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Business Terminology, Practice & Techniques MUS128 Wk 2
Transcript of Business Terminology, Practice & Techniques MUS128 Wk 2
Business Terminology, Practice & Techniques
At the end of the session a student should be able to
identify & examine standard business & financial terminology & definitions
have a sound knowledge of what financial records they must be kept & how to keep them using ‘best practice’ accounting principles
Questions from last week?
1) Review & reflect on today’s lecture, bring questions next week along with a piece of relevant financial music industry news to discuss in class.
2) Sign upto (and read!) industry blogs - suggest:
2) Make sure you have purchased at least one core textbook & start reading about business terminology.
BRING INTO CLASS NEXT WEEK
Carter, S. and Jones-Evans, D. (2012) Enterprise and Small Business: Principles, practice and policy. London: Pearson.
Passman, D. (2014) All You Need To Know About The Music Business (9th Ed) New York: Free Press
3) Start a module diary - reflect on your professional development. Include workings out from weekly seminars & workshops (bring to class).
Business terminology practice & techniques
Identify business terminology from your own experience. Discuss what business experience you have/can you use in the future
Cash flow forecast
Financial year - tax year
Profit & loss accounting (net/gross)
Assets - fixed & liquid
Liabilities - current, long term
Fixed & variable costs
Common terms :
Standard Business Finance Terminology
Business terminology glossaries:
Direct to fan
Standard Music Business Terminology
Music industry terminology glossaries:
Search for anything:
Special words or expressions used by a profession or group that are difficult for others to understand.
Is jargon a good thing?
What is Jargon?
What "proof" of financial records must be kept?
cheque book stubs
Receipts for goods & stock
Paying in bank slips
Goods VAT exempt
Why is it important to keep good financial records? (think of as many reasons as you can)
To get a loan – a lender will want to see financial statements
To make good business decisions e.g. profitability, margins & cash-flow
To track key performance indicators (KPIs)
To track past growth & forecast future growth
To compare projected performance with actual performance
To compare performance against industry benchmarks;
To calculate income & expenses for tax returns
Financial records help answer questions like:
Can I hire an employee?
Can I afford to purchase new equipment?
What do I owe, or will I owe, in taxes?
A financial statement that summarises a company's assets, liabilities & shareholders' equity at a specific point in time = a "snapshot" also called
Statement of Financial Position
Shows what money has been spent by a business & details where.
Shows what is owned & owed (the "accounting equation").
Each of the three segments of the balance sheet will have many accounts within it that document the value of each.
Assets = cash, inventory & property
Liabilities = accounts payable, long-term debt
The exact accounts on a balance sheet differs by company, by industry & by business model (HMRC estimates eg music retail vs ticket comission. margins!)
A business uses a balance sheet to:
Analyse the use & sources of company funds
Investors, creditors & regulatory agencies generally focus their analysis of financial statements on the company as a whole.
Does not show how much a business is worth - no value specified for goodwill, human resources. Only measures monetary items. Also current book values vs wholesale costs
Profit & Loss Statement
Also known as a
Statement of Financial Performance
Summary of the financial performance of a business over time (monthly/quarterly/annually)
Adds the income for a period & subtracts the expenses incurred for the same period to calculate the profit or loss for the business (sales - costs).
Profit is the money left after all deductions. There are two types of profit: Gross Profit & Net Profit.
A business uses a profit & loss statement to:
Reflect on past performance
Analyse efficiency, viability, monitor
The P & L report is most often used by small business owners to track how their business is performing
Cash Flow Statement & Forecast
Cash Flow shows the amount of money coming into the business (cash in-flow) & going out of the business (cash out-flow). Reflects credit given to customers & received from suppuliers, money invested, borrowed or drawn
Cash Flow Statement
tells us how much cash
available in a business to keep the business running - the actual cash flow
Cash Flow Forecas
t gives an estimate of how much cash
available in a business. It is used to plan ahead and to help monitor business progress over the period.
A business uses a cash flow forecast to:
Identify potential shortfalls in cash balances eg if the forecast shows a negative cash balance then the business needs to ensure it has a sufficient bank overdraft facility
Analyse the trading performance of the business eg Retail - account managers, buyers, weekly budgets
Analyse whether the business is achieving the financial objectives set out in the business plan
What records are kept?
There are different forms of financial analysis
Basic Profit & Loss Statement
Records must be accurate & available
to view by HMRC
Records stored for at least 6 years from the
end of the last company financial year
they relate to.
To sleep better/ be more productive (by reducing uncertainty) & answer the question, "How much money am I making, if any?"
Business Terminology, Practice & Techniques
From the accounts provided give an overview of the companies health pointing out what the the key info is from each statement.
What is each statement commonly used for?
Gross profit margin %
Net profit/loss amount
Quick Ratio (acid test)
Debt liabilities ratio
What do the results of the ratio test reveal about the company?
Gross Profit Margin
139 ÷ 325 X 100 = 42.8%
Key measure of profitability by which investors/analysts compare similar companies to overall industry. The metric is an indication of the financial success & viability of a particular product or service. The higher the percentage, the more the company retains on each dollar of sales to service its other costs & obligations.
Successful companies are able to build economic moats that help them defend their territory from competitors. The wider the moat, the longer a company can hold rivals at bay & continue generating outsized returns for shareholders.
Why is Gross Profit Margin Important?
Apple beats world record in quarterly profits Jan 2015
The quick ratio measures a company’s ability to meet its current obligations with its most liquid assets i.e pay its current bills with only quick assets.
Quick assets are current assets that can be converted to cash within 90 days or in the short-term eg cash, short-term investments, current accounts receivable
A quick asset can be readily converted into cash with little impact on the value
Examples of non liquid assests?
Quick ratio examples - Apple Case Sudy
The debt ratio compares a company's
debt to its total assets (not current)
Example 1: Total liabilities of ABC Record Company are £267,330 & total assets are £680,400.
Debt ratio = £267,330 ÷ £680,400 = 0.393 or 39.3%
Example 2: The balance sheet for Coca-Cola Co for the first quarter of 2014 shows (in millions) total liabilities of £58,635 & total assets of £32,654.
Debt ratio = £58,635 ÷ £32,654 = 1.8 or 180%
Debt Liabilities Ratio
Why is Debt Liabilties Ratio Important?
Spotify financial results show struggle to make streaming music profitable
The real problem with streaming?
Abbreviated version of Apple Inc.'s balance sheet for the quarter ended 27.6.15 showing the components of the company's current assets & current liabilities (all figures in millions of dollars):
Cash and cash equivalents 15,319
Short-term marketable securities 19,384
Accounts receivable in 30 days 36,250
Premises roperty 11,000
Total assets 83,995
Accounts payable 30,973
Accrued expenses 31,812
Current portion of long-term debt 2,500
Total current liabilities 65,285
Liquid current assets = add cash, cash equivalents, short-term marketable securities & accounts receivable (not inventories or premises). Divide by total current liabilities
Apple's acid-test ratio
= ( 15,319 + 19,384 + 36,250 ) ± 65,285 =
Quick ratio is an indicator of solvency of an business. A company is considered sound when quick assets exceeds current liabilities.
The higher the ratio, the more financially secure a company is in the short term. A common rule of thumb is that companies with a Acid-Test or quick ratio of greater than 1.0 are sufficiently able to meet their short-term liabilities.
Also called the "acid test" - method for testing whether a metal is real gold is to apply acid
Low/decreasing acid- test ratios suggest that a company is over-leveraged (borrowed too much) struggling to maintain or grow sales, paying bills too quickly, or collecting receivables too slowly.
Why is Quick Ratio Important?
Debt Ratio is a financial equation that indicates the percentage of a company's assets that are provided via debt.
The lower the percentage means that a company is using less leverage & has a stronger equity position.
If the ratio is less than 0.5, most of the company's assets are financed through equity. If the ratio is greater than 0.5, most of the company's assets are financed through debt.
Companies with high debt/asset ratios are said to be highly leveraged. The higher the ratio, the greater risk will be associated with the firm's operation. I
Like all financial ratios, a company's debt ratio should be compared with their industry average or other competing firms.
Knowledge and understanding:
i. Demonstrate knowledge of business and management theories and models
ii. Analyse the impact of the business environment on the behaviour of an entertainment organisation.
iii. Interpret financial reports, including Profit and Loss Accounts and Balance Sheets to assess performance of a business
You have now successfully completed some of the key learning outcomes for the Music Business & Finance Module!!!!
Have we meet the LOs for this session?
Can you identify & examine standard business & financial terminology & definitions?
Do you understand what financial records must be kept & how to keep them using ‘best practice’ accounting principles?
Homework & Next Week
LOs can be strengthened by research & reading. Read the "finance" sections in your text books (eg Stokes & Wilson chapter 13, How Music Works David Byrne Chapter 8) & research online.
Review & reflect on today’s lecture, bring questions next week along with a piece of relevant financial music industry news to discuss in class.
Revise course content so far for a fun test on concepts, terminology & ratios next week
What financial records must be kept?
Balance Sheet (Assets & Liabilities)
HOW TO SET UP A BUSINESS (ORGANISATION STRUCTURES)
Read relevant chapters in your core texts!
GPM = £13,500 ÷ £18000 = 75%
Net profit/loss = £13,500 - 12,175 = £1,325
Quick Ratio = Total current assets = £2385 ÷ Total current Liabilities = £1210 = 1.97
Debt Liability = Total debt (1210 + 1600) £2810 ÷ Total Assests (2000 + 2385) £4385 = 0.64
GP = 75% very healthy
Made £1325 profit after all overhead incl. wages
P & L A/C Reflect on past performance, Analyse efficiency, viability, monitor, financial forecasting
QR - more than sufficiently able to meet short-term liabilities (0.1 & above)
DL - If the ratio is greater than 0.5, most of the company's assets are financed through debt, at 0.64 healthy & under 2.
B. Sheet - analyse the use & sources of company funds. Show what is owned & owed. Investors, creditors & regulatory agencies generally focus their analysis of financial statements on the company as a whole = good investment/loan/tax return