Managing your finances

Página 1

Explain the features of the BUDGET process within the organisation?

Budgeting is forecasting of the financial behaviour of an organisation over a specified period.

Types of budget - profit (P&L budget) balance sheet or cash

Budgets usually broken down into months

Forecasting sales -look at previous years, assess types of property sold/let, new markets, fee structure changes, reassess local market, new technology, other changes in ops.

Forecasting costs - fixed and variable

Market variables - costs of petrol, electricity will change, projected one off costs

Check budgets monthly. Carry out variance analysis - adverse or favourable variance.

Identify the main types of ACCOUNTS and their BENEFITS

PROFIT AND LOSS account - Trading performance over time, particularly the financial year. Trade AS NORMAL

All items of INCOME AND EXPENDITURE

IRRESPECTIVE of whether income received or paid (ACCRUALS concept)

NO CAPITAL expenditure but DEPRECIATION IS shown

Includes TAX and bank INTEREST

BALANCE SHEET - snapshot of financial strength at the end of an accounting period

Assets and liabilities.

Fixed, intangible fixed assets (good will, trademarks, patents lease, software) and current assets

Long term and short term liabilities

Difference between assets and liabilities = NET ASSETS or 'CAPITAL EMPLOYED' OR EQUITY or net worth

CASH FLOW statement

Movement in the cash position of the company during the accounting year.

Shows if payment has actually been RECEIVED

Doesn't list NON CASH ITEMS e.g depreciation

Includes purchase of fixed assets and any loans received

WHAT P&L TELLS YOU?

Is income going up/down?

How much is being received from different parts of the business?

Why are there changes eg lettings up?

Can then alter pricing, be more competitive, marketing, customer service, diversify, sit it out

Expenditure analysis - up/down, key factors eg expanding business or economical, 1-off costs eg legal, cut back expenses, change suppliers,

WHAT BALANCE SHEET TELLS YOU?

Tells you details of assets and liabilities and net assets - CAPITAL EMPLOYED. How stable organisation is - Greater capital employed = greater value

Has value increased/decreased?

Trade debt up/down, assets up/down, cash up/down,

Consider using cash to expand business, or borrow funds or sell assets or increase days to pay, debt collection, delay paying

Capital employed reflects how much business is worth - shows if investment has paid off. Increase assets and reduce liabilities.

WHAT THE CASH FLOW STATEMENT TELLS YOU?

Shows where cash is going and coming from. Carried over from past year? Reduced due to asset purchase? salaries or overheads increased?

more tax, bad debts

Actions - frequent analysis, efficiency invoice-payment process, credit control, debt collection, budgeting

Outline the keys provisions of the STATUTORY framework for FINANCIAL accounting

To protect shareholders, customers, suppliers and the public by requiring organisations to disclose a certain amount of info on profitability, liquidity and financial status.

COMPANIES ACT 2006 -KEY law for organisations re financial accounting

Keep records disclosing the financial position of the company with reasonable accuracy, e.g receipts and payments, assets, liabilities and keep these for THREE YEARS

Keep ANNUAL ACCOUNTS provide true and fair view of assets, liabilities, p&l, financial position ie. BALANCE SHEET and P&L

Send copy of accounts to every member (shareholder)

File company accounts with Companies House

Accompany accounts with a DIRECTOR'S report and an AUDITOR'S report. Optional for small companies

No requirement to file a cash flow statement unless medium/large company

Small companies only file a BALANCE SHEET and notes.

FRS 18 - Accounting Policies

Accounting concepts which underpin the legal requirement for financial statements, issued by UK Accounting Standards Board. Concepts are:

True and fair view

Going concern

Accruals - accounted for in the period to which tx relates NOT when received

Realisation - only profits realised to be included in the P&L

Reliability - represent faithfully, free from error

Comparability - consistent across time periods

Understandable - to anyone with reasonable knowledge

Describe the main accounting RATIOS?

Analysing financial performance - ratio analysis Compare year to year and against other organisations in same sector

PROFITABILITY ratios - turnover, costs and profit. Higher = better

1. Gross profit /turnover = gross profit margin OR

2. Net profit/turnover = net profit margin

3. ROCE (return on capital employed) = net profit/capital employed

LIQUIDITY ratios. Ability of company to pay its debts

1. Current assets compared with current short term liabilities. 1 or more is liquid, otherwise struggling to pay

EFFICIENCY ratios - how well a company is using its assets

1. Average collection period = (debtors 365)/sales

** PROFIT ** LIQUIDITY ** EFFICIENCY

Página 2

Main accounts ratios ** PROFITABILITY ** LIQUIDITY ** EFFICIENCY (debtors)

1. Profitability ratios

Turnover Sales Profit

Gross Profit/turnover = Gross profit margin (or net)

Net profit/capital employed = ROCE return on capital employed

2. Liquidity Ratios

Ratio of current-assets to short term liabilities

Must be greater than 1

3. Efficiency ratios

Average collection period = (debtors x 365)/sales

Debtors is amount owing balance sheet

Sales is annual t/o

Higher the figure - more worrying

Página 3

Regulatory Framework for companies

To protect shareholders, customers, suppliers and the public by requiring information to be disclosed

Companies Act 2006 - part 15

- Keep records with reasonable accuracy. Receipts, payments, assets, liabilities. Keep for 3 years

- Keep annual accounts. True and fair view. I.e. a balance sheet, P&L and notes

- Send a copy to every member, approved by board and signed by one of the Directors

- File annual accounting information with companies house, depending on co size

- Director's report and auditor's report. Optional for small businesses

Small business < £6.5m < 50 employees Only file balance sheet or abbreviated balance sheet and notes. P&L optional.

FRS18

True and fair view

Going concern

Accruals - NOT when paid/received

Realisation - only profits realised are included

Relevance - able to influence financial decisions

Reliability - free from bias

Comparability - consistent evaluations across time periods

Understandability