovery of debt within the stipulated credit period Taking interest from the customer for the period of delay Volume sales Surplus capital to offset these negative impacts on rotation of funds Proper formulation and execution of credit policies by the finance manager Discipline in collection policy and its execution. Discounts Cash discounts, quantity discounts and trade discounts are offered by many firms to the customers to encourage credit sales, favoring bulk purchases. A firm cannot be expected to survive long by pursuing the policy of cash sales while similar firms can overtake it by adapting to liberal credit policies. The main aspects of receivables management decisions are as follows: Time period of credit Credibility of the customer Cash discounts Trade discounts Learn the basics of the Income Statement, Balance Sheet and Cash Flow Statement and understand how they fit together. Credit Policy Credit policy on one hand stimulates sales and so also its gross earnings, but on the other may be accompanied by added costs, such as: 1) Clerical expenses involved in investigating additional accounts and servicing added volume of receivables, 2) increased bad-debt losses due to credit extension to less credit worthy customers, 3) higher cost of capital. Incremental earnings from increased sales should be matched with incremental costs that arise due to credit terms, to avoid funds being tied up in receivables. In course of time it would deprive you of your profits. The pivotal consideration of your credit policy would be the selection of credit worthy customers or debtors. If your funds become sticky, recovery becomes next to impossible and you need to proceed legally to claim your rights. Properly maintained accounting records and vouchers will stand as a testimony in your favor, in the court of...

Liquidity Ratio or Working Capital Ratio Liquidity ratio indicates that the firm has sufficient liquid resources to meet its short-term liabilities. It measures the ability of the firm to meet its short-term obligations, i.e., capacity of the firm to pay its current liabilities as and when they fall due. Also known as “short-term solvency ratio” or “working-capital ratio”. Thus these ratios reflect the short-term financial solvency of a firm.  The various ratios that explains about the liquidity of the firm are Current Ratio Acid Test Ratio / quick ratio Absolute liquid ration / cash ratio 1. CURRENT RATIO The current ratio measures the short-term solvency of the firm.  It establishes the relationship between current assets and current liabilities. It is calculated by dividing current assets by current liabilities. An ideal ratio would be 2:1 which provides margin of safety to the creditors and financial stability. Current Ratio =              Current Assets                                                  Current Liabilities   Current assets cover cash and bank balances  marketable securities inventory, and debtors, excluding provisions for bad debts and doubtful debtors Bills receivables and prepaid expenses.  Current liabilities include sundry creditors  bills payable  short- term loans  income-tax liability  Accrued expenses and dividends payable.  2. ACID TEST RATIO / QUICK RATIO/LIQUID RATIO It has been an important indicator of the firm’s liquidity position and is used as a complementary ratio to the current ratio. It establishes the relationship between quick assets and current liabilities.  It is calculated by dividing quick assets by the current liabilities. Acid Test Ratio =           Liquid Assets                                               Current liabilities Liquid ratio is the true test of business solvency. The ideal ratio is 1:1 which indicates sound financial position. 3. ABSOLUTE LIQUID RATION / CASH RATIO It shows the relationship between absolute liquid or super quick current assets and liabilities. Absolute liquid assets include cash, bank balances, and marketable securities. Absolute liquid ratio =       Absolute liquid assets                                                 Current...

Ratio Analysis – An Introduction What is Ratio?  The relationship between two variables expressed mathematically is called a ratio. It refers to the systematic use of ratios to interpret the financial statements in terms of  operating performance and financial position of a firm. Some important definitions:  “The relation of one amount, a to another b, expressed as the ratio of a to b”– Kohler “Ratio is the relationship or proportion that one amount bears to another, the first number being the numerator and the later denominator” – H.G.Guthmann  Significance of ratio analysis:  It consolidates and simplifies the accounting information or data It is a clear indicator of an organisation’s efficiency It helps in the evaluation of a firm’s performance by comparing the past and present ratio It aids the management in formulating poilicies, preparing budgets etc., It points out the liquidity position thereby assisting in assessing the short-term obligations and long-term solvency It facilitates inter-firm and intra-firm comparison, the former to understand the position of firm in the market and latter to gauge the performance of different divisions of the firm. Since ratios have the power to speak, they are considered as effective means of communication  A broad classification of ratios:  Pic Courtesy : Financial Ratios CLASSIFICATION BY FUNCTION 1. Solvency  Short-term         Long-term Current ratio      Proprietory ratio Liquid ratio         Debt-Equity ratio 2. Profitability Gross profit ratio Net profit ratio Operating profit ratio Return on Investment ratio 3. Activity ratio Fixed assets turnover ratio Debitors turnover ratio Creditors turnover ratio Stock turnover ratio 4. Leverage  Financial leverage ratio Operating leverage ratio Capital gearing ratio CLASSIFICATION BY STATEMENTS 1. Balance sheet ratios Current ratio Liquid ratio Proprietory ratio Debt-Equity ratio Capital Gearing ratio 2. Profit and Loss Account ratios or Profitability ratios  Gross profit ratio Net profit ratio Operating profit ratio Return on Investment ratio 3. Inter-Statement ratios or Turn-over ratios  Fixed assets turnover ratio Debitors turnover ratio Creditors turnover ratio Stock turnover...