Financial Management
Capital Generation and Management
Capital management (CM) is a
financial strategy aimed at ensuring maximum efficiency in a company's cash
flow. Its aim is for the business to have adequate means to meet its day-to-day
expenses, as well as financial obligations in the short-term.
Types of Capitals
1. Fixed Capital:
When an industrial enterprise is started from
the ground up it requires capital to make / purchase:
i. Land,
ii. Building,
iii. Equipment and Machinery,
iv. Tools, and
v. Furniture, etc.
Assets of this type are used over and
over again for a number of years and are commonly termed Fixed Capital.
2. Working Capital:
Once fixed assets, e.g., building, equipment,
machinery, etc., have been purchased, the enterprise needs funds to meet its
day-to-day needs and expenditures such as:
i. Purchase of raw material and supplies.
ii. Payment of employee wages.
iii. Storage costs.
iv. Advertisement and selling expenses.
v. Equipment and plant maintenance costs.
vi. Transportation and shipping expenses.
vii. Expenditures during the time lag
between the sale of the products and payment for them.
Funds required to cover these costs are
commonly called working capital.
Sources of Finance
The provision of finance to a company to
cover its short-term WORKING CAPITAL requirements and longer-term FIXED ASSETS
and investments.
Sources of finance for business are equity, debt, debentures, retained earnings, term loans, working
capital loans, letter of credit, euro issue, venture funding etc. These
sources of funds are used in different situations. They are classified based on
time period, ownership and control, and their source of generation. It is ideal
to evaluate each source of capital before opting for it.
Long-Term
Sources of Finance
Long-term
financing means capital requirements for a
period of more than 5 years to 10, 15, 20 years or maybe more depending on
other factors. Capital expenditures in fixed assets like plant and machinery,
land and building, etc
Medium Term Sources of Finance
Medium term financing means financing for
a period of 3 to 5 years.
Short Term Sources of Finance
Short term financing means financing for
a period of less than 1 year.
Budget and Accounts
A budget is
a financial plan for future activities. The budgets used in business often include a sales or
revenues budget detailed
by products or services, production budgets, budgets for
each department in the company, cash budget, capital expenditures budget, and others.
Production Budget The production budget calculates the
number of units of products that must be manufactured, and is derived from a
combination of the sales forecast and the planned amount of finished goods
inventory to have on hand.
A production budget is a financial plan that lists the number of units to be manufactured during a period. In other words, this is a report that estimates the number of units that a plant will produce from period to period.
Labor Budget is used to calculate the number of labor hours that will be needed to
produce the units itemized in the production budget. A more complex direct labor budget will calculate not only the total number of
hours needed, but will also break down this information by labor category.
A type of budget created by a business,
company or organization for the complete number of employees that are employed
in labor created, accounted, recorded and apportioned
accurately.
Profit and Loss Account
The profit
and loss (P&L) statement is a financial statement that
summarizes the revenues, costs, and expenses incurred during a specified year.
The account that shows annual net profit or net loss of
a business is called Profit and Loss Account. It is
prepared to determine the net profit or net loss of a trader. P&L account
is a component of final accounts.
The following items usually appear on the debit and
credit side of a Profit and Loss Account.
On
the debit side:
1.
Gross Loss
2.
All
Indirect Expenses
On
the credit side:
1.
Gross
Profit
2.
All
Indirect Revenues
A profit and loss statement (P&L), or income statement or statement of operations, is a financial report that provides a summary of a company’s revenues, expenses, and profits/losses over a given period of time. The P&L statement shows a company’s ability to generate sales, manage expenses, and create profits. It is prepared based on accounting principles that include revenue recognition, matching, and accruals, which makes it different from the cash flow statement.
The
main categories that can be found on the P&L include:
1.
Revenue (or Sales)
2.
Cost of Goods Sold (or Cost of Sales)
3.
Selling, General & Administrative (SG&A) Expenses
4.
Marketing and Advertising
5.
Technology
7.
Taxes
8.
Net Income
Balance Sheet
A balance sheet is
a statement of the financial position of a business that lists the assets,
liabilities, and owner's equity at a particular point in time. In other words,
the balance sheet illustrates your business's net worth.
The
balance sheet is one of the three fundamental financial statements and
is key to both financial modeling and accounting. The
balance sheet displays the company’s total assets, and how these assets are
financed, through either debt or equity. It can also be referred to as a
statement of net worth, or a statement of financial position.
The
balance sheet is based on the fundamental equation: Assets = Liabilities +
Equity.
Introduction to Various Taxes
Excise Duty
Excise duty is a form of
tax imposed on goods for their production, licensing and sale. An indirect tax
paid to the Government of India by producers of goods, excise duty is the
opposite of Customs duty in that it applies to goods manufactured domestically
in the country, while Customs is levied on those coming from outside of the
country.
Excise duty was levied
on manufactured goods and levied at the time of removal of goods, while GST is
levied on the supply of goods and services.
Service tax
Service tax is a tax
levied by the government on service providers on certain service transactions,
but is actually borne by the customers. It is categorized under Indirect Tax
and came into existence under the Finance Act, 1994.
In this case, the
service provider pays the tax and recovers it from the customer. Service Tax
was earlier levied on a specified list of services, but in the 2012 budget, its
scope was increased. Services provided by air-conditioned restaurants and short
term accommodation provided by hotels, inns, etc. were also included in the list
of services.
It is
charged to the individual service providers on cash basis, and to companies on
accrual basis. This tax is payable only when the value of services provided in
a financial year is more than Rs 10 lakh. This tax is not applicable in the
state of Jammu & Kashmir.
Income Tax
An income tax is a tax imposed on individuals or
entities (taxpayers) that varies with respective income or profits (taxable income). The tax imposed
on companies is usually known as corporate tax and is levied at a flat rate. However, individuals are
taxed at various rates according to the band in which they fall.
Income tax is applied to both earned income (wages, salaries and commission) and unearned income (dividends, interest and
rents).
Income
tax refers to annual taxes levied
by the federal government and most state governments on individual and
business income.
By law, businesses and individuals must file federal and state income tax
returns every year to
determine whether they owe taxes. Governments use the taxes they collect
to fund their
activities.
V A T
Value added tax or VAT is an
indirect tax, which is imposed
on goods and services at each stage of production, starting from raw materials
to final product. VAT is levied
on the value additions at different stages of production. VAT is widely applied in the European
countries.
A value-added
tax (VAT) is a consumption tax placed on a
product whenever value is added at each stage of the supply chain, from
production to the point of sale. The amount of VAT that the
user pays is on the cost of the product, less any of the costs of materials
used in the product that have already been taxed.
Customs Duty
Customs Duty is a tax
imposed on imports and exports of goods.
Customs duty refers to the tax
imposed on goods when they are transported across international borders. In
simple terms, it is the tax that is levied on import and export of goods. The
government uses this duty to raise its revenues, safeguard domestic industries,
and regulate movement of goods e.g. Import
Duty & Export Duty
The rate of Customs duty varies
depending on where the goods were made and what they were made of.
Types of custom duty
·
Basic
Customs Duty (BCD)
·
Countervailing
Duty (CVD)
·
Additional
Customs Duty or Special CVD
·
Protective
Duty,
·
Anti-dumping
Duty
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