Accounts and Financial Management

Sessions list
1. Meaning of accounts, Types of costs and Expenses, How to main business
records and types of registers.
2. Purpose and Scope of financial statements, Create a startup estimation
3. Break-even analysis, Working Capital, Types of Loans & Financial Criteria

Session 01: Meaning of accounts, Types of costs and Expenses, How to main
business records and types of registers.

What is Accounting
Accounting is the process of recording financial transactions about a business. The
accounting process includes summarising, analysing, and reporting these transactions to
oversight agencies, regulators, and tax collection entities. The financial statements used in
accounting are a concise summary of financial transactions over an accounting period,
summarising a company's operations, financial position, and Cash flows.

Cost of Business: The cost of business/business includes all the costs incurred by an
enterprise in producing and selling goods or services.

Costing: Costing is the process of ascertaining the cost of a PRODUCT, COMPONENT or

SERVICE. Costing a product or service properly is the first step to the proper financial
management of an enterprise.

There are several types of business costs:

Based on behaviour:

● Variable Cost: The variable cost is the cost which changes with the change in
production. Such as raw materials, wages of labour, energy used in production, etc.

● Fixed Cost: The fixed cost is the cost which remains fixed irrespective of the level of
production. Such as rent, salaries of employees, advertising, promotional
campaigns, etc.

 Based on traceability:

● Direct Cost: The direct cost is the cost which can be assigned to the production of
certain goods and services. Labour, material, fuel, power or any other expense
related to the production of a product is the direct cost.

● Indirect Cost: The indirect cost is the cost which cannot be directly attributed to the
production of goods and services. Depreciation, supervision, security, maintenance
and administrative expenses are the costs incurred which cannot be assigned to a
specific product or department and hence are classified as an indirect costs.

Thus, the business cost is computed to determine the efficiency with which the firm is
carrying out its business operations.

Basic registers to be maintained to get a good idea of business:

Cash Book: The most important register to be maintained is the CASH BOOK. This is a
register in which all cash transactions made during an accounting period are recorded in
chronological order. The primary goal of a cash book is to manage cash efficiently, where
it is easy to determine cash balances at any point in time. In this register will be recorded
every single transaction that results in cash either coming in or going out, for whatever
reason. This is what will help the business to account for every rupee at the end of the day.
Some of the other important registers to track business include:

CASH IN CASH OUT

Sales
Daily

Sales
Monthly
Income Expenditure

1. Register of Sales: A sales register records sales and returns to all the customers of a
business. In this Register, there is a track of all sales, both cash sales as well as credit
sales.

2. Register of Receivables: This register helps to keep track of credit sales if any so that
the entrepreneur knows who owes her how much. There should be one page for each

 customer who makes credit purchases which will record what he owes and what he
has repaid, regularly.

IMPORTANT: It is most desirable to keep credit sales to an absolute minimum, as they

frequently result in difficulties of collection and hence losses.

3. Register of Purchases: This register is to keep track of all purchases, both cash
purchases and credit purchases.

Note: At the top of the Purchase register for each item, an entrepreneur should record the
opening stock (the stock at the beginning of the Week or Month) of the item. When you
are just beginning your business, your Opening Stock is 0.
To this Opening Stock in value is added all the purchases which are made.
The total of Opening Stock + the Purchases is the total material available for Consumption.
From this, if we deduct the Closing Stock (the stock at the end of the Week or Month) of
the item, we get that item’s consumption for the Week or Month. The cost of this
consumption goes into the Income and Expenses Statement for the period.

4. Register of Payables: This register is to keep track of credit purchases so that the
entrepreneur knows how much she owes to whom. There should be one page for each
vendor from whom she buys things to record what she owes them and what she has
repaid, regularly.
5. Register of Loans: In this register will be recorded the loans that the entrepreneur may
have taken and the details of repayments, against each party from whom she may
have borrowed.
6. Stock Book: This book has records of the number of finished goods sold to the
customer, goods held in stock and disposed of.

 Session 02: Purpose and Scope of financial statements, Create a startup estimation

There are three key financial statements for every business, which tell us about the health
and status of a business. All three will be introduced to familiarise the participants with their
purpose and importance. There will be more focus on Balance Sheet.

The Balance Sheet

The balance sheet is a snapshot of the company's financial standing at an instant in time.
The balance sheet shows the company's financial position, what it owns (assets) and what
it owes (liabilities and net worth). The "bottom line" of a balance sheet must always
balance (i.e. assets = liabilities + net worth). The individual elements of a balance sheet
change from day to day and reflect the activities of the company. Analysing how the
balance sheet changes over time will reveal important information about the company's
business trends. In this section, we'll discover how you can monitor your ability to collect
revenues, how well you manage your inventory, and even assess your ability to satisfy
creditors and stockholders.
Liabilities and net worth on the balance sheet represent the company's sources of funds.
Liabilities and net worth are composed of creditors and investors who have provided cash
or its equivalent to the company in the past. As a source of funds, they enable the
company to continue in business or expand operations. If creditors and investors are
unhappy and distrustful, the company's chances of survival are limited.
Assets, on the other hand, represent the company's use of funds. The company uses cash
or other funds provided by the creditor/investor to acquire assets. Assets include all the
things of value that are owned or due to the business.
Liabilities represent a company's obligations to creditors while net worth represents the
owner's investment in the company. In reality, both creditors and owners are "investors" in
the company with the only difference being the degree of nervousness and the
timeframe in which they expect repayment.
ASSETS
As noted previously, anything of value that is owned or due to the business is included
under the Asset section of the Balance Sheet. Assets are shown at a netbook or net
realizable value (more on this later), but appreciated values are not generally considered.
Current Assets
Current assets are those that mature in less than one year. They are the sum of the
following categories:
• Cash
• Accounts Receivable (A/R)
• Inventory (Inv)
• Prepaid Expenses
• Other Current Assets

 Cash
Cash is the way to go. Cash pays bills and obligations. Inventory, receivables, land,
building, machinery and equipment do not pay obligations even though they can be sold
for cash and then used to pay bills.
If cash is inadequate or improperly managed the company may become insolvent and
be forced into bankruptcy. Include all checking, money market and short-term savings
accounts under Cash.
Accounts Receivable (A/R)
Accounts receivable are dollars due from customers. They arise as a result of the process
of selling inventory or services on terms that allow delivery before the collection of cash.
Inventory is sold and shipped, an invoice is sent to the customer, and later cash is
collected. The receivable exists for the period between the selling of the inventory and the
receipt of cash. Receivables are proportional to sales. As sales rise, the investment you
must make in receivables also rises.
Inventory
Inventory consists of the goods and materials a company purchases to re-sell at a profit. In
the process, sales and receivables are generated. The company purchases raw material
inventory that is processed (a.k.a. work-in-process inventory) to be sold as finished goods
inventory. For a company that sells a product, inventory is often the first use of cash.
Purchasing inventory to be sold at a profit is the first step in the profit-making cycle
(operating cycle) as illustrated previously. Selling inventory does not bring cash back into
the company -- it creates a receivable. Only after a time lag equal to the receivable's
collection period will cash return to the company. Thus, the level of inventory must be well
managed so that the business does not keep too much cash tied up in inventory, as this
will reduce profits. At the same time, a company must keep sufficient inventory on hand to
prevent stockouts (having nothing to sell) because this too will erode profits and may result
in the loss of customers.
Other Current Assets
Other Current Assets consist of prepaid expenses and other miscellaneous and current
assets.
Fixed Assets
Fixed assets represent the use of cash to purchase physical assets whose life exceeds one
year. They include assets such as:
• Land
• Building
• Machinery and Equipment
• Furniture and Fixtures

 Intangibles
Intangibles may never mature into cash. For most analysis purposes, intangibles are
ignored as assets and are deducted from net worth because their value is difficult to
determine. Intangibles consist of assets such as:
• Research and Development
• Market Research
• Goodwill
• Organisational Expense
In several respects, intangibles are similar to prepaid expenses; the use of cash to
purchase a benefit which will be expensed at a future date. Intangibles are regained, like
fixed assets, through incremental annual charges against income. Standard accounting
procedures require most intangibles to be expensed as purchased and never capitalized
(put on the balance sheet). An exception to this is purchased patents that may be
amortized over the life of the patent.
Other Assets
Other assets consist of miscellaneous accounts such as deposits and long-term notes
receivable from third parties. They are turned into cash when the asset is sold or when the
note is repaid. Total Assets represent the sum of all the assets owned by or due to the
business.
LIABILITIES AND NET WORTH
Liabilities and Net Worth are sources of cash listed in descending order from the most
nervous creditors and soonest to mature obligations (current liabilities), to the least nervous
and never-due obligations (net worth). There are two sources of funds: lender-investor and
owner-investor. Lender- investors consist of trade suppliers, employees, tax authorities and
financial institutions. Owner-investor consists of stockholders and principals who loan cash
to the business. Both lender-investor and owner-investors have invested cash or its
equivalent into the company. The only difference between the investors is the maturity
date of their obligations and the degree of their nervousness.
Current Liabilities
Current liabilities are those obligations that will mature and must be paid within 12 months.
These are liabilities that can create a company's insolvency if cash is inadequate. A
happy and satisfied set of current creditors is a healthy and important source of credit for
short-term uses of cash (inventory and receivables). An unhappy and dissatisfied set of
current creditors can threaten the survival of the company. The best way to keep these
creditors happy is to keep their obligations current.
Current liabilities consist of the following obligation accounts:
• Accounts Payable -- Trade (A/P)
• Accrued Expenses
• Notes Payable -- Bank (N/P Bank)
• Notes Payable -- Other (N/P Other)
• Current Portion of Long-term Debt

 • Proper matching of sources and uses of funds requires that short-term (current)
liabilities must be used. Only to purchase short-term assets (inventory and
receivables)
Notes Payable
Notes payable are obligations in the form of promissory notes with short-term maturity
dates of less than 12 months. Often, they are demand notes (payable upon demand).
Other times they have specific maturity dates (30, 60, 90, 180, 270, and 360 days maturities
are typical). The notes payable always include only the principal amount of the debt. Any
interest owed is listed under accruals.
The proceeds of notes payable should be used to finance current assets (inventory and
receivables). The use of funds must be short-term so that the asset matures into cash
before the obligation's maturation. Proper matching would indicate borrowing for
seasonal swings in sales, which cause swings in inventory and receivables, or to repay
accounts payable when attractive discount terms are offered for early payment.
Accounts Payable
Accounts Payable are obligations due to trade suppliers who have provided inventory or
goods and services used in operating the business. Suppliers generally offer terms (just like
you do for your customers), since the supplier's competition offers payment terms.
Whenever possible you should take advantage of payment terms as this will help keep
your costs down. If the company is paying its suppliers in a timely fashion, the days
payable will not exceed the terms of payment.
Accrued Expenses are obligations owed but not billed such as wages and payroll taxes, or
obligations accruing, but not yet due, such as interest on a loan. Accruals consist chiefly of
wages, payroll taxes, interest payable and employee benefits accruals such as pension
funds. As a labour-related category, it should vary by payroll policy (i.e., if wages are paid
weekly, the accrual category should seldom exceed one week's payroll and payroll
taxes).
Non-current Liabilities
Non-current liabilities are those obligations that will not become due and payable in the
coming year. There are three types of non-current liabilities, only two of which are listed on
the balance sheet:
• Non-current Portion of Long-Term Debt (LTD)
• Subordinated Officer Loans (Sub-Off)
• Contingent Liabilities
Non-current portion of long-term debt is the principal portion of a term loan not payable
in the coming year. Subordinated officer loans are treated as an item that lies between
debt and equity. Contingent liabilities listed in the footnotes are potential liabilities, which
hopefully never become due. The non-Current Portion of Long Term Debt (LTD) is the
portion of a term loan that is not due within the next 12 months. It is listed below the
current liability section to demonstrate that the loan does not have to be fully liquidated in
the coming year. Long-term debt (LTD) provides cash to be used for a long-term asset
purchase, either permanent working capital or fixed assets.

 Contingent Liabilities
Contingent Liabilities are potential liabilities that are not listed on the balance sheet. They
are listed in the footnotes because they may never become due and payable.
Contingent liabilities include:
• Lawsuits
• Warranties
• Cross Guarantees
If the company has been sued, but the litigation has not been initiated, there is no way of
knowing whether or not the suit will result in a liability to the company. It will be listed in the
footnotes because, while not a real liability, it does represent a potential liability, which
may hurt the ability of the company to meet future obligations.
Total Liabilities
Total liabilities represent the sum of all monetary obligations of a business and all claims
creditors have on its assets.
Equity
Equity is represented by total assets minus total liabilities. Equity or Net Worth is the most
patient and last to mature source of funds. It represents the owners' share in the financing
of all the assets.
Income Statement
Known also as the profit and loss statement, the income statement shows all income and
expense accounts over some time. That is, it shows how profitable the business is. This
financial statement shows. how much money the company will make after all expenses
are accounted for. Remember that an income statement does not reveal hidden
problems like insufficient cash flow problems. Income statements are read from top to
bottom and represent earnings and expenses over some time.
Cash Flow Statement
A cash flow statement is a financial statement that provides aggregate data regarding all
cash inflows a company receives from its ongoing operations and external investment
sources. It also includes all cash outflows that pay for business activities and investments
during a given period. 
The cash flow statement has three parts:
● Financing cash flow: is the cash to and from external sources, such as lenders,
investors and shareholders. A new loan, the repayment of a loan, the issuance of
stock, and the payment of dividends are some of the activities that would be
included in this section of the cash flow statement.
● Investing Cash Flow: Investing cash flow is generated internally from non-operating
activities. This includes investments in plant and equipment or other fixed assets,
nonrecurring gains or losses, or other sources and uses of cash outside of normal
operations.
● Operating Cash Flow: Operating cash flow, often referred to as working capital, is
the cash flow generated from internal operations. It comes from sales of the
product or service of your business, and because it is generated internally, it is
under your control.

 The cash flow statement is believed to be the most intuitive of all the financial statements
because it follows the cash made by the business in three main ways—through operations,
investment, and financing. The sum of these three segments is called net cash flow.

Finance
What is financial planning for a business? It is simply the process of allocating funds to and
determining how a business will achieve its different goals and objectives outlined by the
business. Financial planning is almost as important as setting up a business. This is a
necessity for any business belonging to any industry and of any size. But small businesses
often do not do financial planning. However, it is almost impossible for an organization to
function and be financially stable without confiding in some sort of financial planning. Not
all businesses can achieve success, one reason for this can be the lack of financial
planning. There is an urgent requirement for businesses to leverage the benefits of
financial planning.

Here are some reasons why financial planning is important for a business:

Where will funds come from?

Funds to start up a business can come either from equity or debt. Usually, it is a
combination. Equity is the investment by the owners. For instance, you may have Rs.
50,000 which you need to start your business. You could invest all of it. You are then the
sole owner with 100% equity. But if you have only Rs. 25,000, you need to find ways to fill
the gap. Your sister may agree to invest Rs. 25,000. She then becomes the co-owner and
has a share in the profits. Or she may agree to lend you Rs. 25,000 at an agreed interest
rate. This is called debt. In this case, she does not have a share of the profits, but you need
to pay back the principal and interest. Or you may choose to borrow from a bank. This is
also debt.

● Proper Usage of Funds: A smart and powerful benefit of planning a financial

program is judiciously utilizing all the funds that you have. This can be done by
looking at all the assets and liabilities of a business. Planning well in advance
overheads, expenses, salaries, miscellaneous expenditures, taxes etc., will give you
a good idea of how to manage funds.
● Long-Term View: With sufficient financial planning, businesses can have a clearer
long-term view of their allocation of funds. Analyzing and deploying funds to
various parts of the business can have a positive effect in the long run.
● Marketing Strategy: Planning finances will help business to identify the practicality
of marketing strategies that can be implemented. While drafting a business
marketing strategy, one needs to see the ratio of expense and profits on every
strategy that is formulated for business. This gives a brief idea as to which strategy is
worth implementing and which is not.
● To Measure Liabilities and Assets: the stability of a business, assets and liabilities of a
business need to be monitored periodically. This gives an idea of any improvements
that the business needs and how to increase assets and decrease liabilities. This

 gives an overview of what areas of the organization require investment on a prior

basis.
● Measuring Profit and Loss: The reports helps the organization to evaluate the profits
and loss of the organization. Furthermore, these help the business to evaluate
which strategy worked well for the business. This showcases the net profit a
company managed to achieve and what was the prime reason for it. There is no
point in making money until and unless you can make profits that are beneficial for
your business.  

Es ma on of Cost of Star ng Business

in (Rs.)
Investments
A. Investment in produc on unit/shop
Purchase of Land and Building
Repair, Maintenance, etc.
Other
Subtotal
B. Equipments
Machinery, tools
Furniture
Others
Subtotal
C. Working Capital
Raw material
Labour Cost
Salary and Wages
Rent
Water
Electricity
Other
Subtotal
Total
ti
ti

ti
ti

 Session 03: Break-even analysis, Working Capital, Types of Loans & Financial
Criteria

BREAK-EVEN

● A break-even analysis is a financial tool which helps an enterprise to determine the

stage at which the enterprise, or a new service or a product, will recover its cost
and will have no profit or loss. In other words, it is a financial calculation for
determining how much the enterprise has to sell to cover its costs (particularly fixed
costs). Break-even analysis helps in profit planning showing the relationship
between the volume of sales, cost and profit.
● Break-even analysis is useful in studying the relationship between variable cost,
fixed cost and sales. Generally, a company with low fixed costs will have a low
break-even point of sale.
● To start a new enterprise, a break-even analysis is a must. Not only it helps in
deciding whether the idea of starting a new business is viable, but it will force the
startup to be realistic about the costs, as well as provide a basis for the pricing
strategy.

 Working Capital

Working capital is the difference between  a company’s current assets, such as cash,
accounts receivable (customers’ unpaid bills) and inventories of raw materials and
finished goods, and its current liabilities, such as accounts payable. Net operating working
capital is a measure of a company's liquidity and refers to the difference between
operating current assets and operating current liabilities. In many cases these calculations
are the same and are derived from company cash plus accounts receivable plus
inventories, Less accounts payable and fewer accrued expenses.

You will normally need to run your business for some time before sufficient money comes in
from sales. Manufacturers must produce before they can sell. Some service operators
have to buy materials before they can start to provide their services. Many businesses must
spend a lot of money on promotions before they get customers. Wages, rent, etc. have to
be paid during this time. Therefore, you will need working capital for these running costs
and expenses. Some businesses will need enough working capital to cover all costs for six
months. Others may only need to cover three months. So, you must estimate how long it
will take before your business will get sufficient money from sales. It will usually take longer
than you think before your sales start picking up, so plan to have sufficient working capital
for at least a couple of additional months without sales.

Working capital is needed to cover the following expenses:

● Purchase of a stock of raw materials and finished goods

● Promotional expenses
● Wages
● Rent
● Insurances
● Other costs

Remember that if you decide to give credit to the customers that it will take even longer
before cash comes in from sales and you will then need to buy stock a second time with
your start-up capital.

What Is a Budget?

Time and money are scarce resources for all individuals and organisations; the efficient
and effective use of these resources requires planning. Planning alone, however, is
insufficient. Control is also necessary to ensure that plans are carried out. A  budget  is a
tool that managers use to plan and control the use of scarce resources.

A budget is an estimation of revenue and expenses over a specified future period and is
utilised by governments, businesses, and individuals. It is a financial plan for a defined
period, normally a year that is known to greatly enhance the success of any financial
undertaking. Aside from earmarking resources, a budget can also aid in setting goals,
measuring outcomes, and planning contingencies. Personal budgets are extremely useful
in managing an individual's or family's finances over both the short- and long-term horizon.

Overdraft facility: An overdraft Facility is a financial instrument in which you can withdraw
money from your savings or current account, even if your account balance is zero. This
feature is provided by almost every financial institution, including banks and NBFCs.

An overdraft facility is a type of short-term loan to be repaid within defined tenure as

required by the financial institutions. Lenders shall levy interest rates that the borrower
needs to repay, as per the bank’s terms and conditions. The type of interest rate offered
by the lender is fixed and not floating.

Loan: A loan is a type of debt. Like all debt instruments, a loan entails the redistribution of
financial assets over time, between the lender and the borrower.

In a loan, the borrower initially receives or borrows a sum of money, called the principal,
from the lender, and is obligated to pay back or repay an equal amount of money to the
lender at a later time. Typically, the money is paid off in regular instalments, or partial
repayments; in an annuity, each instalment is the same amount.

The loan is usually provided at a cost, referred to as interest on the debt, which provides
an incentive for the lender to engage in the loan. In a legal loan, each of these
obligations and restrictions is enforced by contract, which can also put the borrower
under additional restrictions known as loan covenants. Although this article focuses on
monetary loans, in practice any material object might be lent. Acting as a provider of
loans is one of the principal tasks for financial institutions. For other institutions, issuing debt
contracts such as bonds is a regular source of funding.

If one needs funds, be it for starting a new business, expanding a current business, or
managing daily business expenses, one must have heard of the various types of  term
loans. Such loans are tailor-made to meet the specific financial need of a business.

Types of term loans

Short-Term Loans: A short-term loan is usually for 1 to 2 years. A short-term loan is often
required to meet the day-to-day business needs or the working capital requirements of a
business. There are several sources of short-term loans, including a loan from a
Commercial bank, Trade Credit, Discounting Bills of Exchange, Factoring, and more.

 Short-term loans carry a higher interest rate when compared to long-term loans. Also, it
may involve even weekly repayment if the term of the loan is very short. It is a general rule
– the shorter the term, and the easier a loan is to get, the higher the interest rate. One
must be very careful when going for this type of term loan as it not only involves a higher
interest rate, but charges may also be on the higher side if you default on repayments.

Medium-Term Loans: A medium-term loan is usually for a period of 2 to 5 years and can be
said to be a hybrid of short and long-term loans. Such a loan is often taken for carrying
repair or renovation of the fixed asset. For example, modernizing a showroom.

A medium-term loan is usually skipped when talking about the types of term loans as
people may go straight to the long-term loan after discussing the short-term loan.
However, it is better to keep the duration of 2 to 5 years under medium-term as terms and
condition for such a period is somewhat different from the long-term loan. Like, the interest
rate is comparatively higher, while the documentation part is easier when compared to
long-term loans.

Long-Term Loans: These types of term loans are for more than five years. Most long-term
loans are secured, for instance, home loans, car loans, and loans against property. Since
the loan is secured, the rate of interest is also lower. However, it can be unsecured as well.
In an unsecured loan, no collateral or asset is needed, but the rate of interest is
comparatively higher as the lender bears more risk.

EMI for such a loan is also quite low as the payment is spread over a long period. A long-
term loan is credit-based, so the better your  credit score  is, the better the chances that
you get a lower interest rate. The amount of the loan will also depend on your credit
history and income. Further, a long-term loan also comes with flexibility in terms of
payment options. For instance, you may go for a fixed-interest loan, where the rate is the
same over the term of the loan, or an adjustable rate, where the rate may change each
year. Also, there is an interest-only loan, where the borrower can pay only the interest for a
set period, and then start paying the principal.

Advantages
• A bank loan can be secured quickly; in less than an hour, a qualified borrower can
complete a bank loan transaction.
• A bank loan can be used in several ways; money can be borrowed for many large-
ticket items, such as furniture, vehicles or home renovations.

Disadvantages
• Some loans carry a prepayment penalty, preventing the borrower from paying the
note off early without incurring additional costs.
• There are several limitations to the transaction. Good credit is usually required to
borrow money, and there are stipulations on how the money can be used.

Interest
The interest rate is the amount charged on top of the principal by a lender to a borrower
for the use of assets. An interest rate also applies to the amount earned at a bank or credit
union from a deposit account.