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Understanding Organisational Context 2e Slides by Claire Capon Chapter 6 Finance Financial management Management accounting Financial reporting Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004 6.1 Financial management Introduction Profits and retained profits Loans Shares Rights issues Acquiring and using assets Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004 6.2 Introduction • Financial management covers: - raising capital to finance the organisation’s operations - ensuring the organisation generates sufficient revenue to cover the cost of capital Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004 6.3 Profits and retained profits • Current profits • Profits from previous years • Used to fund growth or expansion of the business Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004 6.4 Loans • Loans are: - from banks as a long-term loan or overdraft - for a definite period and repayable with interest • If interest payments are not met, eventually a receiver is called in Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004 6.5 Loans • Loans are risky for the lender and therefore secured against company assets • Securing loan reduces the risk for the lender (bank) • Borrower pays lower interest rate for secured loan Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004 6.6 Loans • Interest payments: - come out of profits - cannot be reduced, if profits decline, unlike dividends Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004 6.7 Shares • Shares are issued to raise capital and are aimed at: - existing shareholders (a rights issue) - the general public and small investors - institutional shareholders Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004 6.8 Shares • Ordinary shares: - carry ownership rights - give shareholders the right to receive a dividend if the company issues one Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004 6.9 Shares • Dividends: - come from dividing up a portion of company profits - can be raised or lowered as company sees fit Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004 6.10 Rights issue • In a rights issue: - current shareholders are offered the opportunity to buy new shares in the company - new shares are sold at a price equal to or just below market value Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004 6.11 Rights issue • In a 1 for 10 rights issue current shareholders can buy 1 new share for every 10 shares already owned • If rights issue succeeds, then retain the same shareholders Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004 6.12 Rights issue • If rights issue fails, shares are offered on open stock market by underwriters and shareholders may change • Potential for predator to build up stake in the company and mount hostile take-over bid Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004 6.13 Acquiring and using assets • Capital is used to acquire assets • Purchase of fixed assets is capital expenditure • Fixed assets remain in the business long term Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004 6.14 Acquiring and using assets • Fixed assets are used to run the business and include: - plant - machinery - office equipment Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004 6.15 Acquiring and using assets • Current assets are sold or used to make a profit directly and include: raw materials; components; work in progress; finished goods • Current assets remain in the business for a short time period Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004 6.16 Acquiring and using assets • Many companies are concerned with using, not owning, assets • Leasing assets is an option • Assets are acquired without paying full price up front Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004 6.17 Acquiring and using assets • Leased assets may include: - cars - photocopiers - buildings - IT hardware Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004 6.18 Management accounting Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004 6.19 Management accounting • Management accounting is the use of quantitative techniques to provide data to use in the management decision making process Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004 6.20 Management accounting • Management accounting techniques include: - budgeting - cost accounting - investment appraisal - cash flow management Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004 6.21 Financial reporting Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004 6.22 Financial reporting • Financial reports and accounts: - are drawn up and audited - are filed in Companies House • The legal requirements are specified in the Companies Acts 1981, 1985 and 1989 Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004 6.23 Financial reporting • Financial reports should contain: - a directors’ statement showing who the directors are, and commenting on the company’s performance over the previous 12 months and expectations for the next trading year Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004 6.24 Financial reporting - notes on accounts necessary to explain any details, such as how operating profit is calculated - financial statements, a profit & loss account, a balance sheet and cash flow statement Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004 6.25 Financial reporting • A profit & loss account gives a summary of income or sales revenue and expenditure, showing resulting profit or loss Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004 6.26 Financial reporting • A balance sheet shows assets, liabilities and sources of finance • A cash flow statement shows how money has been spent over the trading year Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004 6.27