Business Management AERD 20030 PDF

Financial Management Business Management AERD 20030 Topic 1: Basic Concepts & Accounng Terminology Financial Management Involves managing the assets and liabilities and owners investment in the rm; generating the nancial data required to make decisions, and using the tools of nance to...

Financial Management Business Management AERD 20030 Topic 1: Basic Concepts & Accounng Terminology Financial Management Involves managing the assets and liabilities and owners investment in the rm; generating the nancial data required to make decisions, and using the tools of nance to make e$ective decisions. Why Keep Accounts?  Maybe legally required to present year end reports  https://www.glanbia.com/sites/glanbia/files/glanbia/investors/annual-report/glanbia- annual-report-2019.pdf  For compiling tax returns  For seeking financing  To inform management decisions Basis concepts in nancial accounng  Monetary measurement:  a common denominator  problems in times of high inflation  Concept of the business entity:  A business is regarded as having an existence separate from its owners Basic concepts in nancial accounng Double entry concept: Based on the premise that each transaction within a business has a twofold effect on the business. At least two accounts affected by each business transaction. The double entry rule states that “for every debit entry there must be a corresponding credit entry” of equal amount and vice versa. Each account is “T”- shaped, where the left hand side is called the debit side and the right hand side is called the credit side. Basic concepts in nancial accounng  Example: Business owner makes an investment of €10,000 in a new business Bank A/c Capital A/c 10,000 10,000 Basic concepts in nancial accounng Valuation of assets  Going-concern basis  Value to the business  Cost convention  Lower of cost and market value (net realisable value) Accruals /matching concept  Transactions occur & are recorded when agreements are made, not when cash changes hands  Accounting attempts to “match” revenue with the expenses incurred to generate this revenue Accounng Terminology  Assets are items of value owned by the business  Fixed Assets and Current Assets  Liabilities are sums of money owed by the business  Current Liabilities and Long Term Liabilities  Capital represents the amount of money invested by the owner (owners equity)  Remember: Business treated as separate entity to the owner! Accounng Terminology  Cash flow refers to cash movement through the business  Measurement of cash flow invaluable for business success  Net Profit = Revenue minus Expenses  Financial accounting is based upon a simple idea called the accounting equation  Assets = Capital + Liabilities  At least two accounts are affected by each business transaction -> double entry book-keeping concept Topic 2: Understanding Financial Statements Financial Statements  The three principle statements involved in the Financial Accounting process are: 1. Balance Sheet  A ‘point in time’ statement  Asset and liability position of the business entity at a particular date  Assets and how they have been funded. 2. Profit and Loss Account  A Statement of Income and Expenditure for a specific time period  Various names used:  Profit & Loss Account  Income and Expenditure  Income Statement  Measurement of profit for an accounting period. Financial Statements 3. Cash Flow Statement  Statement of the main movements of cash into and out of the business over the accounting period. 2A: Balance Sheet Balance Sheet A nancial statement that shows the nancial makeup and condition of a business at a specic point in time by listing: What the business owns (assets) What the business owes (liabilities) What the owners have invested in the business (equity or owners funds) Assets = Liabilities plus equity Shows what the business owns and how it was funded i.e. partly with other peoples money and partly with the owners money. (a) Traditional format: Assets Liabilities Fixed assets Equity/Owners’ (Non-current funds assets) Debt Current assets Current liabilities Assets Funding (b) Report format: € Fixed assets 100,000 (non-current assets) Current assets 100,000 Current liabilities (60,000) Net current assets 40,000 Total net assets 140,000 Financed by: Share capital 90,000 Loans 50,000 140,000 Components of the Balance Sheet  Fixed assets (Non-current assets):  Held to earn revenue for the business - not for resale  Consumed/used up in the business over a long period  Examples: Land, buildings, plant and machinery.  Intangible assets  Financial assets Components of the Balance Sheet  Current assets:  Stocks (inventory): value of materials, work in progress and finished products  Debtors (accounts receivable) - amounts owed to the business  credit extended to customers  income due  Payments in advance – expenses prepaid  Cash Components of the Balance Sheet  Current liabilities (amounts falling due within one year):  Trade creditors (accounts payable) i.e. payments due to others  Credit extended by suppliers  Bank overdraft/ line of credit  Current taxation Components of the Balance Sheet  Long term liabilities (amounts falling due after more than one year):  Debt - long term loans  3yr loan, 5yr loan 10yr etc  Term loans  Debentures/ loan stock  Other liabilities not falling due before next balance sheet date Components of the Balance Sheet  Equity (owners’ funds/capital):  Share capital  Ordinary share capital  Preference share capital  Both subscribed by shareholders  Reserves  Mainly retained profits  Capital gains/reserves Tradional Format of Balance Sheet Assets Liabilities Fixed assets Equity/ (Non-current Owners’ funds assets) Debt Current assets Current liabilities Assets Funding  Tradional Format Balance Sheet with High Fixed Assets Assets Liabilities Fixed Equity / Assets Owners’ funds High fixed assets: (Non- eg a farm business current or very capital assest) intensive business Debt Current assets Current liabilities Assets Funding  Tradional Format Balance Sheet with Low Fixed Assets Liabilities Assets Fixed Assets (Non-current Equity / Assets) Owners’ funds Low fixed assets eg retailer with Debt the shop premises leased Current assets Current liabilities Assets Funding  Ardmore Limited, Annual Accounts 2012 Balance Sheet as at 31 Dec. 2012 2012 2011 (€’000) (€’000) Fixed Assets: (note 2) Land and Buildings 3,500.00 3,500.00 Plant and Machinery 1,311.00 1,392.00 Fixtures and Fings 252.00 273.00 Motor Vehicles 590.00 390.00 5,653.00 5,555.00 Current Assets: Stocks (inventory) 3,264.00 2,961.00 Debtors (accounts receivable) 2,450.00 2,592.00 Cash 4.00 7.00 5,718.00 5,560.00 Amounts falling due within one year: (current liabilies) Trade Creditors (accounts payable) 1,358.00 1,250.00 Bank overdra/ 792.35 1,345.12 Short term loans 830.00 765.00 Accruals and other creditors 98.90 58.88 Current taxa2on 235.00 211.00 3,314.25 3,630.00 Net Current Assets: 2,403.75 1,930.00 Total Assets less Current Liabilies 8.056.75 7,485.00 Amounts falling due a3er more than one year: Long Term Debt (loans) 985.00 1,250.00 Capital and Reserves: Authorised Ordinary €1 Shares Issued 3,350,000 Ordinary €1 Shares 3,350.00 3,350.00 Reserves: Share Premium Account 1,000.00 1,000.00 Retained Earnings and other reserves 2,721.75 1,885.00 8,056.75 7,485.00 Financial Management Business Management AERD 20030 2B: Prot and Loss Account Prot and Loss Account (Income Statement)  It’s a financial statement summarising a firm’s revenue, expenses and profit for a given accounting period.  Measurement of profit or loss for an accounting period  Records transactions that were agreed in a given period doesn’t matter if payment was not made or received during the period  May regard it as having three/four components depending on the type of business Prot and Loss Account (Income Statement) Components:  Manufacturing account – only if it is a manufacturing company  Calculates the cost of goods manufactured  Cost of raw materials = purchase of raw materials + opening stocks – closing stocks  Plus other direct factory costs e.g. wages  Plus factory overheads i.e. all other costs incurred in manufacturing excluding raw materials and other direct costs  Plus the value for opening work in progress  Minus the value for closing work in progress  Giving you Cost of Goods Manufactured Workings: Note 1: Cost of Manufacture 2012 2011 (€’000) (€’000) Stock of Raw Material 1 January 846.00 713.00 Purchases of Raw Materials 7,570.00 7,259.00 8,416.00 7,972.00 Less Stock of Raw Material at 31 December 869.00 846.00 Cost of Raw Materials Consumed 7,547.00 7,126.00 Factory Wages 3,606.00 3,243.00 Prime Cost of Manufacture 11,153.00 10,369.00 Factory Overheads: Repairs and renewals 290.00 246.00 Rates 128.00 126.00 Light, heat and power 314.00 282.00 Cleaning 164.00 896.00 141.00 795.00 Total Manufacturing / Produc2on Cost 12,049.00 11,164.00 Add Work In Progress 1 January 624.00 496.00 12,673.00 11,660.00 Less Work In Progress 31 December 595.00 624.00 Cost of Manufacture 12,078.00 11,036.00 Note: The Manufacturing Account is used internally by Management. It is prepared in a format prescribed by Management and is not made public. The main funcon of the Manufacturing Account is to calculate the cost of goods manufactured, the value of which is transferred to the Pro!t & Loss Account where it is used in calculang the Gross Pro!t for the period. Prot and Loss Account (Income Statement)  Trading account  Will appear at the top of the P&L account  Sales less Cost of Goods Sold to give gross profit  Cost of Goods sold in a Manufacturing business is calculated as  Opening stocks of finished goods  Plus Cost of Goods Manufactured  Minus Closing stock of finished goods  For a store it would opening stock + cost of goods purchased in period – closing stocks = cost of goods sold.  Ardmore Limited, Annual Accounts 2012 Prot & Loss Account for year ending 31 Dec 2012 2012 2011 (€’000) (€’000) Turnover (Revenue/Sales) 17,500.00 16,200.00 Less: Cost of Sales Stock 1 Jan 2012 1,215.00 1,123.00 Cost of manufacture (see workings) 12,078.00 11,036.00 13,293.00 12,159.00 Stock at 31 Dec 2012 (1,800.00) (1,215.00) Cost of Sales 11,493.00 10,944.00 Gross Prot 6,007.00 5,256.00 Contd.  Profit and loss account  Takes into account any other income not related to trading e.g. bank interest earned  Now consider all general operating expenses i.e. expenses not related to production of outputs e.g. admin, marketing, etc.  Gross profit less operating expense to give operating profit (profit before interest and tax, PBIT)  Operating profit less bank interest to give profit (earnings) before tax (PBT)  Less tax to give profit (earnings) after tax (PAT)  Ardmore Limited, Annual Accounts 2012 Prot & Loss Account for year ending 31 Dec 2012 2012 2011 (€’000) (€’000) Turnover (Revenue/Sales) 17,500.00 16,200.00 Less: Cost of Sales Stock 1 Jan 2012 1,215.00 1,123.00 Cost of manufacture (see workings) 12,078.00 11,036.00 13,293.00 12,159.00 Stock at 31 Dec 2012 (1,800.00) (1,215.00) Cost of Sales 11,493.00 10,944.00 Gross Prot 6,007.00 5,256.00 Less opera2ng expenses: Selling and distribu2on (1,950.00) (1,900.00) Administra2on (2,554.00) (2,108.00) Deprecia2on (226.00) (208.00) Opera/ng Prot 1,277.00 1,040.00 Less: Interest (165.00) (210.00) Prot before Tax (PBT) 1,112.00 830.00 Taxa2on (123.00) (94.00) Net Prot a4er Tax 989.00 736.00 Contd.  Profit and loss appropriations account  It’s a record of money paid back to the business owners  Deducts dividends to give the profit retained within the business  The Retained profit will be added to the Retained Earnings or (Revenue Reserves) in the Balance sheet of the previous year to give a new Retained Earnings for the current year  Ardmore Limited, Annual Accounts 2012 Prot & Loss Account for year ending 31 Dec 2012 2012 2011 (€’000) (€’000) Turnover (Revenue/Sales) 17,500.00 16,200.00 Less: Cost of Sales Stock 1 Jan 2012 1,215.00 1,123.00 Cost of manufacture (see workings) 12,078.00 11,036.00 13,293.00 12,159.00 Stock at 31 Dec 2012 (1,800.00) (1,215.00) Cost of Sales 11,493.00 10,944.00 Gross Prot 6,007.00 5,256.00 Less opera2ng expenses: Selling and distribu2on (1,950.00) (1,900.00) Administra2on (2,554.00) (2,108.00) Deprecia2on (226.00) (208.00) Opera/ng Prot 1,277.00 1,040.00 Less: Interest (165.00) (210.00) Prot before Tax (PBT) 1,112.00 830.00 Taxa2on (123.00) (94.00) Net Prot a4er Tax 989.00 736.00 Add Government grant received 95.00 85.00 Less Dividend (247.25) (147.20) Retained Prot (Earnings) 836.75 673.80  Ardmore Limited, Annual Accounts 2012 Balance Sheet as at 31 Dec. 2012 2012 2011 (€’000) (€’000) Fixed Assets: (note 2) Land and Buildings 3,500.00 3,500.00 Plant and Machinery 1,311.00 1,392.00 Fixtures and Fi:ngs 252.00 273.00 Motor Vehicles 590.00 390.00 5,653.00 5,555.00 Current Assets: Stocks (inventory) 3,264.00 2,961.00 Debtors (accounts receivable) 2,450.00 2,592.00 Cash 4.00 7.00 5,718.00 5,560.00 Amounts falling due within one year: (current liabilies) Trade Creditors (accounts payable) 1,358.00 1,250.00 Bank overdra< 792.35 1,345.12 Short term loans 830.00 765.00 Accruals and other creditors 98.90 58.88 Current taxa2on 235.00 211.00 3,314.25 3,630.00 Net Current Assets: 2,403.75 1,930.00 Total Assets less Current Liabili/es 8.056.75 7,485.00 Amounts falling due a4er more than one year: Long Term Debt (loans) 985.00 1,250.00 Capital and Reserves: Authorised Ordinary €1 Shares Issued 3,350,000 Ordinary €1 Shares 3,350.00 3,350.00 Reserves: Share Premium Account 1,000.00 1,000.00 Retained Earnings and other reserves 2,721.75 1,885.00 8,056.75 7,485.00 Financial Management Business Management AERD 20030 2C: Cash Flow Statement Cash Flow Statement  Profit = Revenue earned in a period minus Costs incurred in earning that revenue  Focus is on what was earned in the period not what was received and paid out in the period.  But we also need to track cash flow in the period, i.e. the net flow of cash into and out of the business. Cash Flow Statement  An accounting statement reconciling the firm’s cash balance between two points in time; typically shows cash receipts and cash disbursements for a prior accounting period but can also be used to project cash receipts and disbursements for a future period of time. Cash Flow Statement  Profit compared with cash flow  Profit = Sales less expenses (i.e. the costs and expenses associated with the sales)  Cash flow = cash inflows less cash outflows  Difference arises because of time lags: Time lags between time of: (i) payment for fixed assets, materials and services and (ii) cash receipts for sales  Effect is greatest in times of high sales growth – i.e. when cash going out can be consistently higher than cash coming in Cash Flow Statement  Treatment of fixed assets is another important difference between the Profit and Loss Account and the Cash Flow Statement  Profit and Loss Account , fixed assets are accounted for by means of depreciation  An expense known as depreciation is charged/deducted when calculating the profit  In Cash Flow Statement, fixed assets are dealt with only in the year of purchase or the year of sale  If a fixed asset is purchased it is recorded as a cash outflow and sale of a fixed asset is recorded as a cash inflow.  Depreciation is a non-cash transaction and therefore is never included in the Cash Flow Statement Cash Flow Statement Example of profit calculation € € Sales 100,000 Cost of Sales: Opening Stock 40,000 Purchases 60,000 100,000 Closing Stock 45,000 55,000 Gross Profit 45,000 Less Expenses: General Expenses 10,000 Depreciation 4,000 14,000 Operating Profit 31,000 Cash Flow Statement Cash flow calculation Cashflow: € € Cash Inflow 100,000 Cash Outflows: Purchase of materials 60,000 Expenses 10,000 Purchase of Machinery 20,000 90,000 Excess Cash Inflow 10,000 Reasons for Preparing a Cash Flow Statement  To show the main sources of funds for the year:  How much was generated by the business itself  How much was borrowed  How much, if any, was invested from outside by the owners etc.  To show the purposes for which these funds were used:  Expenditure on fixed assets  Investment in working capital etc.  To judge if the sources of funding matched the relevant uses  i.e. long term investments funded from long term sources etc. Funds / Cash Flows in a Business Funds from Trading Working Fixed Assets Capital (Non-current assets) CASH Investing activities Share capital (Equity) Debt Financing Return on investment & Grants/Taxation servicing of finance Deriving a Cash Flow Statement from Financial Statements / Accounts  Requirements:  Profit and loss account for period  Balance sheets for the beginning and the end of the accounting period  Structure of Cash Flow Statement 1. Net Cash Flow from Operating/Trading Activities:  Operating profit (PBIT) + depreciation and other adjustments from Profit and loss account  Movements in Working Capital:  Increase / Decrease in stocks (inventory)  Difference between opening and closing stock on B/S  Increase = Outflow of funds; Decrease = Inflow  Increase / Decrease Debtors (A/C receivable) as for inventory  Increase / Decrease in Creditors (A/C payable)  Difference between opening and closing creditors on B/S  Increase = Inflow of funds; Decrease = Outflow  Short term loan as for creditors Ardmore Limited, Annual Accounts 2012 Cash Flow Statement, Year ending 31/12/2012 Cash from opera!ng ac!vi!es (€'000) Pro(t before interest and tax 1,277.00 Deprecia.on 226.00 Cash in/ow 1,503.00 Movement in W/C: Increase/decrease in stocks (inventory) (303.00) Increase/decrease in debtors (A/C rec.) 142.00 Increase/decrease in creditors & accruals 148.02 Increase/decrease in short term loans 65.00 52.02 1,555.02 Structure of Cash Flow Statement 2. Return on Investment and Servicing of Finance:  Payment of interest:  Interest expense for period as shown on P&L A/C  Payment of dividends:  Dividend on B/S at beg + dividend for year (P&L) less dividend on B/S at end  Both are recorded as cash outflows 3. Taxation Paid:  Payment of tax:  Tax on B/S at beg + tax for year (P&L) less tax on B/S at end Ardmore Limited, Annual Accounts 2012 Cash Flow Statement, Year ending 31/12/2012 Cash from opera!ng ac!vi!es (€'000) Pro(t before interest and tax 1,277.00 Deprecia.on 226.00 Cash in/ow 1,503.00 Movement in W/C: Increase/decrease in stocks (inventory) (303.00) Increase/decrease in debtors (A/C rec.) 142.00 Increase/decrease in creditors & accruals 148.02 Increase/decrease in short term loans 65.00 52.02 1,555.02 Return on investment and Servicing of Finance: Interest paid (165.00) Payment of dividends (247.25) Payment of tax (99.00) (511.25) Structure of Cash Flow Statement 4. Investing Activities:  Investment in or purchase of fixed assets:  Recorded as an outflow of cash  Sale of fixed assets  Recorded as an inflow of cash  Investments in fixed assets calculated as follows  FA on the B/S at end - FA on B/S at beginning + depreciation from P&L Ardmore Limited, Annual Accounts 2012 Cash Flow Statement, Year ending 31/12/2012 Cash from opera!ng ac!vi!es (€'000) Pro(t before interest and tax 1,277.00 Deprecia.on 226.00 Cash in/ow 1,503.00 Movement in W/C: Increase/decrease in stocks (inventory) (303.00) Increase/decrease in debtors (A/C rec.) 142.00 Increase/decrease in creditors & accruals 148.02 Increase/decrease in short term loans 65.00 52.02 1,555.02 Return on investment and Servicing of Finance: Interest paid (165.00) Payment of dividends (247.25) Payment of tax (99.00) (511.25) Inves!ng ac!vi!es Purchase of (xed assets (324.00) (324.00) Structure of Cash Flow Statement 5. Financing Activities:  Grants received:  Grant on the B/S at end - grant on B/S at begin + amount credited to income from P&L.  Repayment of debenture (loans):  Difference between debenture at beginning and end of period on B/S  Issue of shares or loans: inflows of cash Ardmore Limited, Annual Accounts 2012 Cash Flow Statement, Year ending 31/12/2012 Cash from opera!ng ac!vi!es (€'000) Pro(t before interest and tax 1,277.00 Deprecia.on 226.00 Cash in/ow 1,503.00 Movement in W/C: Increase/decrease in stocks (inventory) (303.00) Increase/decrease in debtors (A/C rec.) 142.00 Increase/decrease in creditors & accruals 148.02 Increase/decrease in short term loans 65.00 52.02 1,555.02 Return on investment and Servicing of Finance: Interest paid (165.00) Payment of dividends (247.25) Payment of tax (99.00) (511.25) Inves!ng ac!vi!es Purchase of (xed assets (324.00) (324.00) Financing Grants received 95.00 Repayment of debenture (265.00) (170.00) Net cash in/ow 549.77 Structure of Cash Flow Statement 6. Movement in net liquid funds  Movement in bank overdraft and cash Ardmore Limited, Annual Accounts 2012 Cash Flow Statement, Year ending 31/12/2012 Cash from opera!ng ac!vi!es (€'000) Pro(t before interest and tax 1,277.00 Deprecia.on 226.00 Cash in/ow 1,503.00 Movement in W/C: Increase/decrease in stocks (inventory) (303.00) Increase/decrease in debtors (A/C rec.) 142.00 Increase/decrease in creditors & accruals 148.02 Increase/decrease in short term loans 65.00 52.02 1,555.02 Return on investment and Servicing of Finance: Interest paid (165.00) Payment of dividends (247.25) Payment of tax (99.00) (511.25) Inves!ng ac!vi!es Purchase of (xed assets (324.00) (324.00) Financing Grants received 95.00 Repayment of debenture (265.00) (170.00) Net cash in/ow 549.77 Movement in net liquid funds Change in bank balances (549.77) Analysis of change in debt At 1 Jan Cash -ow At 31 Dec Cash in hand & at bank 7.00 (3.00) 4.00 Bank overdra7 (1,345.12) 552.77 (792.35) Total Debt/Funds (1,338.12) 549.77 (788.35)  Ardmore Limited, Annual Accounts 2012 Pro.t & Loss Account for year ending 31 Dec 2012 2012 2011 (€’000) (€’000) Turnover (Revenue/Sales) 17,500.00 16,200.00 Less: Cost of Sales Stock 1 Jan 2012 1,215.00 1,123.00 Cost of manufacture (see workings) 12,078.00 11,036.00 13,293.00 12,159.00 Stock at 31 Dec 2012 (1,800.00) (1,215.00) Cost of Sales 11,493.00 10,944.00 Gross Pro.t 6,007.00 5,256.00 Less opera.ng expenses: Selling and distribu.on (1,950.00) (1,900.00) Administra.on (2,554.00) (2,108.00) Deprecia.on (226.00) (208.00) Opera!ng Pro.t 1,277.00 1,040.00 Less: Interest (165.00) (210.00) Pro.t before Tax (PBT) 1,112.00 830.00 Taxa.on (123.00) (94.00) Net Pro.t a:er Tax 989.00 736.00 Add Government grant received 95.00 85.00 Less Dividend (247.25) (147.20) Retained Pro.t (Earnings) 836.75 673.80  Ardmore Limited, Annual Accounts 2012 Balance Sheet as at 31 Dec. 2012 2012 2011 (€’000) (€’000) Fixed Assets: (note 2) Land and Buildings 3,500.00 3,500.00 Plant and Machinery 1,311.00 1,392.00 Fixtures and Fi?ngs 252.00 273.00 Motor Vehicles 590.00 390.00 5,653.00 5,555.00 Current Assets: Stocks (inventory) 3,264.00 2,961.00 Debtors (accounts receivable) 2,450.00 2,592.00 Cash 4.00 7.00 5,718.00 5,560.00 Amounts falling due within one year: (current liabilies) Trade Creditors (accounts payable) 1,358.00 1,250.00 Bank overdra7 792.35 1,345.12 Short term loans 830.00 765.00 Accruals and other creditors 98.90 58.88 Current taxa.on 235.00 211.00 3,314.25 3,630.00 Net Current Assets: 2,403.75 1,930.00 Total Assets less Current Liabili!es 8.056.75 7,485.00 Amounts falling due a:er more than one year: Long Term Debt (loans) 985.00 1,250.00 Capital and Reserves: Authorised Ordinary €1 Shares Issued 3,350,000 Ordinary €1 Shares 3,350.00 3,350.00 Reserves: Share Premium Account 1,000.00 1,000.00 Retained Earnings and other reserves 2,721.75 1,885.00 8,056.75 7,485.00 Ardmore Limited, Annual Accounts 2012 Cash Flow Statement, Year ending 31/12/2012 Cash from opera!ng ac!vi!es (€'000) Pro(t before interest and tax 1,277.00 Deprecia.on 226.00 Cash in/ow 1,503.00 Movement in W/C: Increase/decrease in stocks (inventory) (303.00) Increase/decrease in debtors (A/C rec.) 142.00 Increase/decrease in creditors & accruals 148.02 Increase/decrease in short term loans 65.00 52.02 1,555.02 Return on investment and Servicing of Finance: Interest paid (165.00) Payment of dividends (247.25) Payment of tax (99.00) (511.25) Inves!ng ac!vi!es Purchase of (xed assets (324.00) (324.00) Financing Grants received 95.00 Repayment of (265.00) (170.00) debenture 549.77 Net cash in/ow Movement in net liquid funds Change in bank balances (549.77) Topic 3: Financial Statement Analysis & Interpretaon Financial statement analysis:  Financial objectives of business:  To generate enough profit to give reasonable returns on investment and  To attract sufficient funding for business growth and development and  To always have enough cash to meet commitments 2 Financial statement analysis:  Financial ratio analysis Four types: 1. Liquidity ratios 2. Financial ratios 3. Profitability ratios 4. Activity / Efficiency ratios 3 Financial statement analysis:  Liquidity ratios: indicate a firms ability to cover its short term obligations.  Can the firm cover its short term debt?  Will the business be able to pay its bills in the coming year?  Financial ratios: concerned with the relationship between debt and equity and the stability of the business in the longer term.  Indicator of how highly borrowed the business is  Can the business take on more debt 4 Financial statement analysis:  Profitability ratios: An indicator of the firms efficiency of operation  Relate profit to sales  Relate Profit to the amount of capital invested in the business  Activity / Efficiency ratios: Examine how efficiently the business is managing its working capital.  How efficiently the resources of the business are being used 5 1. Liquidity Raos 6 Liquidity raos: (1) Current ratio: Current assets Current liabilities Measures the capacity of a business to pay cash when its bills fall due Ideally should be 2:1 but many businesses manage on a ratio of 1.5:1 or lower Year 2012 Year 2011 Ardmore Example: 5,718 5,560 3,314.25 3,630 = 1.73 1.53 7  Ardmore Limited, Annual Accounts 2012 Balance Sheet as at 31 Dec. 2012 2012 2011 (€’000) (€’000) Fixed Assets: (note 2) Land and Buildings 3,500.00 3,500.00 Plant and Machinery 1,311.00 1,392.00 Fixtures and Fings 252.00 273.00 Motor Vehicles 590.00 390.00 5,653.00 5,555.00 Current Assets: Stocks (inventory) 3,264.00 2,961.00 Debtors (accounts receivable) 2,450.00 2,592.00 Cash 4.00 7.00 5,718.00 5,560.00 Amounts falling due within one year: (current liabilies) Trade Creditors (accounts payable) 1,358.00 1,250.00 Bank overdra/ 792.35 1,345.12 Short term loans 830.00 765.00 Accruals and other creditors 98.90 58.88 Current taxa2on 235.00 211.00 3,314.25 3,630.00 Net Current Assets: 2,403.75 1,930.00 Total Assets less Current Liabilies 8.056.75 7,485.00 Amounts falling due a/er more than one year: Long Term Debt (loans) 985.00 1,250.00 Capital and Reserves: Authorised Ordinary €1 Shares Issued 3,350,000 Ordinary €1 Shares 3,350.00 3,350.00 Reserves: Share Premium Account 1,000.00 1,000.00 Retained Earnings and other reserves 2,721.75 1,885.00 8,056.75 7,485.00 Liquidity raos: (2) Quick ratio : Current assets - stocks (Acid Test Ratio) Current liabilities Measures current assets e.g. cash, savings, debtors that can be quickly converted into cash relative to liabilities Ideally should be 1:1 or greater Year 2012 Year 2011 Ardmore: 5,718-3,264 5,560-2,685 3,314.25 3,630 = 0.74 0.79 9  Ardmore Limited, Annual Accounts 2012 Balance Sheet as at 31 Dec. 2012 2012 2011 (€’000) (€’000) Fixed Assets: (note 2) Land and Buildings 3,500.00 3,500.00 Plant and Machinery 1,311.00 1,392.00 Fixtures and Fings 252.00 273.00 Motor Vehicles 590.00 390.00 5,653.00 5,555.00 Current Assets: Stocks (inventory) 3,264.00 2,961.00 Debtors (accounts receivable) 2,450.00 2,592.00 Cash 4.00 7.00 5,718.00 5,560.00 Amounts falling due within one year: (current liabilies) Trade Creditors (accounts payable) 1,358.00 1,250.00 Bank overdra/ 792.35 1,345.12 Short term loans 830.00 765.00 Accruals and other creditors 98.90 58.88 Current taxa2on 235.00 211.00 3,314.25 3,630.00 Net Current Assets: 2,403.75 1,930.00 Total Assets less Current Liabilies 8.056.75 7,485.00 Amounts falling due a/er more than one year: Long Term Debt (loans) 985.00 1,250.00 Capital and Reserves: Authorised Ordinary €1 Shares Issued 3,350,000 Ordinary €1 Shares 3,350.00 3,350.00 Reserves: Share Premium Account 1,000.00 1,000.00 Retained Earnings and other reserves 2,721.75 1,885.00 8,056.75 7,485.00 2. Financial Raos 11  Debt / Gearing raos: (1) Debt/equity %: Long term debt X 100 Owners equity Measures the longer term financial stability Describes the relative proportions of long term debt and owners equity used to fund a business. Generally levels of 50 to 60% are considered high Year 2012 Year 2011 Ardmore: 985 X 100 1,250 X 100 3,350+1,000+2,721.75 3,350+1,000+1,885 = 13.9% = 20.0% 12  Ardmore Limited, Annual Accounts 2012 Balance Sheet as at 31 Dec. 2012 2012 2011 (€’000) (€’000) Fixed Assets: (note 2) Land and Buildings 3,500.00 3,500.00 Plant and Machinery 1,311.00 1,392.00 Fixtures and Fings 252.00 273.00 Motor Vehicles 590.00 390.00 5,653.00 5,555.00 Current Assets: Stocks (inventory) 3,264.00 2,961.00 Debtors (accounts receivable) 2,450.00 2,592.00 Cash 4.00 7.00 5,718.00 5,560.00 Amounts falling due within one year: (current liabilies) Trade Creditors (accounts payable) 1,358.00 1,250.00 Bank overdra/ 792.35 1,345.12 Short term loans 830.00 765.00 Accruals and other creditors 98.90 58.88 Current taxa2on 235.00 211.00 3,314.25 3,630.00 Net Current Assets: 2,403.75 1,930.00 Total Assets less Current Liabilies 8.056.75 7,485.00 Amounts falling due a/er more than one year: Long Term Debt (loans) 985.00 1,250.00 Capital and Reserves: Authorised Ordinary €1 Shares Issued 3,350,000 Ordinary €1 Shares 3,350.00 3,350.00 Reserves: Share Premium Account 1,000.00 1,000.00 Retained Earnings and other reserves 2,721.75 1,885.00 8,056.75 7,485.00 Income Gearing or Coverage raos: Concept that financial risk increases as debt/equity increases But Financial problems only follow when cash flow is insufficient to meet interest and repayments 14 Income Gearing or Coverage Raos: (1) Interest cover ratio: PBIT Annual interest How many times the interest payable is covered by the profit Of particular interest to lenders i.e. how vulnerable are the interest repayments to a fall in business profits A ratio of 4 or higher is desirable 2012 2011 Ardmore: 1,277 1,040 165 210 = 7.7 times 5.0 times 15  Ardmore Limited, Annual Accounts 2012 Pro4t & Loss Account for year ending 31 Dec 2012 2012 2011 (€’000) (€’000) Turnover (Revenue/Sales) 17,500.00 16,200.00 Less: Cost of Sales Stock 1 Jan 2012 1,215.00 1,123.00 Cost of manufacture (see workings) 12,078.00 11,036.00 13,293.00 12,159.00 Stock at 31 Dec 2012 (1,800.00) (1,215.00) Cost of Sales 11,493.00 10,944.00 Gross Pro4t 6,007.00 5,256.00 Less opera2ng expenses: Selling and distribu2on (1,950.00) (1,900.00) Administra2on (2,554.00) (2,108.00) Deprecia2on (226.00) (208.00) Operang Pro4t 1,277.00 1,040.00 Less: Interest (165.00) (210.00) Pro4t before Tax (PBT) 1,112.00 830.00 Taxa2on (123.00) (94.00) Net Pro4t a/er Tax 989.00 736.00 Add Government grant received 95.00 85.00 Less Dividend (247.25) (147.20) Retained Pro4t (Earnings) 836.75 673.80 3. Pro4tability Raos 17 Pro4t to Sales raos: (1) Gross profit to sales %: Gross profit X 100 Sales Measures the margin available to cover expenses and profit, i.e. whats left from sales to cover admin, selling, depreciation etc. as well as taxes and provide a profit for owners/shareholders Need to track changes over time 2012 2011 Ardmore: 6,007 X 100 5,256 X 100 17,500 16,200 = 34.3% 32.4% 18  Ardmore Limited, Annual Accounts 2012 Pro4t & Loss Account for year ending 31 Dec 2012 2012 2011 (€’000) (€’000) Turnover (Revenue/Sales) 17,500.00 16,200.00 Less: Cost of Sales Stock 1 Jan 2012 1,215.00 1,123.00 Cost of manufacture (see workings) 12,078.00 11,036.00 13,293.00 12,159.00 Stock at 31 Dec 2012 (1,800.00) (1,215.00) Cost of Sales 11,493.00 10,944.00 Gross Pro4t 6,007.00 5,256.00 Less opera2ng expenses: Selling and distribu2on (1,950.00) (1,900.00) Administra2on (2,554.00) (2,108.00) Deprecia2on (226.00) (208.00) Operang Pro4t 1,277.00 1,040.00 Less: Interest (165.00) (210.00) Pro4t before Tax (PBT) 1,112.00 830.00 Taxa2on (123.00) (94.00) Net Pro4t a/er Tax 989.00 736.00 Add Government grant received 95.00 85.00 Less Dividend (247.25) (147.20) Retained Pro4t (Earnings) 836.75 673.80 Pro4t to Sales raos: (2) Net profit to sales %: Net profit after tax X 100 Sales This is the margin left for distribution to the shareholders/owners and for retention for reinvestment in the business i.e. how much of every €1 of sales is left and available to pay shareholders or re invest in the business 2012 2011 Ardmore: 989 X 100 736 X 100 17,500 16,200 = 5.7% 4.5% 20  Ardmore Limited, Annual Accounts 2012 Pro4t & Loss Account for year ending 31 Dec 2012 2012 2011 (€’000) (€’000) Turnover (Revenue/Sales) 17,500.00 16,200.00 Less: Cost of Sales Stock 1 Jan 2012 1,215.00 1,123.00 Cost of manufacture (see workings) 12,078.00 11,036.00 13,293.00 12,159.00 Stock at 31 Dec 2012 (1,800.00) (1,215.00) Cost of Sales 11,493.00 10,944.00 Gross Pro4t 6,007.00 5,256.00 Less opera2ng expenses: Selling and distribu2on (1,950.00) (1,900.00) Administra2on (2,554.00) (2,108.00) Deprecia2on (226.00) (208.00) Operang Pro4t 1,277.00 1,040.00 Less: Interest (165.00) (210.00) Pro4t before Tax (PBT) 1,112.00 830.00 Taxa2on (123.00) (94.00) Net Pro4t a/er Tax 989.00 736.00 Add Government grant received 95.00 85.00 Less Dividend (247.25) (147.20) Retained Pro4t (Earnings) 836.75 673.80  Pro4t to Investment raos: (1) Return on equity %: Net profit (earnings) after tax (ROE) Equity Measures performance from the point of view of the shareholders Return to the shareholders on there investment 2012 2011 Ardmore: 989 X 100 736 X 100 3,350+1,000+2,722 3,350+1,000+1,885 = 14.0% 11.8% 22  Ardmore Limited, Annual Accounts 2012 Pro4t & Loss Account for year ending 31 Dec 2012 2012 2011 (€’000) (€’000) Turnover (Revenue/Sales) 17,500.00 16,200.00 Less: Cost of Sales Stock 1 Jan 2012 1,215.00 1,123.00 Cost of manufacture (see workings) 12,078.00 11,036.00 13,293.00 12,159.00 Stock at 31 Dec 2012 (1,800.00) (1,215.00) Cost of Sales 11,493.00 10,944.00 Gross Pro4t 6,007.00 5,256.00 Less opera2ng expenses: Selling and distribu2on (1,950.00) (1,900.00) Administra2on (2,554.00) (2,108.00) Deprecia2on (226.00) (208.00) Operang Pro4t 1,277.00 1,040.00 Less: Interest (165.00) (210.00) Pro4t before Tax (PBT) 1,112.00 830.00 Taxa2on (123.00) (94.00) Net Pro4t a/er Tax 989.00 736.00 Add Government grant received 95.00 85.00 Less Dividend (247.25) (147.20) Retained Pro4t (Earnings) 836.75 673.80  Ardmore Limited, Annual Accounts 2012 Balance Sheet as at 31 Dec. 2012 2012 2011 (€’000) (€’000) Fixed Assets: (note 2) Land and Buildings 3,500.00 3,500.00 Plant and Machinery 1,311.00 1,392.00 Fixtures and Fings 252.00 273.00 Motor Vehicles 590.00 390.00 5,653.00 5,555.00 Current Assets: Stocks (inventory) 3,264.00 2,961.00 Debtors (accounts receivable) 2,450.00 2,592.00 Cash 4.00 7.00 5,718.00 5,560.00 Amounts falling due within one year: (current liabilies) Trade Creditors (accounts payable) 1,358.00 1,250.00 Bank overdra/ 792.35 1,345.12 Short term loans 830.00 765.00 Accruals and other creditors 98.90 58.88 Current taxa2on 235.00 211.00 3,314.25 3,630.00 Net Current Assets: 2,403.75 1,930.00 Total Assets less Current Liabilies 8.056.75 7,485.00 Amounts falling due a/er more than one year: Long Term Debt (loans) 985.00 1,250.00 Capital and Reserves: Authorised Ordinary €1 Shares Issued 3,350,000 Ordinary €1 Shares 3,350.00 3,350.00 Reserves: Share Premium Account 1,000.00 1,000.00 Retained Earnings and other reserves 2,721.75 1,885.00 8,056.75 7,485.00 4. Acvity / E purchases, extensions or improvements to fixed assets used in the business  Represent outlays that are expected to benefit the business over the next and subsequent accounting periods  Capital expenditures are not immediately expensed (written off) to the P&L A/c:  The part expected to benefit future periods is carried forward on the Balance Sheet as fixed assets  Only the amount deemed to be used up in the current period is expensed to the P&L A/c by way of depreciation  In the cashflow statement we include the expenditure as a cash-outflow in the year it was incurred 3  Ardmore Limited, Annual Accounts 2012 Balance Sheet as at 31 Dec. 2012 2012 2011 (€’000) (€’000) Fixed Assets: (note 2) Land and Buildings 3,500.00 3,500.00 Plant and Machinery 1,311.00 1,392.00 Fixtures and Fings 252.00 273.00 Motor Vehicles 590.00 390.00 5,653.00 5,555.00 Current Assets: Stocks (inventory) 3,264.00 2,961.00 Debtors (accounts receivable) 2,450.00 2,592.00 Cash 4.00 7.00 5,718.00 5,560.00 Amounts falling due within one year: (current liabilies) Trade Creditors (accounts payable) 1,358.00 1,250.00 Bank overdra/ 792.35 1,345.12 Short term loans 830.00 765.00 Accruals and other creditors 98.90 58.88 Current taxa2on 235.00 211.00 3,314.25 3,630.00 Net Current Assets: 2,403.75 1,930.00 Total Assets less Current Liabilies 8.056.75 7,485.00 Amounts falling due a.er more than one year: Long Term Debt (loans) 985.00 1,250.00 Capital and Reserves: Authorised Ordinary €1 Shares Issued 3,350,000 Ordinary €1 Shares 3,350.00 3,350.00 Reserves: Share Premium Account 1,000.00 1,000.00 Retained Earnings and other reserves 2,721.75 1,885.00 8,056.75 7,485.00  Ardmore Limited, Annual Accounts 2012 Pro2t & Loss Account for year ending 31 Dec 2012 2012 2011 (€’000) (€’000) Turnover (Revenue/Sales) 17,500.00 16,200.00 Less: Cost of Sales Stock 1 Jan 2012 1,215.00 1,123.00 Cost of manufacture (see workings) 12,078.00 11,036.00 13,293.00 12,159.00 Stock at 31 Dec 2012 (1,800.00) (1,215.00) Cost of Sales 11,493.00 10,944.00 Gross Pro2t 6,007.00 5,256.00 Less opera2ng expenses: Selling and distribu2on (1,950.00) (1,900.00) Administra2on (2,554.00) (2,108.00) Deprecia2on (226.00) (208.00) Operang Pro2t 1,277.00 1,040.00 Less: Interest (165.00) (210.00) Pro2t before Tax (PBT) 1,112.00 830.00 Taxa2on (123.00) (94.00) Net Pro2t a.er Tax 989.00 736.00 Add Government grant received 95.00 85.00 Less Dividend (247.25) (147.20) Retained Pro2t (Earnings) 836.75 673.80 Accounng for Fixed Assets - Depreciaon  By definition fixed assets have useful lives extending over a number of years  The business therefore receives the benefits of the fixed asset over a number of accounting periods  Under the ‘matching principle’, revenues for an accounting period are matched with the costs and expenses incurred in generating these revenues to give the profit or loss for the period. 6 Depreciaon of Fixed Assets:  The depreciation decision is to determine what portion of the total cost of a fixed asset should be included as an expense in each accounting period over the useful life of the fixed asset  According to the ‘matching principle’, the amount to be expensed (the depreciation) is that portion of the original cost that has been consumed in generating the revenue for the period  How much has been consumed depends on the useful life of the asset 7 Depreciaon of Fixed Assets:  An estimate is made for the purposes of calculating the amount of depreciation for the year concerned  Under or over estimates are adjusted for at the end of the life of the asset  This will result in additions to or subtractions from the depreciation amount at the time of disposal of the asset 8 Methods of Depreciaon:  Straight-line method:  Writes off to the P&L A/c a constant amount over the estimated useful life of the asset  Calculated as follows: (Historic cost less realisable value)/ estimated useful life  Example: Original cost €10,000, expected residual value €2,000 and expected life of ten years Annual depreciation expense = (10,000 – 2,000)/10 9 Straight Line Method Year Value at Annual Cumulative Value at start Depreciatio Depreciatio close n charge n 1 10,000 800 800 9,200 2 9,200 800 1,600 8,400 3 8,400 800 2,400 7,600 4 7,600 800 3,200 6,800 5 6,800 800 4,000 6,000 6 6,000 800 4,800 5,200 7 5,200 800 5,600 4,400 8 4,400 800 6,400 3,600 9 3,600 800 7,200 2,800 10 2,800 800 8,000 2,000 10 Methods of Depreciaon:  Reducing balance method:  A predetermined percentage of the book value is written off to the P&L A/C each year  Results in higher depreciation being charged in the earlier years  Often justified on the basis that early obsolescence is often associated with many fixed assets  Original expenditure €10,000 and depreciation rate of 15%  Year 1 = €10,000 x 0.15 = €1,500  Year 2 = €8,500 x 0.15 = €1,275  Year 3 = €7,225 x 0.15 = €1,083.75 11 Reducing Balance Method Year Value at Annual Cumulative Value at start Depreciatio Depreciatio close n charge n 1 10,000 1500 1500 8,500 2 8,500 1275 2,775 7,225 3 7,225 1084 3,859 6,141 4 6,141 921 4,780 5,220 5 5,220 783 5,563 4,437 6 4,437 666 6,229 3,771 7 3,771 566 6,794 3,206 8 3,206 481 7,275 2,725 9 2,725 409 7,684 2,316 10 2,316 347 8,031 1,969 12 Methods of depreciaon:  Sum of digits method:  The base for the depreciation charge is calculated by adding together the digits of the useful life of the asset  Somewhat similar to the declining balance method, but the rate of decline tends to be higher and it can provide for having no residual value at the end. 13 Methods of depreciaon:  Sum of digits method contd:  Example: Useful life of asset = 10 years Depreciation per year: = (Cost of asset – realisable value) x fraction Year 1 => 10/(10+9+.+2+1) = 10/55 x 8,000 = €1,455 Year 2 => 9/55 x 8,000 = €1,309 Year 3 = 8/55 x 8,000 = €1,164 etc. Year 10 = 1/55 x 8,000 = €145 14 Sum of Digits Method Year Value at Annual Cumulative Value at start Depreciatio Depreciatio close n charge n 1 10,000 1455 8,545 1,455 2 8,545 2,764 7,236 1,309 3 7,236 3,927 6,073 1,164 4 6,073 4,945 5,055 1,018 5 5,055 873 5,818 4,182 6 4,182 6,545 3,455 727 7 3,455 582 7,127 2,873 8 2,873 436 7,564 2,436 15 Methods of depreciaon: Comparison of depreciation methods 1,600 D ep reciatio n€'s) 1,400 ( 1,200 1,000 Straight line 800 Declining balance 600 400 Sum of digits 200 0 1 2 3 4 5 6 7 8 9 10 Year 16 Sources of Equity 17 Four Main Sources of Equity  Owners Capital the cash invested by the owners or partners  Outside Equity investment by those other than the owners  Debt Finance the use of bank and lender products to finance a business  Grant Funding money provided by the state, rural development organisations and other sources 18 Business Management – AERD 20030 Dr. James Breen Room 1.23 Agriculture & Food Science Centre Lecture Slides Set 3  Managing the Agribusiness What do managers do?  Managing the Agribusiness Performance of Agribusiness firms are dependent on a number of factors Some of these factors are outside of the firms control – global supply and demand, – the weather – changes in consumer preferences – the wider macro economy  Managing the Agribusiness However the decisions taken by managers will determine how well they can capitalise on favourable conditions or adapt to unfavourable conditions – Investment decisions – Recruitment policy – Purchasing decisions – Production decisions Therefore an important factor in firm performance is how managers utilise the firms resources  Characteristics of Managers Effective managers Failed managers Positive and direct thinking. Excessive focus on the Address problems before detail him/her. Likes the status- not the Extracts the optimum from work his/her effort and Avoids responsibility environment. Poor to co-operate with Acts on decisions. others Accepts the consequences Excessively work-focused of decisions taken. Fears success/ too self critical  What is Management? It is both an art and a science Managers must efficiently combine the human, financial and physical resources of a firm to maximise long-run profits Management is a process because it comprises of a series of actions that lead to the attainment or accomplishment of certain activities Management is tasks, management is discipline, management is also people Management is a system of authority in that it usually exists as part of a hierarchy where upper levels “dictate” to lower levels  Management Defined “Management aims to accomplish purposes with the least expenditure of material or human resources (Koontz, 1969) “Management is the art of getting things done through other people” (Hellreigel and Slocum 1986) Management is the effective and efficient integration and co-ordination of resources to achieve desired objectives (Middlemist and Mathis, 1989) Management is the art and science of successfully pursuing desired results with the resources available to the organisation (Barnard et al 2012)  Management Defined The Art - management deals with people and so management principles must be viewed as imperfect The Science – is in the principles and tools that you use to manage  Four Key Tasks of Agribusiness Managers The functions of management address 4 key areas marketing, finance, supply chain management and human resources. All effective managers execute 4 key tasks 1. Planning 2. Organising 3. Directing 4. Controlling  Planning Forward thinking about specific courses of action based upon a full understanding of all factors involved and directed at specific goals and performance objectives. In other words it’s the development of a plan of action that will allow you to achieve a specific objective. Planning is undertaken by all managers at some level It should be undertaken before the other tasks Identify your objectives - what do you want to achieve?  S.M.A.R.T. Objectives Specific – they should specify what is to be achieved Measurable – helps control whether/not objectives are being met Achieveable – challenging, yet achievable and attainable Realistic – within resources at your disposal Time-bound – should identify when objectives are to be achieved by  S.M.A.R.T. Objectives So if a firm said – “our objective is to grow the firm by 400% in the future” Would this satisfy the criteria of a S.M.A.R.T. objective? If a firm said – “Our objective is to increase volume of sales by 25% over the next 3 years” Is this a S.M.A.R.T. objective?  The Three Levels of Management Level Examples Responsibilities Top or senior President, vice president chief Responsible for the overall Managers executive officer (CEO) chief performance of the firm financial officer (CFO) Set general policies, formulate strategies and approve significant decisions Represent the company in dealings with other firms and government Middle Plant manager, operations manager, Responsible for implementing the Managers division manager, regional sales strategies and working towards manager the goals set by top managers Front-line Supervisor, office manager, project Responsible for supervising the Managers manager, group leader work of employees who report to them Ensure employess understand and are properly trained in company policies and procedures  Types of Planning Strategic Planning is the process of developing a long- range plan for an organisation. Tackle broadest elements or wider issues Typically developed at the top level of the organisation More long-term in its focus (>5 years) May address issues like – What countries will we operate in – What business will we be in – What plants will we build  Types of Planning Tactical Planning involves smaller scale, more immediate plans are developed to implement the strategic plan. Tactical plans should be consistent with the strategic plan Focused on the current operations of the various parts of the organisation Medium-term in its focus Tends to involve middle management  Types of Planning Operational Planning is concerned with short-term planning of day to day functions and serves to guide immediate action undertaken by the organisation. Usually carried out by front-line supervisors Involves setting short-term targets, budgets and specific programmes of action at a unit or departmental level and that are geared towards achieving the tactical plan.  Types of Planning Contingency Planning is the development of alternative plans in case the assumptions made in the planning process do not materialise. It should be part of the strategic and tactical planning process. It provides guidance in the event of something unexpected happening.  Time Spent Planning Time Spent Planning Senior Management Middle Management Front-line Supervisors Time  Levels and Nature of Planning Strategic Level Tactical Level Operational Level Management Top Management Middle Management Line Manager, Involved Foreman or Line Employees Flexibility Very Flexible Somewhat Flexible Inflexible Time-Frame Long-term Intermediate-term Immediate Written Written Analyses Written Reports Unwritten Detail Complex, Detailed Less Detail, Outlined Simple Focus Broad General Very Specific  The Planning Process Six Steps 1. Gathering Information 2. Analyse the Information 3. Forecasting Change - what does the future hold 4. Set goals/performance objectives, goals are specific quantitative or qualitative aims for the company, performance objectives are set for specific units and may include performance targets 5. Develop Alternatives – alternative plans that can enable you to achieve the objective 6. Evaluate Results – is the plan on course to achieving the objectives Business Management – AERD 20030 Dr. James Breen Room 1.23 Agriculture & Food Science Centre Lecture 5: Directing  Directing Involves guiding the efforts of others towards achieving a common goal and leading, supervising, motivating, delegating and evaluating human resources. Central to Directing – Selecting, allocating and training personnel – Staffing positions – Assigning duties and responsibilities – Establishing the results to be achieved – Creating the desire for success – Seeing that the job is done and done properly  Directing Leadership is the process of helping individuals or groups to accomplish organisational goals by unleashing each person’s individual potential as a contribution to organisational success It’s about influencing and motivating those who are following to do their best work Leadership not only involves providing instruction on how to complete the task it also provides incentives to complete the task properly and in a timely manner Motivation is a key component Need to demonstrate own initiative  Leadership Leadership task Management task Creates a long-term vision Plans to meet current objectives Sets broad purpose and Makes the best use of resources direction Creates a better future Manages today’s problems Focus upon the product Focus upon making the process work well Inspires people to do more Ensures people work to contract Teaches by example and praise Seeks improvement through training Creates more effective systems Establishes standard procedures Focus is upon effectiveness Focus is upon efficiency Looks to the future Looks at the present  Leadership Traits Leaders typically possess some or all of the traits below. 1. Drive 2. Desire to lead 3. Honesty and Integrity 4. Self-confidence 5. Intelligence 6. Job-relevant knowledge 7. Extraversion  Leadership Styles Authoritarian or Autocratic Leader A leader-centered style of leadership in which the thoughts, ideas and wishes of the leader are expected to be obeyed completely without question Authoritarian leaders rarely consult subordinates when making decisions Also decisions may be changed suddenly Can be coercive or bullying in their style Benevolent autocrats – provides so much praise for staff that they are shamed into obedience Manipulative autocrats – manipulate staff into thinking they are involved in the decision making process  Leadership Styles Democratic or Participative Leader A leadership style that favours a shared decision-making process, with the leader maintaining the ultimate responsibility for decisions while actively seeking significant input from other. Encourages employee involvement and may improve employee attitudes. Can take time to reach a decision Requires good management skills  Leadership Styles Free Rein or Laissez-Faire Leader A leadership style where the leader literally relinquishes all decision making to followers. The leader joins the group as an equal and they make decisions together. Need a very good group of people to make this work. Unlikely to make good decisions all the time. Likely to lead to frustration amongst the staff  Leadership Styles Transformational Leader A leadership style which motivates followers to work for higher goals rather than for immediate self-interest. In other words you are trying to get staff to work towards transforming some aspect of how the company does business. Requires managers to – Recognise the changes in the market – Create a vision of the firm in this new market – Institutionalise the change  Leadership Styles Transformational Leader Characteristics Charisma : vision, and mission, instills pride, gets respect and trust – Idealised Influence: they act as role models – Inspirational Motivation: they inspire followers to go beyond what is expected – Intellectual Stimulation: encourage creativity by acting as teachers – Individualised Consideration: they give each individual attention  Leadership Styles Which leadership style should you adopt? Depends on: – The character of the leader – The employees that you are working with – The situation in which you are operating It could be argued that leaders should try to move towards a more people centred leadership style as it provides more motivation, improves morale etc.  Leadership Behaviour Directive Leader lets subordinates know what's expected of them, schedules work to be done and provides specific guidance on how to complete tasks. Supportive Leader shows concern for the needs of followers and is friendly Achievement Oriented Leader sets challenging goals and expects followers to perform at their highest level.  Directing Shaping the Work Climate Key steps to creating the right work climate include 1. Setting a good example 2. Conscientiously seeking participation 3. Be goals and results centred 4. Give credit and criticism as required 5. Be fair, consistent and honest 6. Inspire confidence and lend encouragement Good communication is also essential and it should be two-way  Directing Policies A rule or guideline that sets the boundaries for handling specific situations that occur frequently – It guides the thinking process during planning and decision making – Recruitment, Dignity at work Procedures a step-by-step guide to performing a specific activity or function – Procedures are designed to implement a policy Practices Activities and processes as they are actually performed in the agribusiness – May be in conflict with the Policies and Procedures – The manager should ensure that practices are consistent with Policies and Procedures – Therefore Polices must make sense, be relevant and be enforced  Motivation Motivation is a stimulus that produces action. Motivation is largely a function of rewards and punishments? The challenge is to determine what rewards and punishments work. Intrinsic motivation is driven by an interest or enjoyment in the task itself Extrinsic motivation is motivation from an external source such as money, promotion, or a threat such as redundancy etc.  Motivation Understanding Motivation is difficult Different people are motivated by different things Motivation is linked to personal needs, so some understanding of human needs will enable us to understand motivation One widely quoted understanding of human needs is Maslows needs hierarchy Motivation Self- actualisation Ego Status Belongingness Safety Survival  Motivation Survival is the most basic human concern Safety once immediate survival is garunteed then humans look to longer term safety e.g. insurance, retirement and so on. Belongingness i.e. social acceptance and belonging Ego Status i.e. self esteem or status relative to the group Self-actualisation i.e. the feeling of self worth or personal accomplishment Business Management – AERD 20030 Dr. James Breen Room 1.23 Agriculture & Food Science Centre Lecture 6: Controlling  Controlling Represents the monitoring and evaluation of activities and assessment of whether the goals and performance objectives developed within the planning function are achieved Involves monitoring performance and comparing performance with the target levels Evaluating progress towards organisational goals is a key component of Control Proper controls provides the information and the time to correct programs and plans that have gone astray  Controlling How do managers measure performance? 1. Personal observation – Management by walking around 2. Statistical reports – can take the form of numerical displays, graphs etc. 3. Oral reports – meetings, one-to-one conversations 4. Written reports – typically a more formal type of report.  Controlling What do managers use to measure performance? Need to identify the right measures as this is what employees will focus on. Might include: – Some measure of output – Employee satisfaction or turnover – Absenteeism How does actual performance and planned goals compare? What’s an acceptable level of variation?  Controlling What managerial action can be taken? Do nothing. Correct the actual performance. – Take immediate corrective action – corrects problems and gets performance back on track – Basic corrective action – looks at how and why performance deviated before taking corrective action. Revise the standard or plan. – Was the plan or standard realistic? – Just because the target is not being achieved does not mean it is set too high. Business Management – AERD 20030 Dr. James Breen Room 1.23 Agriculture & Food Science Centre Lecture Topic 7: Human Resources Management  Human Resources Management Human Resources Management (HRM) is one of the four functions of Management Human resources are the talents and assets offered to a company by the people it employs. HRM is concerned with acquiring, organising, motivating, leading and managing the firm’s people resources to accomplish its business objectives as effectively as possible.  Human Resources Management HRM consists of two key areas Managing human resource functions Managing employee motivation Three major issues that affect HRM are The size of the firm Knowledge of the human resource functions Top managements philosophy toward human resources  Human Resources Management The size of the HR department can vary considerably Often in small companies there is no HR department and responsibility falls on the General Manager In larger companies it can be quite large and consist of various divisions such as – Payroll – Recruitment – Staff Development or Training In smaller organisations some of these functions may be outsourced or handled by other divisions  Small Scale Food Company Managing Director Sales Accounts Production Technical Manager Manager Manager Manager Sales Team Cook Room Production High Risk Team Team Team Bord Bia Teagasc Organisational Chart  Human Resources Planning Organisation must decide on a HR strategy that fits with its current and future needs. Therefore developing a HR plan is of vital importance HR Planning is an effort to anticipate future business and environmental demands upon an organisation and to provide the personnel to fulfil that business and satisfy those demands. Human Resources Planning  Human Resources Planning The major objectives of HR Planning are: 1. To ensure that the organisation finds and retains the quantity and quality of human resources that it requires 2. To ensure that the organisation makes the best possible use of its human resources 3. To ensure that the organisation can manage the human resource implications of employee surpluses or deficits Its not just about the quantity of employees but also the quality of employees and how they are deployed  Human Resources Planning Principles of good HR Planning 1. The plan has to be fully integrated with the other areas of the organisation’s strategy and planning 2. Senior management must give a lead in stressing its importance throughout the organisation 3. Where possible establish a central HR Planning unit that is accountable to senior management and will co-ordinate and reconcile the HR needs of different divisions 4. Define a time-span to be covered by the plan 5. Establish the scope and details of the plan 6. Base the plan on the most comprehensive and accurate information available  Human Resources Planning Four major stages in the HR Planning process: 1. Demand Analysis 1. Estimating the quality and quantity of staff required to meet the objectives of the organisation. 2. Need to be fully aware of the organisations strategy and its implications for the workforce as well as planned technological changes and the current stock of employees 2. Supply Analysis 1. Estimating the quantity and quality of manpower available to the company 2. Both the internal labour supply (existing employees) and the external supply (potential employees) 3. Need to account for planned and unplanned losses 4. Labour Turnover Index = (Number Leaving/Ave Number Employed) x 100  Human Resources Planning 5. Labour Stability Index = (Number of employees with more than one years service/Number Employed One Year Ago) x 100 3. Estimating Deficits/Surpluses 1. Having conducted your demand and supply analysis can compare results and determine whether the supply of labour exceeds or falls short of the demand for labour 4. Developing Action Plans 1. Having completed the first three steps can now set about preparing an Action Plan 2. Action Plan should ensure that the day-to-day HR needs are met 3. Should identify what the organisation must do and how it will manage recruitment, selection, training and development, promotions etc.  The Functions of Human Resources Management 1. Determine the firms HR needs 2. Find and Recruit people 3. Select and hire employees 4. Orientate new employees to their jobs 5. Set terms of compensation and benefits 6. Evaluate performance 7. Oversee training and development 8. Provide for promotions and advancement 9. Manage terminations or transfers  1 Determining the HR Needs What job are they supposed to do and why or how they are supposed to do it. Often this is not adequately thought out. Every position should have job goals that contribute to the firms success. Two ways to define a job – Job specification - a written set of qualifications of an employee that are needed to perform a specific job satisfactorily – Job description - a list and description of a job’s activities and duties  1 Determining the HR Needs Job Specification A separate job specification should be created for each job and based on the following information 1. The purpose of the job. What are the job goals? What activities are necessary to accomplish those goals. 2. The type of job. How is the employee supervised. What are the responsibilities. What are the training activities. 3. The requirement of the job. What educational level is required. What experience, skills, training are required. 4. Other factors. What other factors if any might be important.  1 Determining the HR Needs Job Description Ideally this should be written by the immediate supervisor of the post Typically it should follow the following format 1. Provide a brief summary paragraph of the job and the goals it is intended to accomplish 2. A list of duties, responsibilities and attendant authority 3. A statement defining lines of authority 4. An indication of how and when job performance and standards will be evaluated Should provide guidance but also be flexible to adapt to special situations Title: Farm Underwriters Department: Underwriting Department Location: FBD Insurance plc, FBD House, Bluebell, Dublin 12. Experience See Description Job/Role Overview: We are seeking to appoint Farm Insurance Underwriters (Level 1) to support the continued development of Farm Insurance Business. This role will appeal to candidates who have achieved an excellent standard of education, preferably to third level with an agriculture qualification. Insurance experience would be an advantage. Successful candidates will be responsible for the development and maintenance of relationships with Local Offices, agricultural organizations and individual customers. They will be able to demonstrate excellent presentation and communication skills. They must be ambitious and energetic in their approach to their work and possess a positive outlook. Key Responsibilities: Working closely with and reporting to the Farm Underwriting Team Leader, she/he will be results focused and key responsibilities will include: Ensure work allocated is completed in line with Department SLAs Process allocated administration tasks according to guidelines and ensure regulatory requirements are achieved Ensure the quality of data input and documentation achieves the required standard Ensure that all systems and procedures set down by the company are complied with. Ensure compliance with various regulations and codes across all relevant activities Awareness of and adherence to the Consumer Protection Code and Data Protection Act. Ideal Candidate: Third level degree preferably an Agriculture related and/or professional insurance qualification; Qualified to Certified Insurance Practitioner (CIP) or Approved Product Advisor (APA) standards or working to attain CIP/APA qualifications. Knowledge of Irish agricultural practices and technology Good communication and decision making skills with the ability to work in a team. Ability to provide excellent service to all customers and meet deadlines, as required. Excellent keyboard skills and proficient in Microsoft Word, Excel, Outlook and ideally an underwriting application. Self motivated with the ability to work under own initiative and an active desire to develop knowledge and experience. Excellent interpersonal skills with a demonstrated record in building working relationships with a wide range of internal and external stakeholders.  2 Finding or Recruiting Employees The qualifications required, the type of job, the wage, the location etc. will all help in locating new employees Variety of ways to recruit employees Advertising through the media, trade papers Advertising through the company website Industry websites Recruitment agencies Career fairs Government employment services University or College lecturers Headhunting  2 Finding or Recruiting Employees Method of advertising used may also depend on the post or level. Applicants are usually required to submit either – CV – Standard application form Applicants are usually also required to submit a cover letter For some posts a document outlining your plan for the post may be required May be required to make a presentation outlining your plan for the post  3 Selecting the Right Person Screen the applicants against the job spec and job description. Both the application and the screening should be consistent with equal opportunities employer act. Shortlist candidates Interview candidates one-to one, panel, group The interviewer should have three constant objectives 1. To obtain enough information about the candidate to determine how s/he will fit the job. 2. To ensure the applicant has enough information about the vacancy and the organisation. 3. To leave the applicant with the genuine impression that s/he has been treated fairly.  3 Selecting the Right Person Some companies may hold a test like an aptitude test, a personality test or some sort of skills test Some companies may have a longer selection process – Involving more than 1 round of interviews – Assessment Centres Seek references Rank the candidates Contact both the successful and unsuccessful candidates  4 Job Orientation Job Orientation is the process of introducing a new employee to the job and involves four major steps 1. Introducing the company to the employee – History, goals of the company, specific details of the post 2. Establishing job relationships and encouraging familiarity with the facilities – Introduced to supervisor, fellow employees etc 3. Helping the employee to begin the job – Discuss all equipment etc, health and safety issues – Make sure they have everything they need to get started 4. Following up and evaluating the employee’s adjustment – In terms of the job, with fellow employees and with their supervisor  5 Compensation and Benefits Compensation The total amount of salary, commissions, bonuses, benefits and perquisites that are given to an employee in exchange for work done. Benefits Polices and programmes offered to employees as a part of their compensation package e.g. health insurance, retirement packages. In deciding compensation must consider – What you can afford to pay. – What competing companies are paying. – What other companies in the area might be paying – What the cost of living is in the area  5 Compensation and Benefits Compensation Types Flat rate e.g. hourly, weekly, monthly, – Simple, easy to administer and to understand – Provide little incentive to go beyond basic expectation Flat rate + individual, group or company-wide payment by results – Provides a wage incentive for employees – More complex to administer and understand, may also cause conflict Merit rating – Receive a bonus based on a systematic assessment of your performance relative to specified objectives – May be difficult to find a good overall measure of performance Profit/gain sharing – Receive a bonus based on company performance in the form of cash or stocks Piecework – Paid for work you have completed  5 Compensation and Benefits Other types of Compensation include – Commissions tied to productivity levels – Bonuses for achieving a certain level of performance – Stock options Benefits can be very varied, some maybe required by law others may be voluntary – Maternity leave – Child care – Career breaks – Holidays – Company cars  6 Evaluating Performance Performance Evaluation is a critical component of HRM Performance Evaluation is an appraisal of an employee’s performance; makes the employee aware of their contributions and their strengths and weaknesses; normally include goals for the next evaluation period The goals of an employee performance evaluation program are to: 1. Improve future performance 2. Identify employees with untapped potential, so they can realise that potential 3. Provide employees with a benchmark of their achievements 4. Provide information relating to decisions about promotion, advancement and pay 5. Give the manager guidelines for helping employees in the future  6 Evaluating Performance Performance Evaluations should focus not just on past contributions but also future opportunities. Therefore need to identify the employees goals for the next evaluation period. These goals should be consistent with the overall goals of the organisation. The main purpose of evaluation is to improve performance not punish employees. It isn’t intended to be confrontational but rather should be an honest two-way discussion. Should aim to improve morale and productivity of the employee.  6 Evaluating Performance The evaluation instrument should be as objective as possible. Should encourage employee self evaluation beforehand. Follow-up with the employee post evaluation can be useful Alternatively instead of a formal evaluation meeting some managers may opt to hold regular 1 on 1 meetings with employees to e