BME - Financial Reports

Financial Reports

Financial Position = Stability

Financial Performance = Profitability

Cash Flow = Liquidity.

Purpose and Features of a Balance Sheet

A business organisation will show its total assets and equities in the form of a Balance Sheet of Statement of Financial Position.  ( financial stability + financial position)

The Balance Sheet is composed of three important elements:  assets, liabilities and equity. 

Assets – Items of value owned by the business (For example: inventory, debtors/receivables, office furniture, machinery, buildings).

Liabilities – Debts owed by the business to other entities (For example: overdraft, creditors/payable, loans, mortgages).

Equity – The owner’s share of the business.  It is calculated by subtracting Assets from Liabilities (For example: capital, drawing, profit/loss).

A Balance Sheet must always balance, and it should always be representative of the accounting equation. 

A = L + Eq

Classifications of a Balance Sheet

Current assets are resources which the business expects to turn into cash (such as accounts receivable) or consume (such as cash at bank) within a 12-month period, for example cash, accounts receivable/debtors and inventory/stock.

Non-current assets are resources which the business intends to have the use of for a period longer than 12 months to help generate income, for example, investments, property, plant and equipment and land.

Current liabilities are amounts that the business owes other entities, which fall due within a 12-month period, for example overdraft, accounts payable and provisions.

Non-current liabilities are obligations which the business will be committed to for a period longer than 12 months, for example long term loan and mortgage.

Purpose and Features of a Profit and Loss Statement

A business will show income and expenses in the form of an Income Statement, also called a Profit and Loss Statement or a Statement of Financial Performance.  This gives important information about the profit and loss that the business has earned, also referred t as the business’ profitability.  The statement shows the financial performance of the business over a period.

The Profit and Loss Statement (or Income Statement) is composed of two main elements: income and expenses.  A simplified definition of each is given:

Income – Money received by the business e.g., sales, fees, interest.

Expenses – Payments or costs incurred by the business e.g., cost of sales, rent, wages, internet, water.

Classifications of a Profit and Loss Statement (Income Statement)

The simple Income Statement/Profit and Loss Statement has expenses classified into three groups:

Selling and distribution: petrol, vehicle repairs, advertising

General and administration: office, rates, power, phone, internet, rent

Financial: interest, bad debts.

Purpose and Features of a Budget (Cash Flow)

A business organisation will show cash inflows and outflows in the form of a Statement of Cash Flows.  The financial report gives important information about the liquidity of the organisation and shows the cash coming in and going of the business over a period.  An example, of this financial statement is given below.

Cash flow is the amount of cash entering and leaving the business. The Balance Sheet and Income Statement provide important information about the financial position and performance of the organisation.  However, they do not indicate whether the business is receiving enough cash to pay its ongoing expenses. 

Profit is the excess of income over expenditure for a business.  Cash flow is the amount of cash entering and leaving the business.  It is shown in the Statement of Cash Flows and can arise from transactions involving any of the five elements of financial statements.

Function of key performance indicators (KPIs)

In the managers’ role of monitoring and controlling the business, as they work to achieve business goals, they receive regular feedback on:

•Operations quality

•Financial results

•Customer satisfaction

•Human resources

Goals achievement can be checked using Key Performance Indicators (KPIs).  These allow the business to determine the progress it has made towards its goals.

A good KPI is directly related to the business's goals, is measurable and is a valuable indication of business success.

Key performance indicators are quantifiable measures that can be expressed in either financial or non-financial terms.  The business owner or manager responds to KPIs by using the policies and procedures of the business to work on improving poor indicators

Profitability - Financial Indicator

•Profit margin

•Increase in income

Cost Reduction - Financial Indicator

•Purchasing costs

•Selling expenses

•Administration expenses

•Financial expenses

Sales - Financial Indicator

•Take up of specials/discounts

•Customer attrition

•Customer queries

Quantity of sales

Quality - Non-Financial Indicator

•Certification of suppliers

•Testing of inputs

•Requirements of processes

•Methods of correcting problems

•Audit of output

Customer Satisfaction - Non-Financial Indicator

•Exit interviews

•Customer attrition

•Customer queries

•Quantity of sales

•Take up of specials/discounts.