Financial Management For Engineers & Professionals

Course Attend By: Mirza Sajjad Uz Zaman Baig

Dated: 12 to 14 January’11

Location: NED University (CCEE)

Trainers: Mr. M Yousuf Khan

Mr. Amir Bashir

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Acknowledgement

I am heartily thankful to my Manager Operations, Mr. Abid Shehzad; Manager Electronics, Mr. Imran

Mazhar; and especially to HR Department for allowing me and giving me the opportunity to attend the course “Financial Management for Engineers and Professionals”.

The encouragement, guidance and support provided to me by my workplace; has enabled me to develop an understanding of the subject and has opened my thoughts towards the financial management knowledge.

Lastly, I offer my regards and blessings to all of those who supported me in any respect during the completion of the course.

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ContentsDay -1

- Financial Accounting and Statements- The Accounting Equation- Balance Sheet- Income Statement- Cash Flow Statement- Statement of Retained Earnings- Finance as a function of business

Day -2

- Business Cycle- Working Capital Management- Working Capital Management & Financing decisions- Capitalization Vs Expensing- Impact on financial statements due to Capitalization Vs Expensing

Day -3

- Time Value of Money - Simple interest and compound interest - Present and future values - Compounding of series payments - Valuation models - Decision making financial tools

o For Project Financingo For Project Cash flow analysis

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Day -1:

-Financial Accounting and Statements:

Financial accounting and statement provide the financial condition/situation of an individual company over a given time. As per the financial standards, the first financial statement of is issued after 18 months and after that, the annual financial accounting cycle is followed. Financial Statements include:

Balance Sheet Income Statement Statement of Owner's Equity Statement of Cash Flows

-The Accounting Equation

The accounting equation says:

Assets = Liabilities + Capital – equation (1)

This equation depicts that

Capital = Assets (total resource invested and left in the business)

Asset is the resources owned by the business Liabilities are the name given to the amounts owing the people for assets - People other than

owner who have supplied some of the asset. Capital is owner’s equity or net worth. It comprises the funds invested in the business by the

owner plus any profits retained for use in the business less any share of profit paid out of the business to the owner. Any money taken out as drawings will reduce capital.

-Balance Sheet

Equation 1 depicts the Balance Sheet formula of working.

Assets are either current or fixed. Current assets, quickly and easily converts to cash. Current assets include cash, accounts receivable, marketable securities, notes receivable, inventory, and prepaid assets such as prepaid insurance. Fixed assets include land, buildings, and equipment. They are recorded at historical cost, which often is much lower than the market value Liabilities represent the portion of a firm's assets that are owed to creditors.

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Liabilities can be classed as short-term liabilities (current) and long-term (non-current)

liabilities. Current liabilities include accounts payable, notes payable, interest payable, wages payable, and taxes payable. Long-term liabilities include mortgages payable and bonds payable. The portion of a mortgage long-term bond that is due within the next 12 months is classed as a current liability, and usually is referred to as the current portion of long-term debt. The creditors of a business are the primary claimants, getting paid before the owners should the business cease to exist

Equity is referred to as owner's equity in a sole proprietorship or a partnership, and stockholders' equity or shareholders' equity in a corporation. The equity owners of a business are residual claimants, having a right to what remains only after the creditors have been paid. For a sole proprietorship or a partnership, the equity would be listed as the owner or owners' names followed by the word "capital".

-Income Statement

The income statement presents the results of the entity's operations during a period of time, such as one year. The simplest equation to describe income is:

Net Income = Revenue - Expenses

Revenue refers to inflows from the delivery or manufacture of a product or from the rendering of a service. Expenses are outflows incurred to produce revenue

Income from operations are separated from other forms of income. We have:

Net Income = Revenue - Expenses+ Gains - Losses

Where gains refer to items such as capital gains, and losses refer to capital losses, losses from natural disasters, etc.

-Cash Flow Statement

The nature of accrual accounting is such that a company may be profitable but nonetheless experience a shortfall in cash. The statement of cash flows is useful in evaluating a company's ability to pay its bills. For a given period, the cash flow statement provides the following information

Sources of cash Uses of cash Change in cash balance

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The cash flow statement represents an analysis of all of the transactions of the business,

reporting where the firm obtained its cash and what it did with it. It breaks the sources and uses of cash into the following categories:

Operating activities Investing activities Financing activities

The information used to construct the cash flow statement comes from the beginning and ending balance sheets for the period and from the income statement for the period

-Finance as a function of business

The objective is to cover the following business functions:

Financial Management: Financial Control Budgeting Zero-base budgeting Cash budgeting Inventory control

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Day -2:

-Business Cycle

The business cycle deals with the cash conversion cycle where the following elements are involved:

The inventory conversion period: deals with the time required to convert the raw material in to sellable items and eventually sale of goods. In addition, this compromises of the length of time the product spends in the warehouse.

The receivables collection period: Average time required to convert the receivable in to cash. The payable deferral period: Is the average time between purchase of raw material and labor and

the payment to them in cash.

-Working Capital Management

- Working Capital Management & Financing decisions

By definition, Working capital management entails short-term decisions - generally, relating to the next one-year period - which is "reversible". These decisions are therefore not taken on the same basis as Capital Investment Decisions (NPV or related, as above) rather they will based on cash flow.

One measure of cash flow is provided by the cash conversion cycle - the net number of days from the outlay of cash for raw material to receiving payment from the customer. As a management tool, this metric makes explicit the inter-relatedness of decisions relating to inventories, accounts receivable and payable, and cash. Because this number effectively corresponds to the time that the firm's cash is tied up in operations and unavailable for other activities, management generally aims at a low net count.

- Capitalization Vs Expensing

Cash is the most basic example of an asset. Clearly it is a resource that will lead to future benefit for the enterprise. When a company spends its cash, it must determine whether the cash expenditure simply covered a current period operating cost or whether it purchased an asset that will be used to operate in future periods.

Operating costs are recorded as an expense on the income statement. For example, the payment of rent of $10,000 for the current period is an expense. This reduces assets (cash) by the amount spent and owners� equity (retained earnings). The next picture graphically illustrates the $10,000 expenditure.

Payment of Cash for an Operating Expense

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Asset purchases are “capitalized” and recorded as an asset on the balance sheet. Only later (as the asset is used up) will the cost of the asset be transferred to the income statement as an expense. For example, buying inventory that will be sold in a future period would reducethe cash asset and increase the inventory asset. The next picture depicts using cash to acquire another asset (for example, inventory) that becomes a resource for future use.

Payment of Cash to Acquire Another Asset

The primary criteria for capitalizing rather than expensing an expenditure is whether it is expected to provide some future benefit (i.e. cash collection when the inventory is sold.) Since the classification requires some judgment, it is possible for management to make an honest mistake or to unscrupulously misclassify an expense as an asset

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Day -3

- Time Value of Money

The time value of money is the value of money figuring in a given amount of interest earned over a given amount of time.

For example, 100 dollars of today's money invested for one year and earning 5 percent, interest will be worth 105 dollars after one year. Therefore, 100 dollars paid now or 105 dollars paid exactly one year from now both have the same value to the recipient who assumes 5 percent interest; using time value of money terminology, 100 dollars invested for one year at 5 percent interest has a future value of 105 dollars.

- Simple interest and compound interest Simple interest is calculated on the original principal only. Accumulated interest from prior periods is not used in calculations for the following periods. Simple interest is normally used for a single period of less than a year, such as 30 or 60 days.

Simple Interest = p * i * n

Compound interest is calculated each period on the original principal and all interest accumulated during past periods. Although the interest may be stated as a yearly rate, the compounding periods can be yearly, semiannually, quarterly, or even continuously.

F = P [(1 + i) n

where

F = future value

P = single payment today

i = interest rate per period

n = number of periods

- Present and future values

Present value The current worth of a future sum of money or stream of cash flows given a specified rate of return. Future cash flows are discounted at the discount rate, and the higher the discount rate, the lower the present value of the future cash flows.

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Future value is the value of an asset or cash at a specified date in the future that is equivalent in value to a specified sum today

- Valuation models

In finance, valuation is the process of estimating the potential market value of a financial asset or liability. Valuations can be done on assets (for example, investments in marketable securities such as stocks, options, business enterprises, or intangible assets such as patents and trademarks) or on liabilities (e.g., Bonds issued by a company). Valuations are required in many contexts including investment analysis, capital budgeting, merger and acquisition transactions, financial reporting, taxable events to determine the proper tax liability, and in litigation.

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