FINANCIAL AWARENESSA BASIC OVERVIEW FOR THE NON-FINANCIALJ.TANDIE

In this perspective - I focus on :

UNDERSTANDING , APPLICATION and IMPACT

What it shows you how you actions impact on the figures

Profit = increase / Change / difference/ achievement

Regardless of how you measure it.ROI return on investment : profit/ investment  

ROE return on equity : profit / equity ROE return on energy : profit / energy SROI social return on investment: grant / number of individuals

ROI return on influence for social marketing

The key is to understand what profit tells you about the effectiveness of your business, which is an indicator of how attractive your business is to investors and customers and its levels of sustainability.

Understand the difference between Gross profit and Net profit

WHY ?

A. because it affects the amount of money in the bank ( cashflow) ;

B. Your actions have a direct impact on it ;

C. It affects the sustainability of the company which in turn affects your employment.

Gross Profit : income from sales - cost of product or services

Net Profit : income from sales - ( cost of services + overheads + taxes+

litigation costs + etc)

The bits in blue indicate the things that you can affect directly

RATHER LOOSELY .....

Two types of costs :

fixed costs that are paid regularly each month no matter what.

variable costs of running the business that fluctuate with the success or failure of the business and resulting needs for advertising, staffing, supplies, Jo, litigation, contracts +etc.

fixed costs + variable costs =  overheads. 

EFFECTS ON PROFIT

The day-to-day decisions affect profit.

The aim is to increase income and reduce expenditure.

HOW DO THESE ACTIONS AFFECT PROFIT AND WHY ?

•Outsourced repairs v In-house repairs •qualified contractors v unqualified; • performance goals v no goals; • vetting suppliers v not vetting; • obtaining more quotes v getting one quote from known suppliers;•Hire an event management company v doing it yourselves; • cost of taking advantage of government incentives v not doing so ;•Paying bills on time v delaying for 4 weeks;• building on the impact of previous projects v beginning again;•Feel good factor of new office carpets versus the expense ;

•Paying a marketing fee to Virgin media v doing it in-house;• 10% pay rise v more travel subsidy • planning for growth v lets see what happens ;•Hiring a hall in Richmond v Newham; another full time employee v paying consultants ;•Buying more insurance coverage v risking it ;• advertise in newspapers v attend community events; promote goodwill v take it or leave it attitude;•buy a computer v buy furniture ;•Sales in the first six months are been 10% below expectations.

The Balance Sheet, is like a snapshot taken at a particular moment in time giving a summary of the overall financial position of a business.

Businesses need to use assets in order to generate wealth. Assets are the things that a business owns or sums that are owed to the business at any moment in time.

Assets are either fixed or current. Examples of Fixed assets are properties, cars, furniture & fitting, computers, while current assets includes stock, debtors and cash.

THE BALANCE SHEET

1. Capital raised from the business owners (internally generated from the shareholders in the case of a company).

2. Loans and overdraft (generated externally).

THE BUSINESS OBTAINS THE FINANCE FOR THESE ASSETS FROM TWO MAIN SOURCES:

The Balance Sheet shows how the value of a business assets is financed by the two groups

- 1.Internal (owner's capital), - 2.External (liabilities).

A balance sheet typically appears in a vertical format.

The balance sheet starts off by listing all the assets, followed by the liabilities and finally, the owners' capital and retained profit

FORMAT OF A TYPICAL BALANCE SHEET:ABC TRADING COMPANY

Balance Sheet as at 31st December 2011 Notes 2011 2010 £’000 £’000 Fixed Assets 6 3,000 3,200 Current Assets Stock 7 550 1,610 Debtors 8 950 820 Cash 9 1,000 20 2,500 2,450 Creditors due within one year 10 -1,200 - 2,850 Net Current assets / (Liabilities) 1,300 -400 Creditor due after one year 11 -2,000 -2,300 Total net assets 2,300 500 Share capital 2000 2,000 Retained Profit 12 300 -1,500 Shareholders fund 2,300 500

Fixed Assets – assets that will be kept in the business to generate wealth for the company over a period of time e.g. machines, computers and buildings.

Current Assets – assets that are turned into cash in the short period. For example, a trading company will buy stock, which it then sells on credit. When the debtors pay up, they will pay in cash. This cash can then be used to buy more stock.

Creditors due within one year – This shows the short term liabilities of the business, i.e. money that the company must pay within the next twelve months. 

Net current assets - shows the current assets minus the current liabilities. It is important to have enough current assets (money coming in in the short period) to pay short term creditors (short term liabilities). In the example shown the current assets are £2,500 and the current liabilities are £1,200.Therefore net current assets = £1,300.

THE BALANCE SHEET EXPLAINED:

Creditors due after one year - These are the longer term liabilities of the business, for example long term bank loans and mortgage repayments.

Total net assets - This is calculated by taking away all the liabilities (short and long term) from all of the assets (short and long term).

Total net assets = (Fixed assets + Current assets) - (Current liabilities + long-term liabilities). In our example the total net assets is £2300.

Share capital – This shows the amount of funds brought in by the owners of the business to finance the net asset.

Retained profit – Accumulated profit over years.

Principle Number 1 In business to make money Be aware that everything that you are doing that will contribute to

or prevent you from making a profit.

Principle Number 2Cause and effectCause your actions Effect the amount of money available at any given time - cashflow

FIFTEEN PRINCIPLES THAT WILL HELP YOU  

Principle Number 3Don’t Lose money - it’s never ok

Principle Number 4Treat all your expenditure as investment so demand maximum return

Principle Number 5Understand what the numbers tell youNet profit Overheads (labour , rent rates light heating stationery etc)

Income ( sales , grants )

Principle number 6 Increase your margins where ever possibleGross Profit Margine.g Cost of goods (COG) = £10 Sold for £12 = £2 gross profit Gives a gross profit margin of 16.66%. (Sale price - COG) / sale price x 100

Which means that for every £1 that you spend , you get back 17p( rounded up)

Net Profit Margin Revenue/ income /sales £12     COG                £10

Wages             £8 per dayStall rent          £5 per day

Total costs       £23 per day

Gives a net profit margin (NPM) of {12 – (10 +13)/ 12}x 100 = -9.6%  (Revenue - COG + overheads) / Revenue x 100 -9..6%

Which means for every £1 you spend you lose 10p, if you continued in the same actions , with the same circumstances

Principle Number 7

Don’t lose money

Principle 8

Always add value

A higher, and rising, GPM and NPM indicates a company adding value to its product/ services;

A diminishing GPM shows a decrease in efficiency;

Your actions make a difference – and demonstrate your level of capability;

Increasing the net profit makes money available to pay bonuses, develop offices , pay for staff events, training, Christmas parties, holiday pay , develop the business, pay rises, engage customers, increase customer loyalty i.e. the things that keep you in business.

Your actions affect both the gross profit and the net profit i.e. what I call the wedge

The Wedge

incomeexpenditure

Task

Imagine you are a catering assistant in a small refreshment concession in a small niche interest bookstore. It sold a small selection of pastries that where ordered in , the special which was cream tea ( tea/ coffee served with a scone , jam and butter or whipped cream), quiches and homemade sandwiches. The scones and quiches where made on the premises. Most of your customers are book browsers stopping for cream teas and spent an average of £1.50 per purchase.

WHAT WOULD YOU DO TO CHANGE THIS SCENARIO?

On your busiest day you served 50 customers and on the slowest day you served 10. The concession had 5 members of staff who worked part-time and a manager. Your rate of pay is £4.50/hr . the bookstore is situated on a busy city centre street with lots of offices and lots of trendy restaurants, cafe bars and well known high street chain sandwich shops. The rental overheads are high , therefore the management is concerned about making each square foot profitable

What would you do to improve the gross and net profit margins of this concession ?

Improve your personal income? Make this work meaningful to you?

Principle number 9Always keep the expenditure wedge MUCH smaller than the income wedge

Principle Number 10

Don’t Lose Money

Principle number 11 Always Break Parkinson’s Second Law Cyril. Northcolt Parkinson says expenditure rises to meet income

Principle number 12

Avoid the ostrichSyndrome – don’t hide your head in the sand. Understand that your attitude to profitability directly affects your life – take responsibility and

ownership for what happens

Principle 13

Learn the art of extractionIt’s not just about ticking boxes, having a title or putting things in the right columns - it’s about learning how to extract information from one situation , understanding it and applying it in another situation.

Understand why you do things and not just how to do things because circumstances rarely remain the same.

Principle 14

Keep informed and learning and understand your market, customers and the wider economy.

If you read only the same books, listen to the same people and don’t learn how to gather information and broaden your understanding of other related subjects – then your levels of capability stagnate and your individual contribution to profitability diminishes , which means your employability reduced .

Principle 15: Cash is king

You can be making a super gross profit, but if you don’t have cash in the bank to pay your suppliers, landlords, HMRC, artist etc staff, then you won’t have a business.

The cash flow statement reports the cash generated and used during the time interval specified in its heading. The period of time that the statement covers is chosen by the company. For example, the heading may state "For the Three Months Ended December 31, 2011" or "The Fiscal Year Ended April 05, 2011".

CASH FLOW STATEMENT

Investors believe that "cash is king". The cash flow statement identifies the cash that is flowing in and out of the company. If a company is consistently generating more cash than it is using, the company will be able to meet its obligations as they fall due, increase its dividend, reduce debt, expand its operation or acquire another company. All of these are perceived to be good for stockholder value

The cash flow statement organizes and reports the cash generated and used in the following categories:

1. Operating activities–Converts the items reported on the income statement from the accrual basis of accounting to cash.

2.Investing activities–Reports the purchase and sale of long-term investments and property, plant and equipment.

3.Financing activities–Reports the issuance and repurchase of the company's own bonds and stock and the payment of dividends.

4.Supplemental information–Reports the exchange of significant items that did not involve cash and reports the amount of income taxes paid and interest paid.