Company Finances and Corporate Governance

Corporate Governance = The way companies are run and the accountability of the managers to their owners. Auditing: faulty? Overstating profits? Overstatements? Accounting irregularities? dishonesty Financial irregularities Financial risks - scandals

A finance director needs to be… Careful? Courageous? Creative? Enthusiastic? Good at communicating? Imaginative? Impatient with details? meticulous?

Company finances: Vocab See exercise in dispensa (matching definitions) A creditor Revenue Overheads To go bankrupt To break even Debtor Net profit To overspend Gross profit Operating profit expenditure

KEY - Company finances: Vocab See exercise in dispensa to find definitions with numbers A creditor (2) Revenue (4) Overheads (11) To go bankrupt (3) To break even (5) Debtor (1) Net profit (8) To overspend (9) Gross profit (6) Operating profit (10) Expenditure (7)

Similar meanings To cover costs = To go into liquidation = Turnover = To break even To go bankrupt Revenue

To chase payments To pay off a debt To write off a debt 1)If a company pays the money that it owes to someone, then it………………. 2)If a company tries to make a person or organisation pay it the money that they owe (e.g by sending out letters t remind them), then it………………. 3) If a company decides to stop trying to get the money that a person or organisation owes it (because, for example, the company no longer exists) then it……………….

To chase payments To pay off a debt To write off a debt 1)If a company pays the money that it owes to someone, then it pays off a debt. 2)If a company tries to make a person or organisation pay it the money that they owe (e.g by sending out letters to remind them), then it chases payment. 3) If a company decides to stop trying to get the money that a person or organisation owes it (because, for example, the company no longer exists) then it writes off a debt.

More vocab and definitions 1.Cashflow 2.Deficit 3.Return on sales 4.Acquisition 5.Takeover 6.subsidiary An amount of money that is owed The buying of a company by another company Payments coming into and going out of a business (like a river!) A company which is owned, or more than 50% owned by another company The percentage that is earned by selling the product The buying on one company by another company

More vocab and definitions An amount of money that is owed: = deficit The buying of a company by another company = acquisition or takeover (takeover is more hostile) Payments coming into and going out of a business (like a river!) = cashflow A company which is owned, or more than 50% owned by another company = subsidiary The percentage that is earned by selling the product = return on sales

Vocab note: “ Profit” is the difference between what you sell something for and what you paid for it. “Margin” simply means you turn profit into a percentage of the selling price. You do this so you can compare different items easily. markup is your profit as a percentage of the cost price profit margin is your profit as a percentage of your selling price.

Retained profit Retained profit in accounting, refers to the portion of net income which is retained by the corporation rather than distributed to its owners as dividends. It also refers to the remaining profit retained by the company after all deductions have been made, including tax, interest, minority interests and dividends.

Operating Profit The profit earned from a firm's core business operations. It does not include profit earned from the firm's investments (such as earnings from firms in which the company has a partial interest) and the effects of interest and taxes. Also known as earnings before interest and taxes (EBIT).

Key notes (before reading activity) Financial performance/status of companies Huge losses experienced by investors and employees due to mismanagement and irregularities in financial reporting have led to a demand for stricter corporate governance. Independent auditors such as the SEC in the US have been checking balance sheets, which show the overall performance of companies and income statements (AmE) or profit and loss accounts (BrE) which show the difference between total income and outgoings for a given period.

Financial Scandals Enron (USA) Energy firm (irregularities in accounting) Royal Ahold (Netherlands) A world food retailer (overstated its profits) WorldCom (USA) Telecom company (massive fraud in WorldCom accounts – big investigations by antitrust regulators Parmalat (Italy) Food and Milk products (falsified accounts to conceal losses)

The financial performance of companies is monitored via two key financial statements: 1 - The Profit and Loss Account (P&L) - (BrE) = Income Sheets - (AmE) The difference between total income (eg, sales, profits) and outgoings (eg.costs, expenses) during a particular period 2 - The Balance Sheet (BrE) = state of financial position (AmE) A statement (a snapshot) showing the wealth of a company. It shows the assets (values or power to make money) and the liabilities (money owed to suppliers) during a particular period.

Articles: “Europe’s ENRON” and “Death of Economics” In USA: Enron or WorldCom companies expressed the need to grow at all costs in the new globalised economy: “merger-mania” has led companies to become “creative” in their accounting methods. “creative” = hiding debts to finance acquisitions is becoming common practice. In Europe: AHOLD company (in the Netherlands, europe’s biggest food retailer) – accused of accounting irregularities

More Vocab in article Exceed = to go over Plunged = go down/decrease very quickly To turn a dull company into a growth machine = (Dull has the opposite meaning – similar to not much) Is due to = because of This has led to = to lead to = has the following consequence A rebate = a reduction A dept = money owed To be in debt

To fix a problem = to resolve a problem A former company = previous company To be under investigation = when law evasion is suspected (the SEC investigate) Issues = problems “To buy in bulk” = to buy in large quatities Acquisitions = similar to takeover Earnings = money in = inflow of money «Agressive earnings» = invented earnings (irregular, an exageration in statement, overstatements. «To book rebates» to claim reductions/discounts (rebates) in advance, before payments are made (impossible!)

To overstate sales/earnings: say more than real/actual amount To conceal the truth= to hide the truth = similar to a lie Fraud is an issue that auditors try to deal with or tackle

P.16 -vocabulary key to gap fill 1) a 2) d 3) c 4) a 5) d 6) a 7) d 8) c 9) a

P.17 – Word grammar 2 (key) 1 -Financially 2- Financer 3_investor 4 – investment 5 – capitalise 6 – capitalism 7 – negotiateg 8 - negotiable

Expressions with money 1 -waste 2 – bad 3 – ties 4 – tight 5 – liquid 6 – throw 7 – chenneling 8 - made

Word partnerships 2 p.17 1.ok 2.to regulate B2B relations 3. to put pressure on debtors 4. to minimise ther risk of bad debt 5. to damage customer relations 6. to insist on money in advance 7. to ease the cashflow situation 8. to process letters of credit 9.to run a credit check 10. to charge interest on outstanding debts 11.to risk alienating customers 12. to finance new projects