Nursery Management
Understanding and
Managing Finance
Session 2
Financial Statements

Apart from day-to-day bookkeeping, there are three
different types of ‘official’ financial statements which are
used by an organisation:

The Cash-flow Statement is designed to answer the
question “What happened to all the money?”
The Profit & Loss Account is designed to answer the
question “How much money did we make (or lose)?”
The Balance Sheet is designed to answer the question
“Do the books balance?’


Financial Statements
Statement
Purpose
Terms used
Balance Sheet
To assess the financial
position of the
business at one
moment in time
Assets, claims,
liabilities, capital,
retained profit etc.
Profit & Loss
Account
To measure & report
on how much wealth
the business has
created over a period.
Sales, Turnover, Cost
of Sales, Operating
Costs, Overheads, net
profit etc.
Cash Flow
Statement
A summary of all cash
transactions over a
period
Cash inflow, Taxation,
expenditure, dividends,
net increase in cash
EXAMPLE OF A CASH
FLOW STATEMENT
Net Cash-Flow from Operating Activities
Returns from investment and servicing of finance
Taxation
Capital Expenditure
Subtotal
Equity Dividends paid
Subtotal
Management of liquid resource - disposal of investments
Financing - additional long-term loan
=
Increase or Decrease in Cash over Period
300,000
100,00030,000150,000----------20,000
30,000----------10,00010,000+
50,000+
----------50,000+
Turnover (Sales) (Income)
Cost of Sales (Direct Costs)
Materials
Transport
Labour
£ 100,000
£10,000
£ 5,000
£15,000
Total Cost of Sales
Gross Profit (Gross Margin)
Overheads (Indirect Costs)
Administrative salaries
Advertising
Rent & Rates
£ 27,000
£ 43,000
27%
43%
£ 40,000
40%
£ 30,000
30%
£
8%
£10,000
Profit after tax & interest
Dividends payable
30%
70%
£ 3,000
Profit before tax
Corporation tax due
£ 30,000
£ 70,000
£18,000
£ 5,000
£ 4,000
Total Overheads
Operating Profit (Net Margin)
Interest on loans
EXAMPLE OF A
PROFIT & LOSS
ACCOUNT
£22,000
Retained Profit (Earned Surplus)
8,000
EXAMPLE OF A
BALANCE SHEET
ASSETS
CLAIMS
Fixed Assets
Land
Buildings
Fix & Fit
Total
Capital & Reserves
Share capital
Retained profit
Total
L/T Liabilities
Loan
Total
Current Liabilities
Creditors
Tax & VAT
Total
£ 120,000
£ 150,000
£ 75,000
£ 345,000
Current Assets
Stock
£ 55,000
Debtors
£ 75,000
Bank
£ 25,000
Total
£ 155,000
________
£ 500,000
£ 100,000
£ 120,000
£ 220,000
£ 250,000
£ 250,000
£ 22,000
£ 8,000
£ 30,000
________
£ 500,000
Activity 1
On which of the three main financial statements would you find:
 The assets of the Business
 The costs of running the Business
 The profit made by the business this year
 The profit retained by the company from previous years
 The amount the company has borrowed
 The amount paid out in dividends
 The interest paid on loans this year
 The amount of cash currently held in the Bank
 The amount of surplus cash generated this year
Activity 1 - Solution









Balance Sheet
The costs of running the Business
Profit & Loss
The profit made by the business this year
Profit & Loss
The profit previously retained by the company Balance Sheet
The amount the company has borrowed
Balance Sheet
The amount paid out in dividends
Cash Flow
The interest paid on loans this year
Profit & Loss
The amount of cash currently held in the Bank Balance Sheet
The surplus Cash generated this year
Cash Flow
The assets of the Business
Financial Statements - Example

You decide to run a stall at a car boot sale to earn
some extra money for your mums’ and tots’ group.
You borrow £50 from a friend and you buy 200
pens at 20p per pen. It costs you £5 entry fee, and
on the first day you sell 150 of your pens at 50p
each.
Financial Statements – Activity 2
• You decide to run a stall at a car boot sale to earn some
extra money for your mums’ and tots’ group. You borrow £50
from a friend and you buy 200 pens at 20p per pen. It costs
you £5 entry fee, and on the first day you sell 150 of your
pens at 50p each
Some Questions
 How much did you start with?
 How much did you borrow?
 How much did you pay back?
 How much did you spend?
 How much were your takings?
 How much money have you now?
 What is the value of any unsold stock?
Financial Statements
Activity 2- Solution
You decide to run a stall at a car boot sale to earn some
extra money for your mums’ and tots’ group. You borrow £50
from a friend and you buy 200 pens at 20p per pen. It costs
you £5 entry fee, and on the first day you sell 150 of your
pens at 50p each.
Some Questions
 How much did you start with? Nothing
 How much did you borrow? £50
 How much did you pay back? Nothing
 How much did you spend? £45 (£40 Pens + £5 entry)
 How much were your takings? £75
 How much money have you now? £80
 What is the value of any unsold stock? £10 (50 x 20p)

Cash Flow Example


You decide to run a stall at a car boot sale to earn some
extra money for your mums’ and tots’ group. You borrow
£50 from a friend and you buy 200 pens at 20p per pen.
It costs you £5 entry fee, and on the first day you sell
150 of your pens at 50p each.
Produce a statement showing accounting for the Cash
which your business has received and has been spent.
You should start with an opening balance (what you had
at the beginning of the day), record each item of cash
as it comes in and goes out, and end with a closing
balance (the cash you have at the end of the day).
What happened to all the money?
Opening Balance:
Loan from friend:
Goods purchased:
Entry Fee:
Cash received:
Closing Balance:
£ 0
£ 50+
£ 40- (200 x 20p)
£ 5£ 75+ (150 x 50p)
£ 80
This is an example of a Cash-flow Statement
Financial Statements – Activity 3

On the second car boot sale that you attend, you
purchase another 150 pens at 20p per pen.
There is another £5 entry fee, and you sell 100 of
your pens at 50p each. You decide that you will
pay back £30 of the original £50 that you
borrowed.

Construct a cash flow statement for the second
day.
Activity 3- Solution
Cash Flow Statement Day 2
Opening Balance:
Loan from friend:
Goods purchased:
Entry Fee:
Cash received:
Closing Balance:
£ 80
£ 30- (paid back)
£ 30- (150 x 20p)
£ 5£ 50+ (100 x 50p)
£ 65
Profit & Loss Example
•

You decide to run a stall at a car boot sale to earn some
extra money for your mums’ and tots’ group. You borrow
£50 from a friend and you buy 200 pens at 20p per pen.
It costs you £5 entry fee, and on the first day you sell
150 of your pens at 50p each
Produce a statement showing accounting for any Profit
your business has made. You should start with the
takings, and subtract from this any expenses
(outgoings). The final figure should give you the profit
that has been made in the course of the day’s tradings.
How much money did we gain or lose?
Sales:
Cost of Sales:
Entry Fee:
Net Profit:
£ 75 (150 x 50p)
-£ 30 (150 x 20p)
-£ 5
£ 40
Notice here that we
only account for
what the sales have
originally cost us.
This is an example of a Profit & Loss Account
Financial Statements – Activity 4

On the second car boot sale that you attend, you
purchase another 150 pens at 20p per pen.
There is another £5 entry fee, and you sell 100 of
your pens at 50p each. You decide that you will
pay back £30 of the original £50 that you
borrowed.

Construct a Profit & Loss Account for the second
day.
Activity 4 -Solution
Profit & Loss Account – Day 2
Sales:
Cost of Sales:
Entry Fee:
Net Profit:
£ 50 (100 x 50p)
-£ 20 (100 x 20p)
-£ 5
£ 25
Balance Sheet Example
•

On the second car boot sale that you attend, you
purchase another 150 pens at 20p per pen. There is
another £5 entry fee, and you sell 100 of your pens at
50p each. You decide that you will pay back £30 of the
original £50 that you borrowed
Produce a statement of two halves, one side of which
shows what the business owns (money, unsold stock
etc.), and the other side showing what the business
owes. You should try to ensure that you Balance one
side with the other. The left hand side should show your
assets, (what is owned); The right hand side should
show the liabilities (what is owed). (NB Any profit made
by your business is owed to you as a person!).
Do the Books Balance?
Assets:
Cash:
Stock:
20p)
Total:
£ 80
£ 10 (50 x
£ 90
This is an example of a
Balance Sheet
Liabilities (Claims):
Loan outstanding: £ 50
Retained profits: £ 40
Total:
£ 90
Financial Statements – Activity 5
• On the second car boot sale that you attend, you
purchase another 150 pens at 20p per pen.
There is another £5 entry fee, and you sell 100 of
your pens at 50p each. You decide that you will
pay back £30 of the original £50 that you
borrowed.

Construct a Balance Sheet for the second
day.
Activity 5- Solution
Balance Sheet Day 2
Assets:
Cash:
Stock:
Total:
£ 65
£ 20 (100 x 20p)
£ 85
Liabilities (Claims):
Loan outstanding: £ 20
Retained profits: £ 65
Total:
£ 85
Can you see where all the figures are from?
CASH:
Final Line on the Cash Flow
Statement
Assets:
Cash:
Stock:
Total:
Balance Sheet Day 2
£ 65
£ 20 (100 x 20p)
£ 85
ASSETS:
Opening Stock:
Stock Purchased
Stock Sold
Closing Stock:
50 pens
+ 150 pens
- 100 pens
100 pens
Liabilities (Claims):
Loan outstanding: £ 20
Retained profits: £ 65
Total:
£ 85
LOAN:
Balance Sheet Day 2
Assets:
Cash:
Stock:
Total:
£ 65
£ 20 (100 x 20p)
£ 85
PROFITS:
Previous
Today
Total
Original Loan
Paid back
Amont Owing
£50
-£30
£20
Liabilities (Claims):
Loan outstanding: £ 20
Retained profits: £ 65
Total:
£ 85
£40
£25 (see P & L Account)
£ 65
Financial Statements – Some Terms


There is a difference between cash and
profit.
Cash is simply the money which flows into
and out of the business
Profit is the amount that the business
earns for itself at the end of some period
of time by carrying out its normal trading
activities.
Financial Statements – Some Terms
Assets and claims (or assets and liabilities)


Assets are what the business owns. This can
be anything: money in the bank, nursery
equipment, stock held for example food and art
materials buildings, equipment etc. and also
any money owed to a crèche for example by
parents as fees.
Claims are what the business owes. This can be
bank loans, unpaid bills, profits which can be
claimed by the owner or shareholders
Financial Statements – Some Terms
Businesses usually buy things on credit (as many people
do using a credit card), then pay later.
 Creditors are the people you owe money to. Note
that these are part of the claims on your business.
 Debtors are the people who owe you money.
Note that these are part of the assets of your
business