Introduction to Finance for Non-Financial Managers Training Course London

Finance for NonFinancial Managers

UNDERSTANDING FINANCIAL STATEMENTS

Financial statements are intended to provide users with information about:

• the financial position of the company 
• the financial performance of the company 
• changes in its financial position

This information can be used to assess the ability of the firm to generate cash and the timing and certainty of this cash generation. The ability to generate cash is fundamental to the survival and health of a company and determines, amongst other things, whether it will be able to pay its funders, suppliers, and employees.

Financial statements also provide a way of making the directors accountable to the shareholders for:

• the way they have managed the company, and
• the financial results they have achieved

UNDERSTANDING WORKING CAPITAL

• Working capital is the ‘circulating capital’ of the business.
• In the balance sheet working capital is described as ‘net current assets’ and is calculated by deducting current liabilities from current assets.
• Working capital is important because it has to be funded. Once the firm’s initial funding has been invested in equipment and working capital the business will be able to grow sales to the level that can be supported by the cash and stock available. Exactly where this level is will be determined by the amount of start-up funding, the subsequent profits and by how much working capital is needed.
• In a healthy business, the working capital circulation process takes place smoothly and at a pace that allows the business to keep the business operating at the same level of sales without the need to inject new funds.  However, for the business to grow, it will be necessary to increase working capital; additional funding will often be required to finance this additional working capital.  
• Companies that attempt to grow the business rapidly without access to additional funding run the risk of overtrading

Gross margin 

Gross margin is what is left after deducting variable costs from sales revenue: gross margin is the real income of the business

Break-even point

By understanding the relationship between gross margin and fixed costs it is possible to calculate the break-even sales point for the business.  

Break-even point is the most important dividing line in business, it is the sales level at which the business just covers its costs.  

If sales are below break-even point the business will make a loss; if sales are above break-even point the business will make profit.

Break-even point can be calculated using gross margin: break-even is achieved when fixed costs are covered by gross margin. 

Break-even sales point is calculated by dividing fixed costs by gross margin per unit

MEASURING PERFORMANCE

A business planning cycle is a logically sequenced plan of action that is designed to aid in the task of company planning. The cycle will often focus on the establishment of viable operational plans that ensure a smooth production process, as well as addressing issues such as the ordering and receipt of raw materials, the housing of finished goods prior to transport to customers, and even the shipping processes used to deliver those finished goods.

Stakeholders can use a number of measures to assess the financial performance of a business and to judge how well the business is being managed. Profit and cash-flow are both good measures of financial performance but the key financial measure is return on investment.

Reasons to Create a Budget

• Budgets Set Targets;
• Strategy Requires Funding;
• Money Allocated for Aging Facilities and Equipment;
• Budgets Communicate Priorities;
• Control Spending;
• Eliminate Turf Wars;
• Provides a Profit Margin.

Budgeting is the foundation for all business success. Budgets help with both planning and control of the organization's financial resources.

Measures of financial performance and strength

Definition of 'Financial Performance'

A subjective measure of how well a firm can use assets from its primary mode of business and generate revenues. This term is also used as a general measure of a firm's overall financial health over a given period of time and can be used to compare similar firms across the same industry or to compare industries or sectors in aggregation.

There are many different ways to measure financial performance, but all measures should be taken in aggregation. Line items such as revenue from operations, operating income or cash flow from operations can be used, as well as total unit sales. Furthermore, the analyst or investor may wish to look deeper into financial statements and seek out margin growth rates or any declining debt.

Why some companies are more profitable than others

There are two fundamental questions that business owners and managers ask all over the world:

• Why are some companies and businesses more profitable than others?

It’s a great starting point for the second and even more important question.

• How can we make this business or company more profitable?

The answer is surprisingly simple although the answers can lead to some very clever thinking on complicated subjects.