HIGHER BUSINESS MANAGEMENT Finance

Content Sources of Finance Cash Budgeting  Analysis  Issues & Solutions Final Accounts  Trading Profit & Loss  Balance Sheet  Cash Budget Ratios  Profitability  Liquidity  Efficiency Technology

The Role of Finance Department Finance Control Costs and Expenses Monitor Cash Flow To forecast finance in the future To monitor and analyse performance Provide information for decision- making

Stakeholder Interests Using the following Stakeholders. What might their interests in Financial information be?  Employees  Inland Revenue  Shareholders  Suppliers/Creditors  Lenders e.g. banks

Sources of Finance Sources used at National 5 include Bank Loans, Grants, Hire Purchase, Own Capital… At Higher we need to look at sources used by large organisations.  A grant is more likely to be given to a new small-medium sized business

Sources of Finance Source of Finance DescriptionAdvantagesDisadvantages Issue additional shares Ltd.'s issue extra shares to existing/new shareholders A PLC would do so on the stock market. Large amount of capital made Limited liability Not paid back in the same way as a loan – shareholders receive a dividend Selling price of shares can vary Issues can be expensive Limited to a certain number of shares issued Leasing Renting equipment or premises Saves on expensive purchase (improves cash flow) Equipment can be changed regularly Leasing long-term is more expensive Not owned by the org and not an asset

Sources of Finance Source of Finance DescriptionAdvantagesDisadvantages Venture Capitalist Provide large loans that a bank may feel is too risky They usually own a stake in the company Access to finance for org’s with a poor credit rating Large amounts can be obtained Only used for large sums of money in the long term Expensive Lose some ownership of the org Stock Market Game knox.is/stocktrader

Cash Flow Cash is vital to any organisation. Most organisation want to make a profit, but they also need cash day- to-day to operate.  Profit and cash flow are two different things It is important to monitor cash flow so that a business can meet its financial obligations.

Cash Flow Problems An unhealthy cash flow can be caused by a number of factors:  Too much money tied in stock  Too much time given to customers to pay debts  Not enough money from sales  Too short a credit period from suppliers  Too much drawings/high dividends  Large sums spent on capital items e.g. machinery  Increase in operating expenses Use the internet to find other examples of business failure through poor cash flow.

Cash Flow Solutions Introduce JIT  Save money tied up in stock; stock is only purchased when it is needed Offer time incentive discounts to customers  Encourages customers to pay their bills quickly Increase promotion  Raises awareness of the company and encourage customers to purchase more (special offers). Leads to increased sales and cash flow Sell Fixed Assets  Selling assets no longer used (e.g. vehicle) will generate cash without disrupting operations

Cash Budget A cash budget is prepared to help control cash and future cash flows. This forecasts receipts (money in) and payments (money out). Benefits  Shows if there is a surplus or deficit  Shows if additional finance is required  Highlights when expenses are high so as they can be controlled  Helps make decisions e.g. new product launch  Set targets and measures department performance

Cash Budget Example Page 104 (textbook)  Read through the case study as a class Page 105 (textbook)  Complete the individual activity in your jotter

Final Accounts Organisation must prepare a set of final accounts every year:  Trading, Profit & Loss  Balance Sheet Final accounts provide a summary of different financial transactions over the last 12 months

Trading, Profit & Loss (T,P&L) Summary of the money that has gone in and out of the org over the past year. The Trading account shows:  Gross Profit  The amount of money made from buying and selling (Sales less Cost of Sales) The Profit and Loss account shows:  Net Profit  The final/total profit made after all expenses have been subtracted (Gross Profit less Expenses)

Trading, Profit & Loss Example Page (textbook)  Read through the Example and Case Study as a class Page 110 (textbook)  Complete the individual activity, for the T,P&L account only, in your jotter

Balance Sheet The Balance Sheet shows the value of an org at a particular point in time. It shows its assets (what the org owns) and liabilities (what the org owes)

Balance Sheet ASSETS & LIABILITIES Fixed Assets  Items owned >1 year e.g. Premises Current Assets  Items owned <1 year e.g. Stock Debtors  People who owe the business money Current Liabilities  Short term debts (<1year) Creditors  People we owe money to e.g. suppliers Working Capital  Current assets – Current Liabilities Capital Employed  Fixed Assets + Working Capital (value of the business) FINANCED BY Share Capital  Shows how the business has been financed e.g. shares sold Dividends  Payments to shareholders for having shares ASSETS & LIABILITIES should balance with (be the same as) FINANCED BY

Balance Sheet Example Page (textbook)  Read through the Example and Case Study as a class Page 110 (textbook)  Complete the individual activity, for the Balance Sheet only, in your jotter

Ratios Information from the Final Accounts can be analysed using Ratio Analysis Uses  Compare performance with previous years results  Compare performance with similar organisations  Identify trends and irregularities  Helps decision-making

Ratios Profitability – measures how profitable the org is  Gross Profit %  Net Profit %  Return on Capital Employed (ROCE) Liquidity – how able the org is to pay its short-term debts  Current Ratio  Acid Test Ratio Efficiency – measure of how well the money invested is being used  Stock Turnover Ratio  Return on Capital Employed (ROCE)

Profitability Ratios Gross Profit % - the profit made from buying and selling stock Gross Profit Sales Net Profit % - the profit made once expenses have been deducted Net Profit Sales The ratios show how much profit is made from every £1 of sales x 100

Profitability Ratios Return on Capital Employed (ROCE) – shows the return on the investment made by the owner/shareholder Net Profit Capital Employed x 100

Profitability Ratio Example Page , 117 (textbook)  Read through the Example and Case Study as a class Page 118 (textbook)  Complete the individual activity, for the Profitability ratios only, in your jotter

Liquidity Ratios Current Ratio – how able the org is to pay its short term debts Current Assets Current Liabilities Ideal ratio is 2:1 (twice as many current assets to liabilities)  Lower than 2:1 – might not be able to pay debts  Higher than 2:1 – not using their resources efficiently :1

Liquidity Ratios Acid Test Ratio – ability to pay short term debts without selling stock. Stock can be hard to turn in to cash quickly Current Assets (minus stock) Current Liabilities Ideal ratio is 1:1 – can pay its debts without having to sell stock :1

Liquidity Ratio Example Page , 117 (textbook)  Read through the Example and Case Study as a class Page 118 (textbook)  Complete the individual activity, for the Liquidity ratios only, in your jotter

Efficiency Ratios Stock Turnover Ratio – this measures the length of time stock is held. Cost of Sales Average Stock* * Average stock = closing stock +opening stock / 2 If stock is held for a long time, levels could be too high If stock is held for a short time, levels could be low (JIT) The type of product sold will influence the ratio e.g. Beans vs. Table = ‘times’

Efficiency Ratio Example Page 115, 117 (textbook)  Read through the Example and Case Study as a class Page 118 (textbook)  Complete the individual activity, for the Efficiency ratio only, in your jotter Gill’s Gym & Edward’s Electricals Tasks (server)

Limitations of Ratios The figures are historic and do not show what could happen in the future Comparisons with other org’s are difficult as they have to be the same size and in the same industry External factors are not considered (PESTEC) Internal factors are not all considered e.g. staff morale Stage of the product lifecycle is not considered

Role of Technology Identify types of Technology that can be used by the Finance Department Describe what they would be used for and explain why.