Loading presentation...

Present Remotely

Send the link below via email or IM

Copy

Present to your audience

Start remote presentation

  • Invited audience members will follow you as you navigate and present
  • People invited to a presentation do not need a Prezi account
  • This link expires 10 minutes after you close the presentation
  • A maximum of 30 users can follow your presentation
  • Learn more about this feature in our knowledge base article

Do you really want to delete this prezi?

Neither you, nor the coeditors you shared it with will be able to recover it again.

DeleteCancel

Make your likes visible on Facebook?

Connect your Facebook account to Prezi and let your likes appear on your timeline.
You can change this under Settings & Account at any time.

No, thanks

Finance

No description
by

on 22 May 2014

Comments (0)

Please log in to add your comment.

Report abuse

Transcript of Finance

You should know
The meaning of the word working capital
How businesses manage working capital
Related concepts
Working capital cycle
Cash flow forecasts
Liquidity problems

Final Accounts
You should know
The final accounts for limited companies
Related concepts
Income statements
Trading account
Profit and loss account
Appropriation account
Balance sheets
Cash Flow Forecast
Investment Appraisal
You should know
Investment appraisal methods
Related concepts
Payback period
Average rate of return (ARR)
Ratio Analysis
You should know
Profitability ratios
Liquidity ratios
Efficiency ratios
Gearing ratio

Related concepts
Gross profit margin & net profit margin
Current ratio & acid test ratio
Stock turnover & Return on capital employed (ROCE)
Sources of Finance
You should know
The sources of finance available to business
How businesses choose between different sources of finance
Related concepts
Internal and external sources of finance
Long-, medium, and short-term finance
Accounts and Finance
Investment Appraisal
• Once a business is up and running and making a profit, its director’s next thoughts turn to expansion
• comes down to making choices about which project or opportunity to invest in
• Quantitative and Qualitative methods used

Profitability Ratios
Must be drawn accurately and neatly with no error

Joomin Kim runs a beauty shop called Nails by Joomin specializing in manicures and pedicures. The business operates as a sole trader. Joomin wants to take advantage of the growth of the business and its good reputation by opening a second store in a shopping center about 10 kilometers from the original location. A friend suggested to her that she could develop the business by franchising and increasing her economies of scale, but Joomin wants to open the new store and maintain control. She is considering restructuring as a private limited company. Joomin will finance the new store using $2500 from her saving and $50000 from a bank loan.
She anticipates revenues and expenses for the first 6 months of the new store (January to June) as follows
initial balance: $75000 (savings and bank loan)
initial start-up expenses: $15000
monthly rent: $2000
store manager monthly salary: $2000 (increasing by 6% in month 3)
monthly expenses for additional labor: $1000 for the first month, increasing by 20% per month
initial revenue: $2000 a month, increasing by 20% each month
Deborah Nelson
Reimi Pieters
Jenny Park
Rachel Larson
Lauren Mallory
Izzy Rohani

Internal Sources of Finance
Comes from within a business
Retained Profit: The profits generated form sales once interest payments to lenders, tax to government, and dividends to shareholders have been accounted for
The Sale of Assets: Many large retail businesses that own lots of property decide tos ell off their property portfolio and raise fresh expansion capital or cash
Utilizing Working Capital More Effectively: Squeezing or Reducing working capital needs so that the cash they do need is more efficiently used
Depreciation: The reduction in value of our assets, which occurs naturally through wear and tear in the production process of a business
Working Capital
Working Capital Continued
Working Capital: the capital of the business that is used in its day-to-day trading operations, calculated as the current assets minus the current liabilities
Final Accounts
Cash Flow Forecast
The better a company manages its working capital, the less the company needs to borrow
Need to manage working capital to ensure that those surpluses are invested in ways that will generate suitable returns for investors
Manage it by making sure there is always an amount of uncommitted dollars and funds in the bank account
Liquidity Ratios
Current Ratio:
indicates whether or not the current assets would cover the current liabilities or debts
(current assets/current liabilities)

Acid Test (Quick) Ratio:
the same as the current ratio except it excludes stock
(current assets-stock/current liabilities)
Efficiency Ratios
Stock Turnover:
indicates how many times stock turns over in a period of time
(cost of sales/average stock)= # of times
indicates how many days it takes to sell stock
(average stock/cost of sales) X 365= days

Return on Capital Employed (ROCE)
informs stakeholders about how effective the business is at returning profit from its capital
(net profit before tax/total capital employed) X 100
Investor/Gearing Ratios
Gearing Ratio:
looks at the proportion of capital employed that comes from long-term loans, as opposed to coming from equity and retained profits

(long-term loan capital/total capital employed) X 100
External Sources of Finance - Long Term
Sources of finance outside the business
Share Capital: Represents the monies that are put into a company by its investors, and who are then classified as shareholders. Not relevant for sole traders and partnerships
Loan Capital: Funding provided by outside banks and other lenders is generally referred to as debt or loan capital. Usually provided for a fixed period of time, with repayments evenly spread out over the length of the loan
Venture Capitalists: Specialist bankers who are more prepared to share the risks of business enterprise than high street banks, by investing in the share capital as well as providing loan capital for businesses with expansion potential
Grants from government and other philanthropic organizations: When Governments and successful entrepreneurs promote their social responsibilities by seeking to help the smaller business sectors with grants and soft loans
External Sources of Finance - Short Term
Bank Overdraft: An overdraft is repayable on demand and so should be used for short-term funding needs, such as when a business is waiting for customers to pay, when it needs to pay suppliers upfront, or when staff have to be paid
Trade Credit: Where a business gains extended time to pay its suppliers
Factoring: A factor agent is a company that buys the current unpaid invoices of a business at a discount, and hopes to recover more than the 75% value of the debts in order to make its profit
Leasing: When purchasing assets such as new machines get too costly, a leasing purchase is arranged. Ownership of the asset does not pass to the business until the last payment has been made
How Businesses Choose Between Different Sources of Finance
financial statements that inform stakeholders about the financial profile and performance of the business
statements cover two areas:
one covers trading, profit or loss, and distribution of it at end of financial year
the other is a balance sheet

Trading Account
looks at cost of production
makes it easy to see how efficient this side of the business operation is
Profit and Loss Account
presents sales revenue of the company for a given period of time
shows the related costs in making that sales revenue
shows how the resulting profit is used or "appropriated"
Appropriation Account
it's part of profit and loss account, looks at how the profit is distributed or appropriated
Four uses of profit:
interest payable to lenders (non-negotiable)
corporate tax due to government (non-negotiable)
dividends for shareholders
leftovers for future investment needs
Balance Sheets
tells us on a specific day what the business owns (assets), what it owes (liabilities), and what the net assets are (assets-liabilities)
tells us what the capital employed is (equals net assets, helps to explain why the account is called a balance sheet)
Important Parts
Fixed Assets
long-term and remain in business for more than one year (ex: car, equipment, patents [intangible])
Current Assets
remain in business for up to one year (ex: stock, debtors, cash [parts of working capital cycle])
Current Liabilities
short-term debts, payable within a year (ex: unpaid bills, bank overdraft)
*fixed assets + current assets - current liabilities = net assets
Share Capital
money invested by shareholders, including the original start-up funding (nothing to do with the buying and selling of existing shares on stock market
Loan Capital
long-term finance from a bank or other lenders
Retained Profit
profit used over the years that has remained in the business and been used to help fund its development
*add these components together and compare it to the net assets
Gross Profit Margin (%)
indicates what the return is after the variable costs are taken from the sales revenue
(gross profit/sales revenue) X 100

Net Profit Margin (%)
the profit left after all costs, both fixed and variable
(net profit/sales revenue) X 100
Figure 3.1 of the Working Capital Cycle can be found on pg 149
Squeezing working capital as a source of finance:
Advantage
not having to ask bank of shareholder to give you more money on terms that may be expensive
Disadvantage
suppliers and customers may not be happy waiting for money or paying upfront for goods
How Businesses Choose between Different Sources of Finance
Factors:
o A business should match the source of finance to its specific use—Long term for long term needs, short term for immediate needs
o The cost of the source
o The organization’s objectives
o The flexibility and availability of the finance
o The impact the new funding would have on the organization’s current financial structure
o The state of the external environment
o The type of business structure it is

Payback

• Measures the time it takes to recover enough cash to cover an initial investment or outlay
• Initial Investment/Annual cash flow from the investment

The Average (Accounting) Rate of Return
• Measures the profitability or accounting of a project over its useful life
• Net return (profit) per annum/Capital outlay (cost) x 100=%

Discounted Cash Flows and Net Present Value
• Discounting future cash flows is a way of calculating the effects of inflation on the value of future monies and is a more accurate method of investment appraisal
• Important to understand the objectives and contest of a business before making a choice of project

Working Capital
• The money needed by a business for its day-to-day or immediate needs
• Helps appreciate how cash is used by the business and how it moves form one stage to another

Budgeting
• Cash flow forecasts are one type of budget—a cash budget
• Budgeting is a way of looking into the future and creating financial plans that help to control the business “going forward”
• Create targets and underpin the objectives set by the business
Full transcript