Handout 10: Financial management PowerPoint presentation Unit 320 (B&A 59): Principles of business Handout 10: Financial management

Every organisation needs finance to ensure: profitability survival. Private organisations exist to make a profit. Public organisations must have sufficient finance to fulfil their public service obligations. Voluntary organisations need funds for their cause and to finance their operation. Whether the organisation is a small partnership or a large multi-national, without adequate finance the business will die.

The movement of money in and out of an organisation. Cash flow The movement of money in and out of an organisation. In through sales of goods/services. Out through payment of costs: raw materials staff/labour transport rent power and lighting. The difference between the amount of money coming into and going out of a business is the net cash flow. More money coming in than going out = positive cash flow Less money coming in than going out = negative cash flow. A negative cash flow may mean that the business will struggle to pay its bills meaning it may need to borrow funds. A business may still be making a profit on paper, but have a negative cash flow if its debtors are slow at paying them.

Liquid assets are those that are easily converted to available cash. Liquidity Liquid assets are those that are easily converted to available cash. Stocks and shares in other organisations = very liquid assets. Premises owned by the organisation = least liquid asset. An organisation is liquid when it has assets that can easily be converted to provide cash for use immediately or in the near future. Liquidity and positive cash flow are most important in times of recession when borrowing money may be more difficult or interest rates more expensive.

Capital + Liabilities = Assets Balance sheet Lists assets and liabilities of an organisation at a given date Lists assets in order of realisability Lists liabilities in order of priority Provides a snapshot of the organisation’s liquidity Capital + Liabilities = Assets

Aims of financial management To ensure: cash flows in and out are controlled enough cash available to pay costs enough cash available for investment cash not tied up unprofitably, eg in stock procedures to realise the cash from revenue, eg that debtors’ invoices are paid on time. Surpluses of cash need to be put to work to make more money through investment.

Ways to improve cash flow Realising or making unused assets work, eg renting out unused premises Rigorous procedures for obtaining payments Offering discounts for fast payment of invoices Using hire purchase/leasing for capital assets to spread payments Negotiating trade terms from suppliers Accurately forecasting cash flow to anticipate and plan for problems

Profit and loss accounts A statement of revenue and costs for an organisation over a specific period Total income – Total operating costs = Profit/loss A positive result is the net profit A negative result indicates a loss Profit and loss accounts are either for internal use or for publication. Private and public limited companies are required to make their accounts available to their shareholders and to submit a copy to the Registrar of Companies.

Functions of financial management in an organisation To ensure finance is available to meet strategic aims To use finance cost-efficiently through investment To use analysis of internal and external financial information to provide management with accurate forecasts To ensure compliance with legal requirements for financial reporting To control and monitor use of funds throughout the organisation To inform future financial strategy for the organisation

Consquences of poor financial management Decrease in profits Inability to expand/raise capital Difficulty in obtaining credit from suppliers Inability to pay wage bill Loss of market share Liquidation/administration The consequences will also impact externally on eg the organisation’s suppliers/creditors and in turn on theirs.