THE BALANCE SHEET POCKETBOOK By Anne Hawkins and Clive Turner Drawings by Phil Hailstone “A uniquely accessible guide - if you only read one book on finance, read this!” Peter Colley, Director of Finance and Membership Services, RAC Motoring Services Ltd “The authors’ wealth of practical experience and understanding of the line manager’s perspective is fully reflected in this clear and readable book.” Ray Jennings, Human Resources Director, Dowty Aerospace CONTENTS INTRODUCTION 1 THE BUSINESS 5 FINANCIAL MODEL Sources of Funds, Uses of Funds, making profit, summary CLASSIFICATION 35 OF EXPENDITURE Why classify? Capital or Revenue? control FINANCIAL REPORTS 41 Introduction THE BALANCE SHEET 45 Use of Funds (Fixed Assets, Working Capital), Source of Funds, the balancing act, published format PROFIT AND LOSS ACCOUNT 69 Profit is not cash, operating profit, financing costs, published format APPENDIX ONE 93 Jargon explained APPENDIX TWO 101 Calculating depreciation This symbol refers the reader back to a previous section where the item or term has already been explained 2 NB INTRODUCTION 1 INTRODUCTION CONFUSED? Many people are discouraged in their attempts to understand financial statements by the jargon accountants use and a fear of numbers! 2 Capital Employed Earnings Fixed Assets Creditors Debtors Depreciation Working Capital Reserves INTRODUCTION DON’T BE PUT OFF! Use the Structured process: Step One: Develop a ‘common sense’ model of business finance Step Two: Understand the impact of capital and revenue expenditure on this Business Financial Model Step Three: Extract from this Model the - Balance Sheet - Profit and Loss Account 3 INTRODUCTION COMMON MISCONCEPTIONS Listed below are some of the more common misconceptions we, the authors, encounter in our training sessions. See if any of them seem familiar ◆ ‘The Balance Sheet tells me the value of the business’ ◆ ‘At the year-end the retained profit must be somewhere; in the bank, or the accountant’s drawer’ ◆ ‘If the company’s share price rises it has more money’ ◆ ‘If I compare the results of two businesses, the one which has made more profit has done better’ ◆ ‘The accountant balances the Balance Sheet by entering a balancing figure somewhere probably profit’ These misconceptions will be dealt with at appropriate points in the book. 4 THE BUSINESS FINANCIAL MODEL Page Introduction 6 Source of Funds 9 Uses of Funds 18 Making Profit 28 Summary 31 5 2 THE BUSINESS FINANCIAL MODEL INTRODUCTION In this section a Business Model is developed which explains in straightforward terms how money works within the business. 6 2 THE BUSINESS FINANCIAL MODEL THE MODEL 7 2 SOURCE OF FUNDS USE OF FUNDS SHARE CAPITAL LOAN CAPITAL RETAINED PROFITS PRODUCTS / SERVICES WORKING CAPITAL Sales Attributable Cost Operating Profit Interest Tax Earnings Dividend Retained Profits Less: Less: Less: Depreciation FACILITIES / PROCESSES FIXED ASSETS THE BUSINESS FINANCIAL MODEL APPLYING THE MODEL Use the model to understand your business ● How is your business funded? ● What have you used this money for? ● How much profit do you make? ● IS IT WORTH THE EFFORT? Make the Business Model and Financial Reports work for you! Let’s start at the beginning 8 2 . any of them seem familiar ◆ The Balance Sheet tells me the value of the business’ ◆ ‘At the year-end the retained profit must be somewhere; in the bank, or the accountant’s drawer’ ◆ ‘If the company’s. compare the results of two businesses, the one which has made more profit has done better’ ◆ The accountant balances the Balance Sheet by entering a balancing figure somewhere probably profit’ These. THE BALANCE SHEET POCKETBOOK By Anne Hawkins and Clive Turner Drawings by Phil Hailstone “A uniquely accessible guide - if you only read one book on finance, read this!” Peter