Download UNIT 6: THE FINANCIAL PLAN When the company has more

UNIT 6: THE FINANCIAL PLAN
When the company has more resources than it needs, it can be decided to invest.
Any business investment should be able to generate more resources than those used in acquiring and
maintaining it.
1.
INVESTMENT CONCEPT.
For a company, investment involves the acquisition of goods and rights to facilitate the achievement of
its objectives. From this point of view the staff of the company is an investment and the purchase of
machinery for the production process, too.
2.
TYPES OF INVESTMENT.
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Depending on the media:
physical investments, when investing in an active material such machinery.
intangible investments, when we invest in an exclusive right such as a patent.
financial investments, when we invest in financial assets such as bonds or stocks.
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Depending on the purpose.
Investment to start the activity.
Investment to renew the activity
Investment to expand the activity
Investment to modernize the activity
Strategic investments, when investing in other companies to diversify risk.
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According to the period.
Short Term Investments
Medium Term Investments
Long Term Investments
3.
ELEMENTS OF AN INVESTMENT
 The amount of money that is originally put into an account. (Co)
 The future amount of money (Cn)
 Interest rate (i)
 The amount of time that the money is in the acount(n)
We apply the following formula:
Cn = Co (1 + i) ^n
Example 1:
If you deposit 100€ into an account paying 5% annual interest, how much money will be in the
account after 10 years?
Cn = Co (1 + i) ^n
Cn= 100 (1 + 0.05)^10 = 162.89 €
Example 2:
What amount of money did we invest 10 years ago if today we have € 100 paying 5% annual rate?
Cn = Co (1 + i) ^n
Co= Cn______
(1+i)^n
100
= 61.39
(1+0.05)^10
4. TYPES OF FINANCING
1. Attending to the ownership of resources that we will use to make the investment:
 Own resources, when there is no obligation of repayment by the company.
 Borrowings when the company has to repay the funds, according to the agreed conditions, for
example together with interest.
2. Considering the due date:
 Short-term financing if the repayment period is less than one year or one operating cycle.
 Long-term financing when the expiration date is more than one year or the operating cycle.
3. Depending on how they were generated (Source):
 Internal financing, when they were obtained by the activity of the company. It is known as
self-financing. For example the benefits that the company has generated and decides not to
distribute among the partners to finance the company's business .
 External financing, obtained by the company through financial markets.
4. OWN FINANCING
4.1 INTERNAL

NOT DISTRIBUTED BENEFITES
When a company makes a profit at the end of the financial year it can proceed to its distribution among
the partners but it can also decide not to do it this way to leave benefits available to society to create
reserves and may use such amounts to make the necessary investments .
4.2 EXTERNAL

GRANTS
To encourage entrepreneurship, government approved a set of budget items (grants) aimed to give
financial supports to companies both new and existing ones. These amounts that companies receive
don´t have to be repaid by the companies if they fulfill the conditions for which they were granted.

CONTRIBUTIONS OF PARTNERS
When the company needs monetary resources they can be obtained by selling shares.
Each share represents a portion of the capital of the company and gives its owner the status of
shareholder.
The partners have the right to:
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Attend and vote at the general meeting of shareholders.
Participate in the profits generated by the company.
Get information on the progress of society.
To subscribe shares on a preferential basis
....
The shares have a nominal value call, but when we bought shares may have to pay for them more than
the value indicated.
5. BORROWINGS
5.1 LONG-TERM FINANCING

LOANS.
This is a financial operation based on the delivery of a specified quantity by an entity to a natural or
legal person who agrees to refund the amount and its interest in the stipulated.

CREDIT
This is a financial operation based on the delivery of a specified quantity by an entity to a natural or
legal person but this person only has to pay interest for the quantity of money he uses and a
commission for the unused quantity.
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BONDS.
Bonds are debt securities on the debt of a company. The holder isn’t an owner but a creditor of the
company (the company owes money).

LEASING
This financing system allows us the use of an asset in exchange for a payment previously stipulated in
the lease. There is the possibility to acquire the asset for its residual value. This value is set with the
sign of the leasing contract and is always less than the market value of the property.
If fees are not paid the leasing company would remain with good.
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RENTING
It is a mode to rent something medium and long term paying a fee for the time renting is valid.
5.2 SHORT-TERM FINANCING

SUPPLIERS´ CREDIT
Whenever a supplier gives us a deferment of payment of those products that you have purchased we
have got a short-term financing. The amount is the value of our purchase and the postponement by the
provider, usually 30, 60 or 90 days. Although you can sometimes get higher postponement, it is
unusual. We must also take into account tat there isn’t any financial cost.
The cash discount would also be a way of financing. It is when we get a better price if we pay in cash.
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DISCOUNT
When we sell on credit to our customers we grant a deferment of 30, 60, 90 or even 120 or 180 days.
Perhaps we can’t wait because we haven’t got ready cash. In this case we can use discount.
A financial institution:
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Can pays in advance less the interests of the discount.
Once reaching maturity, when the customer has to pay if he didn’t do it, the bank would
charge us with the interests of the return. We would have to charge our client the new nominal
amount plus of returning costs.
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FACTORING
There are factoring companies whose business consists on:
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
Credit sales.
The factoring company analyzes our customers and inform us about whose paper can be
accepted paper. It offers us information about the situation of our customers.
The one in charge of charging our clients is the factoring company and even assume the risk of
non payment.
GOVERNMENT
Public administration grants us free financing since the payment of VAT, IRPF are not paid at the
moment.

ADVANCES TO CUSTOMERS.
Sometimes customers have to pay in advance a part of the total payment so the company is being
financed with the customers.
6. QUESTIONS:
1. If you deposit 4000€ into an account paying 6% annual interest, how much money will be in
the account after 5 years?
2. If you deposit 6500€ into an account paying 8% annual interest, how much money will be in
the account after 7 years?
3. How much money would you need to deposit today at 9% annual interest to have 12000€ in
the account after 6 years?
6. SOCIAL BALANCE
This document summarizes the main details and figures of the social activity of the company. In the
social balance we´ll find information on supplementary benefits, hygiene and safety at work,
establishing company shops, creation of nursery schools, installation of pollution control devices,
collaboration with public institutions in the educational and cultural, … as well as the living conditions
of workers and their families, to the extent that these conditions depend on the aid or benefits of the
company.
7. DEFINITION OF 'PROFIT AND LOSS STATEMENT - P&L'
The profit & loss (P&L) statement is one of the three primary financial statements used to assess a
company’s performance and financial position (the two others being the balance sheet and the cash
flow statement). It is a financial statement that summarizes the revenues, costs and expenses incurred
during a specific period of time.
Example:
The profit & loss statement summarizes the revenues and expenses generated by the company over the
entire reporting period (usually a fiscal quarter or year). The profit & loss statement is also known as
the income statement, statement of earnings, statement of operations, or statement of income.
The basic equation on which a profit & loss statement is based is Revenues – Expenses = Profit.
All companies need to generate revenue to stay in business. Revenues are used to pay expenses,
interest payments on debt, and taxes owed to the government. After the costs of doing business are
paid, the amount left over is called net income. Net income is theoretically available to shareholders,
though instead of paying out dividends, the firm’s management often chooses to retain earnings for
future investment in the business.
Profit & loss statements are all organized the same way, regardless of industry. The basic outline is
shown in the following example:
Profit & Loss Statement for Company XYZ, Inc.
Total Revenue
$100,000
Cost of Goods Sold
Gross Profit
($ 20,000)
$ 80,000
Operating Expenses
Salaries
$10,000
Rent
$10,000
Utilities
$ 5,000
Depreciation $ 5,000
Total Operating Expenses
Operating Profit (EBIT)
($ 30,000)
$ 50,000
Interest Expense
($ 10,000)
Income before taxes (EBT) $ 40,000
Taxes
Net Income
($ 10,000)
$ 30,000
Number of Shares Outstanding
Earnings Per Share (EPS)
30,000
$1.00