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  • Finance and Management – 35

    In the earlier blog, we completed looking at the various heads in the PnL account. Today we try to understand a popular measure in the IT industry that is used to measure profitability – EBITDA.
    We know from the earlier blog that EBIT stands for “Earnings before Interest and Taxes”; that aspect of EBITDA remains same, we add to the list both depreciation and amortization. This is found to be a very convenient tool to measure the profitability of firm across companies as well as across industries. To calculate EBITDA, one takes the net income and adds to that the interest, tax, depreciation and amortization aspects back to it.
    There are both arguments for and against the use of EBITDA.
    The people not favoring the use of EBITDA argue that:
    1. Factoring the I, T, D and A as part of the measure can make even an unprofitable firm look fiscally healthy.
    2. It is easy to manipulate – fraudulent accounting practices can really make a company more attractive than it really is
    EBITDA finds favor amongst people since:
    1. Can be used as a shortcut to estimate the cash flow that could fund the long term debts
    2. Can also be used to compare companies against each other and against industry averages
    3. Is a good measure of core profit trends because it eliminates some of the extraneous factors and allows a more equal comparison
    2 very interesting metrics have been defined using EBITDA are:
    Measure of Debt’s payback period = Debt/EBITDA
    Interest coverage ratio = EBITDA /Interest Expense
    Read in Kannada:
    http://somanagement.blogspot.com/2011/10/blog-post.html

  • Finance and Management – 34

    In the last blog, we began looking at the different heads in the PnL account. In today’s blog we continue this attempt.
    Continuing from the way we could deduce what would be the operating income; how this income is generate directly from the operations of the company. But the cash put by the companies into the bank also generates interest. This needs to be captured as well – this is indicated by the title “Other Incomes“; in addition to this, when a onetime sale of some of the assets is done; this wouldn’t be capture anywhere else; this is classified into the title – “Extraordinary Income“.
    At this point we have all the income that the company has earned; this is called: “Earnings before Interest and Taxes” and has an acronym – “EBIT“. Clearly the names comes as we have not subtracted the interest and taxes that the company needs to pay.
    When the interest amount that is to be paid on borrowed amount is deducted from this earning, we get the Net profit before tax – NPBT, and once Tax is deducted we call it Net profit after tax – NPAT.
    The amount that is remaining is used partially to pay the dividends; if it was approved in the shareholder’s meeting else the remaining amount is all classified into the Retained Earnings head.
    Read in Kannada:
    http://somanagement.blogspot.com/2011/09/blog-post_9976.html

  • Finance and Management – 33

    In the last blog, we looked at why a corporate would be asked to pay taxes. In today’s blog let’s look at the P&L shown in this link a bit more closely and understand the way it is constructed.
    Simply put, Profit is defined as selling price – cost price. Now for a company, the revenue is generally got when its products/services are sold out. This is indicated as the title Sales. To get each of these products or services out, we would have spent a particular amount and this is indicated by the title, Cost of Goods Sold (COGS). So, profit definition would be re-written as

    Profit = Sales – COGS
    Now at this point, we still haven’t considered some of the concepts we learnt like – depreciation, amortization and taxes. So we cannot call this profit as the final profit we instead call in “Gross Profit“.
    Companies indulge in a lot of R&D activities, and these activities don’t necessarily get over in a year – a certain amount is spent on it each year. So this is indicated by the title – “General Operating Expenses (R&D)” in addition, for the patents and fixed assets, it is mandatory to have an amount paid of every year so we have to subtract these too from the profit. Once we remove these General operations expenditure and amortization we get what we call the “Operating Income”. Though they are not directly related to the product or service sold, these expenses are to be considered to really look at what would come to the company’s kitty – hence are called “Operating Income“.
    Now covering the remaining concepts on the P&L account would become an over doze today, hence we will leave the remaining for tomorrow’s blog.
    Read in Kannada:
    http://somanagement.blogspot.com/2011/09/blog-post_30.html

  • Finance and Management – 32

    In the last blog, we looked at the concept of amortization. In today’s blog we look at the reason for taxes to be charged to a corporate.
    Any company operates within the jurisdiction of a particular country or a state. The policies of a government aid creating an ecosystem that allows the companies could use to their advantage. Government in many ways is the largest entrepreneur who takes enormous risk and tries to drive other people into action. It does this through their policies and gives a binding through the legislation. The judiciary ensure that the just and fairness are the bedrock of country’s progress. We shall deal further on various laws that have an implication on business at a later stage.
    The government for all these activities and more requires the funding, and a portion of this is taken from the corporate and individuals in the form of tax. The profit and loss account of companies shows this component of tax begin deducted from the profit earned.
    This tax earned by the government is again ploughed back to the system by which it (government) can take up activities to encourage greater prosperity
    Read in Kannada:
    http://somanagement.blogspot.com/2011/09/blog-post_4619.html

  • Finance and Management – 31

    In the earlier blog, we learnt about depreciation. In today’s blog we would look at the concept of “amortization“.
    While we discussed depreciation and explained it in the context of a tangible asset, we also mentioned that the concept could also be used with intangible assets. When the concept is extended to an intangible asset say a trademark, or patent, or copyright that the company owns – we call it amortization.
    An example could make this clearer – Let us say the company ABC Pvt Ltd spent Rs 3,00,000/- to buy a calibration device, which has a patent protection for 15 years; this means that the every year Rs 20,000/- would be recorded as amortization expense.
    This repayment is generally over multiple cash-flows installments and is represented by an amortization schedule.
    Read in Kannada:
    http://somanagement.blogspot.com/2011/09/depreciation.html

  • Finance and Management – 30

    In the earlier blog, we looked at the relation between Balance Sheet and the PnL account. In the next few blogs we look at the various items within a PnL account. Today we begin with the term “Depreciation“.
    It should be quite intuitive that when we buy an item (let’s assume a computer table) by paying cash we have an equation,
    Price of Item = Cash Paid
    Now, when we put it up in the balance sheet today – we would add a value equal to the price of the computer table on the assets side, and reduce the cash head by the amount equal to the cost of the computer table. Now, this is what we have when we have made the purchase say today; but what would the scene be after let’s say 1 year! Well this is a dicey question, since in the one year there are many things that could have happened with the computer table (lets worry only about the table now not the cash side of it – makes life simpler. The cash has now manifested as the asset and let’s not worry about the cash spent).
    In the one year since purchase, the table could have broken or I could have disposed it off as junk, or I would have sold it or it might just lay there in the office with some usage by various people in the office. In any case the value of the computer table wouldn’t be the same as the one it was purchased it; it would be lower than that. As the years of its usage grow, it resale value let’s say keeps reducing. This is factored in even in the accounting world and we call the process of doing this as “Depreciation”
    So, we could define “Depreciation” A method of allocating the cost of a tangible asset over its useful life. Businesses depreciate long-term assets for both tax and accounting purposes.
    One thing we need to remember is that not every asset would have the same rate of depreciation; it would vary (and would be defined by the accounting policy of the company). There are also some assets whose value increases with time, these needs to be addressed differently.
    Read in Kannada:
    http://somanagement.blogspot.com/2011/09/blog-post_1401.html

  • ಹಣಕಾಸು ವ್ಯವಸ್ಥೆ ಮತ್ತು ನಿರ್ವಹಣೆ – ೨೭

    ಈ ಹಿಂದಿನ ಅಂಕಣದಲ್ಲಿ ನಾವು Debenture Redemption Reserve ನ ಬಗ್ಗೆ ವಿಸ್ತಾರವಾಗಿ ತಿಳಿದೆವು. ಇಂದು ನಾವು Investment allowance reserve ಬಗ್ಗೆ ತಿಳಿಯೋಣ.

    Investment allowance reserve ಈಗ ಚಾಲ್ತಿಯಲ್ಲಿಲ್ಲದ ಒಂದು ರಿಸರ್ವ್. ಆದಾಯ ತೆರಿಗೆಯ ಆಕ್ಟ್ ಪ್ರಕಾರ ಕಂಪನಿಗಳಿಗೆ ಒಂದು ವಿಶೇಷವಾದ ಭತ್ಯವನ್ನು ಕಂಪನಿಯು Plant and Machinaries ಮೇಲೆ ಬಂಡವಾಳ ಹೂಡಲು ಅವಕಾಶ ಕಲ್ಪಿಸಿದೆ. ಈ ಭತ್ಯಕ್ಕೆ ಇರುವ ನಿರ್ಬಂಧವೇನೆಂದರೆ ಈ ಭಟ್ಯದ ಹಣದ ನಿರ್ಧಿಷ್ಟ ಶೇಕಡಾ ದಷ್ಟು ಹಣವನ್ನು ಒಂದು ರಿಸರ್ವ್ “Investment Allowance Reserve” ಗೆ ವರ್ಗಾಯಿಸಬೇಕು. ಈ ಖಾತೆಯಲ್ಲಿನ ಉಳಿದ ಹಣವನ್ನು ಶೇರ್ ದರಾರಿಗೆ ಹೂಡಿದ ೮ ವರ್ಷಗಳ ವರೆಗೆ ಡಿವಿಡೆಂಡ್ ನೀಡಲು ಅಥವಾ ಬೋನಸ್ ಶೇರ್ ಕೊಡಲು ಆಗುವುದಿಲ್ಲ.

    ಈ ಭತ್ಯೆಯನ್ನು ೨೦೦೧-೦೨ ರಿಂದ ಆದಾಯ ತೆರಿಗೆಯ ಆಕ್ಟ್ ನಿಂದ ತೆಗೆಯಲಾಗಿದೆ.

    ಆಂಗ್ಲ ಅಂಕಣ:

    http://somanagement.blogspot.com/2011/08/finance-and-management-27.html

  • Plunnge – Rakesh Godwani

    When I completed reading my last book – Simply fly; I was looking for something light and quick read. I had borrowed this book – Plunnge by a collegue of mine at IIMB – Rakesh Godwani, so began reading this.
    The long weekend was an ideal time to start off a this book and I must admit, its a pretty engaging read! I was quick to acknowlege it to him on his Facebook wall saying I was enjoying the read.
    Given that the book as a set of 15 short real life stories about people who dared to “reinvent” themselves by taking the “plunge”. The short crisp stories with a learning that Rakesh has picked up was very usefull to reitererate the lessons learnt – a good style!
    I also see that Rakesh has made an attempt to creating a theory here, and has used the different stories to evolve the theory. This differentiates it from just a lot of stories of people who took a differnt path or plunge; there are numerous lessons that Rakesh has put across in the book, and I wouldnt break the suspense out here.
    For a first book, I must admit this is a great start – waiting for more Rakesh. When is the next one coming up?
    Go grab this book and read it!

  • ಹಣಕಾಸು ವ್ಯವಸ್ಥೆ ಮತ್ತು ನಿರ್ವಹಣೆ – ೨೬

    ಈ ಹಿಂದಿನ ಅಂಕಣದಲ್ಲಿ ನಾವು ಶೇರ್ ಪ್ರೀಮಿಯಂ ಬಗ್ಗೆ ಕಲಿತೆವು. ಇಂದು ನಾವು ಇನ್ನೊಂದು ಬಗೆಯ ರೆಸೆರ್ವ್ ಅದೇ The Debenture Redemption Reserve ಬಗ್ಗೆ ತಿಳಿಯೋಣ.

    debenture ಒಪ್ಪಂದಗಳು ಸಾಮಾನ್ಯವಾಗಿ ಕಂಪನಿಗಳು ವಾರ್ಷಿಕ ಮುಳುಗಡೆಯ ಧನದ(sinking fund) ಸಮಪಾಲನ್ನು ಒಂದು Debenture Redemption Reserve ಗೆ ಉಳಿದ ಆದಾಯದಿಂದ (retained earnings) ವರ್ಗಾಯಿಸಬೇಕೆಂದಿರುತ್ತದೆ. ಈ ರೀತಿಯ ವರ್ಗಾವಣೆ ಮುಳುಗಡೆಯ ಧನರಾಶಿ ಇಲ್ಲದಿದ್ದರೂ ಮಾಡಬೇಕು. ಈ ರೆಸೆರ್ವ್ ನ್ನು ನಿಜವಾಗಿ ಕಂಪನಿಯು ಡಿವಿಡೆಂಡ್ ಹಂಚುವಾಗ ಕಂಪನಿಯ ಆಸ್ತಿಯು ಕಡಿಮೆ ಯಾಗಿ ಹಣ ಕೊಡಬೇಕಾದವರಿಗೆ (creditors) ಕೊರತೆಯಾಗಬಾರದೆಂದು ವರ್ಗಾವಣೆಯ ಮೂಲಕ ಆಯೋಜಿಸುವರು.

    ಒಮ್ಮೆ debentures ಗಳನ್ನ ಪಾವತಿಸಿದ ನಂತರ ಉಳಿದ Debenture Redemption Reserve a/c ನ್ನು retained earnings ಗೆ ವರ್ಗಾಯಿಸುವರು. ಈ ಉಳಿದ Debenture Redemption Reserve a/c debentures ಗಳನ್ನ ಬಿಡುಗಡೆ ಮಾಡುವ ವರೆಗೆ ಇದನ್ನ ಬೋನಸ್ ಶೇರ್ ಆಗಿ ಬಿದುವಗೆ ಮಾಡಲು ಸಾಧ್ಯವಿಲ್ಲ.

    ಆಂಗ್ಲ ಅಂಕಣ:

    http://somanagement.blogspot.com/2011/08/finance-and-management-26_11.html

  • ಹಣಕಾಸು ವ್ಯವಸ್ಥೆ ಮತ್ತು ನಿರ್ವಹಣೆ – ೨೫

    ಈ ಹಿಂದಿನ ಅಂಕಣದಲ್ಲಿ ನಾವು ಬೇರೆ ಬೇರೆ ರೀತಿಯ ರೆಸೆರ್ವ್ ಗಳ ಬಗ್ಗೆ ನೋಡಿದೆವು. ಇವತ್ತಿನ ಅಂಕಣದಲ್ಲಿ ನಾವು ಶೇರ್ ಪ್ರೀಮಿಯಂ (ರಕ್ಷಣಾ ಪ್ರೀಮಿಯಂ) ಬಗ್ಗೆ ತಿಳಿಯೋಣ.

    ಶೇರ್ ಪ್ರೀಮಿಯಂ ಎಂಬ ಅಕೌಂಟ್ ನ್ನು ಕಂಪನಿಯ ಶೇರ್ ನ ಮುಖ ಬೆಲೆ ಮತ್ತು ಕಂಪನಿಗೆ ನಿಜವಾಗಿ ಶೇರ್ ನ ಹೊಸ ಬಿಡುಗಡೆಯಿಂದ ಲಭಿಸುವ ಮೌಲ್ಯದ ನಡುವಿನ ವ್ಯತ್ಯಾಸವನ್ನು ಸಮದೂಗಿಸಲು ಇರುವುದು.

    ಒಂದು ಉದಾಹರಣೆಯಿಂದ ಇದು ಅರಿವಾಗುವುದು. ಒಂದು ಕಂಪನಿಯು ೧೦/- ಮುಖ ಬೆಲೆಯ ಶೇರ್ ನ್ನು ಬಿಡುಗಡೆ ಮಾಡಿತೆಂದು ಅಂದುಕೊಳ್ಳೋಣ, ಬದಲಾಗಿ ಕಂಪನಿಯು ೧೫/- ಪ್ರತಿ ಶೇರ್ ಪಡೆಯಿತು ಎಂದು ಅಂದುಕೊಳ್ಳೋಣ. ಆಗ ಕಂಪನಿಯು ೧೫,೦೦೦/- ಇಕ್ವಿಟಿ ಕ್ಯಾಪಿಟಲ್ ಆಗಿ ಪಡೆಯುತ್ತದೆ ಮತ್ತು ಇದರ ೧೦,೦೦೦/- ಶೇರ್ ಕ್ಯಾಪಿಟಲ್ ಆಗುತ್ತದೆ. ಉಳಿದ ಹೆಚ್ಚಿನ ಕ್ಯಾಪಿಟಲ್ ನಿಜವಾಗಲು ಶೇರ್ ಕ್ಯಾಪಿಟಲ್ ಗೆ ಸಮನಾದ ಕಂಪನಿಯ ಮಾಲೀಕತ್ವಕ್ಕೆ ಮರು ಪಾವತಿಯದದ್ದು. ಇದನ್ನು ಬ್ಯಾಲೆನ್ಸ್ ಶೀಟ್ ನಲ್ಲಿ ಶೇರ್ ಪ್ರೀಮಿಯಂ ಅಕೌಂಟ್ ನಲ್ಲಿ ತೋರಿಸುವರು.

    ಇದು ಶೇರ್ ಕ್ಯಾಪಿಟಲ್ ಗಿಂತ ಅಧಿಕವಾಗಿ ಲಭಿಸಿದ್ದರಿಂದ ಇದನ್ನು ಶೇರ್ ದಾರರಿಗೆ ಹಿಂದುರಿಗಿಸಲಾರದು. ಅದನ್ನು ಕೆಳಗಿನ ಉದ್ದೇಶಗಳಿಗೆ ಉಪಯೋಗಿಸಬಹುದು.

    ೧. ಪೂರ್ತಿಯಾಗಿ ಪಾವತಿಯಾದ ಬೋನಸ್ ಶೇರ್ ಬಿಡುಗಡೆ ಮಾಡಲು.

    ೨. ಕಂಪನಿಯ ಆರಂಭಿಕ ವೆಚ್ಚಗಳನ್ನು ಸಮದೂಗಿಸಿ ತೆಗೆಯಲು.

    ೩. ಶೇರ್ ಬಿಡುಗಡೆ ಮಾಡಲು ಅಥವಾ ಕಂಪನಿಯ debentures ಗಳಿಗೆ ನೀಡುವ ಕಮೀಶನ್ ಅಥವಾ ಡಿಸ್ಕೌಂಟ್ ಗಳ ವೆಚ್ಚವನ್ನು ಸಮದೂಗಿಸಿ ತೆಗೆಯಲು.

    ೪. ಬಿಡುಗಡೆ ಗೊಳಿಸಬಹುದಾದ ಶೇರ್ ಕಂಪನಿಯ debentures ಗಳಿಗೆ ನೀಡುವ ಹೆಚ್ಚುವರಿ ಹಣ ನೀಡಲು