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The Basic Rules of Business

The Basic Rules of Business. Finance. Key Terms & Concepts. Accountancy  The communication of financial information about a business to shareholders and managers. This generally takes the form of financial statements Asset

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The Basic Rules of Business

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  1. The Basic Rules of Business Finance

  2. Key Terms & Concepts Accountancy  The communication of financial information about a business to shareholders and managers. This generally takes the form of financial statements Asset Assets are economic resources owned or controlled by the business which are capable of producing value (or cash) Liability Liabilities are the funds (including borrowings), services or products owed by a business at a specified date

  3. Capital & Reserves (or Owner’s Equity) Funds put into the business by the owners or shareholders and retained on their behalf Profit/Loss Statement (past financial performance) Shows the performance of the business over a given time period The Profit/Loss = Total Income – Total Expenditure Gross Profit= sales revenue (and other income) – cost of making the product beforededucting overheads, payroll, taxation and other costs for the period Net Profit = gross profit – all costs (e.g. manufacture/sales, operating costs, taxes etc.)  i.e. after subtracting all costs, expenses and losses for the period

  4. Balance sheet (present financial position) The balance sheet is a summary of the financial balances of a business as of a specific date, such as the end of the financial year. It typically includes a list of the business assets, liabilities and ownership equity Cash Flow Forecast (future financial liquidity) Describes the short-term cash requirements of a business to ensure the future availability of a suitable quantity of liquid cash Liquid (available) cash = cash in the bank + short-term investments – short-term debts (e.g. bills, payroll)

  5. Cost, Price and Value Cost “How much it cost youto produce/manufacture” Price “How much you are selling the product for” Value “How much the customeris prepared to pay for it”

  6. The Profit/Loss StatementA Personal Example This shows the profit/lossthat has been achieved over a given period of time (i.e. in the past). Profit = Total Income – Total Expenditure You have your own monthly profit/loss statement – A bank statement e.g. Alan Sugar’s Personal Bank Statement for December Alan Sugar is in profit for December

  7. Profit and Loss Case Study for Chemistry Co. Q. Fill out the table below and calculate how much profit/loss Chemistry Co. has generated in the first quarter? Note: Think carefully about how we account for the £50,000 of stock in the store? The company is in profit in quarter 1 What about the £50,000 of products in the store? The £50,000 of saleable products in the stores are not included – they were made outside this time period and would have been accounted for in the previous profit/loss report

  8. The Balance SheetA Personal Example Understand your own presentfinancial circumstances • What is likely to be your principal asset? • Do you own it outright or is it financed (i.e. a liability)? House value £200,000 Mortgage from the Bank £120,000 Your equity (profit) £80,000 £200,000 Your personal balance sheet balances

  9. The Balance Sheet Asset– Items of value owned or controlled by the business Liability – Amounts or servises owed by the business Capital & Reserves – Amounts input by the owners/shareholders Stock, Fixtures & Fittings Resources e.g. Vehicles, I.T. etc. Cash Reserve Bank Loans

  10. The Balance SheetCase Study for Chemistry Co. Using the information below complete the following balance sheet Q. Label each item as an asset (fixed/variable), liability or as capital & reserve

  11. The Balance SheetAs of 31st December Q. Using the information in the previous table, complete the following balance sheet So the balance sheet balances

  12. Cash Flow Forecast Many businesses make a profit but fail because they run out of CASH!! Making a profit is the key to a successful business However…. If you run out of the liquid cash required to pay running expenses (e.g. invoices, salaries and make purchases) you’re business may not be able to operate

  13. Cash Flow Forecast The Cash Flow Forecast describes the short-term cash requirements of a business to ensure the future availability of a suitable quantity of liquid cash Liquid (available) cash = cash in the bank + short-term investments – short-term debts (e.g. bills, payroll) “CASH IS KING” Without liquid cash your business can’t operate

  14. Summary • Profit/Loss Statement (past) Lists transactions for a given period (e.g. a year) and shows whether the business is making a profit or loss • The Balance Sheet (present) Shows whether the finances balance on a given date • Cash Flow Forecast (future) Describes the short-term cash requirements of a business “CASH IS KING”

  15. Authors Dr. Trevor Farren, Dr. Simon Mosey & Dr. William Drewe Organisation School of Chemistry, University of Nottingham, U.K. Supported by:

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