2. Management of People and Finance Outcome 2 - Financial Management 1

3.  Payment of wages/salaries  Maintenance of financial records  Payment of invoices  Production of internal financial info (eg budgets)  Analysis of financial info (eg ratios)  Production of annual accounts 2

4.  Bank Overdraft  Trade credit  Factoring  Grant  Retained Profits  Bank Loan  Leasing  Hire Purchase  Owner’s Savings  Share Issue  Debenture  Venture Capital 3 Describe and discuss all on list (P19-21)

5.  Ensures that there are adequate funds available to acquire resources needed  Ensures costs are controlled  Ensures adequate cash flow  Establish and control profitability levels 4

6. Cash Coming In  Profits  Sales of fixed assets  Sales of stocks  Decrease in debtors  New capital introduced  Loans received  Increase in creditors Cash Going Out  Losses  Purchases of fixed assets  Purchases of stock  Increase in debtors  Drawings or dividends  Loans repaid  Decrease in creditors 5 Liquidity - having sufficient “cash” to meet everyday running costs

7.  Control costs and expenditure  Monitor cash flow  Forecast trends  Monitor performance  Inform decision making 6

8. The Trading Account Gross Profit = Sales (Turnover) - Cost of Sales The Profit & Loss Account Net Profit = Gross Profit + Gains - Expenses 7 Copy example P91

9.  Identify 3 national or multinational PLCs  Research online to find their annual accounts 1.How many sales (turnover or revenue) did they make last year? 2.How much did they spend on stock (cost of goods sold)? 3.What Gross Profit/loss did they make last year? 4.What Net profit/loss did they make last year? 5.Can you make any conclusions on their profitability? Summarise your findings in a short report on WP or a Multimedia presentation. 8

10. Purposes of Interpretation  Profitability – to show how ‘profitable’ the organisation is  Liquidity – to show a business’ ability to pay short-term debts  Efficiency – to show how efficiently and effectively the organisation is performing 9

11. Gross Profit% = Gross Profit/Sales x 100 Mark-up% = Gross Profit/Cost of Sales x 100 Net Profit% = Net Profit/Sales x 100 Expenses% = Expenses/Sales x 100 (Expenses% = Gross Profit% - Net Profit) 10 Using figures from the Trading, Profit and Loss Account.

12.  Assets - things owned (fixed and current)  Liabilities - things owed  Finance - capital and reserves 11 A Balance Sheet is a statement of things owned and owed by a company and how they are financed at a particular date. Copy example P92

13. Current Ratio (sometimes known as Working Capital Ratio) =Current Assets/Current Liabilities eg 2:1 Acid-test Ratio =(Current Assets - Stocks)/Current Liabilities (NB should be >1 : 1 - if not, inability to pay debts) 12

14. Interested Parties (stakeholders):  Management  Employees  Rival companies  Investors  Lenders  Banks 13 TASK! Read the table on Page 59 of Leckie & Leckie and compare 6 different ‘interested parties’

15. 1.Identify 3 sources of finance for a business. 2.Define the term liquidity. 3.Explain the term ‘Fixed Assets’. 4.Give an example of a Current Asset. 5.Explain the term depreciation using an example. 14

16. Uses  To compare current year’s performance with previous year  To compare performance with rivals  To interpret in order to improve future performance  To forecast/budget Limitations  The information is historical - too late to do anything about it  Comparisons are difficult - different conditions apply in different years and no 2 companies are the same 15

17. Gross Profit% = Gross Profit/Sales x 100 Mark-up% = Gross Profit/Cost of Sales x 100 Net Profit% = Net Profit/Sales x 100 Expenses% = Expenses/Sales x 100 (Expenses% = Gross Profit% - Net Profit) 16 TASK! Read P93 of each profitability ratio and write a brief description of the purpose of each into your jotter.

18. Current Ratio (sometimes known as Working Capital Ratio) =Current Assets/Current Liabilities eg 2:1 Acid-test Ratio =(Current Assets - Stocks)/Current Liabilities eg 1 : 1 if not, inability to pay debts 17 TASK! Read P94 of each liquidity ratio and write a brief description of the purpose of each into your jotter.

19. Return on Capital Employed (ROCE) % = Net Profit (before interest and tax)/Capital Employed*100 *Capital Employed = Total Net Assets - Debentures Rate of Stock Turnover % = Cost of Goods Sold/Average Stock*100 *Average Stock = [Opening + Closing Stocks]/2 Asset/Turnover Ratio = Sales (Turnover)/Fixed Assets eg £1.65:1 18

20.  An organisation can show a healthy profit but have poor cash flow leading to problems paying debts on time.  A cash flow statement is produced by a company in addition to other accounts to show the movements of cash in and out over the past year. This will be included in it’s published accounts.  P94 19

21. Using spreadsheet software, create one of the below accounts. You may use the Leckie and Leckie book, textbook or ‘real’ organisation accounts as a template or to provide an example.  Trading, Profit and Loss Account  Balance Sheet  Cash Flow Statement  Cash Budget 20

22. 1.What are the 3 categories of ratios? 2.Identify 2 ratios. 3.Describe 2 different ratios. Finance Starter/Plenary Questions 21

23. Purpose  To monitor and control the activity of an organisation - can compare actual figures with budget figures and seek answers from those responsible  To gain information - are we doing well  To set targets - keeping within limits of spending  To delegate management authority - employees are given “freedom” within a set budget 22

24.  To monitor and control individual departments or the organisation as a whole  To assess the validity of a business project in order to secure finance eg bank loan  To assess the feasibility of a business start-up or business expansion  To provide a tool for measuring progress by comparing actual figures with budgeted ones 23

25.  Companies can produce production budgets and sales budgets to plan for the future to provide targets.  Textbook page 175/176 24

26. Sources of problem:  Tied up in stock  Customers allowed too much credit  Customers not paying in time  Borrowing too much finance  Owners taking too many drawings  Purchase of large capital items  Low sales 25 Resolving problem:  Offer discounts/promotions to encourage sales  Sell unnecessary assets  Remind customers to pay!  Arrange credit  Seek another source of finance  Owners draw less  Cheaper suppliers  Purchase capital items on HP

27. Managers - Profitability ratios to compare performance Owners - Profitability ratios especially ROCE Creditors - Liquidity ratios to assess likelihood of payment Employees - Profitability to determine wages/job security Community - Overall profitability for local economy/jobs Any others? Read P97 and summarise at least 2 other stakeholders and their interest. 26

28.  Reviewing past performance and assessing results  Planning future developments based on past performance  Comparing and contrasting with previous years’ and competitors’ performances 27