managing a small business

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  • 1. Module: Business Finance,Assignment No: 5.1Tutor: Paul BridgeUnit code: AK3/3/WR/002Student :Iveta Ermane,Student nr: 1105617
  • 2. AbstractThis report had been written for business finance at University of Bolton, by student IvetaErmane. This report outlines approach for implementing new business systems and differentways how to expand the business. Author will analyse different types of accountinginformation, Break Even analysis, importance of pricing, benefits of financial andmanagement accounting systems and different ways how to raise money in business. 2
  • 3. Content pageAbstract...............................................................................................................................2Content page.......................................................................................................................3Introduction..........................................................................................................................41. Different types of accounting information........................................................................52. Break Even Analysis.......................................................................................................63. Costs...............................................................................................................................74. Good financial and management accounting systems....................................................85. Where to raise additional finance....................................................................................96. Delivery and monitoring of accurate and robust finance.................................................10Conclusion..........................................................................................................................12Appendices.........................................................................................................................13Reference list......................................................................................................................14 3
  • 4. IntroductionAccounting is a key business activity. There had a lot of different changes in accountingwithin recent years. It has put a dramatic impact in accounting theories and types.Mr. Smith owns a business manufacturing, where sells machine parts. Mr Smith went out ofcountry and asked to author manage manufacturing business in his absence. Business isrun as family concern business, with bad financial systems and financial decisions. Thisreport outlines how author will changed Mr Smith manufacturer. 4
  • 5. 1. Different types of accounting informationAccounting can be split into financial or management accountancy. Business can’t survivewithout good financial and management accountancy. However, there is big differencebetween accountancy and accountant.If person get degree in accountancy then this person becomes a general accountant, butmainly accountants specialised in different, specific areas. Such as: auditing, insolvency,taxation, bookkeeping and management consultancy.All of these types of accountancy will help author to develop Mr. Smith manufacturer.Auditing is very high qualified accountants, who are independent of business and they checkdoes financial statements, what has been given is true or false. Sometimes tax offices mayeven request audit of sole trader or partnerships.Bookkeeping does basic accounts and balance sheets. In our days some companies don’thave qualified bookkeepers, but they employ anyone and use bookkeeping computerpackages.Financial accounting is much wider term than bookkeeping. Financial accounting doesannual reports, balance sheets and cash flow statements. It is most important key in anybusiness.Jones M (2002) pp.31 describes that accounting principles can be split into: “accountingconventions and accounting concepts. Accounting conventions is entity, moneymeasurement, historic cost, and periodicity. And accounting concepts is going concern,matching (or accruals), consistency and prudence. “Taxation is very complicated area. Tax accountants do annual income tax statements, andalways are up to date with tax regulations.All of these types of accounting information will assist author in developing Mr. Smithmanufacturer. 5
  • 6. 2. Break Even AnalysisLots of businesses making mistakes,- by selling the product in market, without knowledge inpricing and total costs. Later as a result, business is not making profit, or even fails.There are two different types of decision making: Short term and long term. One of shortterm decision makings is break even analysis. (See chapter 4.)Author to this report would like to describe more about break even analysis and how it couldassist us in Mr. Smith manufacturer and making business decisions.Bridge P.(2011) describes the break even analysis is “Short Term Planning and DecisionMaking Tool.”It helps to business understand and find the lowest price on which product or services canbe sold.Break even analysis requires good study in pricing and costs, and equation method iscalculated as: Breakeven point = Fixed costs ÷ (unit selling price-variable costs).Breakeven point is when all income covered all expenditure. And it is very important beforemaking price, first to identify breakeven point. When it is identified, then business can planabout, how much % to add, and how much profit to make.For to reduce break even volume, can make lower direct costs, cut expenses, or increaseprices.Breakeven point is easier to understand in chart. First need provide chart with horizontal andvertical axis- where horizontal axis is units, but vertical axis is price. On chart can see fixedcosts, and total costs, what starts at fixed costs and go up and based on variable costs, andsecond line what is sales. For some reason both of them lines will cross in one point. Andthat point is called breakeven point. 6
  • 7. Glautier et al. (2001)pp 425, describes that there is three methods how to work out breakeven problems:1. The equation method,2. The contribution margin method,3. The graph method.The equation method outlines the relationships between variable and fixed costs, sales andprofit. As example, Sales =net profit+variable costs+fixed costsThe contribution margin method outlines the variable profit or contribution margin unit ofwhich is covered all costs. It is shown as: X= (Fixed costs + net profit) ÷ unit contribution marginThe graph method is known as –break even chart. (see above). The margin of safety ratio =(margin of safety revenue ÷ actual sales) 3. CostsPrice is major element in any business. Pricing affects product features, promotion andchannel decisions.Costs can be split into variable costs and fixed costs. (See appendices)Variable costs are costs, what can rise or fall, example – raw materials; labour-where labouris paid according to items produces.Fixed costs mainly stay the same, example- insurance, rent, etc. 7
  • 8. Glautier et al. (2011) describe that “Cost-volume-profit analysis is related to a considerationof four factors: fixed costs, variable costs, selling price and sales volume”.For any type of business it is very important, to establish the right costs, not only for pricingin business, but also costs- what is involved to run a business. Right cost helps identifiedbreakeven point (see chapter 2). Breakeven point is when income covered all expenses.And when is identified breakeven point, then business can decide how much % they want toadd on top on breakeven point. There is no profit- if costs for to run manufacturer is higherthan income from machine parts, or with other words, there is no profit, if price to products isless or the same as breakeven point.The pricing decisions is most important in any business, for to survival and profitability.Datar H. (2000)pp422, describes that there is three major influences what effect pricingdecisions- customers, competitors, and costs, what had been invested for to make typicalproduct or service. Then less expenses manufacturer need to pay, then cheaper products itcan offer, because breakeven point will be lower. 4. Good financial and management accounting systemsTogether in accounting are three different types of accounting information: Financial accounting, Management accounting, Tax accounting.Financial accounting is profit and loss accounts, balance sheets, and cash flow statements,and later they are used for to make ratios.Management accounting is cost accounting and decision making. Cost accounting is costing,planning, budgeting, and control. Decision making can be split into – short time and longtime decisions. One of short term decisions is Break-Even analysis. (See chapter 2). 8
  • 9. There is no business without financial and management accounting. Both of this type ofaccounting is very important for managing business, financial accounting is also required bylaw, but management accounting serves only internal needs.Tax accounting also is important in business, but works different than management orfinances accounting. Tax accounting works with tax issues, filling tax returns, and anothertax obligations.There is big difference between types of accounting and types of accountancy. Accountancyis process, but accountant is person. Accountants does auditing, bookkeeping, financialaccounting, taxation, management accounting, consultancy and taxations. It is veryimportant to find good accountant for David Smith manufacturer. 5. Where to raise additional financeThere is quite a lot of ways how to raise some more finances to Mr. Smith manufacturer, butsome of these ways are less risky than other. Business can get loans from banks, sellassets, get overdraft from banks, private loans and others.First option where to ask for money is banks. Advantage borrowing money from banks is lowinterest pay. It is about 2%-5% on top on base rate. However, mainly banks will give loan forsome security-such as, house, car, or other private assets. And must be very carefully takingmoney from banks, especially if business has unlimited liability. Unlimited liability meansthat business owner’s private assets are not separated from company. Other words, ifbusiness fails, then Mr. Smith will lose all his private assets. Business can get secured loanif Mr. Smiths is house owner, if him don’t have private assets, then can get only unsecuredloan, and if him has bad credit history then bad credit loan.Unsecured credit loans mainly are approximately 14% higher than secured loans. 9
  • 10. Annual percentage rate (APR) to all banks is different,-example Alliance Leicester andNationwide it is 6.3%, if company will borrow £10000. Sainsbury finance will charge 6.7%,but Santander 7.4%.Manufacturer also may ask investment from business angels. Business angels mainly arerich entrepreneurs. Typical business angels can see in TV show Dragons Den. A businessangel always knows that there may be risk, but in return they usually get large return.Also any business can apply for grants. Business link describes that grant is “a sum ofmoney given to an individual or business for a specific project or purpose.” It usually coversonly some % of needed costs, but however it may help, because, the rest of money canborrow from banks,- and then less money borrowing from banks, then less interest need torepay back.UK government provides loan opportunity -enterprise finance Guarantee (EFG) This schemeoffers loan between £1000 and even £1000000. Enterprise finance guarantee was beforeknown as Small firm loan guarantee (SFLG). Decision about lend or do not lend lends onparticipating bank. In this type of loan Mr. Smith will pay money back to bank and alsoquarterly fee to government. Advantage of this type loan is that there are no restrictionsabout business age and number of employees. Also maximum term to borrow EFG is 10years. 6. Delivery and monitoring of accurate and robust financial budgetFor any type of business budget analysis is very important. The main responsibility forbudget analysis in Mr. Smith manufacturer is to research the budget and seek new ways toimprove effectiveness and increase profits.For successful deliver and monitor financial statements organisations needs to provideIncome statements, balance sheets, cash flow statements and statements fromshareholders. 10
  • 11. Balance sheet describes all detailed information about business available assets,shareholder interest and liabilities.An asset is everything what company owns, even trademarks, patents, cars, money,furniture, machinery, and equipment.Liabilities outline everything what company owns to others. That includes all loans frombanks, rent, money to suppliers, salary to employees, taxed what is owned to governmentetc.Income statement outlines all business expenses and income over a period of time, and it isalso known as profit and loss statement.Cash flow statements are divided in to three categories: investing categories, operatingactivities and financing activities.Shareholder’s statement outlines changes in shareholders’ equity.All of them statements always are made in interval period of times- weekly, monthly and yearstatements.There are some steps what need to do, for to deliver an accurate and robust financialbudget. Firstly as author mentioned already – need always up to date balance sheets andincome statements. Also very important for to keep finances up to date is always readbusiness credit cards statements and take an advantage of automatic payments. Also veryimportant is to get overdraft protection.Regular finance statements will give good understanding about financial situation inbusiness, and company will take quick action before small problems becoming bigger-example, re-price machine parts in Mr. Smith manufacturer.In our days there are available in network lots of different types budgeting softwares andbudget planners, example Quicken, IBM, Planguru, GnuCash etc.It is very important for Mr. Smith manufacturer to find good accountant, who can provide withthis type financial statements. 11
  • 12. ConclusionTo summarise this report, author would like to outline very important things, what need toknow for to run any type of business.Any business owner need knowledge not only about product or service what they offer, butalso what type of accountancy information is needed for to run business, need tounderstand how to establish right costs, also how to find good management and financeaccountant. It is also very important to deliver an accurate and robust financial budget, for tounderstand and increase price for products, as known price is major element in anybusiness. 12
  • 13. AppendicesTotal and Variable cots 13
  • 14. ReferencesBridge P.(2011) Handout on Break even analysis, Take in University of Bolton,BoltonChooping D.(2007), Accounting standards 2007/2008, Surrey, Wolters kluwerLimitedDatar H.(2000), Cost Accounting, tenth edition, Canada, Prentice Hall international,INC.Hand L.,Isaaks C.,Sanderson P.(2005), Introduction to accounting for Non-specialists, London, Thomson learningRyan B., Scapens R., Theobald M.(2002) Research method and methodology infinance and accounting, London,Thomson learningWatts J.(1993), Accounting in Business environment, London, Pitman publishing 14