Bank Loans
Written or for a temporary of a (usually ) from its (the ) to a who to it the of the , usually for its use. If the loan is the of the lender, it is called a . If repayable in equal , it is an . If repayable in on the loan's (expiration) date, it is a . further their loans into other categories such as , , and loans, and , and and . A written promise to the loan is called a .
Liaising
A firm pays for the use of a piece of machinery over a period of time. The firm is able to use the machinery without having to buy it outright.
Trade Credit
A business can buy goods or services from a supplier and has 30-90 days to pay for them.
Loans From Family And Friend
Sometimes, for a business, loans can be taken from family and friends on a trustworthy basis.
Venture Capitalist
Money lent to new small firms which ordinary lenders would regard as too risky. It can be a combination of loans and share capital.
Grants
Financial assistance from local or central government at a lower rate of interest.
Debentures
Large PLCs can borrow through this special kind of loan. They can last as long as 25 years and are often at a fixed rate of interest.
Factoring
A business sells its trade debt (money owed it by its customers) at less than full value to an agent, who then has the responsibility for collecting that debt.
Creditors And Debtors
A creditor is an individual or business that has lent funds to a business and is owed money. A debtor is an individual or business who has borrowed funds from a business and so owes it money.
There is a cost in borrowing funds. Money borrowed from creditors is paid back over time, usually with an additional payment of interest. Interest is the cost of borrowing and the reward for lending.
A business owner's house could be used as collateral
Creditors often ask for security before lending funds. This means sole traders and partners may have to offer their own house as a guarantee that monies will be repaid. A company can offer assets, eg offices as collateral.
The type of finance chosen depends on the type of business. Start-ups and small firms are considered very high risk and find it difficult to raise external finance. The only source of funds might be the owner's own savings, retained profits and borrowing from friends. Companies can issue extra shares to raise large amounts of capital in a rights issue.
P5
Understanding Accounts
By law companies are expected to produce financial statements each year. There are two main financial statements:
- The profit and loss account shows the value sales, the costs incurred in making these sales and the profits or losses that result. Profits arise when the sales revenue is greater than the total cost of making these sales
- The balance sheet shows the value of assets owned, the liabilities owned and the value of the owner’ capital. The capital is the worth of the business at the accounting date.
Profit And Loss Account
A profit and loss is a financial document which is used to calculate the value of sales that have been made at the end of each year. Financial institutions decide, with the use of this document whether they intend to invest their money in the organisation. Business of smaller size such as private limited companies (Ltd) and sole traders, make good use of the document to see how much of a profit or loss they have made at the end of the year. The document is also used to set a future budget.
Balance Sheet
A balance sheet represents the assets, liabilities, capital and drawings. This document is a snapshot of the affairs of the business at a point in time.
Here is an example of a balance sheet:
Profit and loss account of Hill Systems Ltd for the year ending 31st December 2007 and 2008
2007
The Opening stock of Hill System Ltd at the start of 2007 was £250,000 with purchases added of £1335,000, both together gave a increase in total of £1585,000. However, the less closing stock of £315 was subtracted by the total which gave the cost of goods sold to £1270,000.
With sales of £4235,000, the gross profit at the end of 2007 was £2965,000, after the cost of goods that were sold was totalled at 1270,000.
The less expenses in the end of 2007 netted a profit of £318, with the salaries, rent and rates, leasing, interest, stationary, maintenance and general expenses of Hill Systems gave an total of £2647,000 altogether.
With sales helping at£2965,000 and expenses at £2647,000 the net profit for the ending of year 2007 at Hill Systems Ltd gave a net profit of £318,000.
2008
The Opening stock of Hill System Ltd at the start of 2008 was £3150,000, with purchases added of £2225,000, both together gave a increase in total of £2540,000. However, the less closing stock of £354,000 was subtracted by the total which gave the cost of goods sold to £3348,000.
With sales up a year later from 2007 the sales were £5534,000, the gross profit at the end of 2008 was an increase of £3348,000, after the cost of goods that were sold were totalled £2186,000.
The less expenses in the end of 2008 netted a profit of £480,000, which was an increase a year on, with the salaries, rent and rates, leasing, interest, stationary, maintenance and general expenses of Hill Systems giving an total of £2868,000 which was more from 2007.
However, despite this the sales helping at £5534, and expenses at £2868,000 the net profit for the ending of year 2008 at Hill Systems Ltd gave a net profit of £480,000, a increase of £168,000 from the previous year to 2008.
Balance Sheet of Hill Systems Ltd for the year ending 31st December 2007 and 2008
2007
The fixed assets cost £1365,000, which included land and premises, fixtures and fittings and motor vehicles. The current assets were £1088,000, with stock £315,000 from the less closing stock, debtors and bank cash.
With the less current liabilities creditors at £225,000, the subtraction of the current assets were £863,000 of the working capital.
The net assets employed were £2228,000, which Meant the total capital employed was £2228,000, financed by; Owners capital, bank loan and net profit.
2008
The fixed assets were increases £1764,000, which included land and premises, fixtures and fittings and motor vehicles. The current assets were however slightly decreased from 2007 at £1069,000, with stock £354,000 from the less closing stock, debtors and bank cash.
With the less current liabilities creditors increasing £100,000 the total was £225,000, the subtraction of the current assets was a decrease a year on to £744,000 of the working capital.
The net assets employed were increased £2508,000, which meant the total capital employed was £2508,000, financed by; Owners capital, bank loan and net profit.
Ratio Analysis
Ratio analysis is used to measure how well a business is performing in financial terms. Stakeholders are mainly interested in looking at ratio analysis as they are concerned with how well the directors of the business are doing. The way to judge this is to compare the performance of the business this year with the previous years, with the performance of competitors, with the average for the industry or with the targets set at the start of the year. Ratios are particularly useful as a basis for such caparisons.
Ratios which can be used to measure the businesses performance include:
- Profitability ratios
- Performance ratios
- Liquidity ratios
Hill Systems Ltd
Hill systems ltd had a net profit of £318,000, in 2007, and in 2008 their net profit was £480,000. Their difference in the sales in 2007 to the sales in 2008, so there has been a significant improvement. In 2007 Hill Systems ltd had £2228,000 total capital employment, and in 2008 their capital employed was £2508,000, their was another improvement in this as well. If the business was to carry on there will be improvement in sales and profit, so the business is worth carrying on.
Is Hill Systems A Reliable Business?
I believe it is, due to the raise of net profit a year on. I believe if they carry on with the business they could get double the net profit with the changes happening economically. Hill Systems is a reliable business because its managed to improve most areas, which gives the business a massive advantage to carry on for a further year or years.
by
ashviruppal (student)
