Managing your finances

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      

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

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