Nursery Management Understanding and Managing Finance. Session 4

Financial Terms  Income – An amount of money which comes in to, or is earned by, the business during an accounting period - sometimes called Revenue.  Expenditure – An amount of money which has been spent by, or goes out from, the business during an accounting period.  Creditors - suppliers of goods and services whose invoices are still outstanding for payment(someone to whom you owe money)  Debtors - customers who owe the organisation money

Assets and Claims We have already established previously that:  Assets are items which the organisations OWNS  Claims or Liabilities are items which the organisation OWES We now look at these in more detail

Examples of Assets 1.Money in the bank. 2.Debts owed to the business by its customers 3.Land and property-if the business owns them 4.Machinery, mechanical and electrical equipment 5.Stock 6.Computers 7.Goodwill, patents and other ‘intangibles’ which can have a monetary value attached to them.

Activity 1 Which of the following do you think are assets?  Money in a supermarket till.  Property deeds held by a nursery.  Scrap paper in an office recycling bin.  A computer expert hired by the nursery to update their computer software.

Activity 1- Solution Which of the following do you think are assets? Money in a supermarket till.  Asset (cash) Property deeds held by a nursery)  Asset (or at least the property it represents is an asset) Scrap paper in an office recycling bin.  Asset (until it is thrown away) A computer expert hired by the nursery.  Not an Asset (difficult to assess in monetary terms, and the business does not have exclusive rights.)

Claims (or Liabilities) Claims are what a business ‘owes’. There are two forms of claims: 1.Capital: This is the owner’s (or in the case of a limited company shareholders’) investment in the business. 2.Liabilities: These are claims on the business made by external individuals and organisations, and include:  Trade Creditors  Bank and other Loans  Unpaid Tax

Examples of Claims 1.Bank Overdrafts. 2.Debts owed by the business to its suppliers. 3.Bank Loans 4.Tax 5.Shareholder’s Capital (if there are any) 6.Profit 7.Dividends(if the business is a limited company).

Activity 2 Classify the following as Assets, Claims or Neither.  A Bank Overdraft of £25,000  £230 owed to a supplier for food.  An office computer rented for £20 per month  £150 VAT paid by a customer on goods sold.  Plans for an extension to the premises.  £1000 Profit made on a recent sale of old equipment.  An bill for £500 for fees which have been unpaid for two years.  A van purchased 10 years ago for £30,000, but which is no longer roadworthy.

Activity 2- solution Classify the following as Assets, Claims or Neither.  A Bank Overdraft of £25,000.CLAIM  £230 owed to a supplier for food.CLAIM  An office computer rented for £20 per month.ASSET  £150 VAT paid by a customer on goods sold.CLAIM  Plans for an extension to the premises. ASSET  £1000 Profit made on a recent sale of old equipment. CLAIM  An bill for £500 for nursery fees which have been unpaid for two years. NEITHER  A Van purchased 10 years ago for £30,000, but which is no longer roadworthy. NEITHER

Balance Sheets  The purpose of a Balance Sheet is to measure the accumulated wealth at a specific point in time. This gives a “snapshot” of the financial position of the organisation, balancing Assets against Capital and Liabilities.  Balance Sheets often show the last 2 years to allow comparison

Balance Sheet Formats Balance Sheet can be produced in two different ways: Horizontal Format  This is the easier format to understand, and the type you have already seen. Vertical Format  This is used mainly to communicate to shareholders the size of their investment in a company.

Balance Sheets In Horizontal Format This method is the easiest to understand, as the ‘balance’ figure can be seen at once. Balance Sheet Layout (Horizontal Format) Fixed Assets Capital and Reserves + + Current Assets Long-term Liabilities+ Current Liabilities Total Assets Total Claims BALANCE

Sample Balance Sheet (Horizontal format) Fixed AssetsCapital and Reserves Land£ 120,000Share capital £ 100,000 Buildings£ 150,000Retained profit£ 120,000 Fix and Fit£ 75,000 Total£ 220,000 Total£ 345,000L/T Liabilities Loan£ 250,000 Current AssetsTotal£ 250,000 Stock£ 55,000Current Liabilities Debtors£ 75,000Creditors£ 22,000 Bank£ 25,000Tax and VAT£ 8,000 Total£ 155,000Total£ 30,000________£ 500,000 The two bottom lines Balance

Recording Transactions  In this session we shall examine the effects of transactions on the Balance Sheet  As last week each transaction will have two effects: »One which increases the wealth of the business »One which decreases the wealth of the business  The net effect will be zero.

Examples of Transactions Examine the following Example Carefully: Transaction Stock(food and art equipment for example)is bought for £3000 Cash

Transaction Fixed AssetsCapital and Reserves Land£ 120,000Share capital £ 100,000 Buildings£ 150,000Retained profit£ 120,000 Fix and Fit£ 75,000 Total£ 220,000 Total£ 345,000L/T Liabilities Loan£ 250,000 Current AssetsTotal£ 250,000 Stock£ 55,000Current Liabilities Debtors£ 75,000Creditors£ 22,000 Bank£ 25,000Tax and VAT£ 8,000 Total£ 155,000Total£ 30,000________£ 500,000 Stock is bought for £3000 Cash

Transaction Fixed AssetsCapital and Reserves Land£ 120,000Share capital £ 100,000 Buildings£ 150,000Retained profit£ 120,000 Fix and Fit£ 75,000 Total£ 220,000 Total£ 345,000L/T Liabilities Loan£ 250,000 Current AssetsTotal£ 250,000 Stock£ 55,000Current Liabilities Debtors£ 75,000Creditors£ 22,000 Bank£ 25,000Tax and VAT£ 8,000 Total£ 155,000Total£ 30,000________£ 500,000 Stock is bought for £3000 Cash Effect 1: Stock Increases by £3000

Transaction Fixed AssetsCapital and Reserves Land£ 120,000Share capital £ 100,000 Buildings£ 150,000Retained profit£ 120,000 Fix and Fit£ 75,000 Total£ 220,000 Total£ 345,000L/T Liabilities Loan£ 250,000 Current AssetsTotal£ 250,000 Stock£ 58,000Current Liabilities Debtors£ 75,000Creditors£ 22,000 Bank£ 25,000Tax and VAT£ 8,000 Total£ 155,000Total£ 30,000________£ 500,000 Stock is bought for £3000 Cash Effect 1: Stock Increases by £3000

Transaction 1 Fixed AssetsCapital and Reserves Land£ 120,000Share capital £ 100,000 Buildings£ 150,000Retained profit£ 120,000 Fix and Fit£ 75,000 Total£ 220,000 Total£ 345,000L/T Liabilities Loan£ 250,000 Current AssetsTotal£ 250,000 Stock£ 58,000Current Liabilities Debtors£ 75,000Creditors£ 22,000 Bank£ 25,000Tax and VAT£ 8,000 Total£ 155,000Total£ 30,000________£ 500,000 Stock is bought for £3000 Cash Effect 2: Bank Reduces by £3000

Transaction Fixed AssetsCapital and Reserves Land£ 120,000Share capital £ 100,000 Buildings£ 150,000Retained profit£ 120,000 Fix and Fit£ 75,000 Total£ 220,000 Total£ 345,000L/T Liabilities Loan£ 250,000 Current AssetsTotal£ 250,000 Stock£ 58,000Current Liabilities Debtors£ 75,000Creditors£ 22,000 Bank£ 22,000Tax and VAT£ 8,000 Total£ 155,000Total£ 30,000________£ 500,000 Stock is bought for £3000 Cash Effect 2: Bank Reduces by £3000

Transaction Fixed AssetsCapital and Reserves Land£ 120,000Share capital £ 100,000 Buildings£ 150,000Retained profit£ 120,000 Fix and Fit£ 75,000 Total£ 220,000 Total£ 345,000L/T Liabilities Loan£ 250,000 Current AssetsTotal£ 250,000 Stock£ 58,000Current Liabilities Debtors£ 75,000Creditors£ 22,000 Bank£ 22,000Tax and VAT£ 8,000 Total£ 155,000Total£ 30,000________£ 500,000 Stock is bought for £3000 Cash Net Effect : Stock Increases by £3000 Cash Reduces by £3000 No Change in Balances

Vertical Format Balance Sheets  Although the Horizontal Format for Balance Sheets is easy to understand, many companies prefer to use the Vertical Format.  This Balance sheet is divided into two parts: »The top part shows the Net Assets of the Company, that is, what the company owns when all debts and loans and outstanding tax bills etc. have been paid off. »The bottom part shows the Shareholders’ Claim; in other words, all the money that is invested in the company through share owning.

SAMPLE BALANCE SHEET (VERTICAL FORMAT) Fixed AssetsLand£ 120,000 Buildings£ 150,000 Fix and Fit£ 75,000 Total£ 345,000 Current AssetsStock£ 55,000 Debtors£ 75,000 Bank£ 25,000 Total£ 155,000 Current Liabilities Creditors£ 22,000 Tax and VAT£ 8,000 Total£ (30,000) Net Current Assets£ 125,000 Total Assets£ 470,000 Less Long term liabilities (Loan)£(250,000) £ 220,000 Capital and Reserves Share capital£ 100,000 Retained profit£ 120,000 £ 220,000