1. 1 Understanding and Managing Finance Lecture 1

2. 2 Menu General Introduction 1a The Role of Accounting 1b The Users of Accounting 1c Types of Accounting 1d Types of Organisation 1e Summary & Preparation for S1

3. 3 Module Information General Introduction

4. 4 Understanding and Managing Finance – Aims of the Module  To introduce you to the language and techniques of formal accounting systems, to the point where you can understand and interpret financial statements, and highlight the important issues and differences from year to year.  To provide you with essential management tools in order that you might monitor performance and improve efficiency, work within financial constraints but at the same time exercise a degree of autonomy and control.

5. 5 Managing Finance and Budgets - Key Topics  General Introduction (1 week)  Financial Statements (5 weeks)  Managing Working Capital (3 weeks)  Budgeting (3 weeks)

6. 6 Understanding & Managing Finance - Methods of Learning  Website – module information & learning material  Lectures – mainly theory  Reading - compulsory and supporting material  Self-assessment Exercises  Seminars - application of theory, exercises, case studies  Assessment – Multiple Choice  Assessment - case studies

7. 7 The Required Text Book  You will need to purchase: McLaney & Atrill 2002 Accounting: An Introduction Pearson Education London  Each week you will be set sections from this text as reading (see the programme in the handbook), and the seminar material will draw on exercises from this text.

8. 8 How the Module will be Taught (1) Within each week:  There will be a lecture–based session The purpose of the lecture is to introduce key ideas. The substantive material from the lecture will be available as an interactive PowerPoint Self-Study Session from the website. In it, you may be referred to readings and self- assessment exercises from the set text (see the handbook for details).  You will be given follow-up readings form the text. This will support and extend the basic introductory material from the lecture.  You will be given study exercises to prepare. These will normally be from the set text book.

9. 9 How the Module will be Taught (2) Within each week:  You will attend a seminar. The seminar follows up the lecture and self-study material, usually a few days later. In order to maximise your learning you will be allocated to a seminar group, and a study group of about three or four students. During each seminar your group may or may not be called on to report on the directed tasks. You should always come prepared to report.  At the end of the seminar, the tutor will review the main learning issues of the week, and will be prepared to answer questions.

10. 10 Session 1 - Introduction and Background Learning outcomes: By the end of this week, you will be able to:  Explain the role and purpose of Accounting  Identify the main users of Accounting Information and their needs  Identify the main forms of Business enterprise  Discuss the possible financial objectives of a business

11. 11 Part 1a The Role of Accounting

12. 12 What do we mean by Finance & Accounting? Finance is:  Concerned with the way in which funds used in a business are raised and invested Accounting is:  The process of identifying, measuring and communicating financial (and other) information so as to permit informed judgements and decisions to be made by the stakeholders in a business.

13. 13 The Role of Accounting, Finance and Budgeting There are four separate, but linked functions:  Reporting  providing information about what we are doing  Decision-Making  working out how to do things better  Controlling  making sure we are doing what we said we would do  Planning  working out in detail how we should do things

14. 14 The Role of Finance and Accounting PLANNING  Producing forecasts and budgets  Ensuring that the organisation will have enough cash to survive  Allocating money in line with the mission and objectives of the organisation  Setting targets for the organisation and for each department in the organisation  Providing each department with the money it needs to operate

15. 15 The Role of Finance and Accounting CONTROLLING  Monitoring income - checking that each department achieves its targets  Monitoring expenditure - checking that departments do not over-spend  Monitoring the overall position - checking that the overall organisation is profitable and does not run out of cash

16. 16 The Role of Finance and Accounting REPORTING  Classification of transactions into different categories  Summarising for different users  Reporting on performance - internally - who brought in how much income, who spent what, how is the organisation performing  Reporting externally - to shareholders, tax office, VAT office, Companies House, non-executive Directors

17. 17 The Role of Finance and Accounting DECISION-MAKING  Helping the company to achieve its financial objectives - e.g. increasing wealth of owners  Helping the company and its staff to make decisions about which projects to invest in  Helping the company to determine where to get its money from  Helping the company to decide what to do with its money

18. 18 Activity 1.1 Question  What is the normal order in which the four functions occur? Answer

19. 19 Activity 1.1 Answer  The accounting process is cyclical, so you should have the activities in this order (you can start anywhere). Reporting Monitoring Planning Decision-Making

20. 20 Part 1b The Users of Accounting Information

21. 21 Stakeholders and their Needs  For Accounting information to be useful, it must be put in a form which is relevant to the needs of the user.  The next slide identifies 10 possible stakeholders in a business. Each will have their own need in terms of information on which they will base their decisions

22. 22 Business organisation Competitors Lenders Managers Owners Customers Suppliers Financial analysis Community representatives Government Employees and their representatives Main users of financial information relating to a business

23. 23 Stakeholders and their Needs CUSTOMERSContinuity of supply Ability to meet needs COMPETITORSThreats to sales & profits Provide comparisons EMPLOYEESJob security Remuneration comparison GOVERNMENTPAYE, Corporation Tax, VAT Statutory legislation COMMUNITYEnvironment Contributions Jobs

24. 24 Stakeholders and their Needs SUPPLIERSAbility to Pay, Credit risk LENDERSAbility to meet obligations, Security of investments Credit risk Financial structure MANAGERSRemuneration Company Performance & Planning SHAREHOLDERS Organisational performance Value of shares; Return v risk Management performance FINANCIAL ANALYSTSCompany Performance Plans & Objectives

25. 25 Activity 1.2 Discuss the following:  Why should a non-accountant study accounting?  What sources of information other than accounts might users employ to gain an impression of the financial position and performance of a business? Answer

26. 26 Activity 1.2: A Possible Solution (1) Why should a non-accountant study accounting?  For a stakeholder in a business, its financial performance is a very important indicator of its health as an organisation.  A crucial way in which a business reports its success or failure is through the language of accountancy.  Managers, shareholders, employees and customers all have stakes in the continued running of an organisation. In order to safeguard their interests, they need to interpret accounts, and to be able to judge to what extent their investment (career, capital etc.) is being safeguarded.

27. 27 Activity 1.2: A Possible Solution (2) What sources of information other than accounts can be used to find out about the performance of a business? Meetings with managers or employees Publications or announcements concerning the business Media reports Industry watchdogs/reports FTSE or other performance indicators

28. 28 Part 1c The Different Types of Accounting Information

29. 29 The Different Types of Accounting There are two main types of accounting Financial Accounting This is the main ‘public’ or external financial scrutiny undergone by an organisation in order to demonstrate its effectiveness. Management Accounting This is the internal financial scrutiny used to steer the organisation towards the achievement of its mission.

30. 30 Financial Accounting & Management Accounting Financial Accounting  Seeks to meet needs of other stakeholders  General purpose, summary reports with little detail  Subject to regulations and standardised format  Tends to be annual or six- monthly, backward-looking  Audited, objective measurement of financial position  May be certified by auditor Management Accounting  Seeks to meet needs of managers  Detailed and focused on specific needs  Does not require a specific or standardised format  Produced as frequently as required, with forecasts  May incorporate information which is less objective or verifiable

31. 31 Management accounting Nature of reports produced Level of detail Restrictions Reporting interval Time horizon Range of information Financial accounting Specific purpose General purpose Detailed information Overview Not regulated Highly regulated Monthly/Weekly/Daily Annual/Semi-annual Forward looking Backward looking Monetary and non-monetary information with greater reliance on subjective information Primarily monetary items measured on an objective basis Financial and management accounting

32. 32 Key Topics Financial Accounting  Statutory requirements  Financial statements  Cash-flow statements  Accounting standards  Interpretation of accounts  Annual reports Management Accounting  Costing  Cost-volume-profit analysis  Pricing  Budgeting  Investment Analysis  Sources of finance

33. 33 Other Branches of Accounting  Auditing - checking accounts to ensure there is a true and fair view - may be a legal requirement  External auditing - answering to shareholders  Internal auditing - answering to management  Book-keeping - collecting basic financial data and producing financial statements (usually through a double-entry book-keeping system)  Cost accounting - focusing on costs in greater detail  Taxation - specialised, technical advice

34. 34 Activity 1.3  Which of the following is the most useful to an organisation and why? - Financial Accounting, Management Accounting, Book-keeping, Auditing, Cost-Accounting or Taxation. Answer

35. 35 Activity 1.3: Possible Solution  Which of the following is the most useful: - Financial Accounting, Management Accounting, Book-keeping, Auditing, Cost-Accounting or Taxation.  Each of these have their uses to particular groups of people, and for an organisation to survive it needs all of them.  However, some are merely ‘external measures’ designed to address the issues of accountability - ( Financial Accounting, Auditing, Taxation)  Others are ‘internal measures’ designed to help management improve performance - ( Management Accounting, Book- keeping, Cost-Accounting)  It could be argued that while the first group is necessary, it is the second group which is actually useful to the organisation itself.

36. 36 Part 1d Types of Organisations

37. 37 Types of Organisation  Sole Trader  Partnership  Limited Company (Ltd)  Public Limited Company (PLC)  Voluntary organisations  Central and local government  Quasi-governmental bodies

38. 38 “Sole Trader”  Owned and controlled by one person (though more may work in it)  Advantages: Simple, flexible, full control and full retention of profits  Disadvantages: Unlimited liability, Difficult to raise capital, limits growth  Requirements: Licence (if appropriate), VAT registration (if appropriate) Accounts (for tax reasons) Health & Safety regulations Employment regulations

39. 39 “Partnership”  Similar to Sole Trader but for more than one person  Governed by formal or informal partnership agreement (“Deed of partnership”) or subject to Partnership Act 1890  Shared responsibilities  Shared finance and profits  “Jointly and severally liable”  Liability of “sleeping partners” can be limited

40. 40 Limited Company (Ltd)  Set up to encourage enterprise  Therefore subject to stricter regulatory framework  Owned by shareholders, run by Directors  Separate legal entity to those who own it or run it  Limited liability (may be limited by guarantee)  Pays Corporation Tax on profits  Profits distributed to shareholders through dividends  Registers with Companies House  Governed by Articles/Memorandum of Association

41. 41 Limited Company (Ltd) Advantages:Protection of limited liability Continuity through separate identity Easier to raise finance Credibility £100 to start up Disadvantages:Legal formalities & costs Lack of privacy of accounts Accountability to shareholders Conflict between owners &directors

42. 42 Public Limited Company (PLC)  Similar to Limited Company but shares traded publicly through Stock Exchange  Must adhere to specific legislation (e.g. 6 monthly accounts, qualified accountant as Company Secretary)  Method of raising finance (e.g. through sale of shares)  Original owners can realise some of the value of their shares

43. 43 Statutory Requirements for Incorporated Companies  Annual report including: Annual return Profit and Loss Account, Balance Sheet & Cash-flow Statement Notes to Accounts Directors report Auditors’ report (if appropriate)  Information required is dependent on size of the Company (small, medium, or large)

44. 44 Voluntary Organisation - Unincorporated  Collection of individuals with common aim  May have a membership structure and constitution  No separate legal status - cannot incur debts or be sued  Individuals may therefore be jointly liable (but may take out liability insurance)  A trust may be suitable for organisations with charitable aims  A trust is normally governed by a trust deed - trustees manage the assets for the benefit of a specific purpose

45. 45 Voluntary Organisation - Incorporated  Company limited by guarantee or Industrial and provident society  Can hold property, enter into contracts and employ staff in own name  Limits personal liability (to the guarantee) assuming no breaches of trust  Has to comply with law and legislation and will incur additional costs

46. 46 Charitable Status  A group MAY register as a charity if its aims and objectives are “charitable” according to the Charity Commissioners’ definition - i.e. they fall into one of the 4 “heads of charity”: - relief of the poor, the handicapped & the aged - the advancement of religion - the advancement of education - other purposes beneficial to the community  Trustees may not benefit from the organisation and beneficiaries cannot be those who give (i.e. self-help groups are not charitable)

47. 47 Charitable Status  A group MUST register if its aims and objectives are “charitable” according to the Charity Commissioners’ definition AND: Its income exceeds £1,000 It uses or occupies land or buildings It has a permanent endowment  There is NO sanction for not registering  Charity Commission decides if aims are charitable

48. 48 Charitable Status Advantages  Financial - including exemption from most forms of direct taxation  Status/credibility of charity registration number Disadvantages  Political and campaigning activities are limited  Trading activities are limited  Must comply with charity law - submitting annual accounts; stating charitable status of official documents  Monitored by Charity Commission  Application process (though now simplified including model governing documents)

49. 49 Activity 1.4 Discuss the following:  What are the main advantages and disadvantages which should be considered when deciding between becoming a sole trader or a partnership business?  What are the main advantages and disadvantages which should be considered when whether or not to become a limited liability company?  What are the main advantages and disadvantages when deciding whether or not to apply for charitable status? Answer

50. 50 Activity 1.4: Possible Solutions  Advantages and disadvantages of being a sole trader or partnership Advantages:  Sole Trader: full control and full retention of profits  Partnership: Shared responsibilities, shared finance Disadvantages:  Sole Trader: Unlimited liability, difficult to raise capital  Partnership: “Jointly and severally liable”. Shared profits.

51. 51 Activity 1.4: Possible Solutions  Advantages and disadvantages of becoming a limited liability company Advantages: Protection of limited liability, easier to raise finance Disadvantages: Legal formalities & costs, accountability to shareholders

52. 52 Activity 1.4: Possible Solutions  Advantages and disadvantages of applying for charitable status: Advantages: Financial - exemption from most forms of direct taxation, Status/credibility of charity registration number  Disadvantages: Trading activities are limited, must submit annual accounts

53. 53 Part 1e Summary & Preparation for Semester 1

54. 54 Session 1 - Introduction and Background Key concepts covered:  The role of finance & budgets in the organisation  The differing requirements of stakeholders  The different branches of accounting  Legal and regulatory frameworks

55. 55 Seminar One - Activities During this seminar we will:  Agree working groups  Review Chapter 1 of the set book  Revise key concepts from this week’s work  Discuss Case Study 1  Discuss Case Study 2

56. 56 Seminar One Case Studies  The two case studies which follow ask you to reflect on what you have learnt from the presentation and your reading of the set text.  They are constructed in such a way that you will need to think of arguments (in a variety of forms: business, managerial, personal and career) as to why accounting might be a “good idea”.  In doing this, you will need to draw on facts as well as opinions.

57. 57 Case Study 1 Clare Wong spends a lot of her time working for a large charity. The charity has grown enormously in recent years, and the trustees have been advised to overhaul their accounting procedures. This would involve its workers (most of whom are voluntary) in more book-keeping, and there is a great deal of resistance to this move. The staff have said that they are there to help the needy, and not to get involved in book-keeping Prepare some notes that you could use in speaking to the voluntary workers in order to try to persuade them to accept the new proposals. Dyson (1997) - Accounting for non-Accounting Students.

58. 58 Case Study 2 You are a personnel officer in a manufacturing company, and one of your employees, a young engineering manager has been chosen to attend the local Business School to study for a diploma in management. He is reluctant to sign up for the course because it includes a subject called “Financial Management”. As an engineer, he thinks it will be a waste of time to study such a subject. Prepare some notes that you could use in speaking to the engineering manager in order to show him the benefits to him of studying financial management. Dyson (1997) - Accounting for non-Accounting Students.

59. 59 Seminar One - Preparation  Read Chapter 1 - McLaney & Atrill  Revise key concepts: The role of finance & budgets in the organisation The differing requirements of stakeholders Different branches of accounting Legal and regulatory frameworks  Prepare Case Study 1 and 2 individually, but come with notes for a solution.  N.B. During the seminar, you will be allocated to groups of three or four people and be asked to work on each case study, presenting your solutions to the group.