W4, Financial management

Question 1

What is an income statement (profit and loss statement)?

Answer 1

• profit and loss statement
• shows income and expenses
• shows whether the business has made or lost any money
• 5 key elements
  
  • revenue (sales/ turnover)
    
    • total income from core business activities
    • grants/rebates/ any income received
  • cost of goods sold
    
    • costs directly incurred as a result of buying or making product
    • variable cost- tied to level of production or service
  • gross profit
    
    • revenue- cost of good sold
    • the profit that you have to be able to pay for your expenses(overhead)
  • expenses
    
    • fixed costs
    • incurred regardless of the volume of business that you’re doing
  • net profit__​
    
    • before tax, shows what the business has earned or lost in a period of time, usually monthly, quarterly or annually after expenses have been subtracted from revenue
• SALES-COGS= GROSS PROFIT-EXPENSES=NET PROFIT

Question 2

What is a balance sheet?

Answer 2

• A balance sheet is a snapshot (specific) of what your business owns (assets) and owes (liabilities), at a specific point in time, often produced at the end of the financial year
• Also shows debt and liquidity
• The balance sheet provides a good picture of the financial health of your business and helps you understand the financial strength and capabilities of your business
• ASSETS – LIABILITIES = OWNER’S EQUITY
• owners equity- reflects state of business

Question 3

What are the assets?

Answer 3

• cash at bank
• accounts receivable
• allowance for bad debt

Question 4

What are liabilities?

Answer 4

• accounts payable
• mortgage on building
• bank loan

Question 5

What is a cash flow statement?

Answer 5

• shows the movement of cash in your business
• the more cash available for business operations, the better
• consists of THREE components
  
  • cash inflows (receipts)
    
    • from sales
    • returns from investments
  • cash outflows (payments)
    
    • rent
    • salaries
    • interest on loans
    • taxes
    • expenses
  • net cash position (receipt minus payments)

Question 6

What is the purpose of a cash flow statement?

Answer 6

• To pinpoint periods of cash shortage
• To plan for borrowings/capital expenditure
• To effectively negotiate a loan
• To take advantage of money making opportunities with forecast excess cash
• To finance seasonal requirements
• For greater confidence in where your business stands
• To act as a management tool against which actual results can be measured

Question 7

What are examples of performance indicators?

Answer 7

• Staff to turnover % = total staff expenses/total sales x 100.
  
  • • $373,827/$3,450,000 x 100 = 10.83%
  • • (Average 10-15%)
• Rent to turnover % = Rent & Outgoings/ total sales x100
  
  • $96,000/$3,450,000 x 100 = 2.78%
  • (Average 5-8%)
• Average sales (staff) = total of all sales/ number of customers
• Products per customer = total sales/number of products