CH 11 - Financial Information

Ch 11- Financial information and
management
The purpose of financial information
• To provide objective data
• Help meet financiers’ expectations
• Meet statutory requirements required by law
• Helps evaluate firm viability
• Measures profitability
• Assists in goal setting
• Needed for purchase or sale of
a business
• Assists in conducting performance appraisal and
monitoring of firm
Differences between
small and large firms
• Financial forecasts for new entrepreneurial

ventures are often difficult to prepare — usually
based around a new business concept that can
be hard to accurately quantify
• Small business managers often have to
personally prepare their own financial information
• Small business owner/managers and
entrepreneurs tend to take more personal
financial risk than staff in a large business
Types of financial information
• Sales mix forecast

• Cash flow statement
• Projected profit and loss
• Balance sheet
• Personal expenses
• Owner’s assets and liabilities
Sales mix forecast
• A document used to estimate the sales of

each major product or service, the income
generated by each of these, and the
resulting cost of goods sold
• Usually compiled on a month-by-month
basis
Cash flow statement
• Shows the movement of all cash in and out of a

business during a given timeframe
• Notes the actual bank (cash) balance the
business has at start of the trading period
• Estimate sales and other income in each month,
and expenses
• Subtract income from expenses
to calculate a monthly surplus or deficit
• Add the month’s surplus (or deficit) to the
opening bank (cash) balance, to obtain the
closing bank balance
Eight ways to improve Cash Flow
• Wherever possible, collect payment in cash at the time
of the sale
• Where credit is offered, always issue invoices
immediately on completion of a job or sale.
• Offer clients incentives or discounts to pay promptly
• To make payment easier, allow customers to pay by
credit card or online
• Chase up outstanding debtors on a regular basis
• Smooth out expenses by leasing rather than buying
capital items
• Pay large bills monthly rather than yearly
• Minimize expenditure by reducing owner’s personal
drawing from the firm
Profit and loss statement
• Shows business-related revenues,

expenses and the resulting profit or loss
for a given period of time (usually a year)
• Includes both cash and non-cash
expenses (e.g. depreciation)
• Also known as a statement of financial
performance, revenue statement or an
income and expenses statement
Format of a Profit and Loss statement
Balance sheet
• Provides a statement of financial position at

a given date, usually end of financial year
• Key elements:
– Assets:
items of worth owned by firm
– Liabilities:
debts or financial obligations
– Owner’s net worth (or equity):
the difference between the assets and
liabilities of a firm
Format of a balance sheet
Personal expenses
• Entrepreneurs usually take (draw) their

personal income from their business
• This document estimates the
entrepreneur’s likely cash needs
• Is often also then shown in firm’s cash flow
• Often referred to as drawings to distinguish
it from wages/salaries paid to employees
Owner’s assets and liabilities
• Shows private assets, liabilities and net

worth of the entrepreneur
• Often required by financiers, who typically
only lend funds to new or small
businesses if they can be secured against
owner’s personal assets
Analysing financial data
• Three key areas to examine:

– Profitability ratios: how much profit is
the business making for each dollar
that it sells?
– Liquidity ratios: how well is cash being
managed?
– Efficiency ratios: how competently are
we using the firm’s financial resources?
Profitability ratios
Gross profit
Gross profit margin % 
Sales turnover
Net profit before tax
Net profit margin % 
Sales turnover

Return on equity 
Owner' s equity

Return on assets 
Total assets
Liquidity ratios
Current assets
Current ratio 
Current liabilities
Current assets - Trading stock
Liquid ratio 
Current liabilities
Efficiency ratios
Sales
Asset turnover 
Total assets
Owner' s equity
Ownership ratio 
Total assets
External debts
Debt - to - equity ratio 
Owner' s equity
Annual cost of goods
Stock turnover 
Average stock on hand
Keeping records of
financial information
• All firms need to collect, summarise and

preserve a record of financial transactions
that take place
• Such records must usually be kept for
several years after the financial year in
question has ended
• Often required by law to be stored in either
paper or electronic format accessible to
tax authorities and other regulators
Keeping records of
financial information
Common types of financial records and documents
• Sales journal
• Purchases journal
• Petty cash book
• Accounts receivable ledger
• Accounts payable ledger
• Asset register
• Depreciation schedule
• Cash journals
• General ledger
• These individual records are then used by an accountant

to prepare the financial documents and ratios

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Ch 11- Financial information and

• Financial forecasts for new entrepreneurial

• Sales mix forecast

• A document used to estimate the sales of

• Shows the movement of all cash in and out of a

• Shows business-related revenues,

• Provides a statement of financial position at

• Entrepreneurs usually take (draw) their

• Shows private assets, liabilities and net

• Three key areas to examine:

Net profit before tax

Net profit before tax

• All firms need to collect, summarise and

• These individual records are then used by an accountant

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