In today’s rapidly changing business world, you need to stay updated than ever before. Also recent development in economy has made it necessary for the non finance professionals to gain knowledge of finance which will help in analyzing business opportunities and business decisions. If we talk about the current scenario, most non finance professional are unable to understand financial risk due to lack of knowledge. Most non finance professionals have ability to run business efficiently but they are fails to judge financial strength using small but important techniques of finance due to the lack of financial knowledge. You need to stay update more than ever before. Even if you are not from finance back round then also you need to understand the financials of the company, So lets learn; what it all means and what is the impact of financial on company?
This article on Finance for Non Finance Professionals will help you to gain basic finance knowledge, accounting concepts and understanding of financial statement required for better understanding of finance. So lets start our learning journey with financial statements.
What do you meant by financial statements?
In simple words,we can say that businesses record their financial or other performance in standard statements called financial statements.Financial statements include important information about the organization’s financials. This information is important for shareholders, stakeholders, vendors, customers, government and company management itself. Mainly there are three basic Financial Statements.
Three Financial Statements
- Income Statement
- Balance Sheet
- Cash Flow statement
It measures a company’s financial performance and shows profitability over a specific period. Income Statement also called Profit and Loss, Statement of Earnings or Statement of Operations.
Balance sheet includes companies or entity’s assets and liabilities (financial position) at the end of the day at specific date. It is also known as a Statement of Financial Position.
Cash Flow Statement-
Cash flow statement provides information about cash receipts and payments during specific period of company. It provides information of cash on the basis of its operating, investing, and financing activities.
Asset and liability
An asset is an economic resource that a company owns. For example machinery, Land etc.
A liability is legal obligations of organization which arising from its past actions. for example loans, Accounts payable.
Book value and market value
Book value is the amount of an asset or liability shown on the company’s books or statement. Market value is the current value of the asset or liability.
Depreciation and amortization
Depreciation is reducing value of tangible asset over period of time or over the useful life of the asset.
Amortization is reducing the value of an intangible asset over the useful life of the asset.
A company’s financial reporting year
Account receivables and account payable
Accounts receivable are the amount which company collects or received from their clients or customer (also called debtors) for services which they have been provided.
Accounts payable are amounts which company owes because it purchased goods or services on credit from a supplier or vendor (also called creditors).
Revenue and expenses
Revenue is sale, or any income received, in simple word we can say that it is income that flows into a company.
Expenses are costs that are incurred or required to run business.
Basic Accounting Equation
As an Entrepreneurs or finance professional please do not underestimate the importance of balance sheet equation. Following is the formula for balance sheet equation. This formula is extremely important:
Assets = Liabilities + Owner’s Equity
for better understanding of this equation lets take an example.
Mr. David has the following Assets and Liabilities as at 31 December 2013
Balance Sheet as at 31 December 2013
|Land and Buildings||20000||Capital||27000|
|Plant and Machinery||15000||Bank Loan||16000|
Balance sheet Equation
1) Capital = Assets – Liabilities
27,000 = 47,500 – 20,500
2) Assets = Capital + Liabilities
47,500 = 27,000 + 20,500
3) Liabilities = Assets – Capital
20,500 = 47,500 – 27,000
Techniques of Financial statement Analysis
Understand and interpret financial statement yourself by using some finance techniques like ratio analysis. This techniques may help you to take better business decisions.
It is financial analysis technique in which percentage change in value of each line item of a financial statement is calculated specific period.
- Shows relationship of each item to a base amount on financial statements
- Income statement (each item expressed as percentage of net sales)
- Balance sheet (each item expressed as percentage of total assets)
Ratio analysis is a technique use to interpret the financial statements. It involves comparison for a meaningful interpretation of the financial statements. Ratios can be used to evaluate four different areas of company’s performance and conditions
- Solvency ratios
- Operating Performance
- Risk Analysis
Ratio Analysis – Solvency
These ratios is use to determine the firm’s ability to pay its short-term liabilities. Following are the types of Ratio Analysis – Solvency
- Current Ratio
- Quick Ratio
- Cash ratio
This ratio examines current assets and current liabilities. Formula for current ratio is
Current Ratio = Current Assets / Current Liabilities
Higher the current ratio, more likely is that the company will be able to pay its short-term bills.
If the ratio is less than 1 then it means that the company has negative working capital and is probably facing liquidity crises.
Quick Ratio :
Quick Ratio adjusts current assets by removing less liquid assets. Quick ratio is more stringent measure of liquidity than current ratio.
Formula for quick ratio is,
Quick Ratio= (Cash + Marketable Securities + Receivables)/ Current Liabilities
Higher the quick ratio, more likely is that the company will be able to pay its short-term bills
Cash ratio relates cash (ultimate liquid asset) to current liabilities.
Cash Ratio=( Cash + Marketable Securities)/ Current Liabilities
Higher the cash ratio, more likely is that the company will be able to pay its short-term bills.
Finance for Non Finance Professionals – FAQs
I am an entrepreneur. Can I analyze my business balance sheet using Financial analysis techniques?
Yes, you can analyze your business balance sheet using ratio analysis.
I am from non-finance back round. Can you provide me free finance training material which will help me to learn accounting from basic?
There are so many online portal which provide free training material however don’t be confused.select right one and quality courses. Get free finance training material for non finance professionals.
Hello, will you please recommend me a online course on finance, because I am working professional in IT sector and I don’t have enough time for classroom training. Please suggest me best course so that I can understand basic concepts of finance from scratch?
If you are new to the finance world then choose online course which includes basic concepts from scratch. For professionals like you online course are really helpful. you should go for online course on Finance for Non Finance Professionals
Finance for Non Finance Professionals Infographics
Learn the juice of this article in a minute – Finance for Non Finance Professionals
Here are some articles that will help you to get more detail about the Non-Finance Professionals so just go through the link.