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6.1Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004
Understanding Organisational Context 2e
Slides by Claire Capon
Chapter 6
FinanceFinancial management
Management accounting
Financial reporting
6.2Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004
Financial management
Introduction
Profits and retained profits
Loans
Shares
Rights issues
Acquiring and using assets
6.3Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004
Introduction
• Financial management covers:
- raising capital to finance the organisation’s operations
- ensuring the organisation generates sufficient
revenue to cover the cost of capital
6.4Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004
Profits and retained profits
• Current profits
• Profits from previous years
• Used to fund growth or expansion of the business
6.5Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004
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
6.6Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004
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
6.7Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004
Loans
• Interest payments:
- come out of profits
- cannot be reduced, if profits decline, unlike
dividends
6.8Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004
Shares
• Shares are issued to raise capital and are aimed at:
- existing shareholders (a rights issue)
- the general public and small investors
- institutional shareholders
6.9Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004
Shares
• Ordinary shares:
- carry ownership rights
- give shareholders the right to receive a dividend if the company issues one
6.10Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004
Shares
• Dividends:
- come from dividing up a portion of company
profits
- can be raised or lowered as company sees fit
6.11Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004
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
6.12Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004
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
6.13Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004
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
6.14Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004
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
6.15Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004
Acquiring and using assets
• Fixed assets are used to run the business and include:
- plant
- machinery
- office equipment
6.16Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004
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
6.17Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004
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
6.18Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004
Acquiring and using assets
• Leased assets may include:
- cars
- photocopiers
- buildings
- IT hardware
6.19Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004
Management accounting
6.20Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004
Management accounting
• Management accounting is the use of quantitative techniques to provide data to use in the management decision making process
6.21Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004
Management accounting
• Management accounting techniques include:
- budgeting
- cost accounting
- investment appraisal
- cash flow management
6.22Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004
Financial reporting
6.23Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004
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
6.24Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004
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
6.25Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004
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
6.26Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004
Financial reporting
• A profit & loss account gives a summary of income or sales revenue and expenditure, showing resulting profit or loss
6.27Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004
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
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