© ncc education limited v1.0 finance and accounting unit 2: getting started instructor: johnson hsu...

© NCC Education LimitedV1.0

Finance and Accounting

Unit 2: Getting Started

Instructor: Johnson Hsu

[email protected]

Mobile: 0939386611

Getting Started Unit 2 - 2.2


Unit 2 – Purpose and Coverage

• The purpose of this unit is to think about issues to be considered when setting up a new organisation or business.

• The unit covers planning, sources of funds, acquiring premises an equipment, evaluating proposed purchases and accounting information systems.



The First Steps

• The first step is to decide what you hope to achieve – the aims and objectives of your activities.

• These may include making a profit.

• For a non-profit organisation aims and objectives might include a public service or alleviation of suffering.



10 Powerful Goal Setting Steps Break it down

Unit 2: Getting Started Unit 2: Getting Started

Unit 2: Getting Started Unit 2: Getting Started

Unit 2: Getting Started

BREAK IT DOWN



10 Powerful Goal Setting Steps TRACK YOUR PROGRESSTRACK YOUR PROGRESS



10 Powerful Goal Setting Steps COMMIT TO THE PROCESSCOMMIT TO THE PROCESS



10 Powerful Goal Setting Steps BUILD A SUPPORT SYSTEMBUILD A SUPPORT SYSTEM



10 Powerful Goal Setting Steps STAY FLEXIBLESTAY FLEXIBLE



10 Powerful Goal Setting Steps KEEP YOUR EYE ON THE PRIZEKEEP YOUR EYE ON THE PRIZE



10 Powerful Goal Setting Steps ACCEPT IMPERFECTIONACCEPT IMPERFECTION



10 Powerful Goal Setting Steps DON'T STOP MOVINGDON'T STOP MOVING



10 Powerful Goal Setting Steps THINK POSITIVELYTHINK POSITIVELY



10 Powerful Goal Setting Steps CELEBRATE YOUR SUCCESSESCELEBRATE YOUR SUCCESSES



Introd - 14

Mission - the basic purpose toward which activities are directed.

Mission - the basic purpose toward which activities are directed.

Missions, Goals, and StrategiesMissions, Goals, and Strategies



Introd - 15

Goal - a definable measurable target or

objective based on the organization’s

mission.

Goal - a definable measurable target or

objective based on the organization’s

mission.




Introd - 16

Strategy - a course of action that will assist in achieving one or

more goals.

Strategy - a course of action that will assist in achieving one or

more goals.




Introd - 17

Cost leadership

Product or service

differentiation

Focus on market

niche

Porter’s Strategic PositionsPorter’s Strategic Positions



Introd - 18

MANAGEMENT DECISION - MAKINGCYCLE

Planning

Organizing

Action

Control

Establishment of goals

Developing means toachieve goalsReview of results

Revision of plans



Aims and Objectives

• The first priority is to research your ‘idea’ to see if it is viable.

• You then devise a set of aims and objectives around the most beneficial options. These are the purpose of your new activity.



Terminology: Strategy

• “A course of action, including the specification of resources required to achieve a specific objective.” (CIMA 2000: p.50)

• Essentially, how you intend to achieve your objectives.



Introd - 21

Seat customer and offer menu Take customer order Bring order to kitchen Bring food to customer Replenish beverages Determine and bring bill to customer Collect money and give change Clear table

An Activity (A Unit of Work)An Activity (A Unit of Work)

Waiter or Waitress Activity



Planning

• Long-term strategic planning – the ‘big picture’ of the activity i.e. Where we are going and how we are going to get there.

• Short-term operational planning – the detailed view of resources required.

• Note: resources might include money, people, technology, particular skills or expertise.



Goal achievable In order for your goals to be achievable, they must meet certain

criteria. They must be:

Conceivable: you must be able to put your goals into words;

Achievable: you must have the attributes, energy and time to accomplish them;

Believable: you must believe you can reach them;

Achievable Within a Certain Time Frame: you must be able to state how long it will take you to reach each goal;

Clearly Defined: you must know exactly what it is you want to achieve;

Flexible: you must be willing to make modifications as necessary;



What Type of Organisation?

• In the previous unit we considered a variety of organisational types including sole traders, partnerships and companies.

• The type of organisation influences many aspects of activities, controls and records to be kept.



What Initial Funds do you Need?

• Premises

• Equipment

• Stock to sell

• Transport

• Staff recruitment

• Wages

• Water and power

• General expenses



Where Might you Find the Money?

Sources of finance:• Own resources

• Loans

• Investors

• Grants



Sources of Finance

• Savings

• Family support

• Sponsorship

• Friends

• Potential business partners

• Retained profits

• Creditors

• Issue shares

• Bank loans

• Other informal loans

• Venture capital

• Grants

• Leasing and hire purchase

• Factoring



Control Over Expenditure - 1

Any expenditure should be planned carefully. The objective is to ensure:

• No unnecessary expenditure

• Benefit exceeds cost

• A good balance between cost and quality



Control Over Expenditure - 2

• It may be sufficient to apply common sense to minor expenditure following the general principles in the previous slide.

• More comprehensive procedures and practises are necessary for larger and longer term items. These might include purchase of premises, vehicles, machinery etc. These items are known as fixed assets.



Terminology: Fixed Asset

• “Any asset, ... , acquired for retention ... For the purpose of providing a service to the business, and not held for resale in the normal course of trading.” (CIMA 2000: p.95)



What are Fixed Assets? DEFINITION Capitalized fixed assets (Property, Plant and Equipment) include 3 types of assets used in

operations of the University and that have a normal life expectancy of more than two years:

Permanent–land, improvements to land, easements, buildings, building improvements, infrastructure, and structures

Moveable Equipment (Asset barcodes applied & inventoried) – Office equipment and furniture, Data processing equipment, Educational, research and scientific equipment, Motor vehicles- licensed, Other equipment -unlicensed vehicles, machinery, landscaping,

dining hall, maintenance and other equipment

Other tangible or intangible assets- Software, copyrights, etc.



Capital Investment Appraisal

• In making purchases for the longer term, the organisation is making a financial investment for its future.

• In this context we are considering investment for the purposes of the future of the business, not simply investing money in another business to earn interest.



Capital Investment Appraisal: Appraisal process and methods

Objectives:

Describe the nature of capital investment appraisal

Apply the main investment appraisal techniques

Recognise the limitations of investment

appraisal technique



Terminology: Investment

• An investment is making a financial sacrifice for the possibility of a future benefit.



Types of capital investment

Replacement of obsolete assets

Cost reduction e.g. IT system

Expansion e.g new building & equipment

Strategic proposal: improve delivery service, staff training.

Diversification for risk reduction



Need for Investment Appraisal

Large amount of resources are involved and wrong decisions could be costly

Difficult and expensive to reverse

Investment decisions can have a direct impact on the ability of the organisation to meet its objectives



Investment Appraisal Process Stages:

identify objectives. What is it? Within the corporate objectives?

Identify alternatives. Use CAD, CAM or use external service.

Collect and analyse data. Examine the technical and economic feasibility of the project, cash flows etc.



Investment Appraisal Process

Stages:

decide which one to undertake

authorisation and implementation

review and monitor: learn from its experience and try to improve future decision - making.



Appraisal Methods

Payback method

Accounting Rate of Return (ARR).

Net Present Value

Internal Rate of Return



Why do Businesses Invest?

• To improve efficiency

• As a defence against competition

• To increase profit

• For the business to grow



Why do we Evaluate Investment Projects?

• Internal competition for available funds

• To minimise risk

• To maximise net benefit



What Factors Could We Use to Evaluate an Investment Opportunity?

• Expenditure

• Income

• Timing

• Duration of activity



The Principle

• We are looking to compare total income and total costs over the working lifetime of an asset to see if it makes a positive contribution to the business/organisation.

• As we shall be looking into the future, we need to make assumptions and forecasts.



An Evaluation Formula

Total income

minus

Initial costs

minus

Running costs

Plus or minus

Termination costs or benefits

=

Total net benefit



OR

Initial costs

Plus/minus profit/loss year 1



Etc

Plus/minus termination costs

= Net benefit



An Example

• A new delivery vehicle is expected to improve sales by £50,000 per year but cost £30,000 per year to operate. The vehicle is expected to cost £21,000 to purchase, have a working lifetime of 5 years, and then have a resale value of £7,000.

• The net benefit of the vehicle is therefore

• 5 (£50,000 - £30,000) - £21,000 + £7,000

• = £100,000 - £21,000 + £7,000 = £86,000.



The Effect of Time

• An important point to note is that money loses value over time.

• Thus, money to be received now has a higher value to us than the same sum due to be received in several years time.

• We can deal with this in our calculations by applying a technique known as discounted cash flow (DCF).



Key Concepts and Skills

Be able to compute the future value of multiple cash flows

Be able to compute the present value of multiple cash flows

Be able to compute loan payments

Be able to find the interest rate on a loan

Understand how interest rates are quoted

Understand how loans are amortized or paid off

6F-49



Discount Rates

• Discount rates are calculated by a mathematical formula based in the estimated or forecast discount rate for a given number of years ahead.

• i.e. The discount factor at 10% for a sum to be received or paid out 5 years hence is 0.62.

• Therefore, a sum of £1,000 to be paid, multiplied by 0.62 shows the value in present-day terms to be £620.



Discounts Factors at 10%

Now 1 year 2 years 3 years 4 years 5 years

Cash amount

£1 £1 £1 £1 £1 £1

Discount factor

1.00 0.91 0.83 0.75 0.68 0.62

Current value

£1 £0.91 £0.83 £0.75 £0.68 £0.62



Discount Table



Multiple Cash Flows – Present Value Find the PV of each cash flows and add them• Year 1 CF: 200 / (1.12)1 = 178.57

• Year 2 CF: 400 / (1.12)2 = 318.88

Year 3 CF: 600 / (1.12)3 = 427.07• Year 4 CF: 800 / (1.12)4 = 508.41

• Total PV = 178.57 + 318.88 + 427.07 + 508.41 = 1,432.93

6F-53



Timeline

0 1 2 3 4

200 400 600 800178.57

318.88

427.07

508.41

1,432.93

6F-54



Net Present Value

• The result of DCF calculations is the net present value (NPV) of the activity:

• “The difference between the sum of the projected discounted cash inflows and outflows attributable to a capital investment or other long-term project.” (CIMA 2000: p.115)



NPV Illustrated Assume you have the following information on Project

X:

Initial outlay -$1,100 Required return = 10%

Annual cash revenues and expenses are as follows:

Year Revenues Expenses

1 $1,000 $500 2 2,000 1,000

Draw a time line and compute the NPV of project X.



NPV Illustrated (concluded)0 1 2

Initial outlay($1,100)

Revenues $1,000Expenses 500

Cash flow $500

Revenues $2,000Expenses 1,000

Cash flow $1,000

– $1,100.00

+454.55

+826.45

+$181.00

1$500 x 1.10

1$1,000 x 1.10

2

NPV



Underpinnings of the NPV Rule Why does the NPV rule work? And what does “work” mean? Look Why does the NPV rule work? And what does “work” mean? Look

at it this way:at it this way:

A “firm” is created when securityholders supply the funds to A “firm” is created when securityholders supply the funds to acquire assets that will be used to produce and sell a good or a acquire assets that will be used to produce and sell a good or a service;service;

The market value of the firm is based on the present value of the The market value of the firm is based on the present value of the cash flows it is expected to generate;cash flows it is expected to generate;

Additional investments are “good” if the present value of the Additional investments are “good” if the present value of the incremental expected cash flows exceeds their cost;incremental expected cash flows exceeds their cost;

Thus, “good” projects are those which increase firm value - or, put Thus, “good” projects are those which increase firm value - or, put another way, good projects are those projects that have positive another way, good projects are those projects that have positive NPVs!NPVs!

Moral of the story: Invest only in projects with positive NPVs. Moral of the story: Invest only in projects with positive NPVs.



Discounted Cash Flow Technique

• Allows for the changing value of money over time

• Enables the calculation of a ‘net present value’ (NPV) over the life of the investment.−A negative NPV represents loss of value,−The highest NPV among options is the one to

go for.



Our Previous Example

• A new delivery vehicle is expected to improve sales by £50,000 per year but cost £30,000 per year to operate. The vehicle is expected to cost £21,000 to purchase, have a working lifetime of 5 years, and then have a resale value of £7,000. A discount rate of 10% is assumed.

• The net benefit of the vehicle is therefore

• £20,000 (0.91) + £20,000 (0.83) + £20,000 (0.75) + £20,000 (0.68) + £20,000 (0.62) - £21,000 (1.00) + £7,000 (0.62)

• = £18,200 + £16,600 + £15,000 + £13,600 + £12,400 - £21,000 + £4,340

• = £59,140. [Compared to our non-discounted calculation of £86,000 net benefit]



Key Factors to Remember

• You are attempting to look into the future

• Estimates may be inaccurate

• Assumptions may be invalid

• You must consider uncertainty and risk

• Remember there may be value and/or costs at the end of asset working life



Accounting Information Systems

• You will need to create an accounting system to provide information to support the organisation/business.

• This will need to be specific to the needs of that organisation/business and therefore unique.

• Management accounting will be considered later in the module. However, there are some obvious general requirements for financial accounting – what are they?

• We shall discuss this in seminar.



Reference

• CIMA. (2000). Management accounting official terminology. London: Chartered Institute of Management Accountants.

Getting Started - Unit 2 - 2.64


Unit 2

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© ncc education limited v1.0 finance and accounting unit 2: getting started instructor: johnson hsu...

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