Accounts and Finance
Sabrina Lieu, Grayson Turley, Cyrus Batara,
Biniam Tesfaghaber, Afua Tiwaa
Sources of Finance
Definition: This is the breakdown of finance in different categories that describe the management of money in a
business/company and by the government.
Sources of Finance Breakdown
● Capital Expenditure
● Revenue Expenditure
● Internal
● External
● Equity Finance
● Debt Finance
Short Term Finance - Items that are paid in less than a year. Usually assets that need to quickly get paid off,
Medium Term Finance - Different sources of finance that are used for the expansion of a business or for the purchase of
large fixed. Usually paid off between 3 - 5 years
Long Term Finance - Long term payments that may last over a year to a bank. Usually used for vehicles and rent.
Sources of Finance
Capital Expenditure
● Used for buying fixed assets
● Fixed assets are used to bring in more money
● Capital is only used to bring in Medium and Long term finance
Revenue Expenditure
● It is only used for the daily function of a business
● Always manage cash flow and try to avoid liquidity issues
● Used for short and medium term sources of Finance
Equity Finance
● The firm gives up shares and dilutes ownership
● Less control for majority stockholder and profits are shared to more people
● This type of finance can raise up to high amounts in finance
Debt Financing
● Principal and interest has to be paid back or the firm will pay a higher interest rate
● This type of finance can be very small or very big
Sources of Finance
Internal Finance
● Personal Finance - Sole Traders and Partnerships take risks of losing money
● Selling Assets - Assets are usually sold. But fixed assets sold for liquidity may cause future production
problems.
● Retained Profits - Profits that are returned back to the business
External Finance
● Share Capital - Limited companies that are selling their shares.
● Venture Capital - Investments in high risks and high return firms that returns ownership in the firm.
● Loans - Taking a loan and paying it back after a certain amount of years. This comes along with interests
● Government Grants - Money received from the government in order to support a specific sp
● Leasing - This is when renting an item and paying it off over a period of time when the contract is over.
● Hire Purchase - Purchasing an item (with interest) on credit over an extended time perio
Sources of Finance
How Might They Appear?
Capital Expenditures
● Purchasing Assets
● Renting businesses, stores, land, etc…
● Machines/Equipment
● Cars, trucks, buses, vehicles, etc…
● Patents
Revenue Expenditures
● Wages
● Depreciation
● Advertisements
● Insurance/Utility/Electricity/Repair
Investment Appraisal
An investment appraisal is an evaluation of
the attractiveness of an investment proposal
using methods such as:
● Payback Period
● Average Rate of Return
Investment Appraisal
Payback period-Amount of time required to
recoup the funds expended in an investment
● PP=Costs of investment/Annual cash inflows
● EX: a $5000 investment which returned $1000 per year would have a 5year payback period.
● EX: A $100 investment which returned $50 per year would have a 2-year
payback period.
● The time value of money is not generally taken into account.
Investment Appraisal
Average rate of return(ARR)-The average
return from an investment expressed as a
percentage of the cost of the investment
● ARR=(Annual return profit/Initial investment) x 100
● EX: A company buys a delivery truck that costs $10,000. 1,000 is profited
each year from deliveries.
1,000/10,000 x 100 = 10% ARR
Working Capital
Definition- The capital of a business that is
used in its day-to-day trading operations,
calculated as the current assets minus current
liabilities.
What is Working Capital used for?
How Businesses manage Working
Capital
1. Working Capital Cycle
2. Sources of additional working capital
3. Handling Receivables (Debtors)
4. Managing Payables (Creditors)
5. Inventory Management
6. Capital Ratios
Working Capital Cycle
Working Capital
Cash Flow Forecasts- Planning future cash
requirements to avoid a crisis of liquidity.
Working Capital
Liquidity- Definition: The degree to which an
asset or security can be bought or sold in the
market without affecting the asset's price.
Liquidity is characterized by a high level of
trading activity. Assets that can be easily
bought or sold are known as liquid assets.
Example of a liquid asset for any company?
Final Accounts -Limited Company
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Income statements
o Measures a company's financial performance over a specific period of time.
Trading account
o looks at the cost of the business’ production to evaluate how efficient it is
Profit and loss account
o reviews the business’ sales revenue and related costs that helped “make” the revenue
 As well as how the profit was appropriated.
Appropriation account
o it’s the part of the profit and loss account that looks at the distribution of the profit
after costs, and expenses has been subtracted.
 Taxes - paid to the government
 External capital interest - like loan interest
 Dividends - paid to shareholders
Balance sheet
o shows the assets and liabilities of the business on a specific date in time
Final Accounts - The Balance sheet
1. Indicates how much the business is worth and how valuable they are
a. value is just an estimate of the business by internal stakeholders
2. Vocabulary: Fixed assets, Current assets, current liabilities, share capital, loan capital and
Retained Profit.
a. Fixed assets: these are assets that the business owns for more than one year
b. Current assets: they are assets owned by the business and are planned to remain so for
one year
c. Current liabilities: they the short term liabilities that the business owns to its creditors;
ex suppliers bills etc
d. Share capital: it the shareholders investments (often times money) into the business
e. Loan capital: it’s a one year or more (long term) source finance from the bank
f. Retained Profit: it the profit that is kept in the business
3. These accounts provide information for Internal and External stakeholders for things like loans
etc.
Examples of final accounts
Examples of Final Accounts
Ratio Analysis
★ Profitability Ratios
○ Gross Profit Margin
○ Net Profit Margin
★ Liquidity Ratios
○ Current Ratio
○ Acid Test Ratio
★ Efficiency Ratios
○ Stock Turnover
○ Return on Capital Employed
★ Gearing Ratio
Profitability Ratios
Measure the ability to convert sales revenue into profit
★ Gross or Net Profit Margin
○ Calculated as gross or net profit over sales revenue
multiplied by 100
○ informs us how efficient the production process is
at generating a surplus to help “contribute”
towards paying the other costs of the business
Profitability Ratios
Gross Profit Margin:
(Revenue – COGS)/Sales Revenue x 100
Net Profit:
[Revenue – (COGS+Overheads+Taxes+Interest)] x 100
Sales Revenue
Liquidity Ratios
Determines whether or not your current assets
cover your current liabilities or debts
★ Current Ratio*
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Calculated as: current assets/current liabilities
*The current ratio is not as accurate, as it includes stock, which is difficult to
liquidate.
Liquidity Ratios
★ Acid Test Ratio (Liquidity Ratio)
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More accurate than current ratio, as it removes
stock from the calculations
Calculated as:
(current assets – stock)/current liabilities
Efficiency Ratios
Return on Capital Employed (ROCE)
★ Often referred to as the primary ratio, it
inorms stakeholders about how effective
the business is at returning a profit from
the capital it invests on a product.
★ Calculated as:
(net profit before tax/total capital employed) x 100
Efficiency Ratios
Stock Turnover Ratios
★ Lets investors know how well a business
manages its stock.
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If it is turning over quickly, a business may consider
increasing production
If it is turning over slowly, it may indicate that the
product is not very popular
Efficiency Ratios
Can be calculated as how many times does the
stock turn over in a period:
★ cost of sales/average stock = # of times
Can be calculated as number of days it takes
to sell the stock:
★ (average stock/cost of sales) x 365 = # of days
Gearing Ratio
Looks at percentage of capital employed that
came from long-term loans.
A high gearing ratio is not necessarily a bad
thing. However, if your gearing ratio is high, it
is more difficult to obtain more loans.
Gearing Ratio
calculated as :
long-term loan capital/total capital employed