This workbook covers the following elements of the management standards used in the S/NVQ in Management, as well as a range of other S/NVQs. If you are building an S/NVQ portfolio, you may wish to develop some of the activities in this workbook as evidence of your competence.
Session A
- Monitoring transactions
- Working to a budget
- Making a profit
- Planning
- Source documents for accounting records
- Business capital
Now let's look at our fourth reason why a company keeps books: to be able to examine its operations to ensure it is making a profit or operating within budget. This is the fifth reason to keep accounts: to make it possible to plan for the future in a practical way.
Session B
Using capital
One technique that all businesses use to plan the money flowing in and out of the organization is a cash flow forecast. The difference between receipts (cash in) and payments (cash out) is the forecasted cash flow or balance or net cash at the end of each week's business. Therefore you can see that the amount recorded as the actual balance carried over for Week 3 is in the cash flow forecast below (£19,000).
The bakery saw that the actual cash flow did not always coincide with its forecasts. We saw above that the cash flow forecast looks at transactions in terms of cash flow.
Session C
Cost of goods sold
To find out how much inventory they have at the end of a fiscal year, they do an inventory count. The stock count is done to arrive at the true stock position at the end of a trading year, known as the closing stock. This will also be the value of the stock at the beginning of the next year and is therefore referred to as opening stock for that year.
In the case of the Hillside Company, the end of the financial year is March. Here are the figures for a year's trading to 31 March for Straton Limited, calculated on a profit accounting basis (that is, ignoring whether or not sales or expenses were settled in cash).
Deductions from profit
Dividends refer to ways of sharing earned profits, known as profit allocations. Let's continue with the profit and loss statement for Straton Limited in slightly different terms. This is the type of structure or layout you will see in your own or another company's annual report and financial statements, although you may notice some differences.
Note that in the above, revenue is another name for sales, and profit on ordinary operations before tax is the same as net profit. The retained earnings are the final profits that a company can use to reinvest in itself for growth.
Income and expenditure accounts
As you search for the specific features of profit and loss statements and income and expense accounts, you've probably seen a number of different terms used for the types of expenses that represent the use of resources. If you have extra time to study these, it will improve your overall understanding of financial information. One difference between a balance sheet and a profit and loss account (or income and expenditure account) is that the latter is a statement of what has happened over a period of time - usually a year.
This is a review of your previous work; if you had any difficulty you should go back and check your previous studies. 4 Examples of fixed assets are: a car; a computer purchased for business use; machinery; a building;
Assets and liabilities
You will remember that fixed assets are worth money and will not normally be sold or converted into cash. The assets that are already cash, such as cash in the bank, or that will be converted into cash very quickly, such as accounts receivable, are current assets. The other assets – receivables, cash in the bank and goods for sale – are all current assets.
And just as the bank accepts interest as the 'price' of the loan over time, the owners seek some kind of return on the capital they have provided. The fact that shareholders in listed companies can make a profit individually by selling their shares at a higher price than they bought them is essentially a bonus that has little or nothing to do with the company. .).
Preparing a balance sheet
Now you can see why it's called a balance sheet: total assets balance total liabilities. Calculate the capital invested (total assets minus current liabilities) and record the number in the appropriate place on the balance sheet. You would have had to add the total assets and subtract the accounts payable to arrive at the capital.
You will notice that the sum of the asset side of the balance sheet is the same as the sum of the liability side. In the previous activity, for example, the business consists of three different fixed assets and three different current assets.
The balance sheet and the profit and loss account
Basically, the retained earnings for the period (shown on the income statement) are added to the owner's equity (shown on the previous balance sheet) to get the new balance sheet. The fact that a business has generated money during a period, be it a profit or a surplus, results in an increase in total assets less current liabilities – often called net assets. Note the slightly different layout of the balance sheet, which completely separates capital employed from total assets less current liabilities, or net assets.
Simply by adding the figures given to them in the balance sheet brought forward, you should have arrived at the following balance sheet. Before we leave this topic, briefly consider how Crombie Ltd's balance sheet would be affected if its shareholders had injected £5,000 of cash into the company (in exchange for shares).
The balance sheet and the income and expenditure account
Review the balance sheets of each of them and make a list of the different types of fixed and current assets, short-term and long-term debt, and capital financing that you encounter. You should now have a good idea of the different financial data you can expect and how it will be presented.䊏 A balance sheet is a snapshot at a point in time of the company's assets and liabilities balancing together.
In this session, we'll look at some important ratios, that is, measures or indicators of a business's performance. Financial indicators are usually presented in one of the last two forms in the list above.
Current ratios (liquidity)
Session D
Profit margin (profitability)
This is called the profit margin and it shows how much return the company is getting as a result of its efforts. To do this, we go to the income statement and look at the profit relative to sales (revenue or turnover). In Straton Limited's income statement that you saw earlier, profit before tax was £3,000 and sales revenue was £60,000.
Return on capital (profitability)
An investor would expect a higher profit margin and return to compensate for the risk of losing everything.䊏 For each, calculate the current and quick ratios, the profit margin, and the return on invested capital. If the annual accounts also include figures for the previous year, as is usual, then also calculate the ratios for that year.
Prepare a report comparing the results of the different organisations, and for the same organization over the last two years if you have figures available. And does it matter whether the need is for the short term, say to cover an increase in credit that is allowed to continue, or the medium or long term.
Retained profits
This often leads to spending on projects early in the financial year and cuts at the end. Some organizations have one budget for day-to-day expenses such as wages and materials. In the holiday example in the introduction to this session, we looked at savings and an overdraft.
Session E
- Bank overdraft
- Trade credit
- Retained profits
- Loans
- Share capital
- Grants
Name two long-term projects that your organization paid for with retained earnings (or surpluses). It may be difficult for you to distinguish between the portion provided from retained earnings and the portion provided from other sources in an investment money supply. Nevertheless, you should have found that retained earnings represent a large portion of the total investment.
The new project described above is likely to be more viable if financed through retained earnings. Ideally, organizations would want to earn more from the use of retained earnings than would be achieved by putting the money into a bank deposit or building society account.
Performance checks
Use the financial information to prepare the profit and loss account and the balance sheet, year ended 31 December. Study the profit and loss account and the balance sheet and read any accompanying notes. They will be interested in your work and may be able to help you if you have any problems with the way the annual accounts have been presented.
Talk about any ways you can think of that you and your work group could improve the way your organization works. Write down your findings and create an action plan for you and your work group.
Reflect and review
Based on these accounting records, the company can adjust its operations so that it continues to make a profit and can plan what to do next. The money is just enough to buy a £1,000 van, but that would leave the company broke. 3 Offering customers a six-month period of interest-free credit, after previously only allowing customers one month's credit, means that the company will have to wait an extra five months for a sales receipt and thus have to finance about five extra months of debtors.
In addition, the company expects sales levels to increase, so it will have to buy more shares to meet the increased orders. The benefits of making such an offer are that the company is likely to generate more sales from existing and new customers, which, provided all customers pay for what they order, means an increase in profits.
SUPERSERIES