Finance for Managers: A Comprehensive Guide to Financial Concepts and Techniques

This report delves into the essential financial concepts and techniques that business managers need to understand and apply in their daily operations. It covers key financial statements, including the income statement, balance sheet, and cash flow statement, and explores their role in effective financial management. The report also examines break-even analysis, flexible budgeting, and variance analysis, providing practical examples and insights. Furthermore, it explores various investment appraisal techniques, such as accounting rate of return, payback period, net present value, and internal rate of return, to assist managers in making informed investment decisions. This comprehensive guide equips managers with the knowledge and tools necessary to navigate the complexities of financial management and drive business success.

Finance for managers

Contents
Introduction:....................................................................................................................................3
Task 1...........................................................................................................................................4
Task 2:.......................................................................................................................................12
Task 3.........................................................................................................................................16
Conclusion:....................................................................................................................................24
References:....................................................................................................................................25

Introduction:
The following report has been prepared in order to understand the various concepts of finances
related with the business managers of the company and dealing with the matters of financing
while working in the company. The report will contain different cases and complex problems
associated with various calculations to be performed in order to assist in efficient financial work
in the company. The report will include investment appraisal techniques to be applied and
budgeting reports to be prepared in order to compare and draw the conclusions for the actual
results and deficiencies associated with that performance.

Task 1
Financial statements are report of the financial position of a business. It includes the information
about expenses, incomes, assets, liabilities and other financial factors of entity. Financial
statements are classified as:
1. Income statement: The statement shows profit for the year called income statement. Income
statement includes trading and profit and loss account of company. It contains information about
the sales, closing stock, direct expenses and indirect expenses. Key points of income statement:
 It is prepared at the end of the year.
 It is categorized as second level in formulation of final accounts.
 Includes all direct and indirect incomes and expenses which are related with current year.
 All items of incomes and expenses which are related with current year are considered in
formulation of income statement. It is no matter that they are received or not (Hartley, 2014).

(Figure: Format of income statement)
Role in the process of financial management:
 Main object of financial management is adequate and efficient management of funds.
Income statement is helpful to achieve this object. Income statement shows result of various
activities of business. Management can use this information for inter period comparison to
find out the loose points of process and employees and take corrective decision. Thus it helps
to increase efficiency (Pavlova, 2017).
 Cost control and future planning: Income statement includes information about many
types of expenses which may use for comparing and controlling the cost which is essential
part of funds also Management can use this information as a base for future forecasting and
budgeting.
2. Balance sheet: balance sheet shows the position of assets, liabilities and owner’s capital at the
end of the year. It is image of financial position of company at particular point of time. The three
major elements of balance sheet is
 Assets: items which business owns called assets. Assets are mainly classified as current
asses and non-current assets. Assets which are converted in cash with in the year called
current assets and assets which are hold by business for many years called non-current year.
 Liabilities: liability is obligation or duty for business. It is also classified as current and
non-current liability (Hartley, 2014).
 Owner’ capital: net of assets and liabilities is capital which indicates the owner’s or
shareholders fund.

(Figure: Format of balance sheet)
Role in the process of financial management: using the information provided by balance sheet,
management can run a variance analysis like cash and debt analysis, to check health of the
company and to reduce the risk of insolvency. Balance sheet is important source of information
for creditors of company and they can use it for their decision making. The key role of balance
sheet in process financial management is:
 Management will be able to identify best profitable source of funds.
 Ensures that enough working capital is available for business operations.
 Explains net worth of company.
 It helps in planning of near- time fund needs and future debt obligations (Pavlova, 2017)
3. Cash flow: cash flow indicates movement of cash. In accounting terms, difference between
opening cash balance and closing cash balance is cash flow. It shows how money transfers
within and outside the company. If closing balance of cash is higher than opening cash balance,
it is called positive cash flow and negative in opposite situation.

Cash flow activities are classified in into three categories:
 Operating activity
 Investment activity:
 Financial activity:
(Figure: Format of cash flow statement)
Methods of preparation of cash flow:
 Direct method
 Indirect method
Role in the process of financial management: cash flow have important role in financial
management in following manner:
 Detailed cash statement: cash flow provides detailed information of change in cash. This
information is used by management in better and profitable arrangement of fund which is
main target of financial management.
 Ensures enough cash availability for routine operational activities within the business.

 Money is the premise of every monetary task. Consequently, a predictable income
statement will empower the management to plan and control the budgetary activities
accurately.
 Income analysis together with the proportion examination helps measure the profitability
and monetary position of business (Pavlova, 2017).
 It is helpful in creation of future financial plans for effective financial management.
Financial accounting vs. management accounting:
Basis Financial accounting Management accounting
Objective The objective here is to
present financial reports for
investors of the company.
The objective is concerned
with providing information for
management decision making.
Users External users including
investors, creditors and others
(Kim, 2016).
Internal users like managers,
employees etc.
Source of information Past data Past, present and forecasted
data
Significance in effective
operation
Financial reports helps in
identifying the financial
problems and making
corrective actions
The management reports
consider the qualitative as well
as quantitative aspect of the
business and thus overall
growth is maintained (Kim,
2016).

Break-even point: Point of sales where total cost of product is equal to total sales. In this
situation no profit or loss arises for company. The various types of costs are explained below:
 Direct cost – Te cost which is directly associated with the production activity of the
product. Ex – Direct material consumed.
 Indirect cost – The cost which is not associated directly in the production activity of the
product. Ex – Rent paid for premises (Plank, 2018).
 Variable cost – The cost which directly vary with the level of production. Ex – Direct
labour.
 Fixed cost – The cost which does not vary and remain fixed over the period. Ex – Rent
paid.
Calculation of breakeven point for ice cream product:
Selling price per unit = £15/unit
Variable cost per unit = £10/unit
Fixed cost per month = £6000
Break-even sales (units) = fixed cost/ (selling price –variable cost per unit)
= 6000/ (15-10)
=1200 units
Calculation of break even selling price:
In case of 2000 units:
Fixed cost = £6000
Total Variable cost = £20000
Selling price for BEP: [(Total variable cost + Total fixed cost) / No. of units produced]
= (20000+6000) / 2000

= £13 per unit.
Proposal:
It is proposed to fix a price which is more than £13 per unit as the same represents the break even
selling price and the company should add reasonable amount of profit margin while fixing the
selling price of the product (Plank, 2018).

Task 2:
The flexible budget has been prepared for the business which is presented below:
Flexible budget
For 2000 units For 3000 units
PARTICULARS BUDGETED
AMOUNTS
BUDGETED
AMOUNTS
Direct materials 6000 9000
Direct labour 4000 6000
Maintenance 1000 1500
Total variable cost (A) 11000 16500
Semi variable cost(B) 3600 4600
Fix cost:
Deprecation 2000 2000
Rent and rates 1500 1500
Total fix cost© 3500 3500
Total cost of production(A+B+C) 18100 24600

The variance analysis for the company has been prepared on the basis of the actual information
provided by the company and the same has been presented below:
Flexible budget and variance analysis
For 2000
units
For 3000
units
For 3000
units
PARTICULARS BUDGETED
AMOUNTS
BUDGETED
AMOUNTS
ACTUAL
AMOUNTS
varia
nces
Favourable/
Unfavourable.
Direct materials 6000 9000 8500 500 Favourable
Direct labour 4000 6000 4500 1500 Favourable
Maintenance 1000 1500 1400 100 Favourable
Total variable cost
(A)
11000 16500 14400 2100 Favourable
Semi variable
cost(B)
3600 4600 5000 -400 Unfavourable
Fix cost:
Deprecation 2000 2000 2200 -200 Unfavourable
Rent and rates 1500 1500 1600 -100 Unfavourable
Total fix cost© 3500 3500 3800 -300 Unfavourable
Total cost of
production(A+B+
C)
18100 24600 23200 1400 Favourable
Analysis Report:

The variances along with the reasons and the suggestions are presented as follows:
Direct Material variance - The direct material variance refers to the difference observed in the
direct material cost utilized in the company due to variances ion the material consumed or the
prices obtained for purchasing the material.
500 (Favourable)
The reasons may include the low prices charged for purchasing the material form the market or
the efficiency achieved in utilizing the material in the production process of the company (Plank,
2018).
Direct Labour variance - The direct labour variances can be obtained due to the differences
recognized in the amount of labour utilized in the company or the prices on which the labour is
hired.
1500 (Favourable)
The reason behind the favourable variance as compared with the budgeted labour can be due to
the effective bargaining of the purchase department regarding the labour force wages or the
efficient utilization of labour (Collier, 2015).
Maintenance variance - The maintenance variance can be a result of variation in the budgeted
level of maintenance expenditure incurred in the company in comparison to the actual
maintenance.
100 (Favourable)
The reason behind the favourable variance is due to the efficiency and maintenance of the
machinery in a highly sound way which has resulted in low obsolescence and repair works.
Fixed overhead variance - The fixed cost variance refers to the variances observed in the fixed
cost of the company.
300 (Unfavourable)

The reason behind the unfavourable variances can be due to the increase in the capacity of the
company which has increased the fixed cost expenditure or the additional output produced.
It must be ensured that the company does not reach the unacceptable level of fixed cost which
starters making losses for the company (Plank, 2018).

Task 3
a. Accounting rate of return – The accounting rate of return method is concerned with
obtaining the average return accrued by the project during the lifetime of the project and the time
value of money is ignored in this method (Collier, 2015).
Project 1:
ARR = Average Accounting Profit / Average Investment
= [(58000-2000+4000) / 186000] * 100
= 32.25%.
Project 2:
[(36000-4000+8000) / 108000] * 100
= 37%
Advantages Disadvantages
Easy to calculate ARR Time value of money ignored
Growth rate is considered Subjectivity involved

b. Payback period – The payback period method is the method which takes into consideration
the time period required to recover the cost of project and compare the time periods in order to
take decision about the acceptability of the project.
Advantages Disadvantages
Time constraint considered Time value of money ignored
Cash inflow are considered Lengthy process
Project 1:
Payback Period = 2yrs + (20000/80000)
= 2.25 yrs
Project 2:
Payback Period = 2yrs + (16000/56000)
= 2.285 yrs

c. Net present value – The net present value method is the method of investment appraisal under
which net present value of all the cash inflows is calculated after deducting the present value of
cash outflows and they are discounted at the cost of capital recognized by the company. The
project with higher NPV is selected (Braun, et, al., 2014).
Advantages Disadvantages
Time value of money considered Returns are ignored
Profit ignored and cash flows considered Costly method for small business
Project 1:
Year Cash
Outflow
Cash Inflow (Operating
profit + Depreciation)
Net cash
inflow
P V
Factor
(10%)
Present value of
cash inflow
0 200000 200000 1 200000
1 (58000+62000) 120000 0.909 109080
2 (-2000+62000) 60000 0.826 49560
3 (4000+62000+14000) 80000 0.751 60080
Net present value 18720

Project 2:
Year Cash
Outflow
Cash Inflow (Operating
profit + Depreciation)
Net cash
inflow
P V
Factor
(10%)
Present value of
cash inflow
0 120000 120000 1 120000
1 (36000+36000) 72000 0.909 65448
2 (-4000+36000) 32000 0.826 26432
3 (8000+12000+36000) 56000 0.751 42056
Net present value 13936

d. Internal rate of return – The internal rate of return method is based on comparing the
projects on the basis of return acquired by the project and the project with higher IRR is
accepted.
Advantages Disadvantages
Considers time value of money Efforts are required
Returns are better indication of profitability Complex process
Project 1:
Yea
r
Cash
Outflo
w
Cash Inflow
(Operating profit +
Depreciation)
Net
cash
inflow
P V
Facto
r
(10%)
Present value
of cash
inflow
P V F
(15%
)
Presen
t value
of cash
inflow
0 200000 20000
0
1 200000 1 200000
1 (58000+62000) 12000
0
0.909 109080 0.869 104280
2 (-2000+62000) 60000 0.826 49560 0.756 45360
3 (4000+62000+14000) 80000 0.751 60080 0.657 52560
Net present value 18720 2200
IRR = 15% approximately

Project 2:
Yea
r
Cash
Outflo
w
Cash Inflow
(Operating profit +
Depreciation)
Net
cash
inflow
P V
Facto
r
(10%)
Present value
of cash
inflow
P V F
(17%
)
Presen
t value
of cash
inflow
0 120000 12000
0
1 120000 1 120000
1 (36000+36000) 72000 0.909 65448 0.854 61488
2 (-4000+36000) 32000 0.826 26432 0.73 23360
3 (8000+12000+36000) 56000 0.751 42056 0.624 34944
Net present value 13936 -208
IRR = 17% approximately
Recommendation – On the basis of analysis made above it can be observed that the net present
value acquired by the company form both the projects is higher in case of project 1 which is
£18720 and the payback period is also less in comparison to the project 2. Thus if the projects
are mutually exclusive project 1 will be selected (Braun, et, al., 2014).

Determination of annual net book values:
Asset 1:
Particular Machine 1
Cost 200000
Depreciation (Year 1) 80000
Net book value (Year 1) 120000
Depreciation (Year 2) 48000
Net book value (Year 2) 72000
Depreciation (Year 3) 28800
Net book value (Year 3) 43200
Depreciation (Year 4) 17280
Net book value (Year 4) 25920
Asset 2:
Particular Machine 2
Cost 120000
Depreciation (Year 1) 48000
Net book value (Year 1) 72000
Depreciation (Year 2) 28800
Net book value (Year 2) 43200
Depreciation (Year 3) 17280
Net book value (Year 3) 25920
Depreciation (Year 4) 10368

Net book value (Year 4) 15552

Conclusion:
It can be concluded that the role of business managers in performing the financial work in
company is very crucial and the same should be performed very carefully after considering the
various techniques of budgeting and investment appraisal technique that can help them in taking
various business decisions. The cost profit analysis of breakeven point will enable the company
in obtaining the amount of sales to be obtained in the year. The preparation of budgets will help
in performing variance analysis and the techniques of capital budgeting will help the business
managers in taking long term decisions.

References:
 Braun, K.W., Tietz, W.M., Harrison, W.T., Bamber, L.S. and Horngren, C.T.
(2014). Managerial accounting. Pearson.
 Collier, P.M. (2015). Accounting for managers: Interpreting accounting information for
decision making. John Wiley & Sons.
 Fields, E. (2016). The essentials of finance and accounting for nonfinancial managers.
AMACOM Div American Mgmt Assn.
 Hartley, W.C. (2014). An introduction to business accounting for managers. Elsevier.
 Kim, J.B. (2016). Accounting flexibility and managers’ forecast behavior prior to
seasoned equity offerings. Review of Accounting Studies, 21(4), pp.1361-1400.
 Najjar, P.A., Strickland, M. and Kaplan, R.S. (2017) ‘Time-driven activity-based costing
for surgical episodes’. JAMA surgery, 152(1), 96-97.
 Park, K. and Jang, S. (2014) ‘Hospitality finance and managerial accounting research:
Suggesting an interdisciplinary research agenda’. International Journal of Contemporary
Hospitality Management, 26(5), 751-777.
 Pavlova, K. (2017) ‘Revenue management system for the hospitality industry–essence
and elements’. Economics and computer science, (1), pp.42-71.
 Plank, P. (2018). Introduction. In Price and Product-Mix Decisions Under Different Cost
Systems. Springer Gabler, Wiesbaden.
 Szende, P., Reddy, P., Oshins, M., Dogru, T., Mody, M., Suess, C., Guarracino, G.,
Cohen, N. and Pekin, O. (2017). Boston Hospitality Review: Spring 2017.