BUSINESS ACCOUNTING U23348/U20431/U21076 LECTURE 1 Introduction to Business Accounting, cash budgets

At the end of this lecture, you should be able to: Explain the purpose of accounting Discuss why non-accountants need to understand accounting Understand the basic terminology of business transactions Prepare a simple cash budget Understand why a cash budget is important

INTRODUCTION Accounting is about the information needed to run a business or organisation. Accountants consider what information is required and then communicate it in a meaningful way to users. Users may be from inside or outside the business. Managers need to make decisions based on accounting information – this must be reliable and sensible. KEY QUESTION - How is the business doing?

EXAMPLE – SMART SPORTS Sam Smart wants to set up a business as a clothing supplier of team sports kits. He is concerned that he does not understand the accounting aspect of the business and wants to learn the basics of accounting, as the business owner. What key decisions will Sam need to make, what accounting information will he need? Cash to start up? Sales forecasts? Costs – any profit (reward for risk)?

EXAMPLE – SMART SPORTS Who else might need accounting information about Sam’s business, and why? Bank Suppliers of goods and services Lenders – if not the bank? Investors – a business partner, other owners?

THE CASH BUDGET Sets out all cash receipts and payments that a business expects to make over a period of time. Will relate to Sam’s business transactions and not his personal expenses. Has Sam got enough cash to start his business? He has to prepare a cash budget to find out. This is a good starting point for a new business.

BASIC PRINCIPLES and TERMS Entity concept - business transactions should be recorded separately from the transactions of the owner – even if the business is not a separate legal entity. Money measurement concept - to be able to record a business transaction, there must be a monetary value attached to it. Capital – amount that the owner invests in a business. Drawings – amounts taken out of a business for the owner’s personal use.

IMPORTANT PARTS OF THE CASH BUDGET Relevant to most businesses! Sales are the income earned from selling goods or services. Purchases are the costs incurred by the business or organisation in buying the goods (or materials or parts) that it plans to sell to its customers. There may be a manufacturing or conversion cost. Expenses are costs incurred by the business in order to enable it to operate.

EXAMPLE – SMART SPORTS CASH BUDGET Sam plans to invest his savings of £10,000 and to use his garage initially as his office and to store his purchases. He has estimated his spending. Prepare the cash budget for Sam’s first three months of trading from January to March 2015, to help Sam. Sam’s CAPITAL is £10,000

EXAMPLE – SMART SPORTS CASH BUDGET Jan 2015Feb 2015Mar 2015TOTAL RECEIPTS: Capital10,000-- Sales6,0002,0003,00011,000 Total receipts16,0002,0003,00021,000 Sales to customers must be estimated – can be difficult

EXAMPLE – SMART SPORTS CASH BUDGET Jan 2015Feb 2015Mar 2015TOTAL PAYMENTS: Printing machine(2,900)-- Suppliers(4,200)(1,200)(1,650)(7,050) Delivery costs(75) (225) Telephone costs--(375) Fees & expenses(525) (1,575) Drawings – Sam(600) (1,800) Total payments(8,300)(2,400)(3,225)(13,925) Sam’s capital helps to buy a printing machine and goods from suppliers

EXAMPLE – SUMMARY CASH BUDGET Jan 2015Feb 2015Mar 2015TOTAL Total receipts16,0002,0003,00021,000 Total payments(8,300)(2,400)(3,225)(13,925) Balance brought forward07,7007,3000 Balance carried forward7,7007,3007,075 Cash balance carried forward = Balance brought forward + Receipts – Payments Outgoings are shown in brackets

TIMING OF RECEIPTS and PAYMENTS (important for the cash budget) Cash sales are made when cash is received at the same time as goods or services are delivered to customers. Credit sales are made when payment is received after goods or services have been delivered to customers. Cash purchases are goods or services paid for at the same time as they are received from suppliers. Credit purchases are goods or services which have been received from suppliers but payment for them is made at a date after delivery. CREDIT TRANSACTIONS ARE NORMAL FOR MANY BUSINESSES

EXAMPLE 2 – SMART SPORTS CASH BUDGET Sam sets about planning the cash receipts and payments for the next three months, taking into account the different timings of the sales and purchases. Sam agrees that some customers will pay for their goods on credit. To save printing costs he will buy and pay for a new machine for £5,500 in May. Some other costs will increase. Prepare the cash budget for April to June 2015 – how does this change Sam’s business position – his cash flow?

EXAMPLE 2 – SMART SPORTS CASH BUDGET Apr 2015May 2015Jun 2015TOTAL RECEIPTS: Cash customers--5,000 Credit customers-2,4004,0006,400 Total receipts02,4009,00011,400 Timing of cash receipts makes a big difference Credit customers pay for goods after receiving them

EXAMPLE 2 – SMART SPORTS CASH BUDGET Apr 2015May 2015Jun 2015TOTAL PAYMENTS: Printing machine-(5,500)- Suppliers(1,500)(2,000)(4,000)(7,500) Delivery costs(75)(100) (275) Telephone costs--(375) Fees & expenses(525)(625) (1,775) Drawings(600) (1,800) Total payments(2,700)(8,825)(5,700)(17,225) Cash payments now vary much more each month – especially when large items are purchased!

EXAMPLE 2 – SUMMARY CASH BUDGET Apr 2015May 2015Jun 2015TOTAL Total receipts-2,4009,00011,400 Total payments(2,700)(8,825)(5,700)(17,225) Balance brought forward7,0754,375(2,050)7,075 Balance carried forward4,375(2,050)1,250 Sam will temporarily run out of cash in May 2015 (buying machine?)

CASH and PROFITS CASH is very important, businesses must have this to survive. Sam needs to arrange an OVERDRAFT with his bank for the month of May – a temporary borrowing. The BANK will need information about Sam’s business before agreeing to this. Sam and the Bank need to know if his business is PROFITABLE. Having enough cash AND making enough profit are both important! Calculating profits will be covered in the next lecture.

** SUMMARY OF KEY POINTS ** Every business and organisation needs accounting information to plan, control, and make decisions. Different users will require different information. All managers should appreciate the fundamentals of accounting, as they will need to use and interpret the information. Cash budgets forecast all cash receipts and payments for a business or organisation. Cash budgets helps businesses to identify cash surpluses to use or invest AND shortfalls which must be covered. Businesses need to make a profit to survive but also have enough cash.