FINANCE

HIGHER BUSINESS MANAGEMENT

UNIT 3

IMPORTANCE OF FINANCE

Ensures that there are enough funds available to get the resources needed to meet objectives.

Ensures costs are controlled

Ensures adequate cash flow

Establish and control profitability levels.

ROLE OF THE FINANCE DEPARTMENT

Provide financial information to help managers manage good decisions

Ensure cash is available to meet objectives

Prepare financial statements

Monitor the funds of the business

Ensure bills are paid

Ensure the firm is controlling its credit well

CASH FLOW

Looks at the liquidity of the business.

This is having enough cash to meet everyday running costs.

Cash Coming In Cash Going Out

Profits Losses

Sales of Fixed Assets Purchasing Fixed Assets

Sales of stock Purchase of stock

Decrease in Debtors Increase in debtors

New capital introduced Drawing of dividends

Loans received Loans paid

Increase in creditors Decrease in creditors

FINANCIAL STATEMENTS

1. Balance Sheet

Statement of things owned and owed by a company and how much the business is worth at a given period of time.

ELEMENTS OF THE BALANCE SHEET

Fixed Assets – things that the company owns that will last more than a year. E.g. machinery, premises

Current Assets – things that the company owns that will last less than a year. E.g. cash, stock, Debtors

Current Liabilities – things that the company owes that will be repaid within a year. E.g. Creditors

Working Capital – the difference between Current Assets and Current Liabilities.

Net Assets (Capital Employed) – Fixed Assets plus Working Capital.

Issued Share Capital – the amount of shares that have been sold in the firm.

Reserves from Profit and Loss Account – retained profits from previous years.

Long-term Liabilities – things that the company owes that will take longer than one year to repay. E.g. debentures

2. Trading, Profit and Loss Accounts

This works out the profits the firm makes.

Gross Profit – profit made on the buying and selling of their product.

Sales less cost of goods sold

Net Profit – overall profit after all expenses have been taken into consideration.

Gross Profit less expenses