Finance_for_Managers

FINANCE FOR MANAGERS 1.1 Explain the purpose and requirement for keeping financial records This paper sets out to clear the basic concepts of financial management and its appliance on the corporate world with the basic sets of accounts prepared while moving up to the end of financial year. “The financial manager plays a dynamic role in a modern company's development” (JC Van Horne 1980). Today, external factors have an increasing impact on the financial position of the company. Heightened corporate competition, technological change, volatility in inflation and interest rates, worldwide economic uncertainty, and ethical concerns over certain financial dealings must be dealt with almost everyday basis. Financial records in the company are [prepared for many different purposes: 1) To analyse the profit & loss in the fiscal year 2) To judge the competitor’s market share 3) To satisfy different stake owners 4) For government bodies & Taxation 5) For claiming back VAT 6) To assess growth and market competences 7) Planning strategies 1.2 Analyse techniques for recording financial information in a business organisation  Preparation of financial accounts of the company and their's interpretation for assessing the financial position of the company in the market. Lets take the example of company like ONE STOP BEAUTY LTD. (OSB), one of the leading company in cosmetics and perfumeries. This company is running well from last few decades and the only reason is the efficient construction of financial accounts and making the policies in relation to it. Accounts of the company are to be made on the daily basis starting from: Journal > Ledger > trial balance > cash book > Cash flow statement >Petty cash> cash flow forecasting > final accounts. Journal: OSB creates its daily basis accounts primarily from journals. The daily transactions of business like give , take , credit, cash , etc. all the things are to be recorded in journals. The main headings of OSB are salary, wages ,purchase , bills, rent, rates , returns ,etc. source: google images Ledger: The main accounting record of a business which uses double entry bookkeeping. It will usually include accounts for such items as current assets, fixed assets, liabilities, revenue, and expense items, gains and losses. Each general ledger is divided into debits and credits sections. The left hand side lists debit transactions and the right hand side lists credit transactions. Petty Cash : Petty cash refers to small amounts of cash kept on hand in a business. (The term "petty" comes from "petite," or "small.") There are two reasons to keep petty cash: * To make change for customers or patients * To pay for small purchases which require cash, such as food for the office lunch or coffee supplies, or for parking. Most retail businesses keep a cash drawer as do health care practices. Trial balance: OSB makes the trial balance to make sure that the accounts are compatible and reliable and are arithmetical accurate for the smooth running of financial accounts and avoiding the errors. Difference of both debit and credit side is recorded in trial balance to calculate the arithmetical operations of accounts. Cash book: cash book is the central record of all the money that comes into and goes out of your business. OSB record the cash coming into the company and cash going out of the company. The sales of cosmetics, perfumes, rent received from the property acquired , and expenses of office equipment, furniture, purchase of clearance, stock, etc. source: google images Cash flow statement: cash flow statement OSB shows the cash inflows and cash outflow of the company. It breaks further into operating activities, financing activities, and investing activities. The cost incurred for running operations in the company, shareholders fund, interest accounts, and investment made by OSB in certain fields. Source: google images> www.howto.co.uk 1.3 Analyse the legal and organisation requirements for financial reporting Insurance & Taxation: Insurance and taxation are the main parties having interest in the organisation. Company need to be insured properly in relation to its products, services and in case of any emergency if arises. And on the other hand company need to be clear in eyes of taxation authorities to be fair in paying VAT and other stuff for the maintenance of the company and running well. In case of claiming back VAT , and in case of import and exports of the company, company need to satisfy these stake owners for sustainment of the company and to be fair in eyes of government. 1.4 Evaluate the usefulness of financial statements to stakeholders Every organisation have more than one stake owners. Then the question arises that who are these stake owners' So it is very important to be clear in the meaning of the stake owners, stake means interest , thus stake owners are the persons who are having interest in the organisation. The firm cannot work in the market or at the business place alone it has to be involved with the different functions and processes and other parties are involved in it as well. So when the question comes on the stake owner of OSB , this company mainly deals with the cosmetics and perfumeries , so the possible stake owners of this company could be : Customers: Customers are the main take owners in every organisations because they are the one for whom the products and services are made and are to be delivered . They are mainly or could be related to the end users of the product and services. So the main stake owners of OSB in terms of cosmetics are female strata of the society and in terms of perfumeries are male and female both. Suppliers: suppliers are the other major party concerned with the stake in the OSB. The company need to take the products and services time to time either due to stocking of products or due to clearing the old stock and refilling the new ones. Creditors: It is not necessary that every time if the company place the order with any other firm as a purchase , the company clear its due balance thereafter or soon. Sometimes the company keeps the balance for some time till it clears some of it stock. Trading Standards: Trading standards are the main stake owners looking for the benefit of the society and are mainly focused for checking the quality of the cosmetics and discovering the fakes in the perfumeries. So they are the one whop regularly checks the OSB stock to make sure that the customers are not be fooled or harmed by the company products and should get full value for money. Competitors: The main stake owners of OSB are competitor , every market place have one or more than one business having the same product line to sell. So it just depends on the company's price strategy and planning mechanism that the customer choice will depend upon. So the company in competition with OSB keep on looking the products and prices of the company to formulate their own policies and to have first mover advantage. 2.1 analyse components of working capital Final accounts ( PROFIT & LOSS ACCOUNT & WORKKING CAPITAL): At the end of financial year the company has to make its final account. OSB at the end of financial year prepares its financial account to be aware of its financial position. Like to be awarer of the assets in hands of the company and the liabilities company needs to pay. The final account consist of two major accounts – profit and loss account and second is balance sheet. Profit and loss account gives the exact figures to the OSB that how much profit or loss they had made in the previous year and what were the major expenses , incomes, tax to be paid, insurance , etc. with the help of gross profit OSB moves ahead towards the calculation of net profit. The shareholders fund, equity, investment all are to be included in this accounts. source: google images> www.quiwkstep.eu This final account of OSB gives the image of the company to the stake owners of the company about, how the company is going on in its financial terms. This is the major account and is very important to be considerable for lending money to OSB, or while purchasing shares, giving goods on credit, etc. A measure of both a company's efficiency and its short-term financial health. The working capital ratio is calculated as:   To assess these two elements , balance sheet is prepared along with profit and loss account. In baance sheet to give the accurate statements, assets are always equal to liabilities of the company. Source: www.modeladvisors.com 2.2 Explain how business organisations can effectively manage working capital Working capital management : Involves the relationship between a firm's short-term assets and its short-term liabilities. The goal of working capital management is to ensure that a firm is able to continue its operations and that it has sufficient ability to satisfy both maturing short-term debt and upcoming operational expenses. The management of working capital involves managing inventories, accounts receivable and payable, and cash. 3.1 Explain the difference between management and financial accounting FINANCIAL ACCOUNTING: Financial accounts describe the performance of a business over a specific period and the state of affairs at the end of that period.  The specific period is often referred to as the "Trading Period" and is usually one year long.  The period-end date as the "Balance Sheet Date". The format of published financial accounts is determined by several different regulatory elements: ·   Company Law ·   Accounting Standards ·   Stock Exchange Financial accounts concentrate on the business as a whole rather than analysing the component parts of the business.  For example, sales are aggregated to provide a figure for total sales rather than publish a detailed analysis of sales by product, market etc. Most financial accounting information is of a monetary nature. financial accounts present a historic perspective on the financial performance of the business MANAGEMENT ACCOUNTING: Management accounts are used to help management record, plan and control the activities of a business and to assist in the decision-making process.  They can be prepared for any period (for example, many retailers prepare daily management information on sales, margins and stock levels). There is no legal requirement to prepare management accounts, although few (if any) well-run businesses can survive without them. There is no pre-determined format for management accounts.  They can be as detailed or brief as management wish. Management accounts can focus on specific areas of a business' activities.  For example, they can provide insights into performance of: ·   Products ·   Separate business locations (e.g. shops) ·   Departments / divisions 3.2 Explain the budgetary control process Budgets and budgeting A budget is a financial plan for the future concerning the revenues and costs of a business. However, a budget is about much more than just financial numbers. Budgetary control is the process by which financial control is exercised within an organisation.   Budgets for income/revenue and expenditure are prepared in advance and then compared with actual performance to establish any variances. Managers are responsible for controllable costs within their budgets and are required to take remedial action if the adverse variances arise and they are considered excessive. 3.4 Evaluate the use of different costing methods for pricing purpose METHODS OF COSTING: Different industries follow different methods for ascertaining cost of their products. The method to be adopted by business organisation will depend on the nature of the production and the type of output. The following are the important methods of costing. * Job Costing: Job costing is concerned with the finding of the cost of each job or work order. This method is followed by these concerns when work is carried on by the customer’s request, such as printer general engineering work shop etc. under this system a job cost sheet is required to be prepared find out profit or losses for each job or work order. * Contract Costing: Contract  costing is applied for contract work like construction of dam building civil engineering contract etc. each contract or job is treated as separate cost unit for the cost ascertainment and control. * Batch Costing: A batch is a group of identical products. Under batch costing a batch of similar products is treated as a separate unit for the purpose of ascertaining cost. The total costs of a batch are divided by the total number of units in a batch to arrive at the costs per unit. This type of costing is generally used in industries like bakery, toy manufacturing etc. * Process Costing: This method is used in industries where production is carried on through different stages or processes before becoming a finished product. Costs are determined separately for each process. The main feature of process costing is that output of one process becomes the raw materials of another process until final product is obtained. This type of costing is generally used in industries like textile, chemical paper, oil refining etc. * Service (Operating) Costing: This method is used in those industries which rendered services instead of producing goods. Under this method cost of providing a service is also determined. It is also called service costing. The organisation like water supply department, electricity department etc. are the examples of using operating costing. * Operation Costing: This is suitable for industries where production is continuous and units are exactly identical to each other. This method is applied in industries like mines or drilling, cement works etc. Under this system cost sheet is prepared to find out cost per unit and profits or loss on production. * Multiple Costing: It means combination of two or more of the above methods of costing. Where a product comprises many assembled parts or components (as in case of motor car) costs have to be ascertained for each component as well as for the finished product for different components, different methods of costing may be used. It is also known as composite costing. 4.1 Demonstrate the main methods of project appraisal PROJECT APPRAISAL Project appraisal methodologies are methods used to access a proposed project's potential success and viability. These methods check the appropriateness of a project considering things such as available funds and the economic climate. A good project will service debt and maximize shareholders' wealth. Net Present Value : A project's net present value is determined by summing the net annual cash flow, discounted at the project's cost of capital and deducting the initial outlay. Decision criteria is to accept a project with a positive net present value. Advantages of this method are that it reflects the time value of money and maximizes shareholder's wealth. Its weakness is that its rankings depend on the cost of capital; present value will decline as the discount rate increases. Payback Method : A company chooses the expected number of years required to recover an original investment. Projects will only be selected if initial outlay can be recovered within a predetermined period. This method is relatively easy since the cash flow doesn't need to be discounted. Its major weakness is that it ignores the cash inflows after the payback period, and does not consider the timing of cash flows. Internal Rate of Return : This method equates the net present value of the project to zero. The project is evaluated by comparing the calculated Internal rate of return to the predetermined required rate of return. Projects with Internal rate of return that exceed the predetermined rate are accepted. The major weakness is that when evaluating mutually exclusive projects, use of Internal rate of return may lead to selecting a project that does not maximize the shareholders' wealth. Profitability Index : This is the ratio of the present value of project cash inflow to the present value of initial cost. Projects with a Profitability Index of greater than 1.0 are acceptable. The major disadvantage in this method is that it requires cost of capital to calculate and it cannot be used when there are unequal cash flows. The advantage of this method is that it considers all cash flows of the project.  4.3 Explain how finance might be obtained for a business project SOURCES OF FINANCE FOR BUSINESS PROJECT Formal sources of finance> 1) loans from the bank: long term loans short term loans 2) overdrafts 3) credit limits 4) Issue of shares 5) Issue of debentures 6) Raising public funds 7) Mutual funds 8) factoring services Informal source of finance 1) Retain earnings 2) sale of assets 3) Reducing stock 4) Trade credit 5) Borrowing from informal sources Conclusion while summing up the whole concept of financial management, finance is the main backbone of the company, without finance no company can predicts its future. It is not necessary that company having excessive finance will lead. Finance need to be managed efficiently through carefully study and its interpretation at its best. Financial decisions are necessary for any organisations , but it should also satisfy the logic of financial accounts and in relation to stake owners of the company. So the financial manager plays a crucial role in performing all the back stage activity of the successful show which is hardly recognised but is inevitable and very important. Sometimes the company is barely surviving in hard times of recession so that does not means to shut the company down at that time. Additional sources of finance are needed to be explored and let the company run without any hindrance and will touch the sky at its most with the competing spirits. 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