Module three

finance

What are costs? Any business will require a large number

of resources for making and selling a good or providing a service. Such payments for these resources are known as costs.

What are the typical costs of a business? Labor (salary, training, bonuses) land ( rent or purchase price ) buildings (rent or purchase price) power ( heating, lighting ) equipment – communications – raw

materials – parts – depreciations – interest on loans

true or false:Another name for a cost is price.

False Costs are the payments a business makes to

buy or hire resources, to make and sell goods or provide services. When the good or service is sold, the business will set a price, which will bring in income or revenue to the firm before any costs are taken away.

Industries Primary industry-- collecting and bringing in materials that exist in nature,

such as farming, fishing and mining Secondary industry-- use the materials gathered in by primary industries to

produce commodities that man can use as capital goods or consumer goods.

Tertiary industry-- service industrye.g. trade, banking ,insurance, transport, administration,

personal service .

What are the main types of revenue? Revenue is income earned by a firm selling

either the goods it makes or the services it offers.

1. Some firms in primary industry earn revenue by extracting raw materials

E.g. mines might extract and sell coal

2. Manufacturing firms make or assemble goods, and earn revenue by selling them to other firms..

What are the main types of revenue?3. Retail firms earn revenue mainly by selling

goods or services to their customers from the general public

4. Other firms in the tertiary sector earn revenue by selling services either to the public or to other firms.

True or false: depreciation is a cost to a firm even though no money is actually paid out for it. true:

Depreciation is a special cost that is included on a profit and loss account. Capital equipment such as plant, machinery, tools and vehicles will gradually lose value as they become older, worn out and perhaps out-of-date or obsolete. It is included as an expense on a firm’s annual profit and loss account.

Start-up costs and running costs Start-up costs are any costs that a firm

needs to pay out before it is able to make and sell its goods or provide its service.

e.g. the purchase of premises, equipment, vehicles and furniture, market research, raw materials, etc.

Start-up costs and running costs Running costs are the costs a business need

to pay out for its day-to-day operations as it makes the goods or provides its services.

e.g. wages, electricity, gas, rent etc.

True or false: another name for revenue is profitFalse: Revenue is income to a firm before any

costs are taken away. A profit is calculated by taking costs away

from revenue.

Break-even point This is the level of sales where the total

costs of making and selling items of output equals the total revenue from selling them.

Sales above this point will mean -- a firm is making a profit. Sales below this break-even point will

mean-- a loss

Inflow of cash Owners’ money Loans Sale of its goods or services

Outflow of cash The start-up costs Running costs Repay loans, share of profits , pay any tax

Cash surplus – cash deficit Cash surplus: net inflow Cash deficit: net outflow ( shortage of

cash )

What could a firm do facing the short-term net outflow?

-- overdrafts from banks ( high interest rates )

True or false: a profitable firm will always have enough cash to pay its bills. False A firm might be able to make a large profit

over the year but it may still find itself short of cash. It could even go Bankrupt if it can not find enough cash to pay its debts during a cash shortage.

Cash-flow forecast Cash-flow forecast: this statement shows

where cash comes from and where it goes over a period of time.money comes in when customers pay for a product, and money goes out when you pay for raw materials, equipment or other items.

Cash-flow forecast It will estimate the likely flows of cash into and

out of the business usually over several months. It will identify when it :

1. Needs to speed up the flow of cash into the business.

2. Needs to slow down the flow of cash out of the business

3. Can afford to pay some debts4. Can afford to order new stocks or equipment5. Needs to negotiate an increases in overdraft

Cash-flow forecast Table

Amount in $ Month 1 Month

2

Month 3

Bank balance 600 (250) (500)

Cash from sales

1,100 1,505 2,320

Total cash available( A+B)

1,700 1,255 1,820

Total cash out 1,950 1,755 1,770

Bank balance (250) (500) 50

profit Profit is the result of a firm’s income being

greater than its expenditure over a certain period of time. The opposite to this

-- a loss A profit and loss account

-- this is the record of the firm’s financial record in this statement shows the revenue earned from sales against all the costs related to those sales.

Profit and loss account A small electrical retailer’ profit and loss

account:

Sales revenue $ 450,000

(Less) cost of sales $ 250,000

Gross profit $ 200,000

(Less) expenses $ 155,000

Net profit $ 45,000

True or false: some firms use the term turnover as a substitute for revenue

True

Turnover is a short version of sales turnover, which is exactly the same as revenue or even sales revenue. They all mean exactly the same thing – income to the firm from sales of the good or service before any costs are deducted

Balance sheet The balance sheet is an account that gives a

statement of a firm’s wealth on a particular date. It will be produced at the end of the firm’s financial year. It has three main parts:

Balance sheetAssets: everything that a company owns and which has a

money valueLiabilities: everything that a company owes and which has a

money valueCapital: the different forms and sources of money invested in

the firm.

Extract from a balance sheet Fixed assets -- land and buildings, vehicles and machinery,

furniture and furnishings ----- $515 Current assets-- stock, debtors , cash ----- $ 150 Current liabilities-- creditors ----- $ 110Net assets = total assets – current liabilities ----$ 555

Annual report Annual report: a report presented each year by the

directors to the members and shareholders of a company, giving information about the company’s trading activities and including certain documents which must be produced by law, namely the balance sheet, the profit and loss account and the auditors’ report, cash-flow forecast.

Cash flow problems There are many reasons why companies

fail but cash-flow problems and over-trading are often weak spots. New companies often find that they have too much money tied up in the business and so find themselves in debt and, eventually , they run out of money and their creditors take them to court to have them wound up. The company then goes out of business.

Writing business letters Ref :(reference) at the top of a business letter, usu.

Consisting of the initials of the persons signing and typing the letters. Thus: AG/MJ. Sometimes the reference consists of the initials of a department and a file number, thus: SD/2539(the paper can be easily found in the files.)

Enclosure: if you’re enclosing something with your letter, you can use the abbreviation ‘ENC’ below your name and title, followed by details of what’s enclosed.

Triangular debt

suppliers

producers retailers

Envelope Sender’s address stamp

and name

receiver’s name

and address

Sender’s address

Date

Ref

Receiver’s address

Opening

The body

Closing

Enc

Example Leighton Textiles Ltd. 886 Cheung Sha Wan Road

Tsin Sha Tsui East Kowloon , Hong Kong SAR 16 June 2004

Ms J LamSales RepresentativeMiracle Carpets Ltd1/F Commercial Industrial BuildingSha Lin Industrial EstateTusen Wan New Territories

ExampleDear Ms LamSubject: Faulty Carpet DeliveryThank you for delivering our consignment of5000 yards of Miracle Tuffweave carpet ( seeour order G43099-dated 30 May 2004).We have just examined the contents of thisconsignment and have discovered that there is a faultin the weave which makes the carpeting completelyunusable.

Example Unfortunately, as you know, this is the season whensales are at their highest, and we need this carpet tomeet the high demand. We should be obliged,therefore, if you would replace the faulty carpetwithin the next week, whereupon we shall pass theinvoice to our accounts department for payment.We hope you understand our concern in this matter,and that it will be possible to continue our goodbusiness relationship.

Example Yours sincerely

Edward ChanEdward Chan

Assistant manager

Enclosures 2

The structure of financial presentation

Flow chart:

Greeting The purpose of the pre

The sequence of the pre

Referring to visuals

Changing topic summarizing

The financial presentation Greeting: good morning, ladies and gentlemen. My name

is __, I’m the _. Introducing the purpose of the presentation: the aim of thi

s presentation is to tell you about __. Introducing the sequence of the presentation: first I’ll tell

you about __, then__, after that__, finally__. Referring to visuals: I’d like to draw your attention to __. Changing topic: let’s turn to our plan for the future). Summarizing and concluding : in conclusion, __.

What type of person is most likely to succeed in setting up their own business?

Disciplined, independent, hard-working, decisive, optimistic, self-motivating, ambitious, flexible, organized, calm, financial awareness, a risk taker, a leader.

Why will a firm produce a business plan? To make sure any business activity is successful,

a firm will need a plan so that nothing is forgotten To run and control the business successfully, the

business plan can include a checklist of key guidelines.

To help the owners and managers review progress, the plan can include a set of aims, objectives or targets

Why will a firm produce a business plan? To help obtain loans and other forms of

credit To show potential investors that the firm is

worth the risk of investing capital in it, it can be used to attract additional partners or shareholders.

A business plan What should it contain? Executive summary:

--- general description of the business Nature of the business:

--- the aims and objectives of the business. Management of the business:

--- the key people in the business and their relevant qualifications and experience.

A business plan Sales and marketing: --- whether there’s a demand for the product or not

and who your customers are. Product and service:--- what you ‘re actually going to produce or offer Premises, equipment and vehicles:--- where you’re going to set up your business and

what you need in order to supply your product or service.

a business plan* Legal and insurance:

--- information about setting up partnerships or limited companies, property leases, etc and covering yourself for when things go wrong.

Financial planning-profit and loss:

--- start-up costs, a sales forecast ,the cost of sales and your overheads.

Monitoring performance—cash-flow forecast:

--- when money comes into and goes out of the business over a period of time.

A business plan Personal survival budget:--- how much you will need to live on while setting

up your business Assessing profitability: --- calculate the ‘break-even point’ Contingency plans/risk assessment: --- what you will do if circumstances change or

something unexpected happens and things don’t go according to plan.

A business plan – different reports Analysis of the business Customer profile Focus group report SWOT analysis Action plan and activity chart for every week Costing Risk analysis and management plan The project framework Final report

Finance managementkey to firm’s high performance To catch up with their high-performance

foreign competitors, Chinese enterprises should transform their finance functions from

‘Mister account managers’ ---- modern finance managers

What’s the difference?

Finance management key to firm’s high performance The traditional finance department deals

with data and focuses mainly on the accuracy of the data.

----What they lack is the further analysis of the data.

Finance management key to firm’s high performance What should be the financial manager’s

primary responsibility?

---improving his/her company’s performance ,

---participating in the decision-making with leaders ,

---develop and implementing long-term strategies.

Finance management key to firm’s high performance

The manager should be expected to provide clear pictures in many aspects:

1. Financial operations

2. The effectiveness of operational capital

3. The target of operational costs

4. The ability to recognize and manage financial risks

Financial scandals The financial scandals of some huge firms

shocked the world,

---- which proved

transparent accounting operations is vital to a company’s success.

Graphs Graph Diagram Flow chart Pie chart Bar chart Table