1. Understanding and Managing Finance
Lecture 1

2. What do we mean by Finance & Accounting?
Finance is:
Concerned with the way in which funds used in a business are raised and invested
Accounting is:
The process of identifying, measuring and communicating financial (and other) information so as to permit informed judgements and decisions to be made by the stakeholders in a business.

3. The Role of Accounting, Finance and Budgeting
There are four separate, but linked functions:
Reporting
providing information about what we are doing
Decision-Making
working out how to do things better
Controlling
making sure we are doing what we said we would do
Planning
working out in detail how we should do things

4. The Role of Finance and Accounting
PLANNING
Producing forecasts and budgets
Ensuring that the organisation will have enough cash to survive
Allocating money in line with the mission and objectives of the organisation
Setting targets for the organisation and for each department in the organisation
Providing each department with the money it needs to operate

5. The Role of Finance and Accounting
CONTROLLING
Monitoring income - checking that each department achieves its targets
Monitoring expenditure - checking that departments do not over-spend
Monitoring the overall position - checking that the overall organisation is profitable and does not run out of cash

6. The Role of Finance and Accounting
REPORTING
Classification of transactions into different categories
Summarising for different users
Reporting on performance - internally - who brought in how much income, who spent what, how is the organisation performing
Reporting externally - to shareholders, tax office, VAT office, Companies House, non-executive Directors

7. The Role of Finance and Accounting
DECISION-MAKING
Helping the company to achieve its financial objectives - e.g. increasing wealth of owners
Helping the company and its staff to make decisions about which projects to invest in
Helping the company to determine where to get its money from
Helping the company to decide what to do with its money

8. Activity 1.1
Question
What is the normal order in which the four functions occur?

9. Stakeholders and their Needs
For Accounting information to be useful, it must be put in a form which is relevant to the needs of the user.
The next slide identifies 10 possible stakeholders in a business. Each will have their own need in terms of information on which they will base their decisions

10. Stakeholders and their Needs
CUSTOMERS Continuity of supply
Ability to meet needs
COMPETITORS Threats to sales & profits
Provide comparisons
EMPLOYEES Job security
Remuneration comparison
GOVERNMENT PAYE, Corporation Tax, VAT
Statutory legislation
COMMUNITY Environment
Contributions
Jobs

11. Stakeholders and their Needs
SUPPLIERS Ability to Pay, Credit risk
LENDERS Ability to meet obligations, Security of investments
Credit risk
Financial structure
MANAGERS Remuneration
Company Performance & Planning
SHAREHOLDERS Organisational performance
Value of shares; Return v risk
Management performance
FINANCIAL ANALYSTS Company Performance
Plans & Objectives

12. Discuss the following:
Activity 1.2
Discuss the following:
Why should a non-accountant study accounting?
What sources of information other than accounts might users employ to gain an impression of the financial position and performance of a business?

13. The Different Types of Accounting
There are two main types of accounting
Financial Accounting
This is the main ‘public’ or external financial scrutiny undergone by an organisation in order to demonstrate its effectiveness.
Management Accounting
This is the internal financial scrutiny used to steer the organisation towards the achievement of its mission.

14. Financial Accounting & Management Accounting
Seeks to meet needs of other stakeholders
General purpose, summary reports with little detail
Subject to regulations and standardised format
Tends to be annual or six-monthly, backward-looking
Audited, objective measurement of financial position
May be certified by auditor
Management Accounting
Seeks to meet needs of managers
Detailed and focused on specific needs
Does not require a specific or standardised format
Produced as frequently as required, with forecasts
May incorporate information which is less objective or verifiable

15. Management Accounting
Key Topics
Financial Accounting
Statutory requirements
Financial statements
Cash-flow statements
Accounting standards
Interpretation of accounts
Annual reports
Management Accounting
Costing
Cost-volume-profit analysis
Pricing
Budgeting
Investment Analysis
Sources of finance

16. Types of Organisation Sole Trader Partnership Limited Company (Ltd)
Public Limited Company (PLC)
Voluntary organisations
Central and local government
Quasi-governmental bodies

17. “Sole Trader”
Owned and controlled by one person (though more may work in it)
Advantages: Simple, flexible, full control and full retention of profits
Disadvantages: Unlimited liability, Difficult to raise capital, limits growth
Requirements: Licence (if appropriate),
VAT registration (if appropriate)
Accounts (for tax reasons)
Health & Safety regulations
Employment regulations

18. “Partnership” Similar to Sole Trader but for more than one person
Governed by formal or informal partnership agreement (“Deed of partnership”) or subject to Partnership Act 1890
Shared responsibilities
Shared finance and profits
“Jointly and severally liable”
Liability of “sleeping partners” can be limited

19. Limited Company (Ltd) Set up to encourage enterprise
Therefore subject to stricter regulatory framework
Owned by shareholders, run by Directors
Separate legal entity to those who own it or run it
Limited liability (may be limited by guarantee)
Pays Corporation Tax on profits
Profits distributed to shareholders through dividends
Registers with Companies House
Governed by Articles/Memorandum of Association

20. Limited Company (Ltd) Advantages: Protection of limited liability
Continuity through separate identity
Easier to raise finance
Credibility
£100 to start up
Disadvantages: Legal formalities & costs
Lack of privacy of accounts
Accountability to shareholders
Conflict between owners & directors

21. Public Limited Company (PLC)
Similar to Limited Company but shares traded publicly through Stock Exchange
Must adhere to specific legislation (e.g. 6 monthly accounts, qualified accountant as Company Secretary)
Method of raising finance (e.g. through sale of shares)
Original owners can realise some of the value of their shares

22. Statutory Requirements for Incorporated Companies
Annual report including:
Annual return
Profit and Loss Account, Balance Sheet &
Cash-flow Statement
Notes to Accounts
Directors report
Auditors’ report (if appropriate)
Information required is dependent on size of the Company (small, medium, or large)

23. Voluntary Organisation - Unincorporated
Collection of individuals with common aim
May have a membership structure and constitution
No separate legal status - cannot incur debts or be sued
Individuals may therefore be jointly liable (but may take out liability insurance)
A trust may be suitable for organisations with charitable aims
A trust is normally governed by a trust deed - trustees manage the assets for the benefit of a specific purpose

24. Voluntary Organisation - Incorporated
Company limited by guarantee or Industrial and provident society
Can hold property, enter into contracts and employ staff in own name
Limits personal liability (to the guarantee) assuming no breaches of trust
Has to comply with law and legislation and will incur additional costs

25. Charitable Status
A group MAY register as a charity if its aims and objectives are “charitable” according to the Charity Commissioners’ definition - i.e. they fall into one of the 4 “heads of charity”:
- relief of the poor, the handicapped & the aged
- the advancement of religion
- the advancement of education
- other purposes beneficial to the community
Trustees may not benefit from the organisation and beneficiaries cannot be those who give (i.e. self-help groups are not charitable)

26. Charitable Status
A group MUST register if its aims and objectives are “charitable” according to the Charity Commissioners’ definition AND:
Its income exceeds £1,000
It uses or occupies land or buildings
It has a permanent endowment
There is NO sanction for not registering
Charity Commission decides if aims are charitable

27. Charitable Status Disadvantages
Political and campaigning activities are limited
Trading activities are limited
Must comply with charity law - submitting annual accounts; stating charitable status of official documents
Monitored by Charity Commission
Application process (though now simplified including model governing documents)
Advantages
Financial - including exemption from most forms of direct taxation
Status/credibility of charity registration number

28. Discuss the following:
Activity 1.4
Discuss the following:
What are the main advantages and disadvantages which should be considered when deciding between becoming a sole trader or a partnership business?
What are the main advantages and disadvantages which should be considered when whether or not to become a limited liability company?
What are the main advantages and disadvantages when deciding whether or not to apply for charitable status?

29. Seminar One Case Studies
The two case studies which follow ask you to reflect on what you have learnt from the presentation and your reading of the set text.
They are constructed in such a way that you will need to think of arguments (in a variety of forms: business, managerial, personal and career) as to why accounting might be a “good idea”.
In doing this, you will need to draw on facts as well as opinions.

30. Case Study 1
Clare Wong spends a lot of her time working for a large charity. The charity has grown enormously in recent years, and the trustees have been advised to overhaul their accounting procedures. This would involve its workers (most of whom are voluntary) in more book-keeping, and there is a great deal of resistance to this move. The staff have said that they are there to help the needy, and not to get involved in book-keeping
Prepare some notes that you could use in speaking to the voluntary workers in order to try to persuade them to accept the new proposals.
Dyson (1997) - Accounting for non-Accounting Students.

31. Case Study 2
You are a personnel officer in a manufacturing company, and one of your employees, a young engineering manager has been chosen to attend the local Business School to study for a diploma in management. He is reluctant to sign up for the course because it includes a subject called “Financial Management”. As an engineer, he thinks it will be a waste of time to study such a subject.
Prepare some notes that you could use in speaking to the engineering manager in order to show him the benefits to him of studying financial management.
Dyson (1997) - Accounting for non-Accounting Students.

32. Seminar One - Preparation
Read Chapter 1 - McLaney & Atrill
Revise key concepts:
The role of finance & budgets in the organisation
The differing requirements of stakeholders
Different branches of accounting
Legal and regulatory frameworks
Prepare Case Study 1 and 2 individually, but come with notes for a solution.
N.B. During the seminar, you will be allocated to groups of three or four people and be asked to work on each case study, presenting your solutions to the group.