Importance of Business AccountsImportance of Business Accounts

• Show awareness of the different users of accounts.

• Show knowledge of what users might look for in the accounts of a business.

• Show how users such as lenders [e.g. a bank] might use accounts as the basis upon which to make decisions

Who produces Business Who produces Business AccountsAccounts

Most businesses produce profit and loss accounts Most businesses produce profit and loss accounts and balance sheets.and balance sheets.

Even small businesses need to produce a profit Even small businesses need to produce a profit and loss account for Inland revenueand loss account for Inland revenue

PLC’s Must produce these accounts for their PLC’s Must produce these accounts for their annual reports.annual reports.

Businesses need to let people who have an interest Businesses need to let people who have an interest in the business see their accounts. Eg. If a business in the business see their accounts. Eg. If a business wants to borrow money from a bank.wants to borrow money from a bank.

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Stakeholders and businesses Stakeholders and businesses

Who, or what, are stakeholders?Who, or what, are stakeholders?

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StakeholdersStakeholders

They have expectations They have expectations about the performance of the about the performance of the business.business.

Their lives are affected by Their lives are affected by the business.the business.

They can influence the plans They can influence the plans and operations of the and operations of the business.business.

Stakeholders are individuals or groups who have an interest in business because:

Employees and customers are both stakeholders for a retailer.

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Types of stakeholders with a Types of stakeholders with a financial interestfinancial interest

ShareholdersShareholders – who have invested their own – who have invested their own money in the business.money in the business.

ManagersManagers – who make decisions which affect the – who make decisions which affect the financial performance.financial performance.

EmployeesEmployees – concerned about their jobs. Some – concerned about their jobs. Some may also be shareholders.may also be shareholders.

BanksBanks – which have lent, or plan to lend, money – which have lent, or plan to lend, money to the business.to the business.

CustomersCustomers – who want to know that service – who want to know that service agreements will be honoured.agreements will be honoured.

Why examine Business accountsWhy examine Business accounts

Each stakeholder will have specific things which Each stakeholder will have specific things which they want to learn about the business.they want to learn about the business.

Sometimes people do not just look at the latest Sometimes people do not just look at the latest financial statements of a business, they compare financial statements of a business, they compare the accounts from the previous year, or pervious the accounts from the previous year, or pervious several years.several years.

These will show how the business has changed. These will show how the business has changed. (have assets increased, is the business more (have assets increased, is the business more profitable)profitable)

Similar business will want to compare themselves Similar business will want to compare themselves with their competitors.with their competitors.

Understand the importance of Understand the importance of business accountsbusiness accounts

Key items in business accountsKey items in business accountsProfit and loss account Profit and loss account -Sales-Sales-Net profit-Net profitBalance SheetBalance Sheet-Assets-Assets-Debtors-Debtors-Cash at bank-Cash at bank-Creditors-Creditors-Share capital, reserves,profit-Share capital, reserves,profit-Shareholders funds-Shareholders funds

Items in the profit and loss Items in the profit and loss accountaccount

SalesSales

‘‘This is the total amount of money received from This is the total amount of money received from customers over the year’.customers over the year’.

It is also a measure of how well the business is It is also a measure of how well the business is doing.doing.

It could be compared to:It could be compared to: the previous year’s figure to find out if sales have the previous year’s figure to find out if sales have

increased or decreased.increased or decreased. with other similar businesses.with other similar businesses.

Items in the profit and loss Items in the profit and loss accountaccount

Net profitNet profit

‘‘This is a measure of how successfully or not the This is a measure of how successfully or not the business has performed over the year’.business has performed over the year’.

Comparisons can be made with previous years and Comparisons can be made with previous years and with other businesseswith other businesses

Can be used to see of the business is making Can be used to see of the business is making enough money to enough money to pay dividendspay dividends to the to the shareholder,s andshareholder,s and

Has enough left over to Has enough left over to re-investre-invest in the business. in the business.

Items in the Balance SheetItems in the Balance Sheet

AssetsAssets

‘‘Assets include: buildings, vehicles, stock and Assets include: buildings, vehicles, stock and other items owned by the business’.other items owned by the business’.

If the business was in trouble, should If the business was in trouble, should perhaps be sold to raise money to over perhaps be sold to raise money to over come the temporary problem.come the temporary problem.

Items in the Balance SheetItems in the Balance Sheet

DebtorsDebtors If the money owed by debtors is quite high If the money owed by debtors is quite high

in relation to the sales figure, it means that in relation to the sales figure, it means that many customers are not paying their bills many customers are not paying their bills on time.on time.

Even worse some may not pay at all! (Even worse some may not pay at all! (bad bad debtorsdebtors!)!)

This could mean trouble in the long term as This could mean trouble in the long term as it is not receiving money it is owed.it is not receiving money it is owed.

Items in the Balance SheetItems in the Balance Sheet

Cash at bankCash at bank

‘‘The cash at bank figure shows how much the The cash at bank figure shows how much the business has available to meet routine debts business has available to meet routine debts (eg suppliers and wages)’(eg suppliers and wages)’

Anyone looking at this figure would be Anyone looking at this figure would be concerned if the business is not making concerned if the business is not making enough money to cover it’s expenses.enough money to cover it’s expenses.

Items in the Balance SheetItems in the Balance Sheet

CreditorsCreditors A high figure of current liabilities could A high figure of current liabilities could

mean the business is not paying its bills mean the business is not paying its bills reasonably quicklyreasonably quickly

This could mean the business is in troubleThis could mean the business is in trouble Also it would be upsetting it’s suppliersAlso it would be upsetting it’s suppliers The business may have borrowed too much The business may have borrowed too much

money and may be struggling to pay it backmoney and may be struggling to pay it back

Items in the Balance SheetItems in the Balance Sheet

Share capital, reserves, profit and loss Share capital, reserves, profit and loss accountaccount

This money all belongs to the shareholdersThis money all belongs to the shareholdersShareholders findsShareholders finds This is the total amount that ‘belongs’ to the This is the total amount that ‘belongs’ to the

shareholdersshareholders If a business goes into liquidation, If a business goes into liquidation,

shareholders receive only the money that is shareholders receive only the money that is left over after all debts are paid.left over after all debts are paid.

Combining FiguresCombining Figures

As well as looking at individual items, stakeholders As well as looking at individual items, stakeholders may also look at combination figures, eg:may also look at combination figures, eg:

Sales and ProfitSales and ProfitAn increase in sales may look good, however, if the An increase in sales may look good, however, if the

profit has gone down then the efficiency of the profit has gone down then the efficiency of the business has fallen.business has fallen.

Cash at bank and creditorsCash at bank and creditorsIf the cash figure is higher than the amount listed If the cash figure is higher than the amount listed

against creditors, the business could pay all of its against creditors, the business could pay all of its bills immediately.bills immediately.

Combining FiguresCombining Figures

Cash at bank and debtorsCash at bank and debtors

At first sight the business may have low At first sight the business may have low amounts of money in the bank, which could amounts of money in the bank, which could spell trouble. However, if the debtors’ spell trouble. However, if the debtors’ figure is high that could mean the business figure is high that could mean the business is simply not good at collecting money.is simply not good at collecting money.

Stakeholders interest in business Stakeholders interest in business accountsaccounts

Stakeholders

Shareholders

Employees

Customers

Manager

Bank

ShareholdersShareholders

Shareholders can be private individuals or Shareholders can be private individuals or other businesses.other businesses.

They buy share hoping to make money out They buy share hoping to make money out of themof them

Share holders only have one decision to Share holders only have one decision to make, whether to keep their shares or sell make, whether to keep their shares or sell them.them.

If sales and profit are both increasing they If sales and profit are both increasing they will probably hold on to them.will probably hold on to them.

ManagersManagers

Some business offer senior managers Some business offer senior managers annual bonuses based on performance of annual bonuses based on performance of the business as a whole (eg. Sales figures).the business as a whole (eg. Sales figures).

All the managers would be interested in the All the managers would be interested in the overall performance of the company overall performance of the company because serious problems could mean their because serious problems could mean their jobs are threatened.jobs are threatened.

EmployeesEmployees

Employees normally do not have much Employees normally do not have much influence in how the whole business is run.influence in how the whole business is run.

However, all employees have an interest in However, all employees have an interest in how well the business is doinghow well the business is doing

- could get pay rises- could get pay rises - job security- job security

BanksBanks

All businesses have a bank account so the All businesses have a bank account so the bank can see each day the ‘cash at bank’ bank can see each day the ‘cash at bank’ figure (balance sheet).figure (balance sheet).

If the account is overdrawn, the bank will If the account is overdrawn, the bank will know immediately and will ask some know immediately and will ask some serious questions unless it has be warned!serious questions unless it has be warned!

Banks also lend money which they will Banks also lend money which they will expected to be paid back with interestexpected to be paid back with interest

CustomersCustomers

CustomersCustomers – may need equipment to be – may need equipment to be serviced or spare parts to be supplied for serviced or spare parts to be supplied for expensive items. May be critical for business expensive items. May be critical for business customers. Will check sales and profit to customers. Will check sales and profit to check business is viable.check business is viable.

ActivityActivity

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Key items for stakeholders in a profit and loss Key items for stakeholders in a profit and loss account… what would they want to know?account… what would they want to know?

SalesSales – – ExpensesExpenses – – Net profitNet profit –. –.

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Key items for stakeholders in a profit and loss Key items for stakeholders in a profit and loss accountaccount

SalesSales – amount received from customers. Is – amount received from customers. Is compared with previous years and with other compared with previous years and with other firms in the same market.firms in the same market.

ExpensesExpenses – any major changes from – any major changes from previous years?previous years?

NetNet profitprofit – an important measure of ‘health’. – an important measure of ‘health’. A good profit is required to pay good dividends A good profit is required to pay good dividends and invest money for future developments.and invest money for future developments.

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Key items for stakeholders in a Key items for stakeholders in a balance sheet balance sheet

AssetsAssets – – DebtorsDebtors – – Cash at bank –Cash at bank – CreditorsCreditors-- Shareholders’ funds-Shareholders’ funds-

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Key items for stakeholders in a Key items for stakeholders in a balance sheet balance sheet

AssetsAssets – are there plenty of assets? Could some be – are there plenty of assets? Could some be sold to raise money? But too much money tied up sold to raise money? But too much money tied up in stock may mean that sales in stock may mean that sales are low.are low.

DebtorsDebtors – if figure is too high in relation to sales, – if figure is too high in relation to sales, customers are not paying their debts quickly customers are not paying their debts quickly enoughenough

Cash at bankCash at bank – how much is available? Enough to – how much is available? Enough to pay debts or cope in an emergency? Is the account pay debts or cope in an emergency? Is the account overdrawn? This would indicate serious problems.overdrawn? This would indicate serious problems.

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Key items for stakeholders in a Key items for stakeholders in a balance sheet balance sheet

CreditorsCreditors – how much money is owed to – how much money is owed to suppliers? If this figure is high, it may indicate the suppliers? If this figure is high, it may indicate the company is not paying its own debts quickly. company is not paying its own debts quickly.

Shareholders’ fundsShareholders’ funds – the money that ‘belongs’ to – the money that ‘belongs’ to the shareholders. This amount should increase each the shareholders. This amount should increase each year and it influences the share price.year and it influences the share price.

StakeholdersStakeholders

The types of people who look at business The types of people who look at business accounts are:accounts are:

ShareholdersShareholders ManagersManagers EmployeesEmployees BanksBanks CustomersCustomersNot everyone is interested in the same thing.Not everyone is interested in the same thing.

ActivityActivity

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Stakeholder interests Stakeholder interests (what do they want to know regarding the business accounts?) (what do they want to know regarding the business accounts?)

ShareholdersShareholders – – ManagersManagers – – EmployeesEmployees – – BanksBanks – – CustomersCustomers – –

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Stakeholder interests Stakeholder interests

ShareholdersShareholders – want good dividends. Want the – want good dividends. Want the share price to rise. These aspects are affected share price to rise. These aspects are affected mainly by profit and shareholder funds figures.mainly by profit and shareholder funds figures.

ManagersManagers – make decisions which affect financial – make decisions which affect financial performance. Financial accounts reflect their performance. Financial accounts reflect their success/failure. All managers interested in sales success/failure. All managers interested in sales and profit figures. Some may also be shareholders and profit figures. Some may also be shareholders or be paid bonus linked to profit.or be paid bonus linked to profit.

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Stakeholder interests Stakeholder interests EmployeesEmployees – want job security. Good profits can – want job security. Good profits can

mean good pay rise. Employees may be mean good pay rise. Employees may be shareholders and/or involved in bonus scheme.shareholders and/or involved in bonus scheme.

BanksBanks – mainly interested if have loaned money or – mainly interested if have loaned money or asked to do so. Want to check money is safe and asked to do so. Want to check money is safe and will be repaid. Will check creditors’ figure and cash will be repaid. Will check creditors’ figure and cash in bank.in bank.

CustomersCustomers – may need equipment to be serviced or – may need equipment to be serviced or spare parts to be supplied for expensive items. May spare parts to be supplied for expensive items. May be critical for business customers. Will check sales be critical for business customers. Will check sales and profit to check business is viable.and profit to check business is viable.