1. The Basic Rules of Business Finance

2. Key Terms & Concepts Accountancy The communication of financial information about a business to shareholders and managers. This generally takes the form of financial statements Asset Assets are economic resources owned or controlled by the business which are capable of producing value (or cash) Liability Liabilities are the funds (including borrowings), services or products owed by a business at a specified date

3. Capital & Reserves (or Owner’s Equity) Funds put into the business by the owners or shareholders and retained on their behalf Profit/Loss Statement (past financial performance) Shows the performance of the business over a given time period The Profit/Loss = Total Income – Total Expenditure Gross Profit = sales revenue (and other income) – cost of making the product before deducting overheads, payroll, taxation and other costs for the period Net Profit = gross profit – all costs (e.g. manufacture/sales, operating costs, taxes etc.) i.e. after subtracting all costs, expenses and losses for the period

4. Balance sheet (present financial position) The balance sheet is a summary of the financial balances of a business as of a specific date, such as the end of the financial year. It typically includes a list of the business assets, liabilities and ownership equity Cash Flow Forecast (future financial liquidity) Describes the short-term cash requirements of a business to ensure the future availability of a suitable quantity of liquid cash Liquid (available) cash = cash in the bank + short-term investments – short-term debts (e.g. bills, payroll)

5. Cost, Price and Value Cost “How much it cost you to produce/manufacture” Price “How much you are selling the product for” Value “How much the customer is prepared to pay for it”

6. This shows the profit/loss that has been achieved over a given period of time (i.e. in the past). Profit = Total Income – Total Expenditure You have your own monthly profit/loss statement – A bank statement e.g. Alan Sugar’s Personal Bank Statement for December The Profit/Loss Statement A Personal Example Item Credit (£)Debit (£) Apprentice income75,000 Loan repayments 10,000 Electricity and Gas bill 600 T.V. and advertising appearances50,000 Other bills 1,250 Cleaning Co. household cleaners 350 Credit card bill (food, entertainment, clothes, travel)15,550 Total Credit/Debit125,00027,750 Balance carried forward to January97,250 Alan Sugar is in profit for December

7. Q. Fill out the table below and calculate how much profit/loss Chemistry Co. has generated in the first quarter? Note: Think carefully about how we account for the £50,000 of stock in the store? Profit and Loss Case Study for Chemistry Co. Item Credit (£)Debit (£) Sales income of chemical products185,000 Business and Laboratory running costs50,000 Staff salaries55,000 Invoice paid to chemical suppliers25,000 Repayment of loans to bank 25,000 Total Credit/Debit185,000155,000 Net Profit or Loss for 1 st Quarter£30,000 What about the £50,000 of products in the store? The £50,000 of saleable products in the stores are not included – they were made outside this time period and would have been accounted for in the previous profit/loss report The company is in profit in quarter 1

8. Understand your own present financial circumstances  What is likely to be your principal asset?  Do you own it outright or is it financed (i.e. a liability)? The Balance Sheet A Personal Example House value £200,000 Mortgage from the Bank£120,000 Your equity (profit) £80,000 £200,000 Your personal balance sheet balances

9. Asset – Items of value owned or controlled by the business Liability – Amounts or servises owed by the business Capital & Reserves – Amounts input by the owners/shareholders The Balance Sheet Stock, Fixtures & Fittings Resources e.g. Vehicles, I.T. etc. Cash Reserve Bank Loans

10. Using the information below complete the following balance sheet Q. Label each item as an asset (fixed/variable), liability or as capital & reserve The Balance Sheet Case Study for Chemistry Co. Item£Asset, Liability or Capital & Reserve Freehold of laboratory350,000Asset (fixed) Equipment used within the business (inc. chemistry, I.T. etc.)775,000Asset (fixed) Business fixtures and fittings175,000Asset (fixed) Amount owed to chemical suppliers/other bills25,000Liability Stocks of chemicals within the laboratory25,000Asset (variable) Stocks of saleable chemical products50,000Asset (variable) Loan from bank (repayable in 5 years)250,000Liability Venture capitalist investment500,000Liability Cash in the bank125,000Asset (variable) Capital invested by the owner375,000Capital & Reserve Accumulated profits (after 5 years trading)350,000Capital & Reserve

11. Q. Using the information in the previous table, complete the following balance sheet The Balance Sheet As of 31 st December Fixed Assets£Liabilities£ 1. Freehold of laboratory 2. Equipment used in business 3. Business fixtures and fittings 350,000 775,000 175,000 1. Amount owed to suppliers/other bills 2. Loan from bank 3. Venture capitalist investment 25,000 250,000 500,000 Variable Assets£Capital and Reserves£ 1. Stocks of chemicals 2. Stocks of saleable products 3. Cash in the bank 25,000 50,000 125,000 1. Capital invested by the owner 2. Accumulated profits 375,000 350,000 Total Assets1,500,000 Total Liabilities & Capital1,500,000 So the balance sheet balances

12. Many businesses make a profit but fail because they run out of CASH!! Making a profit is the key to a successful business However…. If you run out of the liquid cash required to pay running expenses (e.g. invoices, salaries and make purchases) you’re business may not be able to operate Cash Flow Forecast

13. The Cash Flow Forecast describes the short-term cash requirements of a business to ensure the future availability of a suitable quantity of liquid cash Liquid (available) cash = cash in the bank + short-term investments – short-term debts (e.g. bills, payroll) “CASH IS KING” Without liquid cash your business can’t operate Cash Flow Forecast

14. Summary  Profit/Loss Statement (past) Lists transactions for a given period (e.g. a year) and shows whether the business is making a profit or loss  The Balance Sheet (present) Shows whether the finances balance on a given date  Cash Flow Forecast (future) Describes the short-term cash requirements of a business “CASH IS KING”

15. Authors Dr. Trevor Farren, Dr. Simon Mosey & Dr. William Drewe Organisation School of Chemistry, University of Nottingham, U.K. Supported by: