FINANCE FOR NON-FINANCE PEOPLE

PRESENTATION BY: FRANCIS LEPIPIMOLEMO DEVELOPMENT

FOUNDATION

Purpose of Presentation

1.1. To increase knowledge about Finances among the participants.

1.2. To assist existing and potential entrepreneurs in Lesotho to appreciate the usefulness of MONEY in business

Introduction of training Workshop• People in business have to make money!Our ambitions,although

significant,are subsidiary.REMEMBER,IN BUSINESS,YOU MUST MAKE PROFIT.We are aware that MONEY everyday.We have all,since very early days,spent MONEY.For most of our lives we have all earned MONEY.It is strange;therefore,that it causes so many business problems.Most busines people understand the product they make or the service they provide.They appear rarely to understand how to control MONEY.The inability to understand finance is the major cause of business failure.

Today you can begin to put yourself in control of your financial affairs: We shall consider:

2.1 How MONEY flows and how you can use this vital resource to your maximum advantage.

2.2 Where MONEY comes from and where it goes to.

2.3 How forecasts can be produced and actual performance measured

2.4 Working capital2.5 Good business practices for controlling

of debtors,creditors,AND stocks.2.6 How MONEY is used in business.

3. IN BUSINESS-HOW DOES MONEY FLOW?

3.1 THREE THINGS MONEY DOES IN BUSINESS?3.1.1 MONEY COMES IN3.1.2 MONEY GOES OUT3.1.3 MONEY NOT SPENT STAYS IN

THE BUSINESS3.2 LIST OF ALL THE RESOURCES OF

MONEY CAN THINK OF

3.2 LIST OF ALL THE RESOURCES OF MONEY CAN THINK OF3.2.1 MONEY INTRODUCED BY OWNERSFrom time to time ,and certainly when a new business starts, the owners introduce MONEY. This is called the OWNER’S CAPITAL.3.2.2 MONEY MADE AND RETAINED(Called Profit)The objective of all businesses is to buy and sell goods and services AT A PROFIT. In other words, the MONEY RECEIVED must EXCEED the MONEY SPENT. In simple terms, if this is achieved then the profit is made.

More MONEY is available after trading than before.For the business rather than individuals to benefit,this money must be left in the business.If it is withdrawn by the owners hen is not available to the business.Remember,money can only sensibly be withdrawn once profits are made.

3.2.3 MONEY BORROWED FROM OTHER PEOPLEmany businesses borrow MONEY as a matter of course.Financial institutions like (banks) and development corporations are examples of lenders.More often than not,they will require SECURITY for the WARNED :if you pledge your PERSONAL ASSETS to secure a BUSINESS LOAN you could LOSE THEM.

• Control you borrowing. It is one thing to use other people’s money to finance profitable expansion. It is quite another for a business to borrow money to support losses or to provide the owners with higher standard of living.

3.2.4 CREDIT GRANTED BY SUPPLIERSWhen our suppliers grant us credit terms e.g (date plus 30 days)this is a SOURCE OF MONEY.

3.3LIST OF ALL THE USES OF MONEY ONE CAN THINK OF

3.3.1MONEY SPENT BUYING THINGS TO KEEPMany of the things we need to run

businesses last for more than one year. Examples include motor vehicles, plant and machinery, premises, computers,office equipment and furniture. We commit some of the available MONEY buying these things that we will be using for a number years.

This money is no longer available. We have exchanged it for other things, called FIXED ASSERTS.

3.3.2 MONEY SPENT BUYING/MAKING THINGS TO SELL

More often than business has to spend money before it has a product to sell.

Lets look at two examples:

• A manufacturer must buy raw materials .Pay his workers, pay his electricity, and so on, BEFORE HE HAS A PRODUCT TO SELL.• A RETAILER MUST FIRST BUY GOODS,THEN SELL THEM3.3.3 CREDIT GRANTED TO CUSTOMERS

When we allow our customers to pay us later, we are in effect lending them money and this is a USE OF MONEY. It is normal business practice but

must be very carefully controlled.

• 3.3.4 DRAWING BY THE OWNER OF THE BUSINESSYou ,as a business person,operate TWO SEPARATE sets of

finances or,two money pots:• MY OWN PERSONAL financial affairs• MY BUSINESS financial affairs.- You must first pay your business commitments

(wages,creditors,loans,expenses,etc)- Then you must lease enough money in the business to take

account of contigencies AND TO ENABLE IT TO GROW- You really should DRAW A FIXED AMOUNT each week/ month.

• IF YOU ACCEPT THE ABOVE,HOW CAN A BUSINESS PERSON TRUELLY UNDERSTAND AND PLAN BOTH SETS OF FINANCIAL AFFAIRS IF BOTH OPERATE THROUGH THE SAME BANK ACCOUNT?

4.CASH FLOW AND CASH FLOW FORECASTING

4.1 We have discussed how important it is in business to control the MONEY. You must know that MONEY is available and how this MONEY is being used. This involves making decisions. Not ‘on the spot’ decisions such as should I pay this creditor or that creditor. YOU MUST PLAN YOUR BUSINESS ACTIVITIES.

Formal business planning is vital in any successful business.

• It is not just good enough to say’’ it will be alright tomorrow” or I get on well with the bank manager-he’ll see me through.

• There are many good books on business planning. If you are not sure of the processes, make sure you read one of these.

• It is important to remember, however,that Business plan is not a form provided by your bank and completed by your Accountant.

What then is a Business Plan?- Where the business is now- Where the business wants to be after a period of time say one year or two years.- A detailed plan of how the owner(s)propose achieving the objectives set out above.- The financial forecasts of the results of these efforts.

4.2 PROFIT AND CASH FLOW PLANNING

Lack of CASH can arise for a number of reasons:4.2.1 Unplanned or poorly planned CASH

requirements4.2.2 Poor profit margins4.2.3 Over-trading or, in simple terms, growing

too quickly4.2.4 Not collecting your debts quicker enough4.2.5 Paying your debts quicker than you need to4.2.6 carrying too much stock

We can summarize this as POOR PLANNING AND CONTROLSo how do you ensure you don’t run out of MONEY?You can never be certain-nothing is in business! The best way is to plan your business affairs. In much the same way as you would plan your holiday.First produce a PROFIT FORECAST, and then a CASH FLOW FORECAST.

4.3 The Cash Flow forecast

Profit forecast and cash flow forecasts are very different animals. Profit is ‘visible’,

cash flow lurks in the dark and when it bites, It has very sharp teeth!Think of things like:

4.3.1 If you sell on credit, your sales forecast for any one month may well be VERY DIFFERENT to the money you collect.

4.3.2 If you buy materials on credit, the cost of materials used in any one month may be VERY DIFFERENT to the money you have to pay your supplier.

4.3.3 Loan repayments are not in your forecasts(correctly so)but they will be in your cash flow.

4.3.4 Drawings are not in your profit forecasts (correctly so)but they will be in your cash flow.

6.THE ACCOUNTING EQUATION

This is the foundation of double-entry bookkeeping. It is established that:Asserts + Expenses = Liabilities + Income

This is not sleight of hand but the result of recognizing that each transaction has two sides. Another way of stating this duality is to note that the items listed on the right side of the balance sheet, liabilities plus shareholder’s equity can be viewed as the source of the asserts listed on the left side of the balance sheet or as claims against those assets.

Similarly, should income exceed expenses,there is likely to be a greater value of cash(left hand side) and the surplus of income over expenses will be called profit, which to the business, is a liability for it is money owed to the owner(s).

7.A CLOSER LOOK AT THE BALANCE SHEET

The balance sheet provides a ‘snapshot’ of a firm’s financial position.Prepared at a

point in time, the balance sheet shows what the firm owns (assets) and

owes(liabilities owed to outsiders plus the residual interest owed to shareholder/owners).

7.1 ASSETS

An asset is something the firm owns that has future economic benefit. An item cannot be recorded as an assert unless the company owns it. Equipment leased under a short term operating lease or a building that is rented would, therefore, not be considered an assert. However, ownership is not enough: the item, whether tangible (you can stub your toe on it) or intangible (no physical substance) ,must have future economic benefit. An example of something a company owns that has no future economic benefit is obsolete inventory.

In most financial statements, assets are divided into at least two categories namely current and noncurrent. Current assets comprise those that are expected to be converted into cash or used up within one year or the operating cycle. Non-current assets chiefly include property, plant and equipment (PP & E). These are not acquired with the intent to resell them; rather, they provide the productive capacity to earn revenue.

Current Assets: Cash: Cash and cash equivalents including currency,

bank deposits, and various marketable securities that can be converted into cash on short notice. Only securities that are purchased within 90 days of their maturity dates may be classified as cash.

Accounts Receivable: Amount due from customers that have not yet been collected.

Accounts receivable should “turn over” or be collected within the firm’s normal collection period, usually 30 to 60 days. An increase in the collection period may signal either a customer’s inability to pay or the company inability to collect. Managers and readers of financial statements are interested in the estimated cash that will be generated from collection of accounts. Since some customers may fail to pay amounts due, an allowance for doubtful accounts is deducted from accounts receivable to derive the net amount of cash that the company believes will be collected.

Inventory:Represents items that have been manufactured or purchased for resale to customers. They are valued at the costs assigned to them by the firm’s management. So in a company like Edgars for example, inventory comprises the purchase price paid by Edgars to all its suppliers for the inventory held at any point in time.

Fixed Assets (Non-Current Assets)Property, Plant, and Equipment:The most common non- current asset, (anything “non current” has a value that does not change materially within a full year, except for depreciation and additions or disposals) is PP&E. This generally includes such long-lived elements as land, buildings, machinery, equipment, furniture, and motor vehicles. PP&E is recorded at historical cost and shown at that cost less accumulated depreciation except land.The term ‘accumulated depreciation’ represents all depreciation expense to date for each depreciable asset included in PP&E.

LIABILITIES

Liabilities are obligations to pay or convey assets in the future based on past transactions. Liabilities are divided into current and non-current. Current liabilities are those obligations that will be satisfied within one year or the operating cycle; non-current liabilities are debts due after one year. Regardless of their classification as current or non-current, liabilities represent a claim, not an ownership interest.

Current Liabilities:Accounts Payable:The amounts the company owes to regular business creditors from whom it has bought goods and services on open account. Often called “trade debt,” accounts payable represents the short-term, unsecured debt that arises in the normal course of trade or business. The firm may also owe the Receiver of Revenue tax payments, and these would reflect as a current liability owed by the business to the Receiver as creditor.

SHAREHOLDERS’ EQUITY

Shareholders’ Equity:Shareholders’ equity is the ownership interest of those who have invested in the company through the purchase of capital stock. Shareholders’ equity account classifications include shares (in a company) interest (in a close corporation), and retained earnings.

Members’ contributions:In the context of a close corporation as the legal entity by which a business is represented, the member(s) will make a contribution to float the close corporation. The total initial contribution could be as little as R10, for the member or members can elect to float the business with a loan in their personal capacity, made to the CC. This would be a member's loan.

Retained EarningsAny profits made by the business that are not drawn by the owner/partners/members in the form of a dividend/distribution/profit share, are obviously retained in the business. These retained surplus profits are referred to as retained earnings.

A CLOSER LOOK AT THE CASH FLOW,INCOME STATEMENT AND BALANCE SHEET