KEY FUNCTIONS OF BUSINESS Finance slides – brief overview

cash flow statement
 income statement
 balance sheet
The financial statements (balance
sheets, profit and loss account and
cash flow statement) can be used to
check the performance of a business
entity.These statements can be used
to compare businesses and to
analyse trends.
Finance (and accounting)
Accounting and finance support the operations of a business.
Accounting allows business performance to be monitored. It is
concerned with information management.
Money comes into the business (revenue) as a result of sales
Money goes out of the business (expenses)
And the flows are recorded. This is accounting.
Finance relates to the external sources of funding that allow the
business to perform its prime function and to make a profit
using borrowed funds
Larger businesses have separate departments however in a small
business the owner is often responsible for keeping the basic
records for accounting purposes and will outsource the final
accounting, auditing and financial advice to an accountant.
Source of funds (not in syllabus)
There are two ways a business can source
funds, can you think of what these are?
Source of funds:
Equity and debt
Business owners hold profit back to
reinvest in the business as ‘retained
 Owners equity
When a company ‘goes public’ or is
‘listed’/’floated’ it means a business is
seeking shareholders to contribute funds
to the operation of the business
 Many organisations have floated
companies on the ASX
 Can all companies access money easily
this way? Why/why not?
 What is a blue chip company?
External Funds
Other funds are available these can be from:
Private funds: family, friends, personal loans
Banking: Overdrafts, bank loans
Merchant Banks: Investment, corporate financial advice, money
Finance companies: medium-term financing to smaller businesses
and companies. Active in lease financing and lending for equipment purchases.
Building Societies: deposits/housing loans. Many
now banks and can
loan money
Insurance companies and superannuation
Financial markets
Debt vs Equity
Which is better?
Debt vs Equity
Debt financing comes from loans (borrowed funds).
The business goes to an outside source for the money
that it needs. The interest due from large loans needs
much consideration.
Equity financing comes from the owners of the business
– either retained profits or personal savings.
Small businesses will often re-invest their profits in
capital assets in an attempt to minimise taxation, such as
purchases that are tax deductable.
Discuss the purpose of financial
Employment contracts
Looking at examples provided to you of
employment contracts in different
industries and for different employment
types (casual, permanent, part-time);
identify similarities and differences
between the contracts
cash flow statement see pg. 127
Cash flow: businesses exist to make a keep up
with payments and financial commitments and stay active,
the business needs a steady flow of funds.
Liquidity: describes a business’s ability to meet its debts from
its cash inflows.
All aspects of a business depend on its ability to pay bills as
they become due. If it can’t pay its bills it will be declared
insolvent and cease to exist.
Cash-flow budgets will help a business predict if and when cash
shortages are likely to occur. Such shortages may need to
be covered by short-term loans such as bank overdrafts.
Regular (monthly) cash-flow budgets and statements allow
such needs for finance to be recognised and acted upon.
income statement
Summarises the structure of the revenue that has come into
the business and the expenses that have been incurred in
running and operating the business.
See income statement on pg. 122
Through bookkeeping and accounting each business is able to
look at the GROSS PROFIT and NET PROFIT which will show
how the business is performing.
Gross profit vs Net profit
subtracting the costs associated with sales from the
value of sales (revenue)
deducting from the gross profit the other expenses that
were part of operating the business.
balance sheet – see fig on pg. 124
The final document that is produced at the
end of the full accounting process.
It is built on the accounting equation:
Assets = Liabilities + Owner’s equity
The balance sheet shows the owners all the things that have
been done with its earnings.
Balance sheet
Assets: items of value/there are 3 types
 Current assets: cash or items that can very easily
be converted to cash (stock, debtors, accounts
receivable and pre-payments)
 Non-current assets: more durable and more
expensive. Difficult to sell quickly (buildings,
furniture, land, machinery and office equipment)
 Intangibles: difficult to measure/value. Goodwill,
trademarks and patent rights and can be of great
value when selling
Balance Sheet
Liabilities: items that the business owes to other people
or organisations.
Current Liabilities: include short-term debts that
need to be paid within 12 months or the financial
year, bank overdrafts, creditors, accounts payable
and accruals.
Non-current liabilities: include mortgages (land,
buildings), and loans for large machinery and
equipment (usually large, long-term loans)
Balance Sheet
Owners’ equity: starts off with what the business owner
invests in the larger companies owners’ equity is
replaces with shareholders’ funds
Paid-up capital: amount of money originally put into the
business – basis for determining the success of the
original investment
Reserves/retained profits: the amount added to the
original money put into the business. Often owners
have re-invested in the business or are preparing to do
Net profit: figure calculated in the revenue statement for
a certain trading period, presented as net profit before
tax or a net profit after tax
Financial statements recap- in
After looking at various businesses annual
reports online explain the construction of
financial statements, their role and
 Using simple financial data construct
examples of all three financial statements
 Assess the importance of effective cash
flow management for business

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