6.1Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004

Understanding Organisational Context 2e

Slides by Claire Capon

Chapter 6

FinanceFinancial management

Management accounting

Financial reporting

6.2Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004

Financial management

Introduction

Profits and retained profits

Loans

Shares

Rights issues

Acquiring and using assets

6.3Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004

Introduction

• Financial management covers:

- raising capital to finance the organisation’s operations

- ensuring the organisation generates sufficient

revenue to cover the cost of capital

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Profits and retained profits

• Current profits

• Profits from previous years

• Used to fund growth or expansion of the business

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Loans

• Loans are:

- from banks as a long-term loan or overdraft

- for a definite period and repayable with interest

• If interest payments are not met, eventually a receiver is called in

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Loans

• Loans are risky for the lender and therefore secured against company assets

• Securing loan reduces the risk for the lender (bank)

• Borrower pays lower interest rate for secured loan

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Loans

• Interest payments:

- come out of profits

- cannot be reduced, if profits decline, unlike

dividends

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Shares

• Shares are issued to raise capital and are aimed at:

- existing shareholders (a rights issue)

- the general public and small investors

- institutional shareholders

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Shares

• Ordinary shares:

- carry ownership rights

- give shareholders the right to receive a dividend if the company issues one

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Shares

• Dividends:

- come from dividing up a portion of company

profits

- can be raised or lowered as company sees fit

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Rights issue

• In a rights issue:

- current shareholders are offered the opportunity to buy new shares in the company

- new shares are sold at a price equal to or just below market value

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Rights issue

• In a 1 for 10 rights issue current shareholders can buy 1 new share for every 10 shares already owned

• If rights issue succeeds, then retain the same shareholders

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Rights issue

• If rights issue fails, shares are offered on open stock market by underwriters and shareholders may change

• Potential for predator to build up stake in the company and mount hostile take-over bid

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Acquiring and using assets

• Capital is used to acquire assets

• Purchase of fixed assets is capital expenditure

• Fixed assets remain in the business long term

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Acquiring and using assets

• Fixed assets are used to run the business and include:

- plant

- machinery

- office equipment

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Acquiring and using assets

• Current assets are sold or used to make a profit directly and include: raw materials; components; work in progress; finished goods

• Current assets remain in the business for a short time period

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Acquiring and using assets

• Many companies are concerned with using, not owning, assets

• Leasing assets is an option

• Assets are acquired without paying full price up front

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Acquiring and using assets

• Leased assets may include:

- cars

- photocopiers

- buildings

- IT hardware

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Management accounting

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Management accounting

• Management accounting is the use of quantitative techniques to provide data to use in the management decision making process

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Management accounting

• Management accounting techniques include:

- budgeting

- cost accounting

- investment appraisal

- cash flow management

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Financial reporting

6.23Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004

Financial reporting

• Financial reports and accounts:

- are drawn up and audited

- are filed in Companies House

• The legal requirements are specified in the Companies Acts 1981, 1985 and 1989

6.24Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004

Financial reporting

• Financial reports should contain:

- a directors’ statement showing who the directors are, and commenting on the company’s performance over the previous 12 months and expectations for the next trading year

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Financial reporting

- notes on accounts necessary to explain any details, such as how operating profit is calculated

- financial statements, a profit & loss account, a balance sheet and cash flow statement

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Financial reporting

• A profit & loss account gives a summary of income or sales revenue and expenditure, showing resulting profit or loss

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Financial reporting

• A balance sheet shows assets, liabilities and sources of finance

• A cash flow statement shows how money has been spent over the trading year