1. Nursery Management Understanding and Managing Finance Session 2

2. Financial Statements  Apart from day-to-day bookkeeping, there are three different types of ‘official’ financial statements which are used by an organisation:  The Cash-flow Statement is designed to answer the question “What happened to all the money?”  The Profit & Loss Account is designed to answer the question “How much money did we make (or lose)?”  The Balance Sheet is designed to answer the question “Do the books balance?’

3. Financial Statements StatementPurposeTerms used Balance Sheet To assess the financial position of the business at one moment in time Assets, claims, liabilities, capital, retained profit etc. Profit & Loss Account To measure & report on how much wealth the business has created over a period. Sales, Turnover, Cost of Sales, Operating Costs, Overheads, net profit etc. Cash Flow Statement A summary of all cash transactions over a period Cash inflow, Taxation, expenditure, dividends, net increase in cash

4. Net Cash-Flow from Operating Activities300,000 Returns from investment and servicing of finance100,000- Taxation 30,000- Capital Expenditure150,000- ----------- Subtotal 20,000 Equity Dividends paid 30,000- ----------- Subtotal 10,000- Management of liquid resource - disposal of investments 10,000+ Financing - additional long-term loan 50,000+ ----------- = Increase or Decrease in Cash over Period 50,000+ EXAMPLE OF A CASH FLOW STATEMENT

5. Turnover (Sales) (Income)£ 100,000 Cost of Sales (Direct Costs) Materials£10,000 Transport£ 5,000 Labour£15,000 Total Cost of Sales £ 30,00030% Gross Profit (Gross Margin)£ 70,00070% Overheads (Indirect Costs) Administrative salaries£18,000 Advertising£ 5,000 Rent & Rates£ 4,000 Total Overheads £ 27,00027% Operating Profit (Net Margin)£ 43,00043% Interest on loans£ 3,000 Profit before tax£ 40,00040% Corporation tax due£10,000 Profit after tax & interest£ 30,00030% Dividends payable£22,000 Retained Profit (Earned Surplus) £ 8,0008% EXAMPLE OF A PROFIT & LOSS ACCOUNT

6. ASSETS CLAIMS Fixed AssetsCapital & Reserves Land£ 120,000Share capital £ 100,000 Buildings£ 150,000Retained profit£ 120,000 Fix & Fit£ 75,000 Total£ 220,000 Total£ 345,000L/T Liabilities Loan£ 250,000 Current AssetsTotal£ 250,000 Stock£ 55,000Current Liabilities Debtors£ 75,000Creditors£ 22,000 Bank£ 25,000Tax & VAT£ 8,000 Total£ 155,000Total£ 30,000________£ 500,000 EXAMPLE OF A BALANCE SHEET

7. Activity 1 On which of the three main financial statements would you find:  The assets of the Business  The costs of running the Business  The profit made by the business this year  The profit retained by the company from previous years  The amount the company has borrowed  The amount paid out in dividends  The interest paid on loans this year  The amount of cash currently held in the Bank  The amount of surplus cash generated this year

8. Activity 1 - Solution  The assets of the Business Balance Sheet  The costs of running the Business Profit & Loss  The profit made by the business this year Profit & Loss  The profit previously retained by the company Balance Sheet  The amount the company has borrowed Balance Sheet  The amount paid out in dividends Cash Flow  The interest paid on loans this year Profit & Loss  The amount of cash currently held in the Bank Balance Sheet  The surplus Cash generated this year Cash Flow

9. Financial Statements - Example  You decide to run a stall at a car boot sale to earn some extra money for your mums’ and tots’ group. You borrow £50 from a friend and you buy 200 pens at 20p per pen. It costs you £5 entry fee, and on the first day you sell 150 of your pens at 50p each.

10. Financial Statements – Activity 2 You decide to run a stall at a car boot sale to earn some extra money for your mums’ and tots’ group. You borrow £50 from a friend and you buy 200 pens at 20p per pen. It costs you £5 entry fee, and on the first day you sell 150 of your pens at 50p each Some Questions  How much did you start with?  How much did you borrow?  How much did you pay back?  How much did you spend?  How much were your takings?  How much money have you now?  What is the value of any unsold stock?

11. Financial Statements Activity 2- Solution  You decide to run a stall at a car boot sale to earn some extra money for your mums’ and tots’ group. You borrow £50 from a friend and you buy 200 pens at 20p per pen. It costs you £5 entry fee, and on the first day you sell 150 of your pens at 50p each. Some Questions  How much did you start with? Nothing  How much did you borrow? £50  How much did you pay back? Nothing  How much did you spend? £45 (£40 Pens + £5 entry)  How much were your takings? £75  How much money have you now? £80  What is the value of any unsold stock? £10 (50 x 20p)

12. Cash Flow Example  You decide to run a stall at a car boot sale to earn some extra money for your mums’ and tots’ group. You borrow £50 from a friend and you buy 200 pens at 20p per pen. It costs you £5 entry fee, and on the first day you sell 150 of your pens at 50p each.  Produce a statement showing accounting for the Cash which your business has received and has been spent. You should start with an opening balance (what you had at the beginning of the day), record each item of cash as it comes in and goes out, and end with a closing balance (the cash you have at the end of the day).

13. What happened to all the money? Opening Balance: £ 0 Loan from friend:£ 50+ Goods purchased:£ 40- (200 x 20p) Entry Fee:£ 5- Cash received:£ 75+ (150 x 50p) Closing Balance:£ 80 This is an example of a Cash-flow Statement

14. Financial Statements – Activity 3  On the second car boot sale that you attend, you purchase another 150 pens at 20p per pen. There is another £5 entry fee, and you sell 100 of your pens at 50p each. You decide that you will pay back £30 of the original £50 that you borrowed.  Construct a cash flow statement for the second day.

15. Activity 3- Solution Cash Flow Statement Day 2 Opening Balance: £ 80 Loan from friend:£ 30- (paid back) Goods purchased:£ 30- (150 x 20p) Entry Fee:£ 5- Cash received:£ 50+ (100 x 50p) Closing Balance:£ 65

16. Profit & Loss Example You decide to run a stall at a car boot sale to earn some extra money for your mums’ and tots’ group. You borrow £50 from a friend and you buy 200 pens at 20p per pen. It costs you £5 entry fee, and on the first day you sell 150 of your pens at 50p each  Produce a statement showing accounting for any Profit your business has made. You should start with the takings, and subtract from this any expenses (outgoings). The final figure should give you the profit that has been made in the course of the day’s tradings.

17. How much money did we gain or lose? Sales: £ 75 (150 x 50p) Cost of Sales:-£ 30 (150 x 20p) Entry Fee:-£ 5 Net Profit: £ 40 This is an example of a Profit & Loss Account Notice here that we only account for what the sales have originally cost us.

18. Financial Statements – Activity 4  On the second car boot sale that you attend, you purchase another 150 pens at 20p per pen. There is another £5 entry fee, and you sell 100 of your pens at 50p each. You decide that you will pay back £30 of the original £50 that you borrowed.  Construct a Profit & Loss Account for the second day.

19. Activity 4 -Solution Profit & Loss Account – Day 2 Sales: £ 50 (100 x 50p) Cost of Sales:-£ 20 (100 x 20p) Entry Fee:-£ 5 Net Profit: £ 25

20. Balance Sheet Example On the second car boot sale that you attend, you purchase another 150 pens at 20p per pen. There is another £5 entry fee, and you sell 100 of your pens at 50p each. You decide that you will pay back £30 of the original £50 that you borrowed  Produce a statement of two halves, one side of which shows what the business owns (money, unsold stock etc.), and the other side showing what the business owes. You should try to ensure that you Balance one side with the other. The left hand side should show your assets, (what is owned); The right hand side should show the liabilities (what is owed). (NB Any profit made by your business is owed to you as a person!).

21. Do the Books Balance? Assets: Cash: £ 80 Stock: £ 10 (50 x 20p) Total: £ 90 This is an example of a Balance Sheet Liabilities (Claims): Loan outstanding: £ 50 Retained profits: £ 40 Total: £ 90

22. Financial Statements – Activity 5 On the second car boot sale that you attend, you purchase another 150 pens at 20p per pen. There is another £5 entry fee, and you sell 100 of your pens at 50p each. You decide that you will pay back £30 of the original £50 that you borrowed.  Construct a Balance Sheet for the second day.

23. Activity 5- Solution Balance Sheet Day 2 Assets: Cash: £ 65 Stock: £ 20 (100 x 20p) Total: £ 85 Can you see where all the figures are from? Liabilities (Claims): Loan outstanding: £ 20 Retained profits: £ 65 Total: £ 85

24. Balance Sheet Day 2 Assets: Cash: £ 65 Stock: £ 20 (100 x 20p) Total: £ 85 Liabilities (Claims): Loan outstanding: £ 20 Retained profits: £ 65 Total: £ 85 CASH: Final Line on the Cash Flow Statement CASH: Final Line on the Cash Flow Statement ASSETS: Opening Stock: 50 pens Stock Purchased+ 150 pens Stock Sold - 100 pens Closing Stock: 100 pens ASSETS: Opening Stock: 50 pens Stock Purchased+ 150 pens Stock Sold - 100 pens Closing Stock: 100 pens

25. Balance Sheet Day 2 Assets: Cash: £ 65 Stock: £ 20 (100 x 20p) Total: £ 85 Liabilities (Claims): Loan outstanding: £ 20 Retained profits: £ 65 Total: £ 85 LOAN: Original Loan £50 Paid back-£30 Amont Owing £20 LOAN: Original Loan £50 Paid back-£30 Amont Owing £20 PROFITS: Previous £40 Today £25 (see P & L Account) Total £ 65 PROFITS: Previous £40 Today £25 (see P & L Account) Total £ 65

26. Financial Statements – Some Terms There is a difference between cash and profit.  Cash is simply the money which flows into and out of the business  Profit is the amount that the business earns for itself at the end of some period of time by carrying out its normal trading activities.

27. Financial Statements – Some Terms Assets and claims (or assets and liabilities)  Assets are what the business owns. This can be anything: money in the bank, nursery equipment, stock held for example food and art materials buildings, equipment etc. and also any money owed to a crèche for example by parents as fees.  Claims are what the business owes. This can be bank loans, unpaid bills, profits which can be claimed by the owner or shareholders

28. Financial Statements – Some Terms Businesses usually buy things on credit (as many people do using a credit card), then pay later.  Creditors are the people you owe money to. Note that these are part of the claims on your business.  Debtors are the people who owe you money. Note that these are part of the assets of your business