2. BM Unit 2 - LO31 Higher Business Management Unit 2 Learning Outcome 3 Financial Management

3. BM Unit 2 - LO32 The Importance of Financial Management n Ensures that there are adequate funds available to acquire the resources needed to help the organisation achieve its objectives n Ensures costs are controlled n Ensures adequate cash flow n Establish and control profitability levels

4. BM Unit 2 - LO33 Key Financial Concepts Cash flow Financial statements Financial analysis (ratios) Budgets

5. BM Unit 2 - LO34 Cash Flow Cash Coming In n Profits n Sales of fixed assets n Sales of stocks n Decrease in debtors n New capital introduced n Loans received n Increase in creditors Cash Going Out n Losses n Purchases of fixed assets n Purchases of stock n Increase in debtors n Drawings or dividends n Loans repaid n Decrease in creditors Liquidity - having sufficient “cash” to meet everyday running costs

6. BM Unit 2 - LO35 Financial Statements The Balance Sheet n Assets - things owned n Liabilities - things owed n Finance - capital and reserves A Balance Sheet is a statement of things owned and owed by a company and how they are financed at a particular date.

7. BM Unit 2 - LO36 Financial Statements Trading and Profit & Loss Accounts The Trading Account n Gross Profit = Sales (Turnover) - Cost of Sales The Profit & Loss Account n Net Profit = Gross Profit + Gains - Expenses

8. BM Unit 2 - LO37 Interpretation of the Final Accounts and Balance Sheet Interested Parties n Management n Employees n Rival companies n Investors n Lenders n Banks

9. BM Unit 2 - LO38 Ratio Analysis Purposes of Interpretation n Profitability - Is the organisation earning more than it is spending? n Liquidity - Does the organisation have enough money to pay its bills? n Efficiency - Is the organisation making the best use of its resources?

10. BM Unit 2 - LO39 Ratio Analysis Uses n To compare current year’s performance with previous year n To compare performance with rivals n To interpret in order to improve future performance n To forecast/budget Limitations n The information is historical - too late to do anything about it n Comparisons are difficult - different conditions apply in different years and no 2 companies are the same

11. BM Unit 2 - LO310 Profitability Ratios Gross Profit% = Gross Profit/Sales x 100% Mark-up% = Gross Profit/Cost of Sales x 100% Net Profit% = Net Profit/Sales x 100% Expenses% = Expenses/Sales x 100% (Expenses% = Gross Profit% - Net Profit%)

12. BM Unit 2 - LO311 Liquidity Ratios Current Ratio =Current Assets/Current Liabilities eg 2:1 Acid-test Ratio =(Current Assets - Stocks)/Current Liabilities (NB should be >1 : 1 - if not, inability to pay debts)

13. BM Unit 2 - LO312 Efficiency Ratios Return on Capital Employed (ROCE) = Net Profit (before interest and tax)/Capital Employed (Capital Employed = Total Net Assets - Debentures) Rate of Stock Turnover = Cost of Goods Sold/Average Stock (Average Stock = [Opening + Closing Stocks]/2) Asset/Turnover Ratio = Sales (Turnover)/Fixed Assets eg £1.65:1

14. BM Unit 2 - LO313 Budgets Purpose n To monitor and control the activity of an organisation - can compare actual figures with budget figures and seek answers from those responsible n To gain information - are we doing well n To set targets - keeping within limits of spending n To delegate management authority - employees are given “freedom” within a set budget

15. BM Unit 2 - LO314 Cash Budgets (the most common type of budget) n To monitor and control individual departments or the organisation as a whole n To assess the validity of a business project in order to secure finance eg bank loan n To assess the feasibility of a business start-up or business expansion n To provide a tool for measuring progress by comparing actual figures with budgeted ones

16. BM Unit 2 - LO315 Cash Budgets and the Role of Management Plans Organises Commands Co-ordinates Controls Delegates Motivates

17. BM Unit 2 - LO316 Using Financial Information n Reviewing past performance and assessing results n Planning future developments based on past performance n Comparing and contrasting with previous years’ and competitors’ performances