Finance Processes

Planning and Implementing

Includes: Financial needs, budgets, record system, financial risks, financial controls

also debt and equity financing + matching the terms and source of finance to business purpose

Financial Needs (P&I)

determine where a businesses is headed + how it will get there

• size of business

• current phase of bus cycle

• future plans for G&D

Budgets (P&I)

Provide info in quantitative terms about requirements to achieve a particular purpose

1. Project budgets→ capital expenditure, R&D

2. operating budgets→ sales production, expense, raw materials

3. Financial budget → income statement, balance sheet, cash flow

Record System (P&I)

Mechanisms employed by a business to ensure data is recorded + info is accurate, reliable, efficient and accessible

• allow business to keep record of transactions & indicate where to make cuts to become more efficient

Financial risk + controls

• risk to business of being unable to cover financial obligations (solvency, liquidity)

• control: policies and procedures that ensure that the plans of a business will be achieved in most efficient way possible

Debt financing (+/-) — P&I

Debt is a liability to a business and is money owed to an external source

Advantage—

1. can be a very cheap source of finance

2. interest payments tax deduct able

3. access to a large pool of funds

4. regular repayments make future cash flow certain

Disadvantage—

1. contractual nature=threat of legal action

2. can reduce financial stability and constrain cash flow

3. if variable interest rates rise then cost can rise unexpectedly

Equity financing (+/-) — P&I

money lent to a business in exchange for some ownership in business

Advantage—

1. wont have to rely on outside parties

2. no legal obligation to repay funds

3. no associated additional costs

4. owner retains control over business

5. less risk for business

Disadvantage—

1. can be limited source of funding

2. lower profits and return for owner

3. ownership can be diluted

4. does not provide a tax deduction

matching terms and source of finance to business purpose

• aligning type of funding to appropriate purpose— matching rule for length of finance is:

  • short term funding= short term assets/current expenses

    • e.g. credit card cant purchase stock purchases

  • long-term funding= non-current assets

    • e.g. mortgage to buy a building

Monitoring and controlling

Accounting information is used by managers to monitor and control the business function
includes: cash flow statement, income statement, balance sheet

Cash flow statement (M&C)

This summarises the cash transactions that have occurred over a period of time and can help to see corrective actions needed

• inflows> outflows to generate favourable cash flow

• should pay financial commitments as they fall due

• Inflows- outflows

Income statements (M&C)

Summary of the income and expenses of a business over a period of time which allows business to monitor data, identify issues and then corrective measures

• shows relationship between revenue and expenses to calculate net profits

• indicates profitability and efficiency

• COGS= opening stock + purchases - closing stock

• gross profit= Sales-COGS

• Net Profit= Gross profit- expenses (costs which have to be paid e.g. wages)

Balance sheets (M&C)

gives a snapshot of summary of what the business owes and owns on a certain date

• illustrated relationship between assets, liabilities and owners equity

• determine the financial stability f a business in short and long term

• Assets=Liabilities+ Owners Equity