Accounts and Finance

Sabrina Lieu, Grayson Turley, Cyrus Batara, Biniam Tesfaghaber, Afua Tiwaa

Sources of FinanceDefinition: This is the breakdown of finance in different categories that describe the management of money in a business/company and by the government.Sources of Finance Breakdown

● Capital Expenditure● Revenue Expenditure● Internal● External● Equity Finance ● Debt Finance

Short Term Finance - Items that are paid in less than a year. Usually assets that need to quickly get paid off,Medium Term Finance - Different sources of finance that are used for the expansion of a business or for the purchase of large fixed. Usually paid off between 3 - 5 yearsLong Term Finance - Long term payments that may last over a year to a bank. Usually used for vehicles and rent.

Sources of Finance Capital Expenditure

● Used for buying fixed assets● Fixed assets are used to bring in more money● Capital is only used to bring in Medium and Long term finance

Revenue Expenditure● It is only used for the daily function of a business● Always manage cash flow and try to avoid liquidity issues● Used for short and medium term sources of Finance

Equity Finance● The firm gives up shares and dilutes ownership ● Less control for majority stockholder and profits are shared to more people ● This type of finance can raise up to high amounts in finance

Debt Financing● Principal and interest has to be paid back or the firm will pay a higher interest rate● This type of finance can be very small or very big

Sources of FinanceInternal Finance

● Personal Finance - Sole Traders and Partnerships take risks of losing money● Selling Assets - Assets are usually sold. But fixed assets sold for liquidity may cause future production

problems. ● Retained Profits - Profits that are returned back to the business

External Finance● Share Capital - Limited companies that are selling their shares. ● Venture Capital - Investments in high risks and high return firms that returns ownership in the firm.● Loans - Taking a loan and paying it back after a certain amount of years. This comes along with interests● Government Grants - Money received from the government in order to support a specific sp ● Leasing - This is when renting an item and paying it off over a period of time when the contract is over. ● Hire Purchase - Purchasing an item (with interest) on credit over an extended time perio

Sources of Finance How Might They Appear?Capital Expenditures

● Purchasing Assets● Renting businesses, stores, land, etc… ● Machines/Equipment● Cars, trucks, buses, vehicles, etc…● Patents

Revenue Expenditures● Wages● Depreciation ● Advertisements● Insurance/Utility/Electricity/Repair

Investment Appraisal

An investment appraisal is an evaluation of the attractiveness of an investment proposal using methods such as:● Payback Period● Average Rate of Return

Investment Appraisal

Payback period-Amount of time required to recoup the funds expended in an investment● PP=Costs of investment/Annual cash inflows● EX: a $5000 investment which returned $1000 per year would have a 5-

year payback period. ● EX: A $100 investment which returned $50 per year would have a 2-year

payback period. ● The time value of money is not generally taken into account.

Investment Appraisal

Average rate of return(ARR)-The average return from an investment expressed as a percentage of the cost of the investment● ARR=(Annual return profit/Initial investment) x 100● EX: A company buys a delivery truck that costs $10,000. 1,000 is

profited each year from deliveries. 1,000/10,000 x 100 = 10% ARR

Working Capital

Definition- The capital of a business that is used in its day-to-day trading operations, calculated as the current assets minus current liabilities.What is Working Capital used for?

How Businesses manage Working Capital1.Working Capital Cycle2.Sources of additional working capital3.Handling Receivables (Debtors)4.Managing Payables (Creditors)5. Inventory Management 6.Capital Ratios

Working Capital Cycle

Working Capital

Cash Flow Forecasts- Planning future cash requirements to avoid a crisis of liquidity.

Working Capital

Liquidity- Definition: The degree to which an asset or security can be bought or sold in the market without affecting the asset's price. Liquidity is characterized by a high level of trading activity. Assets that can be easily bought or sold are known as liquid assets.Example of a liquid asset for any company?

Final Accounts -Limited Company

● Income statementso Measures a company's financial performance over a specific period of time.

● Trading accounto looks at the cost of the business’ production to evaluate how efficient it is

● Profit and loss accounto reviews the business’ sales revenue and related costs that helped “make” the

revenue As well as how the profit was appropriated.

● Appropriation account o it’s the part of the profit and loss account that looks at the distribution of the

profit after costs, and expenses has been subtracted. Taxes - paid to the government External capital interest - like loan interest Dividends - paid to shareholders

● Balance sheeto shows the assets and liabilities of the business on a specific date in time

Final Accounts - The Balance sheet

1. Indicates how much the business is worth and how valuable they area. value is just an estimate of the business by internal stakeholders

2. Vocabulary: Fixed assets, Current assets, current liabilities, share capital, loan capital and Retained Profit.

a. Fixed assets: these are assets that the business owns for more than one yearb. Current assets: they are assets owned by the business and are planned to

remain so for one yearc. Current liabilities: they the short term liabilities that the business owns to its

creditors; ex suppliers bills etcd. Share capital: it the shareholders investments (often times money) into the

businesse. Loan capital: it’s a one year or more (long term) source finance from the bankf. Retained Profit: it the profit that is kept in the business

3. These accounts provide information for Internal and External stakeholders for things like loans etc.

Examples of final accounts

Examples of Final Accounts

Ratio Analysis

★ Profitability Ratios○ Gross Profit Margin○ Net Profit Margin

★ Liquidity Ratios○ Current Ratio○ Acid Test Ratio

★ Efficiency Ratios○ Stock Turnover○ Return on Capital Employed

★ Gearing Ratio

Profitability Ratios

Measure the ability to convert sales revenue into profit★ Gross or Net Profit Margin

○ Calculated as gross or net profit over sales revenue multiplied by 100

○ informs us how efficient the production process is at generating a surplus to help “contribute” towards paying the other costs of the business

Profitability Ratios

Gross Profit Margin:(Revenue – COGS)/Sales Revenue x 100

Net Profit:[Revenue – (COGS+Overheads+Taxes+Interest)] x 100

Sales Revenue

Liquidity RatiosDetermines whether or not your current assets cover your current liabilities or debts

★ Current Ratio*○ Calculated as: current assets/current liabilities

*The current ratio is not as accurate, as it includes stock, which is difficult to liquidate.

Liquidity Ratios

★ Acid Test Ratio (Liquidity Ratio)○ More accurate than current ratio, as it

removes stock from the calculations○ Calculated as: (current assets – stock)/current liabilities

Efficiency Ratios

Return on Capital Employed (ROCE)★ Often referred to as the primary ratio,

it inorms stakeholders about how effective the business is at returning a profit from the capital it invests on a product.

★ Calculated as: (net profit before tax/total capital employed) x 100

Efficiency Ratios

Stock Turnover Ratios★ Lets investors know how well a

business manages its stock. ○ If it is turning over quickly, a business may

consider increasing production○ If it is turning over slowly, it may indicate that

the product is not very popular

Efficiency Ratios

Can be calculated as how many times does the stock turn over in a period:★ cost of sales/average stock = # of timesCan be calculated as number of days it takes to sell the stock:★ (average stock/cost of sales) x 365 = # of days

Gearing Ratio

Looks at percentage of capital employed that came from long-term loans.A high gearing ratio is not necessarily a bad thing. However, if your gearing ratio is high, it is more difficult to obtain more loans.

Gearing Ratio

calculated as : long-term loan capital/total capital employed