Using Financial Records

Cash flow and Final Accounts Every business needs to record… Cash Flow Profit Net Worth The first slide establishes the three key elements businesses must track with financial records: Cash flow, Profit and Net Worth. Types of cash flow are outlined in the next slide; profit can be described as any funds left over once all costs are paid and Net Worth is the end value of a business after debts.

Cash Flow Records… Note: cash going in cash going out and the cash left for a given period, such as a month or a year

Cash in… … (otherwise known as Receipts) can be anything from sales, to interest earned on savings, the return on an investment or cash from selling an asset, such as a car Other examples of cash in include: stock dividends, cash from loans, GST refunds and capital (extra money invested in the business).

Cash out… … Can be anything from accounting and consultancy costs, to general bills, sales tax (GST) and drawings – the owner’s own wage Other examples of cash out can include: merchandising costs, business purchases, PAYE (tax on staff wages) and withdrawn capital (to pay back an investor).

Final Accounts Record… Profit Net Worth (the business’s value) This slide describes the two goals of a set of final accounts. Many examples for large corporates, such as Telecom, can be found online as part of publicly available annual reports.

Final Accounts are made up of: A Trading, Profit and Loss Account A Balance Sheet

Trading, Profit and Loss Accounts Show… Gross Profits (funds before sales costs) Net Profits (funds after sales costs)

Balance Sheets Are split into two sections: Net Worth – showing the value of assets after debts Financed By – showing how the assets are paid for

Ratio Analysis… …Is a method of analysing a company’s performance and health …Gives business owners easily understandable results in percentages or ratios

The Results… …Are used as Key Performance Indicators (KPIs) to compare business health with previous years or other competitors KPIs can include: Return on Capital Employed (ROCE), Gearing Ratios (measuring long-term liabilities for lenders), Profitability Ratios, Liquidity Ratios and even Expenditure on the Environment, and many, many more depending on the group analysing the company. Environmental groups, for example, would primarily use Expenditure on the Environment to measure business ethics.

Ratio Analysis primarily focuses on… Profitability Liquidity Efficiency

Profit Ratios… ...Provide percentage margins - the higher the percentage, the more profit/return on investment is being made Ratio results are shown – depending on the analysis – in a number of different ways, including percentages, days and items sold. ‘Real ratios’ are primarily reserved for liquidity ratios.

Liquidity Ratios… …Provide real ratios calculated to analyse changes in the ability to pay debts Two main liquidity ratios are the Current ratio and the Acid Test Ratio The Current Ratio shows a company’s ability to pay its debts, while the Acid Test Ratio – the most famous ratio analysis – goes further by showing a company’s ability to pay its debts when it can’t sell stocks.

Efficiency Ratios… …Analyse how well a business uses its assets - the higher the ratio, the more efficient a company is