LEVEL 6 Finance for Purchasers

1. LEVEL 6Finance for Purchasers

2. External reasons for preparing accounts • To comply with external regulations • To satisfy the tax authorities • To meet the needs of interested parties • To help ensure effective management of the business

3. Exercise Try to think of external organisations who might be interested in seeing your own organisation’s accounts.

4. Examples of stakeholder expectations

5. The role of the company secretary • The financial accounts are published only infrequently, usually every 12 months. In a fast-moving business environment managers cannot afford to wait that long for financial information. • The financial accounts are historical in outlook. They record how well the business has done over the period just ended. They do not include estimated information relating to the future, and yet that is precisely what managers need when making decisions. • The form and content of the accounts are dictated by external regulations. They may not be at all in the form that best suits the information needs of managers.

6. The buyer’s interest in financial analysis • Buyers wish to deal with suppliers who are financially stable. A supplier in financial difficulties cannot be counted on to provide a secure and continuous stream of supply. • Buyers should seek to obtain prices which are fair to their own organisations and also fair to their suppliers. • Buyers are involved with accounts even within their own organisations. For example, most organisations will establish budgets for each operational function, including the purchasing department. You need to understand the principles of budgeting to take part in this process.

7. Financial accounting, cost accounting and management accounting • Financial accounting is mainly concerned with the production of financial statements for users outside the business. • Cost accounting involves the application of a comprehensive set of principles, methods and techniques to ascertain and analyse costs to suit the various information needs of managers. This analysis of costs feeds into the work of the management accountant. • Management accounting is a wider concept involving professional knowledge and skill in the preparation and particularly the presentation of information to all levels of management in the organisation structure. The source of such information is the financial and cost accounts. The information is intended to assist management in its policy and decision-making, planning and control activities.

8. Uses of management accounts • Formulation of strategy • Planning and controlling the activities • Decision taking • Optimising the use of resources

9. Financial accounts and management accounts

10. The role of the company secretary Enusring that the company complies with the various regulations laid down by the Companies Acts • Making arrangements for meetings of the board of directors • Making arrangements for meetings of the shareholders (the annual general meeting, or any extraordinary general meetings) • Maintaining the minutes for meetings of the directors and of the shareholders • Filing appropriate notices with the Registrar of Companies.

11. Exercise Try to think of management accounting information that would be useful in running a purchasing department. As an example, it might be useful to know the (average) costs involved in placing a purchase order (eg the cost of staff time involved, the cost of selecting a supplier and then communicating the order etc).

12. The Combined Code

13. Ethical issues at three levels • At the macro level, there are issues concerning the role of business and capitalism in society. • At the other extreme – the individual level – there are the issues which face individuals as they act and interact within the organisation and supply chain. This is the sphere which is often covered in Professional Codes of Ethics, for example. • In between, at the corporate level, there are the issues which face an individual organisation as it formulates strategies and policies about how it interacts with its various stakeholders.

14. Non-financial corporate objectives • Sustainability issues: the conservation and perpetuation of the world’s limited natural resources (eg by limiting greenhouse gas emissions or logging) • Environmental issues: the reduction of environment pollution, waste management, the avoidance of environmental disfigurement, land reclamation, promoting recycling, energy conservation and so on • Ethical trading, business relationships and development: consumer protection, improvement of working (and social) conditions for employees and sub-contractors (particularly in developing nations), avoidance of exploitation, debt minimisation, contribution to local communities and so on.

15. CSR and the interest of the firm • Law, regulation and Codes of Practice impose certain social responsibilities on organisations. There are financial and operational penalties for failure to comply (eg ‘polluter pays’ taxes). • Voluntary measures may enhance corporate image and build a positive brand. • Above-statutory provisions for employees and suppliers may be necessary to attract, retain and motivate them to provide quality service and commitment. • Increasing consumer awareness of social responsibility issues creates a market demand for CSR (and the threat of boycott for irresponsible firms).

16. Why CSR is important to organisations (CIPS) • Enhancing stakeholder value • Helping to increase reputation • Ensuring increased knowledge of supply, enabling minimum risks from suppliers

17. Definitions of CSR (CIPS White Paper) • CSR places a company’s social and environmental impacts in the context of its obligations to society. It promotes the integration of stakeholder issues into business operations. • CSR is concerned with treating the stakeholders of the firm ethically or in a responsible manner. • CSR is about how companies manage the business processes to produce an overall positive impact on society. • The commitment of business to contribute to sustainable economic development, working with their employees, the local community and society at large to improve their quality of life, in ways that are good for business and good for development.

18. Key areas of CSR for purchasing professionals (CIPS) • Environmental responsibility • Human rights • Equal opportunities • Diversity • Corporate governance • Sustainability • Impact on society • Ethics and ethical trading • Biodiversity

19. Four categories of corporate social responsibility • CSR in relation to community relations means that organisations should seek to be ‘good neighbours’. Actions that some organisations have taken include support of local charities, sponsorship of local educational or sporting initiatives etc. • CSR in relation to the environment means that organisations should control actions that might be damaging to the environment and encourage actions that preserve the environment. • CSR in relation to customers and suppliers means that organisations should behave fairly and ethically in their business dealings. • CSR in relation to the workforce means that organisations have an obligation to care for and develop the people they employ.

20. Accounting requirements of the Companies Acts • The information must be prepared following certain accounting principles. • Prescribed formats must be adopted for the profit and loss account and balance sheet. • Detailed disclosures of information are required. For example, amounts paid to directors as remuneration must be disclosed. • The financial statements must show a ‘true and fair view’. • The accounts must be audited by a qualified expert from outside the company. (This requirement does not apply to very small companies.)

21. Differences in national accounting standards: the problems • It is difficult to make valid comparisons between different companies on the basis of their published accounts. • Anyone wishing to interpret accounts must become familiar with different sets of rules and regulations.

22. EU procurement directives: alternative procedures • The open procedure • The restricted procedure • The negotiated procedure • Competitive dialogue

23. Remedies for breach of the EU directives • Suspension of an incomplete contract award procedure • Setting aside of a decision in an incomplete contract award procedure • An award of damages (in cases where a contract has already been entered)

24. Examples of business assets

25. Fundamental accounting concepts • Going concern – the enterprise will continue in operation, and at its current level of activity, for the foreseeable future • Accruals – revenues and costs are recognised (and matched against each other) as they occur • Consistency – there is consistent treatment of like items, both within a period and from period to period • Prudence – revenue and profits are recognised in the profit and loss account only when realised, whereas provision for costs and liabilities is made as soon as they are foreseen.

26. Classifying assets • Fixed assets are those which will be used in running the business for a long period of time – at least, for more than a single accounting year. • Current assets are those which move into and out of the business quite quickly. For example, stocks of raw materials are a current asset: they will quickly be converted into finished goods and sold to customers.

27. Types of liabilities • A business may buy goods on credit terms from its suppliers. Until the goods are paid for, the business has a liability to its suppliers. • A business may have an overdraft or loan from its bank. Until this is repaid, the business has a liability to its bank. • A business may owe tax to the government. Until the tax is paid, the business has a liability to the tax authorities.

28. Exercise List the following items showing the least liquid items first: cash in hand; stocks of finished goods; cash at bank; debtors; stocks of raw materials.

29. Capital and operating expenditure

30. Terminology relating to expenditure • In the case of operating expenditure, we expense the costs immediately (ie in this year’s profit and loss account). An equivalent term is to say that we write off the costs immediately. • In the case of capital expenditure, we capitalise the costs (ie we classify the expenditure as an asset in the balance sheet, rather as an expense in the profit and loss account). Gradually, over the years, we write off the capital costs by means of a depreciation charge in each year’s profit and loss account. Each year we reduce the value of the asset in the balance sheet by the amount we charge as depreciation in that year.

31. Capital and operating expenditure: some grey areas • Finance costs, such as loan interest. Usually, such costs are expensed immediately. However, interest on a loan taken out specifically to finance purchase of a capital asset ranks as part of the cost of the capital asset. In such a case the cost can be capitalised. • Expenditure on research and development will arguably benefit the organisation for years to come. This is an argument for capitalising such expenditure, but there would then be scope for manipulating an organisation’s profitability. To minimise this risk, accounting rules insist that expenditure on research must be expensed immediately, while expenditure on development may be capitalised provided that strict criteria are met. • In some cases, expenditure on marketing initiatives is claimed to have a long-term beneficial effect on organisations. This is similar to the argument on development expenditure. However, the accounting rules in this case are stricter: such expenditure must be expensed immediately.

32. Tax impact of capital expenditure • To encourage investment, there is a range of tax incentives attaching to capital expenditure. For certain classes of capital assets, companies are able to gain accelerated tax relief on the amounts they invest. • On the other side of the coin, the tax authorities wish to prevent the abuse that can arise from manipulating capital expenditure. In particular, any amounts charged in the profit and loss account for depreciation are not allowed as a deduction against taxable profits. Instead, the tax authorities impose their own system of capital allowances as a substitute for depreciation. This means that tax relief will be given according to rules laid down by the tax man, not according to the judgement of directors.

33. Contents of the published financial accounts • Balance sheet • Profit and loss account • Cashflow statement • Five year summary • Chairman’s statement • Notes to the accounts

34. The balance sheet and the profit and loss account • The balance sheet is a statement of assets and liabilities at a point in time (the balance sheet date). • The profit and loss account summarises income earned and expenditure incurred over a period of time. If income exceeds expenditure there is a profit for the accounting period; if expenditure exceeds income there is a loss.

35. Assets in order of liquidity • The freehold premises and plant/equipment come first and are classified as fixed assets. • Stock comes next, in this case consisting of goods held for resale. When the goods are eventually sold, the business will receive cash in exchange. • If the goods are not paid for immediately there will be an asset described as debtors. This term describes amounts owing from customers which will eventually result in the receipt of cash. • Cash at bank refers to the balance on the company’s current account at the bank. • Cash in hand refers to actual notes and coins.

36. The working capital cycle

37. The link between balance sheets and profit and loss account

38. Other items in the published accounts • The chairman’s statement usually contains a narrative review of the company’s performance and prospects. • The notes to the accounts provide further detail and breakdown of amounts appearing in the main accounting statements. They also include a note of the company’s accounting policies – the particular methods chosen by the company to compute accounting figures in areas where alternative valuations are permissible.

39. Public and private companies • In simplified terms, a public company is a company which must have a minimum share capital of £50,000. Such a company has a name ending with the letters plc (or the Welsh equivalent): these stand for ‘public limited company’. • A private company is a company that is not a public company. Private companies have names ending in the word ‘Limited’ or its abbreviation ‘Ltd’ (or the Welsh equivalents).

40. Elements of shareholders’ capital • Ordinary shares (equity shares) • Preference shares • Reserves

41. Share capital: some terminology • Authorised share capital is the maximum amount of shares a company may issue. This is an amount specified in the company’s Memorandum of Association, another of the documents submitted to the Registrar on registration. It may be changed later if the shareholders think it appropriate to do so. • Issued share capital is the amount of shares that have actually been issued to shareholders. Not all of the authorised share capital need be in issue at a given moment. • Only the issued share capital appears on a company’s balance sheet in the section devoted to shareholders’ capital. It is valued in the balance sheet at its nominal value, regardless of how much the shareholders actually paid to acquire it.

42. Exercise You will probably find that you deal regularly with both private and public companies. For example, when you receive a telephone bill, it is almost certainly from a public company. In future, take note of the companies you come into contact with and observe whether they are private or public.

43. Exercise The prices at which shares in listed companies may be bought or sold are reported in the quality newspapers, such as The Times, The Telegraph and The Financial Times. Get hold of one of these newspapers and glance through the list of companies who are quoted there. You will find that some of them – eg the major High Street banks – are very familiar.

44. Descriptive statistics and inferential statistics • Descriptive statistics means the presentation of statistical information in an understandable form. • Inferential statistics refers to methods of analysing statistical data so that we can draw conclusions relevant to the problem under investigation.

45. Guidelines for diagrammatic presentation of data Simplicity: the material must be classified and detail kept to a minimum. Title: the diagram must have a comprehensive and self-explanatory title. Source: the source of the material used in drawing up the diagram should always be stated (usually by way of a footnote). Units: the units of measurement used must be stated, eg 000s means that the units are in thousands. This can be done in the title, to keep the number of figures to a minimum. Headings: all headings should be concise and unambiguous.

46. Advantages of a diagram over a table • It is easier to understand than the mass of figures from a table. • Relationships between figures are shown more clearly. • A quick, lasting and accurate impression is given of the significant and pertinent facts.

47. Types of diagrammatic presentation • Bar chart • Pie chart • Histogram • Frequency polygon • Scatter diagram

48. Wheat production UK, 20X1-X3 Source: government statistics

49. Grain production, Disney Land, 20X5

50. Distribution of ages in a sample