Name: Trần Thành Tiền Class: 18BHMV01 ID: 1811547254 Chapter Six – Accounting and Financial Planning Undertake accounting responsibilities and evaluate return on investment and return on equity What is equity capital? EQUITY CAPITAL : The part of a company's money owned by shareholders, who have the right to a share in the company's profits and to any other assets if the company is closed down: The company wants to attract more equity capital from investors Responsibilities of an accountant Ensuring the accuracy of financial documents, as well as their compliance with relevant laws and regulations Preparing and maintaining important financial reports Preparing tax returns and ensuring that taxes are paid properly and on time Evaluating financial operations to recommend best-practices, identify issues and strategize solutions, and help organizations run efficiently Offering guidance on cost reduction, revenue enhancement, and profit maximization Conducting forecasting and risk analysis assessments Additionally, accountants have a legal obligation to act honestly and avoid negligence in their practices As such, they are also responsible for ensuring that their clients’ financial records are compliant with the relevant laws and regulations Return on investment (ROI) is an approximate measure of an investment's profitability ROI has a wide range of applications; it can be used to measure the profitability of a stock investment, when deciding whether or not to invest in the purchase of a business, or evaluate the results of a real estate transaction ROI is calculated by subtracting the initial value of the investment from the final value of the investment (which equals the net return), then dividing this new number (the net return) by the cost of the investment, and, finally, multiplying it by 100 ROI is relatively easy to calculate and understand, and its simplicity means that it is a standardized, universal measure of profitability One disadvantage of ROI is that it doesn't account for how long an investment is held; so, a profitability measure that incorporates the holding period may be more useful for an investor that wants to compare potential investments ROI= Net Return on Investment / Cost of Investment ×100% Return on equity (ROE) Return on equity (ROE) is a measure of financial performance calculated by dividing net income by shareholders' equity Because shareholders' equity is equal to a company’s assets minus its debt, ROE is considered the return on net assets ROE is considered a measure of a corporation's profitability in relation to stockholders’ equity Whether an ROE is considered satisfactory will depend on what is normal for the industry or company peers As a shortcut, investors can consider an ROE near the long-term average of the S&P 500 (14%) as an acceptable ratio and anything less than 10% as poor Define, determine, analyze, and construct a budget based on organizational goals and objectives What is a budget? Definition: A budget is a formal statement of estimated income and expenses based on future plans and objectives In other words, a budget is a document that management makes to estimate the revenues and expenses for an upcoming period based on their goals for the business The objectives of budgeting Provide structure A budget is especially useful for giving a company guidance regarding the direction in which it is supposed to be going Thus, it forms the basis for planning what to next A CEO would be well advised to impose a budget on a company that does not have a good sense of direction Of course, a budget will not provide much structure if the CEO promptly files away the budget and does not review it again until the next year A budget only provides a significant amount of structure when management refers to it constantly, and judges employee performance based on the expectations outlined within it Predict cash flows A budget is extremely useful in companies that are growing rapidly, that have seasonal sales, or which have irregular sales patterns These companies have a difficult time estimating how much cash they are likely to have in the near term, which results in periodic cash-related crises A budget is useful for predicting cash flows, but yields increasingly unreliable results further into the future Thus, providing a view of cash flows is only a reasonable budgeting objective if it covers the next few months of the budget Allocate resources Some companies use the budgeting process as a tool for deciding where to allocate funds to various activities, such as fixed asset purchases Though a valid objective, it should be combined with capacity constraint analysis (which is more of an industrial engineering function than a financial function) to determine where resources should really be allocated Model scenarios If a company is faced with a number of possible paths down which it can travel, you can create a set of budgets, each based on different scenarios, to estimate the financial results of each strategic direction Though useful, this objective can result in highly unlikely results if management lets itself become overly optimistic in inputting assumptions into the budget model Measure performance A common objective in creating a budget is to use it as the basis for judging employee performance, through the use of variances from the budget This is a treacherous objective, since employees attempt to modify the budget to make their personal objectives easier to achieve (known as budgetary slack) Conversely, budgeting may not be of much use for a well-established business that has a consistent track record of performance In this case, a better approach may be to manage the organization from a rolling forecast that is updated on a regular basis Doing so reduces the work associated with financial predictions, and also allows the business to shift its operational focus on short notice Establish registration and other pricing for events Event pricing is a daunting task – especially when you’re introducing paid-for events for the first time If prices are set too low, people may deem your event to be cheap and decide not to come Too high and you may not get the attendance levels you want Either way, it’s important you get it right as it can have a big impact on your event’s headcount Event management/registration systems also allow you to be a lot more flexible in the way you price events and manage your cash flow You can use tiered pricing structures where booking fees can automatically change according to timings and audience categories chosen by you You can also offer discounts and promo codes which can be used alongside any promotional activities you decide to around your events event registration is when a person makes a financial and/or time commitment to attend your event It is the point at which a person decides that the benefits from attending the event will outweigh the costs It is important to keep in mind that event registration and event attendance are not the same metric The former is the pre-event process where people make the commitment to attend while the latter is an onsite metric that states the actual amount of people who were present at the event Establish budget review, cash control, and other financial procedures Cash flow maintenance Efficient financial control measures contribute significantly to the cash flow maintenance of an organization When an effective control mechanism is in place, the overall cash inflows and outflows are monitored and planned, which results in efficient operations Resource management The financial resources of an organization are at the very core of any organization’s operational efficiency Financial resources make available all other resources needed for operating a business Hence, financial resource management crucial in order to manage all other resources Effective financial control measures hence are crucial to ensure resource management in an organization Operational efficiency An effective financial control mechanism ensures overall operational efficiency in an organization Profitability Ensuring an organization’s overall operational efficiency leads to the smooth functioning of every organizational department It, in turn, increases productivity which comes with a direct, positive relationship with profitability Hence, establishing effective financial control measures ensures improved profitability of any business Fraud prevention Financial control serves as a preventative measure against fraudulent activities in an organization It can help prevent any undesirable activities such as employee fraud, online theft, and many others by monitoring the inflow and outflow of financial resources Manage cash and cash flow Cash flow is a measurement of the amount of cash that comes into and out of your business in a particular period of time When you have positive cash flow, you have more cash coming into your business than you have leaving it—so you can pay your bills, and cover other expenses When you have negative cash flow, you can’t afford to make those payments The concept of having “enough money to meet your financial obligations” is also known as working capital The following is steps to manage cash flow: To make sure you’ve got enough cash flow to keep your business running, follow these seven steps: Stay on top of bookkeeping Yes, bookkeeping matters! It’s the single best way to understand all the financial transactions in your business, and you can’t the rest of the steps without it Generate cash flow statements If you have an accountant, they can this for you Otherwise, you can use software—or calculate it yourself using spreadsheets Analyze your cash flow Take the info from your cash flow statements, and use it to understand how money is moving through your business Figure out whether you need to increase cash flow Relying on your credit card or line of credit to make ends meet? These are signs you need to free up more cash flow Cut spending where you need to Overspending cash can result either from covering unnecessary expenses, or paying for expenses at strategic times Cut overspending to increase cash flow Speed up your accounts receivable Whether you’re waiting on invoice payments from clients, or deposits from payment processors, the faster you get money in your pocket, the more cash flow you’ll have Rinse and repeat Make analyzing your statements a regular part of your back office routine The more you it, the better you’ll get at spotting opportunities to increase cash flow—and nip shortages in the bud _End ... normal for the industry or company peers As a shortcut, investors can consider an ROE near the long-term average of the S&P 500 (14%) as an acceptable ratio and anything less than 10% as poor Define,... estimating how much cash they are likely to have in the near term, which results in periodic cash-related crises A budget is useful for predicting cash flows, but yields increasingly unreliable... easier to achieve (known as budgetary slack) Conversely, budgeting may not be of much use for a well-established business that has a consistent track record of performance In this case, a better approach