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.

Splitting Profit 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.