Revenue streams: areas of income for a business for example a revenue stream for MUFC would be the

sponsorships that they receive.

Adidas and Pepsi would want to sponsor a football club because they would gain a huge amount of publicity
each time MUFC plays competitively. A large sports club, such as MUFC valued at over $3 billion, would help
Adidas and Pepsi get international exposure, with its many supporters from around the world. Sponsors may
have exclusive marketing rights such as to advertise during live football matches. The sponsors might be
associated with an image of health and fitness as well; following its association with football and MUFC.
Through sponsorship deals, Chevrolet and Pepsi may gain greater brand awareness and possibly brand
loyalty. Sponsorship of well-known clubs or organizations such as MUFC can be a method of cost-effective
marketing.

The image of MUFC may be at risk if they sign with an online gambling company because some supporters
of MUFC may find that a gambling company is unethical whereas a life insurance company such as AIG is
less controversial and will not put the image of MUFC at risk. Additionally AIG may be more stable in their
income due to the security of an insurance company compared to the instability of a gambling company
that is prone to sudden changes.

Stock exchange is the market in which the shares of a company are bought or sold. Nestles stock exchange
in Zurich means that individuals in Zurich can purchase shares of Nestle.

Stakeholder groups of Nestlé:

Shareholders (Nestlé is a listed company on the Swiss Stock Exchange)

Competitors, e.g. Mars and Cadbury
Employees who work for Nestlé
Managers who run the business on a daily basis
Customers of Nestlé’s large range of products
Governments (Nestlé is a large multinational company)

Shareholders – interested in assessing the financial health and the profitability of Nestlé. Competitors –
interested in benchmarking financial data with Nestlé, which can help with strategic decision-making, e.g.
changes to Nestlé’s marketing strategies.
Managers – use final accounts to judge the operational efficiency of Nestlé, enabling them to set new targets
for strategic planning

Closing stock is the value of a business's stocks at the end of a trading period. The value is equal to the
opening stock minus the value of costs of goods sold (COGS) in a given trading period.

Business objectives:
- Profit
- Added value
- Growth
- Survival
- service
Private sector- business owned by individuals
Public sector- organization controlled by central/ local government

Starting a business
- Enough capital?
- Partnerships?
Unlimited liability
- Failure of repaying debts result in liquidation of property
Limited liability
- Business is a separate legal entity
Sole trader advantages
- Autonomy
- Flexible hours
- All profit
Disadvantages
- Days off result in no revenue
- Unlimited liability
- High risk
Vision statement
- Outlines business aspirations
- (ideal and hypothetically not attainable)
- Focused on long term
Mission statement
- Outlines organization values
- Medium to long term
- Actual target goals
Aims vs objectives
Aims:
- Long term goals
- Give purpose and direction to company
- Expressed in mission statement
Objectives:
- Short term goals
- Based on company aims (baby steps)
- Quantifiable and more specific
Strategy is long term whereas tactics are short term
Operational strategies: day to day methods to improve business
Generic strategies: affect business as a whole (differentiation)
Corporate strategies: long term objectives (aiming for market dominance ie. mergers)
Tactical objectives- business survival, maximize revenue
Strategic objectives- long term aims, maximize profit, growth of business, reputation, market standing
Unethical business behavior
- Financial dishonesty
- Environmental neglect
- Exploitation of workers
- Exploitation of suppliers
- Exploitation of customers
Advantages of ethical practices
- Improved corporate image
- Customer loyalty
- Cost cutting (sometimes)
- Staff motivation
- Staff morale
Limitations of ethical practices
- Compliance costs
- Lower profits
- Stakeholder conflicts
CSR
- Corporate social responsibility
Limited liability company
- Sell shares in ownership to raise capital
- Shareholders are owners of joint-stock companies
- Separate legal identity from owners
Private limited company
- Shares don't trade on stock exchange but can be sold privately
- Limited liability for shareholders
- Disadvantages is financial info may be disclosed
- Usually small and not well known
Public limited company
- Well known large business
- Shares traded publicly on stock exchange
- Disadvantages: legal cost of set up can be high
- Must have an IPO
- Annual financial accounts must be published
Cooperative
- Owned by members for mutual benefit
Social enterprise
- Primarily social objectives
- Profits reinvested in business of community
- Not driven by need to maximize profits for shareholders/ owners
- Can be public or private
Objectives of social enterprise
- Economic : make profit or surplus to reinvest in business and provide return for owners
- Social: provide jobs or support for disadvantaged communities
- Environmental : protect environment and manage business in sustainable way

sales 105000

Cost of goods

Opening stock 15000

purchases 50000

closing stock 20000

45000

Gross profit 60000

Open stock+purchase-close stock = 33000

Sales- 33000=gross profit
Sales 140000

Cost of goods

Opening stock 10000

Purchases 35000

Closing stock 12000

33000

Gross profit 107000

Less overhead expenses 17000
Net profit before interest and tax 90000
Less interest 5000
Net profit before tax 85000
Less tax 12750
Net profit after interest and tax 72250

KEY
COGS = opening stock + purchases - closing stock
Gross profit = sales revenue + interest income - COGS
Profit before tax = gross profit - expenses

VIvacious vegetables company

Income statement
As at 31 December 2020
Sales revenue 114700
456200

Interest income 3150

Cost of sales (COGS) 100000

71000
(93570)

Gross profit 496620

Expenses
Production overheads 45732
Wages of production staff 56125
Marketing 8410
Admin costs 64121
Depreciation expenses 16400

Profit before interest and tax 305832

Interest (1225)

Profit before tax 304607

Tax (0.25) 76151.75

Profit for period 228455.25

Dividends (0.55) 125650.39

Retained Profit 102804.86

JV Company

Income statement
As at 31 December 2023
Sales revenue 878450

Interest income 5800

Cost of sales 374100

212700
(174676)

Gross profit 472126

Expenses
Marketing 6180
Admin costs 48700
Depreciation expenses 8400
Production of overheads 86789
Wages of production staff 141700

Profit before interest and tax 180357

Interest (2415)

Profit before tax 177942

Tax (0.35) 62279.70

Profit for period 115662.3

Dividends (0.45) 52048.04

Retained profit 63614.27

Income Statement for the VIvacious Vegetables Company for the quarter end 12/31/2020
Sales revenue 114,700
456,200
Interest income 3150
Cost of sales
Opening stocks 100,000
Purchases 71000
Closing stock 93,570

Gross profit 496620

Less Expenses
Production of overheads 45732
Wages of production staff 56125
Marketing 8410
Admin costs 64121
Depreciation expenses 16400

Profit before interest and tax 305832

Less Interest 1225

Profit before tax 304607

Less Tax (0.25) 76151.75

Profit for period 228455.25

Dividends 125650.39
Retained profit 102,804.86

Income statement for the JV company for the quarter ending 12/31/2020
Sales revenue
Credit card sales 878450
Interest income 5800

Cost of goods sold

Opening stock 374100
Closing stock 174676
Stocks 212700

Gross profit 472126

Less Expenses
Production of overheads 86789
Wages of production staff 141700
Marketing 6180
Admin costs 48700
Depreciation expenses 8400

Profit before interest and tax 180357

Loan interest 2415

Profit before tax 177942

Tax (35%) 62279.70

Profit for period 115662.3

Dividends (45%) 52048.03

Retained profit 63614.27

All companies/ corporations must provide a set of final accounts->

Incorporated companies must produce these to shareholders each year, these can be audited by
independent and chartered accountants

1. Profit and loss accounts (income statements)

- Shows trading position of a business at the end of a specified accounting period
2. Balance sheet
- Shows assets and liabilities of a business at a particular point in time

Stakeholders : internal (manage the business and aid strategic decision making)
- Shareholders
- Employees
- Managers
external (aid evaluative judgments such as the firm's ability to pay supplier)
- Competitors
- Government
- Financiers
- Suppliers
- Potential Investors

Principle and ethics of accounting practice

- Integrity
- Objectivity
- Professional competence and due care
- Confidentiality
- Professional behavior

Sections to an income statement

Profit = Revenue - Cost

- Trading account -> top section, used to show gross profit, shows difference of firms sales revenue and
cost of producing/ purchasing products to sell
Gross profit = sales revenue - cost of goods sold (COGS)
Sales revenue - value of products sold to customers minus any returns or discounts
COGS - term for direct cost of goods that are sold (ie. raw material and wages)
COGS = opening stock + purchases - closing stock
- Profit and loss account -> shows the net profit(or loss) of a business at the end of a trading period
Operating profit = gross profit - expenses
- Appropriation account
Taxation - compulsory levy imposed by government on company profits
Dividends - the share of net profit that is distributed to the shareholders and owners
Retained profit- how much a business keeps from the profit they make

Balance sheet
Owners Equity = assets - liabilities
Assets -> items owned by business that hold monetary value
- Fixed assets
- Any asset purchased for business use (not for sale) that lasts over a year
- Ie. machinery, leased equipment, property, land and buildings, vehicles
- Intangible assets: brand names, copyrights, goodwill, trademarks
- Current assets
- Cash or other assets that can be turned into cash easily
- Ie. cash, supplies, inventory, accounts receivable
Liabilities -> legal obligation of a business to repay its lenders or suppliers at a later date
Long term liabilities
- Debts due to be repaid after a year
- Ie. bank, loans, mortgage payables
- Current liabilities
- Debts to be paid before a year of the balance sheet
- Ie. accounts payable, taxes to the government, dividends to shareholders
Owners equity -> internal sources of funds for a business
- Share capital
- Amount of money raised through the sale of shares
- Value raised when shares were first sold rather than current market value
- Retained profit
- Amount of net profit after interest, tax, dividends
- Reserves
- Record any proceeds from retained profits in previous trading years
Richmond colts company

Statement of financial position

as at 31 December 2023
Non current assets
Property 544100
Trademark 15788
Patent 65123

Current assets
Cash 35645
Debtors 6412
Stock 41222

Total assets 708290

Current liabilities
Bank overdrafts 1174
Trade creditors 4616

Non current liabilities

Debenture 46300
Bank loan 75000

Total liabilities 127090

Net assets 581200

Equity
Share capital 486200
Reserves 95000

Total equity 581200

Depreciation
- Appreciation -> increase in value of fixed assets over time
- Depreciation -> fall in value of fixed assets over time
- Wear and tear - usage causes wearing out and increases maintenance costs
- Obsolete assets - newer and better products become available

Market value : price of asset that a buyer is willing to pay

Book value : value shown on a balance sheet

KEY
Straight line method = purchase cost - residual value/ lifespan
Net book value = historical cost - cumulative depreciation
Depreciation expense = depreciation per unit x # of units produced
a) Current assets is cash or any other property owned by the business that can be liquidated within a
year or owed to a business, for example stock inventory such as the caps at Fishers manufacturer
would be considered a current asset
b) Net profit before interest and tax ->

Fishers income statement as at 2017

Sales revenue 900000
Fixed cost 55000
Variable cost (6 x 75000)
Net profit before interest and tax 395000

c) Forecasted figures

Fishers income statement as at 2018

Sales revenue 990000
Total variable costs (577500)
Interest 655000
Profit for period 262000

d) Fishers experiences a significant increase in current assets and current liabilities from March to
October because sales peak from April to September therefore the stock inventory during March
would be extremely high to accommodate the upcoming sales. In September the company would
have an increase in current liabilities to cover the cost of production and other necessary expenses
during the peak in sales. The opposite process happens near October in preparation for a decrease in
sales.

Profitability and liquidity ratio analysis

Ratio analysis (AKA benchmarking) -> quantitative management tool that compares different financial
figures to examine and judge the financial performance of a business

ie. 50 employees 30 F and 20 M the ratio is 3:2

Ratio Analysis
- To examine firms profitability (short term) and liquidity (long term) financial position
- Assess ability to control expenses
- Compare actual figures with projected/ budgeted figures (variance analysis)
- Assist in decision-making
Ways to compare
- Historical comparisons-> compare same ratio in two different time periods for the same business
- Inter-firm comparisons-> comparing same ratio of business in the same industry of similar size
TYPES OF FINANCIAL RATIOS 😿
- Profitability ratios
- profit making business
- Ratio of profit to sales revenue
- liquidity ratios
- ability of firm to pay short term liabilities
- Working capital to short term debts
- Efficiency ratios
- Shows how well a firm's resources are used
- Avg number of days it takes to collect money
- Time for inventory turnover
- shareholders ratio
- measure return to shareholder
- Earnings per share
- gearing ratio
- long term liquidity position of a firm
- Creditors and investors will be interested
- High degree of gearing means inadequate long term liquidity (large amount of debts)
- Highly geared firms = more risky due to vulnerability to increases in interest rates

GROSS PROFIT MARGIN

Value of gross profit as a % of sales revenue
GPM = (GROSS PROFIT / SALES REVENUE) X 100
- Economies of scale
- Outsourcing
- Cheaper supplier
- Less sustainable material
- Strategic partnerships
- Promotional strategies
- Product development
Higher GPM = better business

PROFIT MARGIN
To improve the profit margin ratio, reduce unnecessary expenses
PM = (PROFIT BEFORE INTEREST & TAX / SALES REVENUE) X 100
- Insurance
- Lease payments for capital equipment
- Mortgage payments
- Phone and internet services
- Rent on commercial buildings
- Salaries for management and administrative personnel
Gross profit of $3.5mil sales revenue of $5.5mil and expenses of $1.5
a) Calculate GPM
Gross profit/ sales rev x 100
b) Calculate margin ratio
Units of production method 😢
Question 17.10 Neville Stibbs Printers
a) Units of production method is finding how much an asset went down in value over a period of time
b) 0.40 per unit
c) 0.40 x 90000 = 36000
d) 250000 - 80000 = 170000

Efficiency ratio analysis

★ Helps business calculate value of liabilities and debts against its equity
★ Shows efficiency of organizations resources
Efficiency ratios
★ Stock turnover
○ Times a firm sells its stock within a time period
○ (COGS/Average Stock)
○ more # of times turned over = more stock sold = more profit generated
★ Debtor days
○ # of days it takes a firm on average to collect debts
○ (debtors/sales revenue) x 365
○ Credit control is the firm's ability to collect debts within suitable time frame (1-2 months)
★ Creditor days
○ Number of days to take on average for business to pay debts
○ (creditors/ COGS) x 365
○ Higher ratio the better -> more time for repayment
★ Gearing ratio
○ Used to assess organization's long term liquidity position
○ (long term liabilities/ capital employed) x 100
○ Higher gearing ratio is worse for business because it leads to high risk and independence on
economy
○ Uphold liquidity if gearing ratio is smaller
○ Industries that require lots of research result in the necessity of high gearing (ie. Tesla,
Pharmaceutical companies)
★ Insolvency and bankruptcy
○ When individuals or business organizations can't settle their debts due to lack of funds
○ Cash flow- firm cannot make payment owed to creditors
○ Balance sheet- when liabilities are greater than its assets

JKL LTD 19.1 - 19.2

a) Stock turnover -> 350/250= 1.4 times a year = 260.7 days
500/350= 1.43 times a year = 255.5 days
[taking less time to sell all stock]
b) Debtor days -> (200/850)x365=55 days
(150/1000)x365=86 days
[better credit control]
c) 300/500 x 365 = 219 days
200/350 x 365= 208.6 days
[longer time to repay debts]
[but…too long may affect relations with supplier]
JKL could improve the efficiency position by decreasing the creditor days in order to maintain good relations
with suppliers
a) Gearing ratio
250/ (250k+550k) = 31.25%
250/ (25k+750k) = 25%
Gearing ratio can be more useful if it is benchmarked and for JKL it is considered relatively safe.
High gearing can be beneficial when you want to generate external finance based on the premise of
high risk-high reward.
Change
Creativity
Ethics
Sustainability

Cash

Debtors creditors EXPECT DELAYS ->

Always have surplus in
Inventory cash

Insolvency (lack of working capital) is the largest cause of failure in a business

Liquidity - how easily an asset can be turned into cash
Working capital = current assets - current liabilities
Current assets: current liabilities:
Cash overdrafts
Debtors creditors
Stocks tax
Current ratio
- Measure of liquidity
- Compares value of current assets with value of current liabilities
- Safer to have more current assets on hand than current liabilities
current ratio= current assets/current liabilities
Cash VS Profit
: trade credits where you record profit before receiving cash
Sales revenue VS Cash inflow
: sales revenue comes only from customers (selling inventory)
: cash inflow can come from selling assets, bank loans, donations, grants, revenue streams
Reason for cash flow forecasts
1. Banks and other lenders need to assess the financial health of a business seeking external
finance
2. Helps managers anticipate periods of potential cash deficiency by adjusting timing of cash
inflow (receipts) and cash outflow (payments)
3. Helps in planning process
Cash flow forecast ->
Causes for cash flow problems
- Overtrading (too much inventory)
- Overborrowing (too many loans)
- Overstocking (can’t sell inventory)
- Poor credit control (debtor time too long)
- Unforeseen circumstances (pandemic)
Resolutions for cash flow problems
- Seeking alternative sources of finance -> sale & leaseback, overdrafts, debt factoring (selling debts to
others), sell assets, growth strategies (diversification, product development)
- Improving cash inflows -> marketing strategy, product development, increase prices, tighter credit
control, cash payments only
- Reducing cash outflows -> lower expenses, reduce drawings, seek better credit terms, alternative
suppliers, better stock control
Minimize risks and impacts of cash flow problems
- Wider customer base (diversify)
- Installment payments for large extended projects
- Ensure quality management system to prevent customer complaints which result in payment +
discount
Limitations of cash flow forecasting
- Marketing
- Competitors
- Changing fashion tastes
- Economic changes
- External shocks

3.8 😔 INVESTMENT APPRAISAL

-
INVESTMENT: PURCHASE OF AN ASSET WITH POTENTIAL TO YIELD FUTURE FINANCIAL BENEFITS
-
SACRIFICING SPENDING TODAY FOR CAPITAL THAT WILL INCREASE PRODUCTION IN THE FUTURE
-
Quantitative techniques use to calculate financial costs and benefits of an investment decision
- Payback period
- Period of time for investment project t recoup cost of initial investment
- Initial investment / contribution per month
- ie. Monica is considering a $30,000 car, annual contribution is $8000. Find payback period: 3.75 years
- ie. $105 mil/ $25 mil per 7 years = 4.2 years
Advantages:
- Simple and quick
- Useful for cash flow problems
- Break even before capital needs to be replaced
- Compare different investment projects with different costs
- Less prone to forecasting errors (short term)
Disadvantages:
- Encourage short termism
- Contribution each month not constant
- Focuses on time, not profit
[21.2 Mark Allegro Leasing Co.]
- Average rate of return (ARR)
- Compare with the interest in the bank
- Calculates average profit on investment project as a percentage of amount invested
- Compared with base interest rate
- ([total profit during project lifespan-initial amount invested]/ #of years of project)x100
Advantage
- Easy comparisons (since its a %)
Disadvantages
- Ignores timing of cash inflow (seasonal factors)
- Useful lifespan is arbitrary
- 2 ways to calculate ARR causing confusion
- Net present value (NPV)
- Present value: future amount of money that has been discounted to reflect its current value, as if it
existed today (affected by interest or inflation)
- Ie. $105 in a year is $100
- Present value decreases yearly
- Compound interest
- Work out the interest for the first period, add it to the total, and then calculate interest for next period
- Discounting
- Reverse of calculating compound interest, using discount factor
- NPV = sum of present values - cost of investment
Advantages
- Helps managers make informed decisions
- More realistic than ARR especially for projects that are medium to long term
- More informed comparisons between projects of varying duration
Disadvantages
- Discount rate (factor) can be subjective at times
- Interest rate or inflation rate can vary significantly over the course of an investment project
Quantitative
- Payback period, ARR, NPV (will be on the test)
Qualitative
Projections (gut feeling, instincts)
Objectives (profit seeking/values)
Risk profile (low risk/high risk)
State of economy (interest rate)
Corporate image (ethical, public relations)
Human relations (workplace relations)
External shock (external influence, weather, crisis)

BUDGETS 😭
- Cost centers
- Department of business that incurs costs but is not involved in earning profit
- Each unit must be accountable for contribution towards organizations costs
- Manager likely to assign a monitor
- Profit centers
- Unit of business incurs both costs & revenues
- Used by large diversified businesses that have a broad product portfolio
- Produce independent profit & loss accounts
1. Function: finance, human resources, marketing
2. Product: basketball, golf, soccer, track (nike)
3. Geography: canada, Uk, china (Mcdonalds)
Main roles of cost + profit centers
- Organization & control function
- Autonomy function
- Motivating function
- Accountability function

Advantages Disadvantages

Managers more accountable for contribution Somewhat subjective for allocating indirect costs,
difficult to calculate overheads

Managers highly specialized -> identify areas of Profits of department change due to apportionment
weakness and strength of fixed costs, allocating greater proportion of
indirect costs may reduce profits

Smaller departments work better -> more organized Performance of department can change due to
and efficient, less redundancy external factors beyond control, collapse of one
department can have domino effect

No fuss about fixed, variable, direct, indirect cost -> Collection is required to accurately account for all
all costs allocated and spread across various costs and revenues, expensive and time consuming
centers

Benchmark most efficient cost + profit center, Add pressure and burdens to employees, less
improved overall efficiency productivity and motivation

Delegation of authority motivates people and Unnecessary internal competition, less likely to
encourages and rewards teams to achieve targets, consider social responsibilities and ethical objectives
speeds up decision making as profit center
Budget is:
- Financial plan of expected revenue and expenditure for organization or department for time period
- Essential part of managing business organizations and should be in line with aims of business
Flexible budgets
Incremental budgets
Marketing budgets
Production budgets
Sales budgets
Staffing budgets
Zero budgets
Considerations when constructing budgets
- Benchmarking data
- Availability of finance
- Historical data
- Organizational objectives
- Negotiations
Variances
Budgetary control: use of corrective measures taken to ensure actual outcomes equal the budgeting
outcomes
Variances = actual outcomes - budgeting outcomes
Favorable variance vs adverse variance
Importance of budgets in decision making
Planning & guidance
Coordination
Control
Motivational
22.4
Wages - more actual -> adverse
Salaries - more actual -> adverse
Stock - more actual -> adverse
Revenue - more actual -> favorable
Direct cost - less actual -> favorable

Importance of budgeting -> control costs, increase profit, increase efficiency, eliminate extraneous