L.9 - Finance

Finance is for enterprise Like life giving air's presence Honest financial management, will ensure long existence."

UDYAM SHATRA-Chapter 9,verse 08

Key Objectives:

This module and its associated activities should help the student to:

1.Compare debt and equity financing.

2.Calculate debt-to-equity ratio and debt ratio

3.Evaluate the risks of heavy debt financing .

4.Evaluate the risks of excessive equity financing

Enterprise Concepts:

Financing.Finance is the use and manipulation of money. Raising money for business is one aspect of financing

Debt.The business borrows the money and pays it back over a set period of time at a set rate of interest. Companies sell debt in the form of bonds and debenture. They may also take loans from banks as part of debt.

Equity.The business gives up a Percentage of ownership for money. The investor receives a percentage of future profits from the business based upon the percentage of ownership. Companies sell equity in the form of shares

Grants.Some charity organisation or community groups may give grants to promising youths. A grant is sort of outright donation. The entrepreneur may show this as equity.

Subsidies.Subsidies are financial help given to aspiring entrepreneurs who want to start a new business under some government schemes.

Bonds.Bonds are deposits taken by the company from the public.Company indemnifies the holder of the bond for refund of value of the bond after stipulated period along with interest due. Bonds are not tradable on the stock exchange

Debentures.: If a loan to be raised by a company is divided into uniform parts(each part being serially numbered)and the loan is raised by enabling people to buy as many parts as they wish,then each part will be known as debenture. The debenture therefore is an acknowledgment under seal of a debt or loan. It is as good as loan taken from individual on certain terms and conditions and on payment of a fixed interest rate for a fixed period. A Company assures/guarantees to the holder to refund the value of the debenture on maturity. On liquidity of the company the debenture holder gets the preferential rights to the refund of the value of the debenture. Debentures can be traded on the stock exchange.

Enterprise Skills:

The student 'Activities' in each lesson are designed to clarify the ENTERPRISE CONCEPTS of the lesson and develop some ENTERPRISE SKILLS (E.SKILLS). The E.SKILLS included in a lesson may not be exhaustive, but are indicative.

E.SKILLS stated in a lesson elsewhere may also get addressed through the activities of a particular lesson.

Some useful E.SKILLS are dealt with below:

Numeracy skill.: The skill to calculate, estimate, use calculators and measuring instruments, analyse and respond to quantitative information, recognise and use numerical pattern & relationships is broadly referred to as NUMERACY SKILL.

Data interpretation: The ability to interpret numerical data, figures, charts,graphs and tables is referred to as Data Interpretation.

Activities:

Activity 1 - USING NEW WORDS IN FINANCE

Instruction To Students

  • The students should fill in the blanks using the terms given.
    Terms- Ownership, debt ratio, equity, bonds and debentures, loan agreement, debt-to-equity ratio

  • After completing the activity, each group should present and share its main discussion points with the rest of the class.

Work Sheet

1. If you raise money by selling shares, you are giving up _________.

2. Holders of ___________ receive dividends and annual corporate reports.

3. If you borrow money from a bank, you will have to sign a ___________ .

4. The ratio of debt to assets is called a ____________.

5. When a company issues __________________it is raising money through debt.

6. The financial strategy of a company is expressed by its ________________ .


Activity 2 - CASH BANK BOOK (RECORD OF RECEIPTS PAYMENT DAY WISE).

Instruction To Students

  • Students should fill the worksheet with entries from the information about ‘Lata’s Snacks Business for January’. First four entries are done in students Activity worksheet. Some cells are filled, some are blanks.

  • After completing the activity, each group should present and share its main discussion points with the rest of the class.

Lata’s snacks business for January.

January 1st Own Capital Rs. 1000.
January 5th Obtained loan of Rs.4000 from bank
January 7th Purchased cooking vessels worth Rs.2000
January 8th Purchased Furniture worth Rs. 1000
January 10th Purchased raw materials worth Rs.1500
January 15th Sales Rs.850.
January 16th Sales Rs. 1050
January 17th Sales Rs. 1000
January 18th Party order Rs. 1500
January 20th Purchased gas worth Rs.350
January 21st Credit Sales Rs.500
January 22nd Sales Rs.900
January 23rd Credit Purchases Rs.1000.
January 24th Sales Rs.500
January 26th Holiday for Republic Day
January 27th Sales Rs.750
January 28th Sales Rs.500
January 29th Paid electric bill Rs.750
January 30th Paid wages Rs.2000.
January 31st Repaid to bank Rs.1000


Method 1:
Cash & Bank Book (Record of Receipts and Payments Day wise)

DateDetails

Payments

(Rs.)

Cash & Bank

Receipts

(Rs.)

Cash & Bank

Balance

(Rs.)

Cash & Bank

Jan 1stOwn Funds 10001000
Jan 5thLoan from bank 40005000
Jan 7thCooking Equipments2000 3000
Jan 8thFurniture Purchase   
Jan 10thRaw materials   
Jan 15thSales   
Jan 16thSales   
Jan 17thSales   
Jan 18thParty order Sales   
Jan 20thPurchased gas   
Jan 22thSales   
Jan 24thSales   
Jan 26thHoliday for Republic Day   
Jan 27thSales   
Jan 28thSales   
Jan 29thElectric bill   
Jan 30thWages   
Jan 31stRepaid to bank   

Summary of Reciepts & Payments for the period 1Jan to 31 Jan

Reciept Payments 

To Opening Balance

To Own Capital

To Sales

To Recived Loan from Bank

0

1000

7050

4000

By Cooking Equipment

By Furniture Purchase

By Raw Material

By Purchased Gas

By Electric Bill

By Wages

By Repaid to Bank Loan

By Closing Balance as on 31 Jan

2000

1000

1500

350

750

2000

1000

3450

Total12050Total12050

Instruction To Students

  • Often professional accountants maintain Receipts on left side of Accounts books and Payments on right side in the same account books. The accounts are then periodically balanced off. 

  • Students should complete the Worksheet below using this Method 2

  • After completing the activity, each group should present and share its main discussion points with the rest of the class.


Activity 3 - LATA'S INCOME EXPENDITURE ACCOUNTS (P & L ACCOUNTS).

Instruction To Students

  • Once more refer to the Record of RECEIPTS & PAYMENTS of Lata’s Snacks Business. 
    From the R & P Account , ask the students to identify the:
    - SALES entries
    - COST of Production entries.
    Outgoes on ASSETS that have appeared in the ‘Balance sheet’ are not to be taken in the P & L Account.

    Prepare a Income & Expenditure i.e. Profit and Loss Account using the Worksheet.
  • After completing the activity, each group should present and share its main discussion points with the rest of the class.

Work Sheet

Determine these ratios to understand the P&L Account.:
Costs-to-sales % = COSTS x 100 = 
SALES 
Profit-to-sales % = PROFITS x 100 = 
SALES 
What impression do you get about the profitability of LATA’S SNACKS BUSINESS 
from these ratios? Is Lata’s Sales Income adequately covering her costs? Why?
Does Lata make adequate profits? What could happen if more competitors start similar snacks business around Lata’s centre?

Activity 4 - LATA'S BALANCE SHEET.

Instruction To Students

  • Students should once again study the Record of RECEIPTS & PAYMENTS (R&P) for Lata’s Business for the month of January.

  • After completing the activity, each group should present and share its main discussion points with the rest of the class.

Work Sheet

1. What items does Lata own on January 31 and what is its value? These are her assets. Fixed assets are her vessels and furniture. Current assets are her cash.

_______________________________________________________________________________________

2. What loan liability does Lata have on 31 January? This is her long term liablity. (Current liablities are creditors example suppliers to whom payments are due shortly. Does Lata have any current liabilities?)

_______________________________________________________________________________________

3. Prepare Lata’s Balance Sheet on 31st. Jan . And determine her NET WORTH (OWNER’S EQUITY) on that day.

_______________________________________________________________________________________



Always the 
Total Liabilities = Total Assets
in the Balance Sheet
Determine these ratios to understand the Balance Sheet.:

Current Assets-to - Current Liabilities ratio = Current Assets (CA) = 
Current Liabilities (CL)

Total Debt-to - Equity ratio = DEBT (D) 
EQUITY (E)

Total Debt-to -Assets ratio = DEBT (D) = 
ASSETS (A)


Students should diagrammatically represent the Current Assets (CA) to Current Liabilities (CL) , Debt (D) to Equity (E) ratio and the Debt (D) to Assets (A) ratio in the following diagrams.


What impression do you get about the financial health of LATA’S SNACKS BUSINESS from these ratios? Is Lata financially strong enough to bear her debts? Why?
Do the current assets of Lata cover her current liabilities adequately?
Do Lata’s Total Assets cover for her debts (long term + current liabilities) adequately? 
What would be the risks if LATA’S business had heavy debt financing, i.e. very large loans had been taken from Bank, in excess of her actual needs?
What was Lata’s Equity Financing when she started on 1 January? 
What is her Equity Financing on 31 January? Could there be risks in excessive equity financing in future?
Activity 5 - START UP FINANCE PLAN.

Instruction To Students

  • Students should list resources they will need for starting up their enterprise. Try to assess whether:

You really need it
Can you get it as courtesy (free of cost) 
Can you get it on loan (borrow)
Can you hire it
If you must buy, can you do as follows
Buy new ?
Buy second hand ?
Buy some in cheap way ?
Buy on credit ?
  • The resource list given here is only suggestive. You may draw up your own.

  • After completing the activity, each group should present and share its main discussion points with the rest of the class.




The Enterprise (You Choose) : ______________________________
List the resources you will need to starting this enterprise and complete the table given below :

ResourceIs this REALLY needed?By when?How can we get it?What cash will we need?
    
Somewhere to work   
Somewhere to sell   
Transport   
Tools   
Equipment   
Materials   
Supplies   
Special Skills   
Cash for anything else?   

Total amount of start-up cash needed Rs.__________