“ Financial management is all about getting the most appropriate manpower, materials or equipment at the best price (economy), making sure that the resources are used in the most productive way (efficiency) to meet the organisation’s objectives (effectiveness).”
A statement of the assets and liabilities of a business at a particular date – It has two parts:
A statement of Fixed Assets, Current Assets & Current liabilities – Total Assets
A statement of how net assets have been financed
Glossary of terms Fixed Assets – Held by the enterprise rather than for sale or conversion to cash e.g. Buildings, machinery, equipment, fixtures & fittings. Current Assets – Cash and anything that is expected to be converted into cash within one year e.g. stock, debtors, cash, bank balance.
Glossary of Terms Current Liabilities – Liabilities to be paid within a year e.g overdraft, trade creditors, short-term loans, accrued expenses, tax. Long-term Liabilities – More than a year Total (Net) Assets – Fixed + Current less current liabilities and long-term liabilities
Profit and Loss Account £’000 Revenue 20 Cost of Sales (10) Gross Profit 10 Operating Costs (inc depreciation): Equipment Depreciation (estimate) (1) Fred Salary (3) Rent (2) Operating Profit 4
Glossary of Terms Cost of Goods Sold – The directly attributable costs of products or services sold e.g. materials, direct labour, production costs. Gross Profit – Where sales revenue (turnover) exceeds the cost of goods sold.
Glossary of Terms Overheads (Indirect Costs or Fixed) Costs that do not vary with changing sales or production volumes e.g. rent, rates, administration, depreciation, telephones, heat, light & power, insurance, professional fees, stationery etc.
Glossary of Terms Net Profit Where sales revenue plus other income (such as rent received) exceeds the sum of cost of goods sold plus overheads
Profit and Loss Account £’000 Revenues, Sales, Income or Turnover 1,200 Cost of Sales (600) Gross Profit 600 Operating Costs (inc depreciation) (300) Operating Profit 300 Interest Payable less Interest Receivable (25) Profit before Tax 275 Tax (75) Profit after Tax 200 Dividend (50) Retained Profit 150
Monitoring Performance Required by law to exercise control Need effective systems for monitoring financial performance in place Need to gather and understand financial information needed to make decisions