6.1 Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004 Understanding Organisational Context 2e Slides by Claire Capon Chapter 6 Finance Financial management Management accounting Financial reporting

6.2 Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004 Financial management Introduction Profits and retained profits Loans Shares Rights issues Acquiring and using assets

6.3 Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004 Introduction Financial management covers: -raising capital to finance the organisation’s operations -ensuring the organisation generates sufficient revenue to cover the cost of capital

6.4 Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004 Profits and retained profits Current profits Profits from previous years Used to fund growth or expansion of the business

6.5 Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004 Loans Loans are: -from banks as a long-term loan or overdraft -for a definite period and repayable with interest If interest payments are not met, eventually a receiver is called in

6.6 Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004 Loans Loans are risky for the lender and therefore secured against company assets Securing loan reduces the risk for the lender (bank) Borrower pays lower interest rate for secured loan

6.7 Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004 Loans Interest payments: -come out of profits -cannot be reduced, if profits decline, unlike dividends

6.8 Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004 Shares Shares are issued to raise capital and are aimed at: -existing shareholders (a rights issue) -the general public and small investors -institutional shareholders

6.9 Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004 Shares Ordinary shares: -carry ownership rights -give shareholders the right to receive a dividend if the company issues one

6.10 Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004 Shares Dividends: -come from dividing up a portion of company profits -can be raised or lowered as company sees fit

6.11 Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004 Rights issue In a rights issue: -current shareholders are offered the opportunity to buy new shares in the company -new shares are sold at a price equal to or just below market value

6.12 Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004 Rights issue In a 1 for 10 rights issue current shareholders can buy 1 new share for every 10 shares already owned If rights issue succeeds, then retain the same shareholders

6.13 Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004 Rights issue If rights issue fails, shares are offered on open stock market by underwriters and shareholders may change Potential for predator to build up stake in the company and mount hostile take-over bid

6.14 Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004 Acquiring and using assets Capital is used to acquire assets Purchase of fixed assets is capital expenditure Fixed assets remain in the business long term

6.15 Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004 Acquiring and using assets Fixed assets are used to run the business and include: -plant -machinery -office equipment

6.16 Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004 Acquiring and using assets Current assets are sold or used to make a profit directly and include: raw materials; components; work in progress; finished goods Current assets remain in the business for a short time period

6.17 Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004 Acquiring and using assets Many companies are concerned with using, not owning, assets Leasing assets is an option Assets are acquired without paying full price up front

6.18 Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004 Acquiring and using assets Leased assets may include: -cars -photocopiers -buildings -IT hardware

6.19 Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004 Management accounting

6.20 Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004 Management accounting Management accounting is the use of quantitative techniques to provide data to use in the management decision making process

6.21 Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004 Management accounting Management accounting techniques include: -budgeting -cost accounting -investment appraisal -cash flow management

6.22 Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004 Financial reporting

6.23 Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004 Financial reporting Financial reports and accounts: -are drawn up and audited -are filed in Companies House The legal requirements are specified in the Companies Acts 1981, 1985 and 1989

6.24 Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004 Financial reporting Financial reports should contain: - a directors’ statementshowing who the directors are, and commenting on the company’s performance over the previous 12 months and expectations for the next trading year

6.25 Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004 Financial reporting -notes on accounts necessary to explain any details, such as how operating profit is calculated -financial statements, a profit & loss account, a balance sheet and cash flow statement

6.26 Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004 Financial reporting A profit & loss account gives a summary of income or sales revenue and expenditure, showing resulting profit or loss

6.27 Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004 Financial reporting A balance sheet shows assets, liabilities and sources of finance A cash flow statement shows how money has been spent over the trading year