1. Accounts and Finance Sabrina Lieu, Grayson Turley, Cyrus Batara, Biniam Tesfaghaber, Afua Tiwaa

2. Sources of Finance Definition: This is the breakdown of finance in different categories that describe the management of money in a business/company and by the government. Sources of Finance Breakdown ● Capital Expenditure ● Revenue Expenditure ● Internal ● External ● Equity Finance ● Debt Finance Short Term Finance - Items that are paid in less than a year. Usually assets that need to quickly get paid off, Medium Term Finance - Different sources of finance that are used for the expansion of a business or for the purchase of large fixed. Usually paid off between 3 - 5 years Long Term Finance - Long term payments that may last over a year to a bank. Usually used for vehicles and rent.

3. Sources of Finance Capital Expenditure ● Used for buying fixed assets ● Fixed assets are used to bring in more money ● Capital is only used to bring in Medium and Long term finance Revenue Expenditure ● It is only used for the daily function of a business ● Always manage cash flow and try to avoid liquidity issues ● Used for short and medium term sources of Finance Equity Finance ● The firm gives up shares and dilutes ownership ● Less control for majority stockholder and profits are shared to more people ● This type of finance can raise up to high amounts in finance Debt Financing ● Principal and interest has to be paid back or the firm will pay a higher interest rate ● This type of finance can be very small or very big

4. Sources of Finance Internal Finance ● Personal Finance - Sole Traders and Partnerships take risks of losing money ● Selling Assets - Assets are usually sold. But fixed assets sold for liquidity may cause future production problems. ● Retained Profits - Profits that are returned back to the business External Finance ● Share Capital - Limited companies that are selling their shares. ● Venture Capital - Investments in high risks and high return firms that returns ownership in the firm. ● Loans - Taking a loan and paying it back after a certain amount of years. This comes along with interests ● Government Grants - Money received from the government in order to support a specific sp ● Leasing - This is when renting an item and paying it off over a period of time when the contract is over. ● Hire Purchase - Purchasing an item (with interest) on credit over an extended time perio

5. Sources of Finance How Might They Appear? Capital Expenditures ● Purchasing Assets ● Renting businesses, stores, land, etc… ● Machines/Equipment ● Cars, trucks, buses, vehicles, etc… ● Patents Revenue Expenditures ● Wages ● Depreciation ● Advertisements ● Insurance/Utility/Electricity/Repair

6. Investment Appraisal An investment appraisal is an evaluation of the attractiveness of an investment proposal using methods such as: ● Payback Period ● Average Rate of Return

7. Investment Appraisal Payback period-Amount of time required to recoup the funds expended in an investment ●PP=Costs of investment/Annual cash inflows ●EX: a $5000 investment which returned $1000 per year would have a 5- year payback period. ●EX: A $100 investment which returned $50 per year would have a 2-year payback period. ●The time value of money is not generally taken into account.

8. Investment Appraisal Average rate of return(ARR)-The average return from an investment expressed as a percentage of the cost of the investment ● ARR=(Annual return profit/Initial investment) x 100 ● EX: A company buys a delivery truck that costs $10,000. 1,000 is profited each year from deliveries. 1,000/10,000 x 100 = 10% ARR

9. Working Capital Definition- The capital of a business that is used in its day-to-day trading operations, calculated as the current assets minus current liabilities. What is Working Capital used for?

10. How Businesses manage Working Capital 1.Working Capital Cycle 2.Sources of additional working capital 3.Handling Receivables (Debtors) 4.Managing Payables (Creditors) 5.Inventory Management 6.Capital Ratios

11. Working Capital Cycle

12. Working Capital Cash Flow Forecasts- Planning future cash requirements to avoid a crisis of liquidity.

13. Working Capital Liquidity- Definition: The degree to which an asset or security can be bought or sold in the market without affecting the asset's price. Liquidity is characterized by a high level of trading activity. Assets that can be easily bought or sold are known as liquid assets. Example of a liquid asset for any company?

14. Final Accounts -Limited Company ● Income statements o Measures a company's financial performance over a specific period of time. ● Trading account o looks at the cost of the business’ production to evaluate how efficient it is ● Profit and loss account o reviews the business’ sales revenue and related costs that helped “make” the revenue  As well as how the profit was appropriated. ● Appropriation account o it’s the part of the profit and loss account that looks at the distribution of the profit after costs, and expenses has been subtracted.  Taxes - paid to the government  External capital interest - like loan interest  Dividends - paid to shareholders ● Balance sheet o shows the assets and liabilities of the business on a specific date in time

15. Final Accounts - The Balance sheet 1.Indicates how much the business is worth and how valuable they are a.value is just an estimate of the business by internal stakeholders 2.Vocabulary: Fixed assets, Current assets, current liabilities, share capital, loan capital and Retained Profit. a.Fixed assets: these are assets that the business owns for more than one year b.Current assets: they are assets owned by the business and are planned to remain so for one year c.Current liabilities: they the short term liabilities that the business owns to its creditors; ex suppliers bills etc d.Share capital: it the shareholders investments (often times money) into the business e.Loan capital: it’s a one year or more (long term) source finance from the bank f.Retained Profit: it the profit that is kept in the business 3.These accounts provide information for Internal and External stakeholders for things like loans etc.

16. Examples of final accounts

17. Examples of Final Accounts

18. Ratio Analysis ★ Profitability Ratios ○ Gross Profit Margin ○ Net Profit Margin ★ Liquidity Ratios ○ Current Ratio ○ Acid Test Ratio ★ Efficiency Ratios ○ Stock Turnover ○ Return on Capital Employed ★ Gearing Ratio

19. Profitability Ratios Measure the ability to convert sales revenue into profit ★ Gross or Net Profit Margin ○ Calculated as gross or net profit over sales revenue multiplied by 100 ○ informs us how efficient the production process is at generating a surplus to help “contribute” towards paying the other costs of the business

20. Profitability Ratios Gross Profit Margin: (Revenue – COGS)/Sales Revenue x 100 Net Profit: [Revenue – (COGS+Overheads+Taxes+Interest)] x 100 Sales Revenue

21. Liquidity Ratios Determines whether or not your current assets cover your current liabilities or debts ★ Current Ratio* ○ Calculated as: current assets/current liabilities *The current ratio is not as accurate, as it includes stock, which is difficult to liquidate.

22. Liquidity Ratios ★ Acid Test Ratio (Liquidity Ratio) ○ More accurate than current ratio, as it removes stock from the calculations ○ Calculated as: (current assets – stock)/current liabilities

23. Efficiency Ratios Return on Capital Employed (ROCE) ★ Often referred to as the primary ratio, it inorms stakeholders about how effective the business is at returning a profit from the capital it invests on a product. ★ Calculated as: (net profit before tax/total capital employed) x 100

24. Efficiency Ratios Stock Turnover Ratios ★ Lets investors know how well a business manages its stock. ○ If it is turning over quickly, a business may consider increasing production ○ If it is turning over slowly, it may indicate that the product is not very popular

25. Efficiency Ratios Can be calculated as how many times does the stock turn over in a period: ★ cost of sales/average stock = # of times Can be calculated as number of days it takes to sell the stock: ★ (average stock/cost of sales) x 365 = # of days

26. Gearing Ratio Looks at percentage of capital employed that came from long-term loans. A high gearing ratio is not necessarily a bad thing. However, if your gearing ratio is high, it is more difficult to obtain more loans.

27. Gearing Ratio calculated as : long-term loan capital/total capital employed