Finance

Yr 11 Business Studies
A business is an
economic entity –
it trades with society and
has a responsibility to
both its internal &
external stakeholders

Yr 11 Business Studies
 The strategic role of finance is to provide the
financial resources available to implement the
strategies necessary to achieve the

goals/objectives of the
business.

Yr 11 Business Studies
Financial Overview

•The effectiveness of Finance is based on the 5 financial objectives.

•To achieve these objectives, and in order to allocate funding, Finance must manage the financial data of the
business.
• This is done by using Accounting Tools (Statements)
• The statements Finance uses include:
• Balance Sheet
• Income Statement
• Cash Flow Statement

•Finance then applies ratios to test and measure the performance of Finance. These ratios are benchmarked
against the business’ past performance or industry averages.

Yr 11 Business Studies
Finance has 5 objectives:
1. liquidity
2. Solvency
3. profitability
4. growth
5. efficiency
Yr 11 Business Studies
Let’s look at a business: Lawn mowing
What supplies do you need?
• Lawn Mower
• Whipper snipper
• Truck
• Rake
• Garbage bags
• Blower

Now, how do you pay for these supplies?

- Personal savings  Equity
 Debt
- Borrow / Loan

Yr 11 Business Studies
Financial Management:
Key processes
Finance Accounting
• Securing funding so that • Accounting enables us
goods & services can be to organise financial
produced information in a
format that is useful
For example, in our lawn mowing
business, we got the money from:
to the business
• Personal savings (equity) We use financial reports to
• Loan (debt) display this information

Yr 11 Business Studies
Finance
Sources of Funds
The are two main ways of obtaining finance for a business:
Equity finance
• Funds that are obtained from the owners, and/or
• Profits that are reinvested back into the business
What are the advantages & disadvantages to this source of funding?
Debt finance
• Borrowed funds – generally from financial institutions
• Involves a contractual agreement to pay back the funds over a set period of
time (typically this involves the extra payment of interest)
What are the advantages & disadvantages to this source of funding?

A high level of debt vs equity finance can be considered risky – why?

Yr 11 Business Studies
Let’s Look at buying a house

Asset
• Items that can be given
monetary value
• Our house is an asset

How do we pay for our house?

• We use all of our savings
•  Equity
• We then take out a loan for
whatever is left
•  Debt

Yr 11 Business Studies
 Accounting equation

Assets = Liabilities + Owners Equity

A = L + OE
This is what we own This is how we funded what we own

The value of all the assets in the business must equal the total of all money borrowed
(liabilities) and the money contributed by owners (owners’ equity)

Yr 11 Business Studies
Example: Buying a home
let’s add figures:

Owners Equity
Asset Debt / Liabilities
• House  The amount of • The mortgage (loan)
the house you’ve that you’ve taken
paid off out

$1 million $200k $800k

Yr 11 Business Studies
Owners equity
the accounting equation can be expressed in terms of
owner’s equity

OWNERS EQUITY = ASSETS - LIABILITIES

Owners Equity is what you have left after you have sold
all your assets and paid off your debt

Yr 11 Business Studies
Owners equity
the accounting equation can be expressed in terms of
liabilities

LIABILITIES = ASSETS - OWNERS EQUITY

Liabilities are what you have to borrow to fund the assets

not paid for by Owners Equity

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 Apply the formula variations
using the below:

Assets = Liabilities + Owners Equity

$1million Mortgage: $800k Savings $200k

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NOW LET’S ADD SOME DETAIL
TO WHAT WE’VE LEARNED
…
SO THAT WE CAN CONSTRUCT
A BALANCE SHEET

Yr 11 Business Studies
Balance Sheet

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Assets

Current Assets: assets that can be turned into cash relatively

quickly (normally in less than a year)

Ex) bank balances, inventories (stock) and account receivable

(money owed to the business by customers who haven’t yet paid)

Yr 11 Business Studies
Assets cont…

Non-Current Assets: assets used over the long term and

difficult to turn into cash quickly (normally takes over a year)

Ex) buildings, land, machinery, technology, vehicles, furniture,

fixtures and fittings.

 Intangible items are also included under Non-Current Assets. Intangible items
are things of worth that have no physical substance.

Examples include goodwill, trademarks, designs, copyright and patents.

Yr 11 Business Studies
liabilities

Current Liabilities: liabilities that need to be paid back in

the short term (in less than a year)

Ex) accounts payable (money owed to suppliers) & bank overdrafts

Non-Current Liabilities: liabilities paid over a longer term

(normally in over one year)

Ex) property loans, retirement benefits

Yr 11 Business Studies
Owner’s equity
The money owners give a business for it to acquire resources and begin operating.

Capital / Equity: money invested by the owners

Retained Profit: profit the business had generated being

reinvested back into the business (as decided by the owners)

Yr 11 Business Studies
Now we have all the information we need to create our first Accounting
report:

Balance Sheet
In short: Details the financial stability of the business, at a
point in time, in terms of what it owes and what it owns

Shows whether the business is sustainable in the long-term

 Solvency

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Balance Sheet
ACTIVITIES
Balance Sheet for Real Zone as at 30 June 2012
Assets Liabilities
   
Current Assets $ Current Liabilities
   
Stock 35, 000 Accounts Payable 8, 000
Cash 10, 000 Overdraft 5, 000
Accounts receivables 20, 000 -----------
-------------- Total Current Liabilities 13, 000
Total Current Assets 65, 000  
  Non-Current liabilities
Non-Current Assets $  
  Mortgage 67, 000
Land & Building 40, 000
Car 10, 000 ------------
-------------- Total Liabilities 80, 000
Total Non-Current Assets 50, 000  
 
Owner’s Equity
 
Owner’s Capital 5, 000
Retained Profits 30, 000
------------
Total Owner’s Equity 35, 000
 

   
Total Assets = 115, 000 Total Liabilities + Owner’s Equity = 115, 000
 

Yr 11 Business Studies
Income / Revenue / Profit & Loss
Statement
In short: It helps users of information see exactly how much
money has come into the business as revenue, how much
has gone out as expenditure, thus shows the profitability of
a business over a period of time (normally a year).

Shows whether the business is profitable over time.

 PROFITABILITY

Yr 11 Business Studies
Income Statement

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 Income / Revenue / Profit & Loss
Statement
There are two forms of profit that a revenue statement looks at:
Gross Profit = Sales - Cost of Goods Sold
This is total sales minus the cost of raw materials to produce the product

Net Profit = Sales - Cost of Goods Sold - Expenses

This factors in all the other costs of running the business such as electricity, insurance,
advertising etc (not raw materials).

substitute
Net Profit = Gross Profit- Expenses

Yr 11 Business Studies
 Gross Profit =
Sales - Cost of Goods Sold

The gross profit calculation is important as, essentially, it tells

the business how much its mark-up is on the cost price of the
goods it has sold. This varies somewhat from business to
business but is generally between 50 and 100 per cent (%).

Yr 11 Business Studies
 Gross Profit = Sales - Cost of Goods Sold

COGS provides firms with the total cost of goods it has resold over the
trading period. It can be calculated using the following:

COGS =
Value of Opening Stock (at beginning of period)
+
Value of Stock Purchased (during period)
-
Value of Stock left (at end of period)
Yr 11 Business Studies
 Example:
Example:
If opening stock was valued at $10,000, a further
$80,000 of stock was purchased and closing stock was
$20,000, what would be the COGS?

Value of Opening Stock ($10,000)

+
Value of Stock Purchased ($80,000)
-
Value of Stock left ($20,000)
=

We turned over $70,000 worth of stock during this period

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ACTIVITIES

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 Cash Flow
Statement
One of the main reasons why businesses fail is due to
insolvency: the inability to pay bills.
Keeping and monitoring detailed cash flow records is
extremely important to ensure you have enough money
to meet your bills (now and over the next few months).

 This is called liquidity – having enough cash

to meet your short-term bills.

Yr 11 Business Studies
 A cash flow statement shows cash in and
cash out over a series of periods (normally months)
“can money inflows cover money outflows?”

Cash Flow Statement

Let’s start with a simple cash flow statement…

Yr 11 Business Studies
Yr 11 Business Studies
 A cash flow statement shows cash in and
cash out over a series of periods (normally months)
“can money inflows cover money outflows?”

Cash Flow Statement

Cash flow in and out is split into 3 categories:
• Operating: related to the main trading operations and prime function of business
• Investing: related to the sale and purchases of non-current assets (land/buildings)
• Financing: related to the acquisition of & repayment of both debt and equity finance

Yr 11 Business Studies
 Brackets = negative

Yr 11 Business Studies
 In summary…
5 Main financial objectives
• Liquidity: Managing the flow of cash into and out of the business to ensure
the business can meet its short term operating bills
• Solvency: The ability of a company to meet its long-term financial obligations
• Profitability: Maximising earnings after expenses are paid
• Growth: Positive change in size over a period of time (continued growth for
life)
• Efficiency: using your resources effectively & with minimal wasteage

Yr 11 Business Studies