X2.3 - Financial Accounts Flashcards
What are the Main Functions of the Finance team?
1) Keep records of money received and paid out, and use this information to produce
business accounts.
2) Analyze information to help managers to plan and review business strategy, and
assess financial risk of different options.
3) Raise finance through loans, bond issues, credit lines etc.
4) Make forecasts about future costs and revenues
What are the Main Accounts of a Company?
Three main financial statements company accountants produce:
1) The Balance Sheet sets out the financial position of the company at a particular
moment in time e.g. the year-end.
2) The Profit and Loss Account shows how the business’s profit or loss has been generated. Essentially, sales minus costs, bank interest on loans, and taxes.
3) A cash flow statement setting out the cash inflows and outflows to the business during a particular period. It helps to see if the company has enough cash to
operate daily.
What is an income Statement?
The Income Statement shows the profit or loss of a business over a given
period of time e.g. 3 months, 1 year, etc.
Profit is the money the company makes after costs have been subtracted
from revenues. It is an absolute number, and there are different types (gross
profit, operating profit, net profit….).
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3. What is an income Statement?
How does an Income statement look?
What does an income statement show?
Analysis of an income statement?
1) Return on Investment (ROI)- version measuring operating profit
Shows how well the company generates profits using its assets
ROI= Operating profit100/Total assets
2) Return on Assets (ROA)
Shows how well the company generates profits using its assets
ROA= Net Profit100/Total assets
3) Return on equity (ROE)
Shows how well a company is at rewarding its investors.
ROE= Net Profit*100/shareholder equity or social capital
How do you calculate ROI, ROA, ROE?
- Analyze the financial structure of the company.
What is the Total Capital? How much of this is Equity (also known as Social
capital), which is the money invested by the owners, and how much is Debt? - Calculate the interest you must pay on debts.
- Prepare an Income statement.
Income minus COGS, Other cost, Interests paid, and Taxes.
Now you have all the key numbers you need to calculate the ROI, ROA, and
ROE.
How to Calculate Net Profit?
Why is CASH flow important?
Earnings vs. Cash:
- Profit is calculated when the transaction happens.
- Cash flow is when money is actually received or paid.
- The difference between the two is crucial for managing cash flow effectively.
Importance of Cash Flow:
- Regular and consistent cash flow helps manage crises.
- Provides resources for expansion or adapting to changes.
Customer Payment Terms:
- Offering “buy now, pay later” options requires enough cash to cover costs while waiting for payment.
Supplier Credit:
- Materials or supplies can often be bought on credit (30/60/90-day terms).
- Early payment discounts can save money, so having cash available is beneficial.
Deposits and Immediate Payments:
- Deposits may be required to secure services (e.g., event spaces or sales fairs).
- Some services (e.g., gasoline, taxis, hotel bookings) must be paid immediately.
Understanding and managing cash flow ensures smooth operations and financial flexibility.
Where does income Come from?
CASH IN
1. Sales
2. Income from investments we have (like shares in the stock market)
3. Selling assets (such as a machine we don’t need)
Where do costs come from?
CASH OUT
1. Direct expenses- materials to make our products
2. Operating expenses- things we need to do to keep out business operating
3. Paying interest to the bank, if we have a bank loan or use a credit card
4. Paying back loans
5. Buying new equipment
6. Emergencies
Example of CASH flow
Analysis of CASH flow
- Cash flow to sales ratio
Indicate how much cash you are generating from each sale.
The higher the percentage, the better. Important to check that this number is in line with growth in sales.
Ratio = Operating Cash Flow/Net Sales - Free Cash Flow (FCF)
Shows how well the company generates enough money to pay investors dividends when they also take into account cash needed for new assets or maintaining existing
assets
FCF = Operating Cash Flow − Capital Expenditures
Managing Cash Flows in a business
“Buy Now, Pay Later” for Customers
Offering this option means you need cash to cover your costs while waiting for customer payments.
Buying on Credit
Suppliers often allow 30/60/90 days to pay for materials or supplies.
Paying early may come with discounts, so having cash ready is an advantage.
Deposits for Services
Some services require deposits (e.g., reserving a booth at a sales fair or a hotel meeting room).
Immediate Payments
Certain services, like fuel, taxis, or hotel bookings, require payment on the spot.
Tip: Maintaining sufficient cash flow ensures you can manage costs, take advantage of discounts, and handle immediate payments smoothly.
What is a balance sheet?
