Tips for good presentations

1 Once you have written your speech CUT IT, CUT IT and CUT IT to make it concise.

2 Group similar ideas together if you want to establish a theme.

3 Use techniques that you are comfortable with to control your nerves.

4 Find out as much as you can informally about your audience and talk to them not at them.

5 Consider how they might react to sensitive issues raised in your speech.

6 Remember that, humour can cause offence and use it sparingly and safely.

7 Involve your audience and make them leave the venue feeling informed by what you said.

Ask yourself the following Questions before your Presentation.

1 What is expected size, average age, male to female ratio of the audience?

2 Have they been chosen, asked to attend, and are they informed about your subject.

3 Do they hold prejudices about the subject, do they know you, and do they different culturally?

4 Find out all the above information from the organiser of the event

Adjusting Your Presentation to Your Audience Size

An audience of 15 people is considered small and is the most common size people are asked to address. With this size you should establish eye contact with each member of the group as early as possible and face the audience all the time. Interact with them, solicit questions, allow individuals to ask questions but to keep them short.

An audience of 15 or more is considered large, speak up to be heard by people at the back, sum up and link up, emphasise important points, keep your message wide and general and only give details if you are asked for them.

Dealing with Presentation Logistics

Only meticulous organisation can ensure that your presentation will be effective. Careful planning of practical details in advance will free you to concentrate on perfecting your presentation.

Logistic Sequence Planning Your Presentation:

1 Find out in good time and obtain details of who is organising the event?

2 Plan and check travel arrangements, how will you be traveling to the venue?

3 Request the floor plan from the organiser, what size and shape is the room?

4 Find out if you have to supply anything yourself and what equipment is available?

5 Find out if you are the first presenter or who will be speaking before you?

6 Make sure they are briefed in advance about who will introduce you?

7 Visit the venue in advance before the presentation time, you may need changes made.

The Purpose of your Presentation

It is important that you are clear about the reason why you giving a presentation. Do you want to pass on information, entertain, educate, explain or inspire your audience?

If your purpose is to pass on information; structure your presentation and whet their appetite; if you want to entertain them, include jokes anecdotes and funny stories; if you intend to inspire the audience, keep the content of your speech positive personally and emotionally.

The Four Essential “Es” of a Successful Presentation are Educate; Entertain;Explain and Emphasise. 228.

The first “ E ” aims to educate the audience to learn something from your speech; the second “ E ” aims to entertain because the audience must enjoy your presentation; the third “ E ” aims is that all the parts of your presentation should be clear to your audience; the fourth “ E ” is emphasise a maximum of four points of your presentation at the beginning of your speech, in the middle and at the and to reiterate your message.

Get a “ catchy ” easy to understand title that sums up your presentation, because a difficult title will only be understood by you, and your audience will not be open to you if they have no clear idea of the subject of your presentation.

Do not rely only on the often quoted out of date dusty old books for your presentation, consider using a press-cutting agency to supply you with the new ideas, use the internet, and finally consult your fellow professionals, they could have the information you need.

Think laterally when structuring your presentation and choose familiar images to support your ideas and look outside your own field of expertise for examples that make your points clear.

The classical formula for a presentation is:

Tell them your audience what you are going to tell them, then tell them what you want to tell them, and finally, tell them that you have told them.

Be aware that written material can sound very different when it is delivered to an audience in spoken form. Remember that writing a speech is different from hearing it. Write your presentation in prose (ordinary),(natural oral style) that follows spoken speech-patterns suitable for verbal presentation. Imagine your words as your audience would hear them.

Avoid grammatically correct sentences that are unclear and use active verbs such as “ I work,I think” and use first and second person pronouns “I” and “You”. Say “You” must recognise this system, and not “This system must be recognised by you” during your presentation. Encourage and engage your audience in what you are saying by being positive all the time. Say, “This can make a difference” and not “This may make a difference”.

Find different ways of expressing the same idea naturally, be particular about what to include in the presentation and make sure that the written structure of your presentation is not complex or confusing and use examples to make your points clear.

Visual Aids

Audio visual aids can be central to a presentation, because they can often make clear difficult concepts more easily than words but, do not use them unnecessarily. Always rehearse your presentation of visual aids and pause when you ask your audience to look at a visual aid.

Remember that reading is faster than speaking and do not read your visual aids because the audience reads them silently faster than you can read them out yourself

Preparing Yourself

A positive self-image is all-important for delivering a successful presentation. The overall impact of your presentation will be determined by how you appear and what you say. Identify your strengths and make the most of them.

Remember that the audience always wants your presentation to be interesting and successful. Repeat encouraging thoughts to yourself to boost your confidence while you prepare for your presentation.

Use the following phrases to be positive and ready for your presentation

1 “My presentation is interesting and full of great ideas, the audience will love it”.

2 “I know my subject in and out. The audience will discover that early on for themselves”.

3 “My presentation is strong and I am prepared. The audience is sure to be enthusiastic”.

4 “My rehearsals went really well; I can’t wait to see the reaction of the audience”.

After telling yourself using any or all of the above phrases, you will be able to visualise success and see your audience enjoying your presentation. Think of the audience as your partner during the presentation because they want you to succeed. Increase your confidence by imagining yourself giving a perfect presentation to an enthusiastic interested faces listening to you.

Understanding Accounts and Financial Statements. 419.

FIRST: Definition of Economics

Economics is a science that studies the way goods and services are produced and sold as well as the way money (the medium of exchanging goods and services) is managed; or it is a science that studies the conditions that affect the economic success or failure of a product(s) of company or a country; and an economist is an expert on economics especially one who advises a business company, government department or organisation on economic matters.

A short History of Financial Accounts

When Fra Pacioli, an Italian monk invented double-entry book-keeping 500 years ago, he introduced the civilised world to reliable accounting where transactions were recorded twice, (1^st to show where an item came from, and 2^nd and then to show where it went) so that nothing could be lost. Modern accountants do the same and produce financial statements that summarise both the past and the current position of organisations.

First and foremost, it is important for you to keep in mind that different businesses have different accounting policies and adding-up methods and that no two sets of accounts will be the same.

Secondly, that different formats (for partnerships or limited liability companies and types of manufacturing or service industries) will operate in different ways, resulting in some accounts being straight forward to understand while others are complicated to understand.

There are three key financial statements or accounts that will help you to assess the success of a company.

The Profit and Loss Account is also called the “the history book ” sets out what has happened in an organisation in the past financial year and reveals the income less expenses. It is an organisation’s statement of earnings over the past year. Make sure you know how the profit and loss account is structured and what types of items are included in it. Items in the profit and loss account should be of a revenue nature, (goods, services and annual expenditure) listing only the “ ins and outs ” or sales less costs to the company over a year’s period.

The Balance Sheet is also known as the “snap short ” gives the current financial position of an organisation today and reveals and shows the assets less the liabilities.

The Cash Flow Statement outlines what has happened to the single most important business asset (cash) in the past year and records the increase or decrease of cash in the company.

Accounts are produced periodically to measure how well your organisation is performing or the performance of your business competitors, they provide valuable insight into business success or failure because they link together to give an overall picture of how well your organisation is performing.

However, it is important to know that accounts can be produced for different reasons such as for calculating tax, assessing investment potential or establishing value for sales. Always remember this when you interpret accounts and financial figures.

1 The profit and loss account measures various levels or “ lines ” of profit, such as Gross Profit: also called Gross Income or Fees Billed) less cost of sales (the cost of providing goods or services).

2 The profit and loss account also measures the “ Gross Profit ” less all the expenses supporting the infrastructure and administration of the company.

3 The Profit and loss account also measures “ Profit before tax ” which is the operating profit less interest incurred on borrowings for the year.

4 The Profit and Loss account also measures “ Profit after tax due ” as a result of trading for the year.

5 The Profit and loss account measures “ Retained profit ” less any dividend to the share holders.

Items included in the profit and loss account must have all passed the accrual test but there are times when deciding what should be counted as sales or expenses is very tricky. For an example, should an invoice be included in the accounts if the work has not been completed?

To help you recognise what and how much to include, and when to do so, here are some sign posts for you:

1 Completion means; is the work substantially completed, if your answer is yes include the account and if the answer is or no do not include the item in the loss and account statement.

2 Ownership means; has ownership passed from the vendor to the customer during the current year? Remember and think of the English proverb “Possession is 9/10ths of the law”.

3 Measurement: means; can the profit be accurately and prudently estimated for the current year?

4 Irrevocability means; can the customer cancel the sale thus causing loss of profit in the current year?

Tips for understanding the profit and loss account

1 Check how the accounting policies show that profit is measured.

2 Remember only “ revenue ” items appear in the profit and loss account.

3 Understand what the main headings in a profit and loss account mean.

4 Remember that items must be recorded when the expenditure arose, and NOT when cash was paid.

5 Know that prudence governs (controls) the process of fair accounting.

6 Be ware that any changes in adding up often indicate that there is something to hide.

A typical profit and loss account is consistently structured into set rows and columns to show the profit or loss for the year, which is the difference between income and expenditure of the organisation in that year.

Understanding Gross Profit

The gross profit or the first line of profit provides you with an important early measure of a business’s wellbeing or health. Make sure you understand which types of expenses are deducted to calculate gross profit and what the gross profit margin can tell you.

The first item on the profit and loss account records a business’s overall volume of activity and is called sales, turnover, income or fees billed. This is the full amount of all the sales invoices raised during the accounting period which have met the correct accrual criteria for being included on the financial statement. They are recorded less any sales-related taxes.

There are two types of costs in the profit and loss account which are deducted separately. The first group is known as the cost of sales(COS). They are sometimes referred to as costs of the goods sold(COGS) expended to make and produce the products or services that are sold. They usually include the materials, premises, production staff costs and machinery costs as well as short factory costs.

Tips for understanding Gross Profit

1 Compare your company’s accounts year on year and with your competitors.

2 Be aware that gross profit measures a company’s basic viability.

3 Look beyond the figures to the type and structure of the organisation.

4 Gross profit percentages can be different between businesses in the same industry and size and it is the most useful comparison between businesses.

5 A low margin is to be expected from a business with a high cost of sales, such as a supermarket. (High involvement and Low Involvement buying or sales)

6 Profit margins for low cost sales businesses are usually between 50 and 90% and profit margins for high cost sales businesses are rarely above 10%.

7 Gross profit, less cost of sale (COS), is a more informative measure of the exact health of the company.

8 Be careful of “ the busy fool syndrome ” or “ busy body ” where a business can be increasing its sales but making little profit from the increased sales.

9 Deduct other costs from the Profit and Loss Account to determine the operating profit e.g. Selling, General and Administration (SG&A) costs or Operating Expenses.

SG&A costs include marketing and advertising and “ selling ”, while “ general and administration ” costs cover head office, accounting, personnel, directors and central costs (sundry).

10 Remember that all costs must either be COS or SG&A costs.

Deducting the SG&A costs from the gross profit gives the subtotal of operating profit which is the end of the first half of the profit and loss account which measures how well the organisation has performed in its core operations. Operating profit is often more usefully expressed as a percentage of sales and is calculated (struck) after the remainder of the costs in a business has been deducted.

Understanding Different Business Cycles.

All businesses have two cycles – an operating cycle and a capital investment cycle.

The Operating Cycle occurs when the business buys goods or services in order to sale them at a profit. It is the purchase of goods and services, usually on credit, which are then sold again on credit; cash is paid out to suppliers and received from customers.

On the other hand the Capital Investment Cycle occurs when the business measures how much is invested in the fabric of the business (such as the plant, tools or machinery) in order to operate the business. Generally, more than one operating cycle is needed to fund one capital cycle. The Capital Investment Cycle refers to the purchase of one-off items needed for an organisation to trade and usually involves a substantial cash flow. Several operating cycles are therefore needed to fund a single capital investment.

Operating Cycle here Capital Investment Cycle here

The Balance Sheet also known as the “snap short. ” The balance sheet is a list if everything a business owns, less all that it owes and is correct only at that precise moment. It is a quick fast moving window (snap shot) (a flash) of assets and liabilities of the company comparing both the financial position of the company during the previous and the current accounting periods. Balance sheets are generally drawn at the same time of the year together with the profit and loss account financial statements

NB The information gleaned form the balance sheets can be flattering and misleading; for example, if a fashion retailer’s balance sheet is drawn after summer sales (when there is plenty of cash in the bank) it will look good. As a manager you should look at, understand and act upon what the balance sheet tells you; that is the only way you will be able to make a better quality financial decision. Beware of flattery.

Questions to ask yourself when reading a Balance Sheet.

1 Does the end-year fit the annual nature of the business activities?

2 Would a different accounting date alter the information in the balance sheet?

3 Have there been major changes in the sums year-on-year?

4 Have assets shown at the current value been estimated fairly?

Grouping Balance Sheet Figures

The balance sheet is split into sections according to strict accounting rules.

1 The first section lists an organisation’s assets split between fixed (long term) assets and current or (short term) assets.

2 The second section itemises liabilities (again split between fixed and current) liabilities.

3 The third section shows shareholders’ funds or money invested in the business by its owners.

Tips for Understanding the Balance Sheet.

1 Think of the balance sheet as an aerial photograph of your business looking from above.

2 Understand the importance of how liabilities and assets are grouped together

3 Appreciate that balance sheets show only cost and not value

4 All assets and liabilities are shown according to a convention called the Historic Cost, which means that they are shown at their original cost to the business.

The balance sheet total, also referred to as total net assets is arrived at by adding up the cost of all assets and then deducting the total short and long term liabilities. Remember again, that the Balance Sheet normally shows only costs, and it should not be seen as an indication of an organisation’s market value.

450 The Cash Flow Statement outlines what has happened to the single most important business asset (cash) in the past year and records the increase or decrease of cash in the company. The cash flow statement is the key to understanding how well cash (money) (the lifeblood of a business) is being managed. Give this statement the attention it deserves because the profit and loss account and balance sheet can only provide a part of the picture. Remember the adage that “ Profits are Vanity and Cash is Sanity ” and that Profits do not pay Loans, only Cash can pay Loans.

Although the Cash Flow Statement is practically the most important statement, it is often under used. When cash (money) stops circulating a business will die, just like when you have no air to breathe you will die. 450

The profit and loss account shows the profits made in the accounting year, but profits are not cash and it is crucial to know how much cash has been received or paid out.

The balance sheet often shows large flows of investment activities such as the purchase of fixed assets or acquisition of a business, but it does not reveal whether the business has excess money for other activities. It is the cash flow that shows that there is money for other activities.

The cash flow statement links the profit and loss account and the balance sheet using CASH as an objective measure that is verifiable against the bank balance of you account.

Cash flow statements generally follow a standard format, although variations on the forma exist. Similar principles are used worldwide in order to make the cash flow statement more useful and easily understood.

The document (the cash low statement) is divided into meaningful blocks and subtotals that provide clear information on the cash movements within the organisation’s activities, interest and dividends, tax, investments, and financing.

To understand the Cash flow Statement you must know what is counted as cash. The general accepted definition is that CASH items are those to which the organisation has immediate access or one-day-access, which means actual cash (money), bank accounts and short term deposits that can be withdrawn quickly.

The Operating Cash Flow

The first and most important subtotal on the cash flow statement is the Operating Cash Flow which shows how much is generated from trading. If you have more stock now than last year, then cash must have been paid out; if debtors owe more money to the company, then they temporarily hold cash, so there is less cash in the business. If the suppliers are owed money (because you have not paid them) then the business has more cash flow (Creative Accounting).

Understanding Financial Accounts and Statements

An understanding the figures and meaning of the three above accounts and financial statements is the key to any successful business management. They can assist you to master the language of finance, enable you to contribute effectively to your business progress and improve your leadership skills.

Tips for Reliable Accounting

1 Use all three key financial statements to help you assess your company success.

2 Always regularly set aside time to review your organisation’s financial performance.

3 You must understand that accounts only reflect the financial reality of your company.

4 You must recognise that accounts are produced for different purposes.

5 Therefore, you must be clear why it is vital to examine your company’s accounts.

6 You must understand the impact of law and the rules of the accounting profession.

7 Keep up to date with accounting methods and accept that information revealed is minimal.

8 Remember that adding up methods vary around the world and figures can be most flattering.

Who Uses Financial Statements and Accounts? 423

Accounts are of interest to everyone associated with the company such as competitors, investors, shareholders, lenders, suppliers, tax collectors, employee organisations and anyone as well as customers. Therefore you should be able to study and understand accounts from different points of view.

In addition to annual reports and accounts for external use, most companies produce internal or management accounts for managers who want to know where the performance can be improved. Internal accounts are only used within the company, they are flexible and they measure different aspects of performance.

They are unique in that they are not subject to rules and regulations that apply to external accounts.

The Law and Accounting

In most countries the primary rules for producing accounts are laid down by law which states exactly what must be done in creating, managing and closing down a company. The law establishes the overall framework for producing accounts.

Although the law is clear on “ what ” accounts should be and “ when ” they should be produced, the law is often vague (not clear) on “ how ” stock should be valued or how profit should be recognised on a particular transaction. This part of the accounts is left to “ Accountants ” to decide and that is where problems or solutions start because accountants’ views differ on what is profit and not profit.

Comparing differences in Different Countries

Countries with strong “ codified ” law systems like Continental Europe tend in general to have weaker GAAP and vice versa. Countries with strong and open stock and exchanges have strong GAAP guidelines that can be drawn up quickly in response to real-life situations such as the cases of Enron and Welcom company bankruptcies in USA in 2002.

Therefore, rules per se, governing the preparation and structure of accounts are unusual. Strict legal requirements laid down by a country’s law, together with generally accepted informal practice created by the accounting profession of that country can either be strong or weak.

Since no two organisations are the same, accounting policies are chosen by the directors of the companies jointly with their business advisors.

Five key Accounting influences

Of the five key influences of accounting statements Company Law and Accounting Practice have the most impact on the form that accounts take, followed by Regulations,Taxation Authorities and International Rules.

Examining Regulations and Practice

The drawing up of accounts is governed by strict legal requirements, by more informal guidelines created by the accounting profession, by the history of Fra Pacioli’s reasons, by the principles and understanding the influences that have shaped the way in which accounts are prepared. However, in most countries primary rules for producing accounts are laid down by law.

Assessing Accounting Guidelines

Where the law is not clear on accounting issues Accountants have established their own guidelines and standards known as (GAAP) General Accepted Accounting Principles which apply to specific countries only and these principles advise (not direct) on how certain key transactions are best treated.

Because compliance with GAAP principles is not compulsory, the systems of accounting can be abused. The world wide phenomenon of creative accounting has caused many problems that have resulted in serious company bankruptcies such as Arthur Andersen who were the accountants of Enron the American Company that went bankrupt in 2002. Furthermore, additional rules also only apply to certain businesses depending on their size, ownership, and listing rules of different stock exchanges in the commercial global world.

Tips and Regulations and the Law on drawing up Accounts

1 Understand that minimal information is usually disclosed and that figures can be flattering

2 Keep up to date with accounting methods and remember that adding differs around the world.

Questions to ask yourself when considering accounts.

1 What size of business am I looking at and at what level and detail of accounting disclosure should I expect to find in these accounts?

2 What does the law require the accounts to contain and how informative should these accounts be?

3 Are the accounting principles of the organisation typical and reasonable for a business of its size and type?

Defining Key Concepts in Accounting 426

Certain fundamental themes or concepts such as Accruals, Prudence, Consistency and Viability are viewed as cornerstone principles of good accounting and it is vital to appreciate their importance. Please commit these four principles to memory

The Accrual Principle sets out when a transaction should appear in the accounts; it asks the question “In which Accounting Period” or “ when the impact of a transaction should be shown”.

Usually, an item is always recorded when the income (or expenditure) arises, and not when cash is received (or paid). For example, even when a sale is made on credit terms and cash is not received until the next accounting period, the sale must be recognised now and not later. This fundamental principle is common sense yet it causes most accounting problems.

The Prudence Principle means that profits must not be overstated and costs must be realistically and fairly estimated. In other words, figures must be on the pessimistic side. Prudence addresses the question: “ How much should an amount be ”? It is the most important key concept.

The Consistency Principle means that an organisation should use similar principles year-on-year so that accounts can be compared sensibly. Financial implications must be highlighted and quantified even if changes to expectations have been made.

The Viability Principle assumes that the company will be in business the following year because if there was an assumption that the company would not exist the following year, all its present existing assets and stock would be affected.

Explaining Key Concept Terms

Asset refers to anything owned by the organisation that has monetary value, from plant and machinery to patents and goodwill.

Audit refers to independent inspection of accounts according to set principles by accountants who are qualified auditors.

Depreciation refers to annual cost shown in the profit and loss account writing off a fixed asset over its expected useful life.

Equity refers to share capital and reserves of a company which represent what shareholders have invested in the organisation.

Fixed Asset is something with a life of more than one year used in a business and not held for resale.

Liability is an amount owed at a set time often split into short term (less than a year) and long term (more than a year).

Reserves mean profits made by a business which have been invested in the business rather than paid out in dividends.

Working Capital refers to capital (money) available for daily operations of an organisation, usually expressed as current assets less liabilities.

Evaluation of the Bottom Line

The second half of the profit and loss statement down to the “ bottom line ” (retained profit) relates to other expenses including taxation and interest whose their financial impact can be significant. The ability of a company to pay interest can be calculated by comparing the operating profit with total interest charges of that year. For example, if a company’s operating profit is $63.00 and the interest in $20.00, the interest can be paid three times over, then the interest cover is said to be 3.

Exceptional Costs

Sometimes you have to pay for one-off non-recurring items such as a fire disaster. These are referred to as exceptional items and are traditionally shown separately to the core gross and operating profit figures so as not to distort the latter. Such items include provisions for future events (recognizing costs now even though the event will happen in the future), currency movements, gains and losses on sales of assets and pensions. Assess whether these items seem reasonable. Do they indicate future problems?.

Examining Taxation.

The operating profit minus interest gives profit before tax(PBT) which is subject to taxation determined from the profit and loss account details. After deducting profit before tax (PBT), the profit after tax(PAT) is determined, this in principle belongs to the shareholders. Profit after tax (PAT) also determines the basis of calculating shareholder earnings per share.

SplittingProfit Before Tax(PBT)

For quoted companies profit before tax is split into three parts

1 One third represents tax (where corporate tax rate is approximately 30%.)

2 One third is typically paid to shareholders by way of dividends

3 And finally one third is retained in the business for further investment.

Pinpointing the Retained Profit

Retained earnings are at the bottom line of the profit and loss account after the dividends have been declared. They are profits kept behind by the organisation to help it grow. In big companies it may not clear exactly where the retained profits will be; it can be in cash or in stock and shares.

Examining Fixed Assets

Fixed assets (tangible assets) are items that can be touched such as trucks and lories and have a life of more than 12 months, while intangibles and investments assets, such as patents, goodwill, know-how, intellectual property and brands cannot be touched but are used by the a business on a permanent basis to create wealth in the normal course of operations. Intangible assets by their nature are difficult to evaluate but they exist in the business mind.

Spending fixed assets is called Capital Expenditure and it reflects how much is invested in the fabric of a business in order to carry on its operating cycle.

Typical fixed assets are land, buildings, equipment, machinery, computers, fixtures and fittings and vehicles. Generally, manufacturers have high fixed assets and are capital capital-intensive and service businesses have low fixed assets and are not capital intensive. Total fixed assets show how much is invested in a business to enable it to trade.

Analysing Depreciation

Fixed assets are shown at cost minus depreciation known as the net book value of the item. Depreciation writes off the cost of the asset over its effective useful life. Depreciation simply spreads the cost of a fixed asset year by year over its life time; but it does not write the asset down to second hand value. The useful economic life of an asset is usually written of over a number of years. Common sense is generally accepted practice of depreciating an asset. However, some assets appreciate with age.

Explaining Goodwill

Goodwill is an intangible fixed asset that relates to the good name and reputation of a business. Any decent business will be worth more than its actual physical assets. In financial statements goodwill is shown as an intangible asset and is amortised (depreciated) over its useful economic life. During a sale of a business, the amount of goodwill is the difference between the purchase price and the fair value of the assets you acquire. A modern development has now classified goodwill as a brand of a company.

Points to remember when dealing with assets

1 Certain intangibles have been shown in accounts for many years without creating problems.

2 Goodwill is no more than an amount needed to get the figures balance, and it might represent something intangible of value.

3 Including the value of brands in the balance sheet involves much subjectivity and is very controversial.

Investment as Fixed Assets

Fixed investment assets cover any monies or shares held outside the company. These can shares in another organisation held for over 12 months

Questions to ask yourself about Fixed Assets

1 Are all fixed assets fairly stated in the cost and depreciation?

2 Do figures demonstrate adequate investment for the future?

3 Should any intangibles be ignored when analysing figures?

4 Have investments been valued and accounted for correctly?

5 Do intangibles make a realistic proportion of the balance sheet?

Working with Current Assets

Current assets are short-term assets that will be converted into cash (money) within the next 12 months of the financial year including cash (money) plus anything that will be converted into money. Current assets show how much the company has in cash or near cash and therefore they show viability of a business.

Three main categories of Current Assets

1 Stock: referring to raw materials, work in progress and finished goods.

2 Debtors: referring to people who have bought goods and owe the company some money.

3 Other current assets: which include money owed, petty cash, money held in the bank etc.

Defining and Valuing Stock

As already stated above there are three components of stock; raw materials, work in progress and finished goods. It is important to know how much is tied up in each component of stock, because raw materials take a long process to become cash. Finished goods are closer to becoming cash. Nevertheless, stock overall is the least liquid of all current assets.

Stock is usually valued at COST which is the price paid for the item when it was bought, or at net realizable, which is what it can be sold for, net of expenses. Cost should never be overstated.

Dos and Don’ts on stock

Do look for unexpected increases in stocks and debtors.	Don’t believe that more current assets are always good news.
Do not always believe the valuation applied to stock.	Don’t overlook other current assets and what they can tell you.

Tips about Current Assets

1 Look at current assets with care; because they represent the business’s lifeblood, theyrepresent (cash or money) of the company.

2 Appreciate that stock on the balance sheet will impact profits on the profit and loss account.

3 Understand and realise that slow moving and obsolete stock is a common problem in business.

Understanding Assets within the Operating Cycle

The cycle starts with Stock which includes raw materials being made into finished goods, followed by Debtors, customers owing money for goods sold to them on credit, followed by Cash, paid by customers to clear their debts.

Identifying Stock

When stock prices rise, then raw materials bought earlier will cost less than those bought later. There are two ways of accounting for this type of materials

1 FIFO meaning (first in, first out) under which the profit and loss account profit and balance sheet closing figures will be higher.

2 LIFO meaning (last in, first out) under which both figures of profit and balance sheet will be lower.

Tips for Handling Stock Issues.

1 Always check that your stock is not over valued and reject any amounts that do not seem right.

2 If the debtor cannot pay, write off the sum as a cost on the profit and loss account statement.

3 Writing off (canceling) the debt is an (SG&A) cost on the profit and loss account statement.

4 Examine in detail the movement in cash for the (financial period) period in question.

5 Think of your current assets as cash temporarily looked after by someone else.

6 Cash includes everything that is liquid asset, money in the bank, cash in the till, petty cash etc.

Understanding Liabilities

Liabilities are debts payable in future because of transactions that have already happened. They can be current liabilities (due in the next 12 months) or long term (to be paid after 12 months).

1 Company liabilities should not be more than assets and all possible liabilities must be included.

2 In time all long term liabilities become short-term to be paid off within 12 months.

3 Increase in debt should be for increasing trade volumes or to acquire fixed assets.

Splitting Liabilities

Liabilities can be split into immediate and future obligations. Sums owed to leasing and hire purchase companies must be payable within 12 months. Installments due after 12 months are long term liabilities and that is why splitting liabilities into current and long term groups helps to find out how comfortable the business is able to pay immediate debts.

Understanding Shareholders Funds

The balance sheet must show funds invested into the organisation by shareholders and must be equal to the Total to Net Assets. It is in here that you can learn where the moneys invested in the balance sheet have come from.

The Share Capital is the money (Risk) that shareholders have invested into the business for no guaranteed return or payment. If a company raises $10 million of share capital, both share capital account and the bank account increase by $10 million.

Calculating Shareholders Funds

This part of the balance sheet looks at where the money came from and consists of share capital, retained profit and technical reserves.

Understanding Retained Profit

The second major source of shareholders’ funds is the Retained Profit. Calculated from the profit and loss account, it is actually the cumulativeyear-on-year retained profit from the time the company started; and is usually the most important source (in size) of continued funding of a business.

What this Retained Profit informs you, is how much funds(money) the shareholders have decided to leave behind in the business, which is the all at Risk should the company fail.

Understanding Technical Reserves

There are two types of technical reserves: the Share Premium and the Revaluation Reserves. The share premiums are proceeds from the company selling shares at a higher price than their normal value.

For example; a $1.00 share is sold for $4.00. This share premium is not retained profit because it has not been made during trading; therefore it has to be shown separately under Technical Reserves

However, a Revaluation Reserve occurs when a business revalues an asset (such as property) to show its current rise value rather than its original cost. Again, this is not strictly Retained Profit because it is merely a revaluation and no profit has yet been realised.

Revaluing Assets 448

Sometimes, an organisation decides to show an asset, such as a building, at a higher current value rather than at its original cost; the difference is shown as a Revaluation Reserve. This informs you that the profit exists but cannot be distributed because it has not yet been realised.

Forecasting Cash Flow 454

Forward looking cash flow forecast is often forgotten because it is not required by law or regulations, yet it is an invaluable document to help you predict at what point the demands on the organisation’s resources will become so great that the cash will be exhausted.

Tips for Forecasting Cash Flow

1 Remember to control capital spending properly; revenue and capital spending are related.

2 Beware that cash flow usually turns out to be worse than you plan for.

3 Involve colleagues regularly in forecasting cash floor to prevent future cash flow problems.

4 Prepare a cash flow forecast from the profit and loss account and the balance sheet.

Dos and Don’ts of Forecasting Cash Flow

Be sensible about the timing of cash flows, they are often made more difficult by optimistic budgets	Don’t assume that cash flow will not be a problem for you because it has not been a problem in the past.
Ask many of “What if” questions about cash flows e.g. should the timing of certain events change?	Don’t presume that everyone will always keep their terms about payments into or out of your organisation.

Measuring Company Performance using Ratios. 456

Ratios such as ½, ¾, 1/5, or 1/10, are essential tools for interpreting the messages behind lines and figures in translating information about the performance of any business. They provide indicators and highlight trends and direction of the future of a company. They help to make year-on-year comparisons performance of companies.

However, because there are no two similar companies in the world, you should avoid relying on ratios that have been produced by another company because they could have been calculated differently from your way of calculating. (Creative Accounting).

When interpreting accounts most people are interested in four key areas of: Profitability;Efficiency;Financing and Liquidity.

Profitability measures how much income is made from sales; it is assessed by analysing the profit and loss account of the company.

Efficiency measures the use to which assets are put by the company.

Financing shows the degree and affordability of funding by the company.

Liquidity measures whether there is sufficient cash for the company to continue in business.

Measuring(ROCE)Return on Capital Employed.

The most important ratio overall and key ratio is the ROCE which reveals how much profit is being made on the money that has been invested in the company; it is also key to showing how well management is doing its job.

ROCE is calculated by dividing the operating profit by the capital employed (shareholders’ funds plus long term liabilities on the balance sheet). The ROCE should be higher than what shareholders could make by investing funds in another company. ROCE also needs be higher than the cost of borrowing, otherwise the business will pay more in interest than it makes on money it has borrowed. (Disaster).

Use the following sequence to assess your company performance:

a) Calculate your organisation’s ROCE;

b) Then assess whether your ROCE ratio is adequate for shareholders;

c) Then check whether the profits of the ROCE have improved on last year;

d) Then check your ROCE against your competitors ROCE and decide whether to boost your ROCE.

Dos and Don’ts in analysing your ROCE

Do use ratios that are appropriate to the nature, type and size of the organisation in scrutiny	Do not be fixed and inflexible in your choice of ratios for assessing your performance
Do takea balanced and holistic view of ration analysis.	Do not be too accurate about the results you calculate from accounting figures

Obtain sets of comparative ratios for your business and show ratio results graphically to help you spot trade trends. 457.

Understanding Investors’ Ratios OR Determining a Company’s Worth. 462.

The world of stock and exchange and external investors use their own ratios to determine the viability of a business. A stock exchange index is a list of the largest quoted companies on the stock market as measured by their overall worth or market capitalisation. As with all financial analyses, always look at more than one ratio or measure of performance of a company.

Whether you work for a quoted company, or you want to know how your competitors, customers, or suppliers are performing, market capitalisation gives you a crude estimate of a company’s worth in the market place.

Calculating Market Capitalisation

Market capitalisation is calculated by multiplying the number (a definite figure) of shares that the company has by the market price (a fluctuating figure). The way the market perceives (feels) the worth of a company will affect the company’s ability to borrow or raise more funds from the investment community.

Leading Companies in the Market

Companies in the stock markets are ranked according to their total worth, with the highest valued businesses forming that country’s stock market index (such as the Dow, FTSE, DAX, and the CAC). Pay particular attention to what the price earnings ratio tells you.

The price earnings (PE) ration provides a good indication as to how the market views a business’s prospects. A high PE ratio is a sign of confidence in a company and a low ration indicates low confidence in a company.

The Yield Ratio 462

The yield ratio reveals how much the shareholders of an organisation are making by way of return on every pound, Euro, Dollar or Ruble invested in shares.

Gathering More Information 464

In addition to the financial statements, many organisations disclose a wealth of information voluntarily or because they are forced by law to disclose the information.

Know where to look for these details, what you can glean from them and get to know what is contained in published reports and accounts.

Interpreting Auditors’ Code 464

The role of auditors is to report on whether financial statements have been properly prepared in accordance with company law and GAAP (Generally Accepted Accounting Principles) 424

In their reports auditors do not state that accounts are correct but they choose phrases such as, the accounts “ give a true and fair ” or the accounts “ fairly represent ”.

Reports with these phrases are said to be “ unqualified ” or clean.

If the reports are “ qualified ” opinions, they point to where there is uncertainty or more worrying disagreement with the internal auditors.

Table for Understanding Qualified Phrases

PHRASE	EXAMLE	MEANING
“SUBJECT TO”	“Subject to continuing support from its bankers or funders…”	Without support from its banks the business will fail
“EXCEPT FOR”	“Except for the valuation of certain stock items…”	There has been a fundamental disagreement between the auditors and management about something.
“DO NOT”	“The accounts do not…”	The accounts have not been properly prepared.

Reading Directors’ Reports

When annual accounts are published the company’s directors often make comments on the results. Because the law of disclosure is strict, whatever is said must be objective rather than propaganda-led. Pay particular attention to salaries because companies are very sensitive about what they pay their directors since salaries must be commensurate with overall corporate performance. (Fat Cat Syndrome).

Focusing On Accounts

Copious notes are usually attached to the main financial statements; e.g. the balance sheet, profit and loss account, cash flow, recognised gains and losses, and movement in shareholders’ funds. Read them together with actual financial statements even if they are daunting because they are part of the integral message that you must understand. 465.

Tips for examining Directors’ Reports

1 Examine reports and notes carefully to uncover important details.

2 The larger the organisation the greater the scope for information.

3 Read reviews by key directors’ optimism about company prospects.

4 Dig into the notes for interesting further details and information.

Broadening your Knowledge

Modern organisations operate internationally, yet despite increasing globalization, accounting practices and formats still differ significantly around the world. Understand these differences in order to pinpoint where problems can arise. Because accounting measurements are dependent on rules of individual countries, this is often a hindrance to international business transactions, because investors must negotiate cross-border obstacles where there are differences in the concept of profits and taxation that result in economic distortions. 466.

Continental Europe has strong legal framework of accounting plans and commercial codes that contrast with the UK and US which combine legal principles with a separate set of accounting rules.

Some countries require the figures in financial accounts to be the same as for tax purposes, while in other countries no such connection is needed. The need for open information for shareholders has ensured that appropriate financial statements have been evolved.

Political and historical factors also play a part in former colonies that were influenced by the UK system.

The Pragmatic UK & US ApproachThe European Controlled Approach

UK Influenced US-Influenced Tax-based Law-Based

UK US Italy Germany

Ireland Canada France Japan

New Zealand Belgium

Australia Spain

Countries influenced by the UK and the US tend to have a more pragmatic approach to accounting because there the onus (duty) to inform shareholders. In other parts of the world and in Japan, strict taxation and legislation rule out subjectivity or deviation so that accounts are less useful and informative to interested outsiders.

Harmonising Accounts

There is now pressure to harmonise accounting in the world. For the last ten years, an international accounting body has been working to produce International Accounting Standards(IAS). The IAS now provides the accounting bench-mark world-wide that is now used by many multinationals. Some companies even use a second Version to prepare their accounts.

The first version will comply with GAAP (General Accepted Accounting Principles) of the country in which the organisation is based, and the second version will be in accordance with (IAS) International Accounting Standards. The EU (European Union) is a useful example where law-based harmonisation has taken place, but no GAAP convergence has occurred. 467.

Advice to you as a Manager on Accounting

Accounting is technical by nature and there are many complex issues facing accountants. You as a manager however its useful to know where problems of accounting can occur and how to deal with them.

Tips for you as a manager

1 Grasp the essentials, not the details of technical accountin

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