Download - BM Unit 2 - LO31 Higher Business Management Unit 2 Learning Outcome 3 Financial Management
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BM Unit 2 - LO3 1
Higher Business Management
Unit 2Learning Outcome 3
Financial Management
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BM Unit 2 - LO3 2
The Importance of Financial Management
Ensures that there are adequate funds available to acquire the resources needed to help the organisation achieve its objectives
Ensures costs are controlled Ensures adequate cash flow Establish and control profitability
levels
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BM Unit 2 - LO3 3
Key Financial Concepts
Cash flow
Financial statements
Financial analysis (ratios)
Budgets
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BM Unit 2 - LO3 4
Cash Flow
Cash Coming In Profits Sales of fixed assets Sales of stocks Decrease in debtors New capital
introduced Loans received Increase in creditors
Cash Going Out Losses Purchases of fixed
assets Purchases of stock Increase in debtors Drawings or
dividends Loans repaid Decrease in creditors
Liquidity - having sufficient “cash” to meet
everyday running costs
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BM Unit 2 - LO3 5
Financial StatementsThe Balance Sheet
Assets - things owned Liabilities - things owed Finance - capital and reserves
A Balance Sheet is a statement of things owned and owed by a company and how they are financed at a particular date.
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BM Unit 2 - LO3 6
Financial StatementsTrading and Profit & Loss Accounts
The Trading Account Gross Profit = Sales (Turnover)
- Cost of Sales
The Profit & Loss Account Net Profit = Gross Profit +
Gains - Expenses
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BM Unit 2 - LO3 7
Interpretation of the Final Accounts and Balance Sheet
Interested Parties
Management Employees Rival companies Investors Lenders Banks
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BM Unit 2 - LO3 8
Ratio Analysis
Purposes of Interpretation
Profitability - Is the organisation earning more than it is spending?
Liquidity - Does the organisation have enough money to pay its bills?
Efficiency - Is the organisation making the best use of its resources?
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BM Unit 2 - LO3 9
Ratio Analysis
Uses To compare current
year’s performance with previous year
To compare performance with rivals
To interpret in order to improve future performance
To forecast/budget
Limitations The information is
historical - too late to do anything about it
Comparisons are difficult - different conditions apply in different years and no 2 companies are the same
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BM Unit 2 - LO3 10
Profitability Ratios
Gross Profit% = Gross Profit/Sales x 100%
Mark-up% = Gross Profit/Cost of Sales x 100%
Net Profit% = Net Profit/Sales x 100%
Expenses% = Expenses/Sales x 100%(Expenses% = Gross Profit% - Net Profit%)
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BM Unit 2 - LO3 11
Liquidity Ratios
Current Ratio = Current Assets/Current Liabilities
eg 2:1
Acid-test Ratio= (Current Assets - Stocks)/Current
Liabilities(NB should be >1 : 1 - if not, inability to pay debts)
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BM Unit 2 - LO3 12
Efficiency Ratios
Return on Capital Employed (ROCE)= Net Profit (before interest and tax)/Capital Employed(Capital Employed = Total Net Assets - Debentures)
Rate of Stock Turnover= Cost of Goods Sold/Average Stock(Average Stock = [Opening + Closing Stocks]/2)
Asset/Turnover Ratio= Sales (Turnover)/Fixed Assets eg £1.65:1
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BM Unit 2 - LO3 13
Budgets
Purpose To monitor and control the activity of an
organisation - can compare actual figures with budget figures and seek answers from those responsible
To gain information - are we doing well To set targets - keeping within limits of
spending To delegate management authority -
employees are given “freedom” within a set budget
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BM Unit 2 - LO3 14
Cash Budgets(the most common type of budget)
To monitor and control individual departments or the organisation as a whole
To assess the validity of a business project in order to secure finance eg bank loan
To assess the feasibility of a business start-up or business expansion
To provide a tool for measuring progress by comparing actual figures with budgeted ones
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BM Unit 2 - LO3 15
Cash Budgets and theRole of Management
Plans
Organises
Commands
Co-ordinates
Controls
Delegates
Motivates
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BM Unit 2 - LO3 16
Using Financial Information
Reviewing past performance and assessing results
Planning future developments based on past performance
Comparing and contrasting with previous years’ and competitors’ performances