FINANCE BASIC FACTS

Sources of funds Internal Retained profits Sale of assets Using trade credit Investing surplus cash Reducing inventory External Personal savings Borrowing from family / friends Issuing shares / bonds Loans / mortgages Leasing equipment Bank overdraft Factoring Grants

Uses of funds Capital expenditure Revenue expenditure

FINANCIAL STATEMENTS What are the main types of financial statements? Balance sheet Profit and loss account / Income statement Cash flow statement What does the trading account show? Gross profit

Who reads financial accounts? Shareholders Unions Other firms Stock exchange speculators Creditors Financial journalists City analysts

What do financial accounts show? Gross profit Dividends Current assets Expenses Net profit Capital employed Leverage Amount of cash at the end of the period Trading account PLA Balance sheet PLA Balance sheet Cash flow statement

BALANCE SHEET A snapshot of a company

Balance sheet Assets Liabilities Shareholders` funds

What does the BS show? Solvency / Liquidity Working capital =  Current assets – Current liabilities Current ratio =  Current assets / Current liabilities Acid test =  (Current assets – Inventory) / Current liabilities *********************************************************** Leverage =  Loan capital / Own capital

Profit and loss account net profit and expenses

Profit and Loss Account What is the main information provided by a profit and loss account? What is the difference between gross and net profit?

COSTS Fixed vs variable Direct vs indirect (overheads) Average vs marginal Standard vs actual

BREAK-EVEN ANALYSIS Variable cost * Sales Volume + Fixed Costs = Total costs Sales price – Variable cost = Contribution Total fixed costs / Contribution = BREAK EVEN POINT

What does the PLA show? PROFITABILITY Gross profit margin = Gross profit / Turnover Net profit margin = Net profit / Turnover Return on Capital Employed = Net profit / Capital Employed FROM BALANCE SHEET

Case study There are two gift shops. One has sales of $ with a net profit of $ The other is much smaller, with a turnover of $ and net profit of $ Which is the more profitable?

OTHER RATIOS EFFICIENCY Stock Turnover = COGS / Average Inventory Debtors’ collection period = ( Average Debtors / Turnover ) * 365 Creditors’ collection period = ( Average Creditors / Turnover ) * 365

CASH FLOW STATEMENT Why do we need a cash flow statement? Give examples of cash inflows and outflows. Does cash equal profit?

BUDGETING AND FORECASTING What is a budget? What is the difference between a budget and a forecast? Why do companies need budgets? What can be budgeted? Sales Production Stock Fixed assets Final accounts Cash flow