Company_Accounts.ppt

7/31/2019 Company_Accounts.ppt

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Company Accounts

AS Business Studies


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Content

Capital and revenue expenditure

Cash flow forecasting

Improving cash flow

Control of working capital

Cash flow vs. profit Sources of finance:

Internal

External

Profit and loss

Balance Sheets

Depreciation

Window dressing


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Capital and Revenue Expenditure

Capital expenditure spending on items that can be

used time and time again in the production process

(fixed assets)

Revenue expenditure meets current day-to-day

expenses e.g purchase of raw materials and the

payment of wages


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Cash Flow Forecast & Cash Flow Statements

A Forecast is a prediction of what may happen in the

future

A cash Flow Forecast is therefore a prediction of theinflows and outflows of cash in the future

Businesses use past figures and experiences to

predict forecasts A Cash Flow statement differs from a forecast. It

detailed what has happened in the business, i.e. the

money that has flowed in and out of the business


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Cash Flow Forecast

Opening balance

Total incomes

Sale of goods

Rental income

Total expenditures Materials

Energy costs Wages

Transport


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Cash Flow Forecast cont

Total incomes total expenditures (outflows) = net

cash flow

Opening balance + net cash flow = Closing balance

Closing balance is then carried forward as the

opening balance for the next month


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Uses of cash flow forecasts

To anticipate potential shortages of cash

To examine and possibly adjust the timings of

receipts and payments, in order to avoid problems

To arrange financial support where problems are

forecast


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Problems with cash flow

Inaccurate market research

Changing tastes

Competitors

Economic changes

Uncertainty


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Cause of cash flow problems

Seasonal demand

Overtrading

Over-investment in fixed assets

Credit sales

Poor stock management

Unforeseen change


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Types of cash flow problems

Long term structural problems

Cyclical features

Internal problems / inefficiencies

External changes

Working capital problems


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Ways of improving cash flow

Improve planning

More thorough market research

Diversifying the product portfolio

Improved decision making

Contingency funds

Use of sources of finance to avoid short termworking capital problems


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Cash flow vs. profit

Cash flow is most important in the short term as it is

the businesses ability to pay their bills

Profit is more important in the long term

Businesses can be profitable and still experience

cash flow problems


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Working Capital

Working capital measures the amount of money the

business has to pay day-to-day expenses

Working capital = current assets current liabilities

Businesses need to be aware of their working

capital and ensure that they have enough cash to

survive


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Control of working capital

Stock and debtor control arranging appropriate

credit terms

Liquidity need to manage assets to ensure that

the business has sufficient liquidity (ease of

converting assets to cash)

Stock needs to be valued correctly

Need to ensure are not holding excess stocks or

excess cash


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Sources of Finance

These are how businesses get money to finance

growth, to overcome working capital / cash flow

problems etc

Internal sources from inside the business

External sources from outside the business

Internal sources: No external body to pay

Generally no time limit


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Internal Sources - Retained Profit

Cheap and flexible

Technically profit is shareholders so they need convincing

its used effectively

Usually okay infrequently

Idea retained profit used to generate future profits and

therefore used for purchase of fixed assets

Opportunity cost needs to be assessed


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Internal Sources - Sale of Assets

This can allow business to develop more profitableventures

If in crisis can sell fixed assets but will lead to a

decrease in profitability in long term In principle the sale of these assets should allow a

firm to increase its level of profit


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Internal Sources - Sale and Leaseback

This allows the organisation to receive a cash

payment improving short term cash flow

But have to rent the asset which may reduce profit

long term

If cash used to buy more profitable assets the cost

of rental is covered


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External sources of finance long term

Share Capital

Share capital

Limited companies can issue shares

Share holders receive dividends

Shares can be

Preference shares fixed % dividend

Ordinary shares

risk capital / equity


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Loan capital

Providers of loans = creditors

Four main types of loan capital: Debentures long term loan to the business at an agreed fixed %

of interest repayable on a stated date. Up to 25 years.

Mortgages used to purchase property. Up to 25 years

Long term loans provided by specialist organisations

Government assistance selective and takes form of grantsgenerally


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External sources of finance medium

term

Bank loans

Leasing

Hire purchase


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External sources of finance short term

Bank overdrafts agreed limit, stated time period

Trade credit suppliers allow time period before

money is due

Debt factoring business receives immediate

payment for credit sales


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Sources of Finance - Choice

Businesses need to consider a number of factors

when deciding what sources of finance to use

External sources of finance are more expensive as

you need to pay interest

To use retained profits you need to get agreement

from shareholders

The source of finance chosen also depends on the

time period and what you need the finance for


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Profit and Loss Account

This is a financial statement that shows a businesses

revenues, expenses and profit / loss over a period of time

Gross profit = Sales cost of sales

Net profit = Gross profit overheads

Retained profit = Net profit tax dividends

Trading account shows the income earned by the

business over a trading period Appropriation account the uses of net profit after taxation


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Interpreting Profit and Loss Accounts

The following groups are interested in a businesses

profit and loss accounts:

Shareholders

Managers

Employees

Inland revenue / government


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Balance Sheets

Balance sheets are financial statements that record the assets andliabilities of a business at a specific point in time

Assets items owned by a business

Fixed assets items owned by a business expected to be retained

for at least one year e.g. buildings Current assets items that are expected to be turned into cash in the

next year e.g. cash, stock

Liabilities monies owed by a business

Current liabilities debts owed by the business payable within a yeare.g. creditors

Long term liabilities debts owed by the business which wont berepaid within the next year e.g. bank loan


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Balance Sheets - Rules

1. Assets = Liabilities

2. Total Assets = Fixed assets + current assets

3. Liabilities = Share capital + borrowings + othercreditors + reserves


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Depreciation

The decrease in value of assets over time

This is shown as an expense on the profit and loss

account

Fixed assets will be depreciated in value on the

balance sheet

Two methods:

Straight line

Reducing


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Window dressing

These improve the appearance of a companies balance

sheet

Can borrow money for a short period of time to improve

cash position just before date of balance sheet Use sale and leaseback

Include intangible assets e.g. goodwill / brands on balance

sheet Capitalise expenditure including things as assets that

could be classified as expenses


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Summary

Capital and revenue expenditure capital spend on fixed assets, revenue on day today expenses

Cash flow forecasting a prediction of cash inflows cash outflows

Improving cash flow cash flow can be improved by better planning, sources offinance, revision of credit terms and better market research

Working capital

current assets

current liabilities, need to ensure have sufficientcash to operate

Cash flow vs. profit Cash flow - short term and profit long term

Sources of finance these are ways businesses can get money Internal from inside the business e.g. retained profits, sale of assets

External from outside the business e.g. loans, mortgages

Profit and loss shows revenues, expenses and profit / loss over a period of time Balance Sheets record assets and liabilities on a specific day

Depreciation the reduction in value of fixed assets over time

Window dressing techniques used to improve appearance of accounts

Company_Accounts.ppt

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