Cash Flow, Income Statements, and Financial Position
CASH FLOWS FORECASTING AND WORKING CAPITAL:
Why cash is important to a b?
(Cash:liquid asset,meaning it can be auickly spend on goods/services)
cash flow: the flow in and out of a b over a period of time
without enough cash, bs face is
sues like: inability lo pay workers, suplliers, or other obligations; prod halt(workers wont work withouy pay, suppliers won’t deliver without payment) and possible liquidation-sellimg assets to pay debts.
Cash inflows:
sums of money recieved by a b during a certain period: sales of prod for cash, payments from debtors(customers who owe money), borrowing from external sources, sale of b assets and new investments (shareholders putting money into the b).
cash outflows:
Sums of money paid out by a b during a period: purchasing goods/materials for cash; paying wages, salaries, and other operating expenses; buying fixed assets; loan repayments and paying creditors (bs that supplies goods on credit).
Cash flow cycle:
shows how cash moves through the b: 1.Cash is needed for labor, materials, etc. 2.Goods are purchased, 3.Goods are sold, 4.Cash is recieved for goods sold. The cycle’s duration affects the need for working capital and cash. Shortages at any stage (e.G., materials, customer payment) can lead to b disruption/liquidity crises. Effective planning is needed to ensuee smooth cash flow.
Bs can be profitable but still still face shortages if customers don’t pay on time.
Importance of cash flow forecasts:
it helps managers track cash available for bills, loans, and purchasing assets; anticipate bank loans needed to avoid insolvency and asses if the b holds too much cash, which could be invested more profitably.
INCOME STATEMENTS:
How profit is made:
FORMULA:
profit= revenue –
cost of making products. This formula is the surplus leftafter deducting bs costs.If cost exceeded revenue a loss occurs.
Ways to increase profit:
1.Increase revenue more than costs, 2.Reduce the cost of making products, 3.A combination of both.
Why profit is important:
1.Reward for enterprise: profit rewards b owners for their efforts and innovation. 2.Reward for risk taking: enterpreneurs and Investors take risks when providing capital. Profit compensate them for these risks.3.Source of finance: retained profits (Profits after dividends and payment to owners) can be reinvested in the b, enabling expansion. 4.Public sector and social enterpirses: in state-owned bs, profit is used to reinvest and improve operations. In social enterprises, Profit helps sustain operations, Though it’s balanced with social goalslike environmental protection and societal benefits Main features of an income statement:
Income statement (also called profit and loss account): Records the income and costs incurred by a b or a certain period of time. It shows where a b has made a profit or loss.
Revenue
FORMULA: revenue= price x quantity. We increase revenue by increasing the price or increasing the quantity sold. Managers use income statements to compare b Performance over time. Income statements shall profit or loss not actual cash movement.
Part of the Companies published financial reports:
shared With investors and stakeholders.
Cost of salss:
(or cost of goods sold): The variable costs directly related to reproduction of goods/services sold. Includes: Materials used in production on direct labor cost (e.G., wages for Workers directly involved in making products) FORMULA: cost of sales = variable cost per unit x quantity. Exclude: Fixed costs(e.G, Distribution costs, Machinery, sales/marketing stuff).
Gross profit
FORMULA: gross profit = revenue – cost of salss. It reflects the profit before accounting for overhead cost (Fixed costs like rent, utilities, salaries). It does show profit from core business activities (trading account).
Net profit:
the remaining after all expenses, Overheads and any non-trading income (Like rent or asset sales) have been deducted from the gross profit. FORMULA: net profit=gross profit – overhead costs – deprecation.
Depreciation:
The fall in value of fixed assets over gime (e.G, Machinery, buildings). This is treated as an annual expense and deducted on the income statement.
Retained Profit:
the Portion of net profit that is reinvested back into the b after tax and dividends to owners. FORMULA: retained profit = net profit – tax – Dividends.
STATEMENT OF FINANCIAL POS:
measures The overall worth of a company at a given point in time; Lists and values all assets and liabilities of the b and Helps managers, investors, and stakeholders esses financial health.
Key components:
1.
ASSETS (what the b owns): -non current(foxed) assets: Held for +1 year (e.G, lamd, buildings, equipment, vehicles, patents, and licenses), -depreciation: most non current assets lose Value over time (except land), -intangible assets: non-physical assets (e.G, patents, copyrights, trademarks). -currnt assets: held for -1 year, used in daily operations, such as cash, inventories(stocks) and accounts receivable (customers owing money) 2.
LIABILITIES:
Non-current (long term) liabilities: debts that must be repaid after +1year, such as lomg term loans. Current liabilities: debts due within one year, Such as bank overdrafts, accounts payable (Money owed to suppliers/Creditors).
3. EQUITY:
(shareholders’ funds). FORMULA: total assets – total liabilities = shareholders’ equity.
It represents the money invested into the b By shareholders. This money is invested in 2 ways: 1. Share capital: Money raised when shareholders buy new shares. 2. Reserves: retained profits from previous years (Not paid as dividends). Used for future investments, crisis management Or expansion.
Interpreting the Statement of Financial pos:
shareholders can check if their investment has grown/declined over a year by comparing total equity. Sources of expansion funding: 1.Increase in long-term loans (nom-current liabilities), 2.Use of retained profits, 3.Selling new shares (increase in share capital) ans 3.Changes in inventiry. Declining stock levels may indicate stock was sold off to fund expansion.
Working capital FORMULA:
Working capital = current assets – current liabilities. Essential for daily operations paying wages, and covering short-term debts. A – working capital may signal financial trouble.
Capital employed FORMULA:
capital employed = shareholders’ funds + non-current liabilities. Represents the total investment in a company’s assets. The statement of financial pos helps calcilate key ratios (liquidity, profitability, and leverage) to assess business performance