Finance and Accounts Basics

Finance and Accounts

• Finance involves channeling money from savers/investors to entities needing it, allowing savers/investors to potentially earn interest or dividends.
• Accounts are records of financial expenditure and receipts during a specific period.

Keeping Accounts

• Accounting is necessary to collate cost and profit information.
• Accounting is important to note figures, managing costs, knowing profits/losses, determining business problems, and planning for the future.
• Accurate records are achieved through systematic notes, papers, and receipts.
• Knowledge of income and expenditures is necessary before accounting.
• Income is the money coming into the business and expenditure is the money being paid out.
• In the account book receive on the left and pay on the right
• Income is recorded on the left, expenditures are recorded on the right.
• Needed forms include account books, invoice, order, receipts etc.

Accounting Administration

• One person should manage accounting within a group, ideally someone experienced or trainable.
• The treasurer can handle accounts initially in credit unions with practice.
• Accounting should be checked by a chairperson or committee member.
• Large cash amounts on hand should be avoided; money should be kept in a bank or credit union.
• In larger businesses finance management and accounting should be separate roles to allow for financial inspections.

Manufacturing Costs, Profits, and Loss

• Manufacturing costs are funds/costs for running a business.
• Costs are determined in relations to selling price of products, potential profit or loss.
• Manufacturing costs include materials, equipment, labor, packaging, utilities, transportation, promotion, management, and fixed asset depreciation.
• Depreciation means the costs arising from the use of the asset, and is relevant to the asset's profits and loss
• Tractors, ovens and sewing machines are examples of "fixed assets."
• Depreciation can be recorded monthly, periodically or seasonally.
• Other costs may be dependent on business type.
• Profit is determined comparing income with manufacturing costs.
• Profit is earned when income exceeds manufacturing costs or the product sells higher than capital investment.
• Loss results when income is less than manufacturing costs.
• Raw materials from the area should be included in manufacturing costs.
• Contributing to environmental maintenance and conserve natural resources, replanting resources, can prevent shortages.

Determinining the Price

• A reasonable price makes the consumer and business happy.
• Sales price considerations include manufacturing costs plus required profits, market prices, and risks.
• A 35% profit margin is a guide but may not always be suitable
• 20 Baht in capital costs, with a 75% profit, results in the pencil case price of 35 Baht.
• Embroidery with 1,000 Baht in Length capital costs, with a 35% profit, results in the sales price of 1,350 Baht.
• Price must be viable for the product.
• High sales require lower margins, smaller units need higher margins.
• Wholesale must consider that the ultimate retailer needs to add on profit.
• Other pricing considerations: site rental, area rental, shop margins (if selling to store).

Sources of Finance

• All businesses need finance for startup, operations, or expansion.
• Finance can come from internal or external sources for short-, medium-, or long-term needs.
• Internal sources include retained profit, reducing working capital, selling unwanted fixed assets, and sale/leaseback of assets.
• External sources include bank overdrafts, trade creditors, debt factoring, government grants, venture capitalists, bank loans, hire purchase/leasing, debenture loans, and capital.

Internal Vs External Sources

• Internal sources faster cheaper than external
• Internal sources have issues with large amounts of funds
• Retained profits is a popular source
• External sources often needed when internal finance is limited
• Reward is demanded in the form of interest or dividend

Time Period

• Needs can vary from short term, medium and long term
• Source depend on the time frame and specific requirement

Short, Medium, and Long-Term Finance

• Short-term finance (less than one year) meets day-to-day needs and includes retained profit, working capital, overdrafts, trade credit, and debt factoring.
• Medium-term finance (one to three years) is for small investments and includes selling unwanted assets, sale and leaseback of assets, government grants, venture capital, hire purchase/leasing, and medium term loans.
• Long-term finance (more than three years) is for investments like plant and buildings, and includes venture capital, long-term loans, hire purchase/leasing, loan debentures, and share capital.

Characteristics of Different Types of Finance

• Retained profit is profit not paid in dividends, it's the quickest source, but may mean lower shareholder dividends.
• Managing working capital reduces stock, but may cause problems; pressuring debtors or delaying creditors may damage relationships.
• Trade creditors allow buying now, paying later but for a limited time.
• An overdraft facility is commonly used for minor cash problems.
• Debt factoring involves selling debtors to firms who chase and collect debts, with the business receiving immediate cash minus high fees.
• Selling unwanted fixed assets raises finance but the assets may be needed later.
• Sale and leaseback involves selling then leasing back assets, allowing continued use but at a rental cost.
• VC firms seek to invest in businesses with high growth potential, there is potential for loss of control.
• Bank loans have installment payback, charge annual interest, and usually require collateral.
• Hire purchase is used by small businesses to buy assets with a deposit and installments, but interest charged can be high.
• Leasing involves paying rent to use equipment/machinery, with business ownership possible after the last installment, though leasing can be expensive.
• Debentures are long-term loans raised to certificate holders on the stock exchange, interest must be paid even during low or no profit years.
• Share capital is the primary source for businesses, in the form of shares, comes as preference or as ordinary.
• Issuing ordinary shares means more owners and loss of control
• Ordinary shares are also known as equity shares where dividends are paid after the preference and based on board decision
• Preference shares are not entitled to voting rights but have fixed rate dividends

Share Capital and Loan

• Long-term debt avoids loss of control to debenture holders, may hinder loan access, is riskier due to mandatory interest and may lead to bankruptcy if repayment isn't possible.
• More issues around share capital, more loss of control to owners, low gearing may enable loans and dividends are paid when there is profit
• Factors impacting fund source choices: cost, financial situation, legal status, control, purpose, and time period.

Business Revenue

• Is the proceeds coming into the business
• The main forms are from
  • Sales revenue
  • Interest
  • Dividends
  • Capital revenue
  • Grants and Subsidies

Direct vs Indirect Costs

• Direct costs are those related to a particular product(raw material)
• Indirect costs are expenses(rent and insurance)

Fixed, Variable, and Semi-Variable Costs

• Fixed costs do not change based on output
• Variable costs do change based on outputs
• Semi-Variable expenses consist of both(electricity bills)

Break Even Analysis

• Done to solve mamangerial problems by economists
• Can provide information to government agencies about revenue forecasts
• BEPSV shows volume needed and can be determined using the equation of fixed costs/ unit selling price - unit variable cost
• Selling price can be determined by Fixed costs + variable cost/quantity
• A graph assumes that the average variable cost is constant, therefore dividing the total variable cost with the amount of output
• At break even point that means there is no profit or loss
• At break even quantity is 50 units, the break even pricing is P50, if costs went up to P1 then enterprise is able to only sell below 50 units at a loss
• An enterprise will have to sell more than 50 units to maximize profit

Profit and Loss Account

• Shows all expenses an profit made in a period of time(usually 1 year)
• First it shows sales revenue, which is deducting the overall net profit amount
• Expenses is indirect and overhead( depreciation, advertising etc)
• Gross profit less selling will give operations profit that comes before interest and tax
• Non operating includes income of interest etc
• Net profit comes before tax or net profit

Balance Sheet

• Shows everything regarding debt, capital, assets and equity

Assets

• An asset is an item that the business owns, be it fixed or current assets
• Fixed is for long term (more than 1 year)
• Ex: Land, vehicles and machinery
• Current asset is the one for less than 1 year
• Ex: Stock, debtors, Cash at bank
• Liabilities is what the company owes to a third party

Liabilities

• Liability is an item or money that the business owes to a third party.
• There are two main types: long term and current liabilities.
• Long-term liability is repayable in more than 1 year in the form of Bank loans, mortgages, and Debentures
• Current liabilities is settled in one year with: bank overdrafts and short-term loans

Shareholders’ funds

• 'owners equity’ = Share capital + retained profit and other reserves.

Working capital or net current assets

• This is for day to day expenses, calculated as; current assets minus current liabilities.

Tangible and Intangible Assets

• Tangible: Physical items (land)
• Intangible: Non physical, like brand or goodwill
• Reason they are included: to help generation future sales, reduce vulnerability.
• Difficulties to including intangibles is the lack of valuations

Revenues

• Receipts are from sales revenue
• Expenditure is from costs for sales
• Capital items appear on the sheet.

Accounts to Different Stakeholders

• Shareholders want to know the return on their investments
• Employees want to know job security and their ability to raise salaries
• Managers want to evaluate and increase effeciency within their companies.
• Creditors will care about ability to repay debts.
• Government wants to ensure tax is being paid.

Principles of Accounting

• Follow the guiding principles by providing integrity, non-biased accounting, honesty, and confidentiality

Lesson 5

• Is about profits and liquidity ratio Analysis

Profitability vs Liquidity Raito

• Done by analysists to check how well the company is doing.
• Where liquidity is the easiest way to convert cash

Accounting Ratios

• Are to assess performances
• Compare those ratios to those from same business

There Are 4 Types of Ratios

• Liquidity Measures the solvency of the business, its ability to meet short term debts
• Proftability Measures how profitable, asset and capital.
• Financial effiency How efficient a business is, in using resources
• Gearing How much capital will come from external resources that need to be repaid

Liquid Ratios Inlcude

• Current : Shows ability in how you can continue the business in short term
  • Example Formula: Current Assets - Current Liabilities, shows for everysale, 139 is the assets you have
• Acid Test Ratio: Measures your debt. Formula. Current Assets -Stock / Current Liabilities

Gross Proft Ratio

Formula. Gross Profit/ Sales Rev * 100 to equal to a percentage, that if high means business is doing well

Rate on Capital Employed: Formula

Average annual profits *100 /initial investment

Effiecency Ratios

return of capital, to deter or get credit

1. Debtors Shows on average owies its debts Formula: Debtors / Sales Tuenover * 365 and answer in days 2 Formula: Cost of Food Sold averagestock shows how many items a year they sell Shows how long the company has to work before it gets there salarys

Gearing

Gearing Formula How much was provided by other groups/Longer term / Equity capital * 100 - The higher the percentage, the lower the profit (highly geared) - The lower the percentage higher is the profit

Good Accounting Raio

Assesses the simplified financial position Areas that need invetigation are highlighted Trends are indicated

Limitations of Ratios

a Lack of comparison with what's going on b. Can not predict future with past information c. Dosent account of economic factors

Improvement to Current Ratio

a Reduce Bank overdraft short term b Sell more assets Strategies to Improve

Current Acid Test

b Sell more assets

Increase Revenues

• Reduce pricing Incease advertisements

Cash Flow

• If products all turn in cash leads to higher revenue

• If products were all sold forcredit leads increased revenue, but can not all turn up for cash

• Profit leads more value Good for more cash Cash low problems Overtrading High prices Too much credit Too little customers Over borrowing

• Cash flow forecast - Shows cash that becoming in

Improve Cast Flow

a Discount pricing too much for revenue b. selling assets can effect oper c. Set credits

Importance of Cast

Provides resources to help for cast and lead to future insolvency (debt). Help to see how much they can earn Forcast gives insight , can provide good insights

Cash is Stated As

In or Out that affect bank

Invest to Capital

• Estimate how worth well is

Is Investment, By Deciding

a By plant machine b Reasearch on production c Develop new channels d.Buy tech

Payback

Measures # of years is taking to earn , expected the inital investments

Decide which ones takes shortest pay period Those that meet the standard levels ARR - is profit based NVP- The best investment for calculating values Also includes ethics , governments

Payback Period is Easy To

Understand Measure quicky Avoid issues depreciation Does not account for Money received Ignores other methods Discounts money

NVP Method

Consider values or benefits But is not to estimate the forecast since it's time based