1. Financial Planning & Analysis

2. Cash Flow Forecasting

3. Types of Cash Flow
Cash Flow Forecasts show the expected flows of cash into and out of a business over a trading period in the immediate future, e.g. next 6 months or year.
Actual Cash Flow Statements, these show an historic view, showing the actual flows of cash into and out of a business that have occurred over a previous trading period, e.g. 6 months, or 1 year.

4. Purpose
To identify periods in time when cash might have to be borrowed
To identify when cash could be invested

5. 3 parts to a cash flow statement
Cash Inflows (Revenues)
Cash Outflows (Expenses)
Money Left Over (Balance)

6. Jan
Feb
Mar
Total Receipts
4000
12000
Total Payments
8050
12450
9450
Net Cash Flow
(4050)
(8450)
2550
Opening Balance
7950
(500)
Closing Balance
2050

7. Sources of finance LONG TERM Issue shares Debentures Mortgage
Government Loan
Industrial Specialist
INTERNAL
Sell assets
Profit
SHORT TERM
Bank Overdraft
Bank loan
Hire purchase
Trade Credit
Credit Cards
Leasing
Debt Factoring
Trade Bills

8. Which one to use?
The source of finance that a business may use is dependant upon:-
Cost
Motive
Size & status
Financial position

9. Budgeting

10. Budgeting
Budgeting is the process of setting targets covering all aspects of costs and revenues
It is to ensure that no department overspends
How do you decide on the amount of money to be allocated to each department?

11. Methods of Budgeting
Method 1: Take last years and add a bit (Flexible budgeting)
Method 2: Zero based budgeting
Method 2: Each company starts at £0 and has to fill in requisition forms in order to spend money

12. Advantages of budgeting
A way to control and monitor costs
A company wide profile can be gained of how much money is needed
Senior staff can find out who is responsible for overspending
Budgets can be used as targets
Budgets are motivational

13. Disadvantages of budgeting
Not an exact tool, it is based on predictions
Flexible budgeting is dodgy
Senior managers may be ‘conned’ into allocating more money than is necessary
Spread of risk
Imbalance- some have too much money to spend, others not enough
Short termism, may lead to further cash flow problems in the future

14. Flexible budgeting
Variances are used to show the amount of overspend and underspend
Favourable
Example; sales/ turnover is greater than the amount in the budget; actual expenditure is less than the amount in the budget
Adverse
Example; sales/ turnover is less than the amount in the budget; Actual expenditure is greater than the amount in the budget

15. Budgetting Budget Actual Variance Adv/Fav Sales 5270 6375 1105 Fav
Rent received
145
180 35
Wages
5125
6195
1070
Adv
Expenses
6416
6441 25
Profit
1291
246
1045
Example: = 1105 is this good or bad?

16. Variance analysis
Variances are the key to analysing budgets. Once a variance has been recognised either adv or fav, analysis can take place
Variance analysis is a means of identifying symptoms- is there too much spending, is there not enough money being allocated?
Quality of management can be assessed with variance analysis- production costs will only be kept down is wastage is low and quality is high. Sales budgets will only be achieved if commitment is high and staff are enthusiastic
Budgets can tell you a lot about the culture of a business

17. Break Even

18. Starter Activity
1) What are the two methods that exist to calculate break even?
2) Using the formula, calculate the break-even point for a firm making toy daleks using the following details:
Fixed costs are: £1000 per month
Selling price per dalek: £15
Variable costs per dalek: £5
3) Why might a business prefer to use the formula method?
4) On a graph, the break even point occurs when which two lines cross?
5) What is contribution?

19. Contribution = Total Revenue – Variable Costs
Mars Bars cost 30p from the wholesaler, they are sold for 40p in the shop.
The 10p leftover is not pure profit, because we have to pay the shops overheads too. Once the overheads have been paid, the money left over is profit. So the 10p is called Contribution.
Overheads for the shop £1.00, how may Mars Bars would we need to sell to cover costs?
What happens once we have sold 11?

20. Profit & Loss

21. What is a profit & loss account?
The Trading Profit & Loss account shows the income that a business has earned over a period of time (usually one year)
Profit (or loss) is calculated by subtracting costs and expenses from revenue.
The P&L can tell us whether the company is trading successfully

23. Balance Sheets

24. Definition
The balance sheet is an accounting statement which shows what a company owes and owns (Assets and Liabilities).
It also shows how the company is financed (Capital)

27. Mfi p159

28. Ratios

29. Objectives of Ratio Analysis
Standardize financial information for comparisons
Evaluate current operations
Compare performance with past performance
Compare performance against other firms or industry standards
Study the efficiency of operations
Study the risk of operations
Uses
1.      Managers – to help analyze, control, improve a firm’s operations
2.      Credit analysts – to help ascertain a company’s ability to pay its debts
3.      Stock analysts – to determine a company’s efficiency, risk and growth potential

30. Acid Test 1:1 seen as ideal
A ratio of 3:1 therefore would suggest the firm has 3 times as much cash as it owes – very healthy!
A ratio of 0.5:1 would suggest the firm has twice as many liabilities as it has cash to pay for those liabilities. This might put the firm under pressure but is not in itself the end of the world

31. Current Ratio
Looks at the ratio between Current Assets and Current Liabilities
Ideal level – 2 : 1
A ratio of 5 : 1 would imply the firm has £5 of assets to cover every £1 in liabilities
A ratio of 0.75 : 1 would suggest the firm has only 75p in assets available to cover every £1 it owes
Too high – Might suggest that too much of its assets are tied up in unproductive activities – too much stock, for example?
Too low - risk of not being able to pay your way

32. Gearing
The higher the ratio the more the business is exposed to interest rate fluctuations and to having to pay back interest and loans before being able to re-invest earnings

33. GPM
80%
Enables the firm to assess the impact of its sales and how much it cost to generate (produce) those sales
A gross profit margin of 45% means that for every £1 of sales, the firm makes 45p in gross profit

34. NPM
20%
Net profit takes into account the fixed costs involved in production – the overheads
Keeping control over fixed costs is important – could be easy to overlook for example the amount of waste - paper, stationery, lighting, heating, water, etc.
e.g. – leaving a photocopier on overnight uses enough electricity to make 5,300 A4 copies. (1,934,500 per year)
1 ream = 500 copies. 1 ream = £5.00 (on average)
Total cost therefore = £19,345 per year – or 1 person’s salary

35. ROCE
Return on Capital Employed (ROCE) = Profit / capital employed x 100
The higher the better
Shows how effective the firm is in using its capital to generate profit
A ROCE of 25% means that it uses every £1 of capital to generate 25p in profit
Partly a measure of efficiency in organisation and use of capital

36. Asset Turnover Asset Turnover = Sales turnover / assets employed
Using assets to generate profit
Asset turnover x net profit margin = ROCE

37. Stock Turnover
Stock turnover = Cost of goods sold / stock expressed as times per year
The rate at which a company’s stock is turned over
A high stock turnover might mean increased efficiency?
But: dependent on the type of business – supermarkets might have high stock turnover ratios whereas a shop selling high value musical instruments might have low stock turnover ratio
Low stock turnover could mean poor customer satisfaction if people are not buying the goods (Marks and Spencer?)

38. Debtor Days Debtor Days = Debtors / sales turnover x 365
Shorter the better
Gives a measure of how long it takes the business to recover debts
Can be skewed by the degree of credit facility a firm offers

39. Limitations of Ratio Analysis
A firm’s industry category is often difficult to identify
Published industry averages are only guidelines
Accounting practices differ across firms
Sometimes difficult to interpret deviations in ratios
Industry ratios may not be desirable targets
Seasonality affects ratios
Limitations
1.      Large firms operate different divisions in different industries
a. Difficult to develop meaningful industry averages
b. More useful for small, narrowly focused firms
2.      Firms want to be better than average
a. Attaining average performance not necessarily good
b. Best to focus on industry leaders’ ratios
3.      Inflation may have distorted balance sheets
a. Must consider effects when comparing over time
4.      Seasonal factors distort ratio analysis
a. Use monthly averages for season items such as inventory
5.      Window dressing can make financial statements look better
6.      Different accounting practices can distort comparisons
a. Inventory valuation, depreciation methods
7.      Difficult to generalize whether a ratio is “good” or “bad”
a. High current ratio – strong liquidity or too much cash (nonearning)
8.      Ratios can give “mixed” view of company
a. Analyze net effects of a set of ratios