Chapter: 8

Finance Department

8.1: INTRODUCTION AND OBJECTIVE OF FINANCE

DEPARTMENT
 Introduction

The part of an organization that manages its money. The business functions of
a finance department typically include planning, organizing, auditing,
accounting for and controlling its company’s finances.

Money is the life-blood at modern business. Money is required to purchase

expensive machinery, and day to day expenses on raw materials, labor, and
operational and administrative needs at business, execution at expansion.

 Objective

 To focus of financial problem of business organization.

 To rising of adequate funds at the minimum cost and using them effectively.

 Definition of finance

“Finance management is an area of financial decision making, harmonizing

individual motives and enterprise goals”

8.2: STRUCTURE OF FINANCE DEPARTMENT

 Finance
manager

Chartered
account

Assistant
manager

[Structure of finance department in ATUL BAKERY]

 8.3:ANALYSIS OF FINANCIAL STATEMENTS WITH THE
HELP OF RATIOS

Trading for the period 01/04/2017 to 31/03/2018

Trading income Rs.

Opening stock 5863728.32
Indirect income trading 62656.78
Sales 89527638.86
Closing stock 5041589.44
Total of trading income 100495613.40
Trading expense
Opening stock 6006259.04
Purchase 67020878.29
MFG.Expense 9294214.29
Gross Profit 18174261.78
Total of trading expense 100495613.40

Profit and loss for the period 01/04/2017 to 31/03/2018

Income Rs.
Gross profit 18174261.78
Indirect income 9228648.61
Total income 27402909
Expenses
Salary account 5239000
Electricity account 922750
Donation A/C 65588.25
Indirect expense 11102182.52
Total of expenses 17329520.77
Net profit 10073388.23

Balance sheet of the company

 Balance sheet as at 2017-2018 Rs
Equity & liabilities:
Owner capita 14118487
Net profit
Current liabilities 15524155
Non-current assets:
Interest bearing loans and borrowings 11123757
Account payables 4578603
Provisions 2262393
Deferred tax liabilities 1117231
Total capita and liabilities 48724626
Assets:
Non current assets
Property,plant and equipment 23691916
Investment property 5083393
Other financial assets 2979636

Current assets
Cash 2559288
Debtors 2859839
Bill receivable 3904546
Stock 7646008
Total assets 48724626

Ratio analysis:

A. Current Ratio
= Current assets/Currents liabilities
= 16969681/15524155
=1.09

INTERPRETATION:
 Ideal current ratio is 2:1
 company current ratio is 1.09 that indicate current liabilities should be equal to
current assets so that company borrowing money from bank, financial
institutes etc.
 So Company’s does not ability to pay its day to day financial obligations.

B. Gross profit
= Gross profit/Sales *100
 = 18174261.78/89527638.86*100
=20.30%

INTERPRETATION:

 Gross profit is very important to judge the manufacturing efficiency of the

business.
 Gross profit is trading margin ratio.
 It is a test profitability and efficiency of management.

C. Net profit
= Net profit / Net sale *100
=10073388.23/89527638.86*100
=11.25%

INTERPRETATION:

 Higher ratio indicates more operational efficiency of the business.

 Net profit ratio throws light on the overall performance of the business
 Higher ratio better for the company.

D. Operating ratio
= cost of goods sold + operating expense/sales*100
= 71353377.08+6161750.10/89527638.86*100
= 86.58%
INTERPRETATION:
 86.58% Operating expense of the company and remain is profitability of the
company.
 It is an expense ratio.
 lower ratio is better for the company.

E. Operating profit ratio:

= 1 – operating ratio
= 1 – 0.8658
= 0.13

INTERPRETATION:

 13% profitability of the company.

F. Return on assets ratio

=Net profit /total assets*100
 =10073388.23/48724626*100
=20.67%

INTERPRETATION:

 20.67% return on investment of the company.

 It measures the profitability of the business investment.

G. Stock turnover ratio

=cost of goods sold/average stock
= 7135335.12/9733585
= 7.3 times

H. Assets turnover ratio

= net sales / total assets
= 89527638.86/48724626
=1.83
INTERPRETATION:
 Stock ratio is more indicate that the stock gets converted into cash quickly and
is a good sign of the business.
 Ratio is helpful in determine policies related to inventory and management.

I. Debtors turnover ratio

= credit sales / debtors + bill receivable
= 89527638.86/2859839+3904546
= 13 times

INTERPRETATION:
 It is desirable that the debtors should be converted into cash as quickly as
possible and hence higher the ratio is better.
 It indicates numbers of times in a year that debtors pay off their dues.
 It is also called receivables ratio.

J. Stock velocity
= 12month/stock turnover ratio
= 12month/7.3
= 9.2

INTERPRETATION:
 Stock velocity is denoting in month or day it indicates the duration of
operating cycle.

K. Liquid ratio
= current assets-stock/current liabilities
 =16969681-7646008/15524155
= 0.60
Quick Ratio also termed as Acid Test or Liquid Ratio. It is supplementary to the
current ratio. The acid test ratio is a more severe and stringent test of a firm's ability to
pay its short-term obligations 'as and when they become due. Quick Ratio establishes
the relationship between the quick assets and current liabilities.
INTERPRETATION:
 Quick ratio is 0.60 it indication that the firm has not better position to meet its
current obligation in time.
 The ideal Quick Ratio of 1:1 is considered to be satisfactory.

8.4 SOURCES AND APPLICATION OF FUND

 Sources of fund
 Funds from business operations.
 Sales of noncurrent assets.

 Application of fund
 Purchase of non-current assets
 Payment of income tax

8.6 MANAGEMENT OF PAYABLE AND RECEIVABLE

 Accounts payable are liabilities.

 Account receivable are assets.
 Payables and receivable is the medium of exchange which allows management to carry on
the various activities of the business on day to day basis.
 When the customer purchases any machine at that time the terms & conditions are decided
and according to that the payment is decided.
 Customers pay money by cheques.
 Management of receivables and payables is not just about saving money. It’s about
improving overall business performance.

8.7 BUDGETING AND BUDGETARY CONTROL

 Budgetary control technique whereby actual or results are compared with
budget. Compels to managements for think about the future for budgetary
planning and set the targets and plans. Improves the allocation of scarce
resources.

8.8 WORKING CAPITAL MANAGEMENT OF THE COMPANY

 Working capital management is the functional area of finance that covers all the
current account of the firm.
 It is concerned with management of the level of individual current assets as well
as the management of total working capital.
 Working capital refers to the fund invested in current assets, i.e. Investment in
stocks, sundry debtors, cash and other current assets.
 Current assets are essential to use fixed asset profitability.
 For example, a machine cannot be used without raw material.
 The investment on the purchase of raw material is identified as working capital.

Working capital management includes the management:

Working capital finance

Management of inventory

Management of cash

A. Working capital finance

 Sources of working capital
 Short term loan
 Trade credit

B. Management of inventory
 To maintain investment in inventory at the lowest level.
 To supply the product to its user as per their requirement at right time.
 To keep inactive, waste, scrape, and obsolete items at the minimum level.
 To minimum holding replacement and shortage cost of inventory at
minimum level.

C. Management of cash
  Cash is the medium of exchange which allows management to carry on the
various activities of the business on day to day basis.

 Four facets of cash management:

Cash planning

Managing the cash flow

Optimum cash level

Investing surplus cash

8.8 WORKING CAPITAL MANAGEMENT OF COMPANY

Net Working Capital= Currents Assets – Currents Liabilities

PARTICULAR AMOUNT
Current assets 16969681
Stock 7646008
Debtors 2859839
Bill receivable 3904546
Cash 2559288
Currents liabilities 15524155
creditors 6209662.11
Loan 9314493.31
Working capital 1445526

8.9 DIVIDEND DECISION OF COMPANY

 Dividend policy determine the division of earning between payment to

shareholders and retained earning.
 Long term financing decision
 Wealth maximization decision
 The dividend policy of a firm refers to the views and practices of the
management with regard to distribution of earning to the shareholders in the
form of dividends.
 Dividends are paid out of profits.
8.10 IMPACT OF BUDGET ON COMPANY
 Exemption of service tax on freight charges for goods transport agencies
for Essential items such as flour, jiggery, sugar, salt, milk and edible oil
could reduce the freight cost for large bakeries.
 Freight surcharge on goods transported through railway could lead to some
price increase on bulk ingredients.

8.11 SUGGESTION

 The company needs to maintain good inventory turnover ratio by

increasing the sales.
 The company needs to increase the working capital turnover ratio for
efficiency utilization of working capital.