BM Unit 2 - LO3 1

Higher Business Management

Unit 2Learning Outcome 3

Financial Management

BM Unit 2 - LO3 2

The Importance of Financial Management

Ensures that there are adequate funds available to acquire the resources needed to help the organisation achieve its objectives

Ensures costs are controlled Ensures adequate cash flow Establish and control profitability

levels

BM Unit 2 - LO3 3

Key Financial Concepts

Cash flow

Financial statements

Financial analysis (ratios)

Budgets

BM Unit 2 - LO3 4

Cash Flow

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

Liquidity - having sufficient “cash” to meet

everyday running costs

BM Unit 2 - LO3 5

Financial StatementsThe Balance Sheet

Assets - things owned Liabilities - things owed Finance - capital and reserves

A Balance Sheet is a statement of things owned and owed by a company and how they are financed at a particular date.

BM Unit 2 - LO3 6

Financial StatementsTrading and Profit & Loss Accounts

The Trading Account Gross Profit = Sales (Turnover)

- Cost of Sales

The Profit & Loss Account Net Profit = Gross Profit +

Gains - Expenses

BM Unit 2 - LO3 7

Interpretation of the Final Accounts and Balance Sheet

Interested Parties

Management Employees Rival companies Investors Lenders Banks

BM Unit 2 - LO3 8

Ratio Analysis

Purposes of Interpretation

Profitability - Is the organisation earning more than it is spending?

Liquidity - Does the organisation have enough money to pay its bills?

Efficiency - Is the organisation making the best use of its resources?

BM Unit 2 - LO3 9

Ratio Analysis

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

BM Unit 2 - LO3 10

Profitability Ratios

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%)

BM Unit 2 - LO3 11

Liquidity Ratios

Current 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)

BM Unit 2 - LO3 12

Efficiency Ratios

Return on Capital Employed (ROCE)= Net Profit (before interest and tax)/Capital Employed(Capital Employed = Total Net Assets - Debentures)

Rate of Stock Turnover= Cost of Goods Sold/Average Stock(Average Stock = [Opening + Closing Stocks]/2)

Asset/Turnover Ratio= Sales (Turnover)/Fixed Assets eg £1.65:1

BM Unit 2 - LO3 13

Budgets

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

BM Unit 2 - LO3 14

Cash Budgets(the most common type of budget)

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

BM Unit 2 - LO3 15

Cash Budgets and theRole of Management

Plans

Organises

Commands

Co-ordinates

Controls

Delegates

Motivates

BM Unit 2 - LO3 16

Using Financial Information

Reviewing past performance and assessing results

Planning future developments based on past performance

Comparing and contrasting with previous years’ and competitors’ performances