Managing financial principles and techniques

Introduction

Accounting is one of the most indispensable parts in a concern. In another word, it could be a nucleus of the company. Harmonizing to the Atrill ( 2005 ) , accounting is related to the fiscal information collection, analysing and pass oning. All these information is really of import to an organisation, company can utilize these information for brand determination on some concern runing like develop new merchandise or service, increasing or cutting the monetary value, arrange distribution in different country.

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Accounting is divided into two parts: finance accounting is focus on the companies ‘ capitals, assets, hard currency flows which people can happen in the company ‘s one-year study like balance sheet, income statement and hard currency flows statement. Other one is direction accounting which include something relates company ‘s day-to-day direction like the Numberss of complains received and so on.

This study is relates to the finance accounting and the methods used by company to analysis informations to assist company do determination. The first portion is the prediction, and so the company ‘s support. The 3rd portion will speak about specifying an appropriate investing via utilizing investing assessment. The last 1 is utilizing several ratios to analysing company ‘s operating state of affairss. Finally a decision will be written.

Forecasting

Prediction is a procedure which was used to gauge the future state of affairss like finance places and possible consequence of the organisation ( replies 2009 ) . It looks rather alike the prognostication, but more easy to be understood by people. There are two methods of prediction, which are the qualitative prediction methods and quantitative prediction methods ( replies 2009 ) .

Qualitative prediction method is the method which demands tonss of experts with equal cognition and experience ; roll uping adequate informations and stuffs ; utilizing expert ‘s experience and cognition to foretell the development of the merchandise or concern in future. In this sort of method, those experts ever use some techniques like Delphi technique and scenario authorship. All these methods require a group of people who has sufficient experience and cognition and supply their ain predict and eventually set them all together to reason a most acceptable prognosis.

Quantitative prediction method is rather different from the qualitative 1. Quantitative demands many sorts of informations like historical informations and analysis them to come out the possible prognosis. In this methods ever use some figures and graphs like scarttergraph, clip series and additive arrested development.

Scarttergraph is a diagram which is used to divide a semi-variable cost into fixed cost and variable 1s. This method is rather easy to utilize and people can understand it without any trouble ( answer 2009 ) .

Time series is another frequently utilizing technique in quantitative prediction method. This method necessitate a long clip period informations which have been already treated with clip goes. This method focal point on predict future tendencies via historical informations, which means that company can calculate one Saturday ‘s gross revenues based on past several Saturdays. It besides can be used to foretell the one-fourth ‘s sale public presentation via analysis the same one-fourth ‘s gross revenues public presentation informations in past few old ages.

The additive arrested development is the method which used to explicate the relationship between the assorted cost and something easy to alter. This method is an of import statistics analysis method which is frequently used. The theoretical account utilizing additive arrested development is much easier to run into the figures than the theoretical account which non use the linearly related theoretical accounts ( Wikipedia 2009 ) .

In qualitative methods, it more focus on calculating the something internal, and it is more flexible. It besides easy to demo people ‘s judgements by discuss with several experts. This method is chiefly utilizing people ‘s judgements, so there is no demand to roll up informations which mean save tonss of clip.

By contrast, quantitative put more attempt on measure alteration analysis, additive arrested development scarttergraph and clip series technique more depend on the historic informations to analysis and1 conclude the consequence. It besides means that quantitative methods have received small consequence by subjective judgement.

However, it besides has its ain failing, the qualitative method was easy to misdirect by some judgment elements like limited experience and deficiency of accurate describe on the measure of development.

The quantitative is more rely on the past information, so it is hard to demo the reaction on the monetary value motion

The Topps Tiles plc is the biggest company in UK which gross revenues tile and wood floor ( Topps Tiles 2009 ) . Harmonizing to the one-year study the gross from 2005 to 2009 of the company is stable addition. In 2005 Topps got 159,430 thousand lbs, following twelvemonth is 173,326 1000 and there is a about one million lbs addition in twelvemonth 2008-2009. Harmonizing to the clip series calculating method, the gross has increased merely 0.08 % between twelvemonth 2008 and twelvemonth 2009. So the gross in twelvemonth 2010 could be 208270 thousand lbs and the company may accomplish a 208642 thousand lbs gross in twelvemonth 2012.

Year

2005

2006

2007

2008

2009

2010

2011

2012

Gross ( A?A?A?000 )

159,430

173,326

180,180

207,898

208,084

208,270

208,456

208,642

The cost in this company besides has addition in past 5 twelvemonth. Harmonizing to the clip series calculating method, company ‘s cost in 2005 is 62282 1000 lbs, and it is has increased every twelvemonth because of company unfastened new shops and something like that. In 2008, company has spent 77,344 thousand lbs, and 79,537,000 in 2009. Harmonizing these informations the cost of Topps in twelvemonth 2010 could be 81,730,000 lbs and it will maintain addition in twelvemonth 2012 when the cost is up to about 86.1 million lbs.

Year

2005

2006

2007

2008

2009

2010

2011

2012

cost ( A?A?A?000 )

62,282

67,146

67,470

77,344

79,537

81,730

83,923

86,116

It could be some motion between the cost and gross because of the revenue enhancements. Harmonizing to the BBC ( 2009 ) authorities may increase the VAT rate from 15 % to 17.5 % . It means that the consumer will pay more money to purchase the materials they want. The gross of company may decelerate down their addition. The monetary value travel up, clients will cipher their shopping list more carefully. Topps should to make something to cut the cost like happen some providers can have a long term paying period, cut the figure of staffs alternatively of recruit parttime staffs and something like that.

Funding

In every sort of concerns, they all need financess to get down their concern or maintain the concern operating. It can be divided into two portion the internal beginning ( or equity finance ) and external beginning ( funding ) .

The internal beginning is the beginning from company ‘s ain. Personal economy is one of the internal beginning, which means the proprietor or the spouses of the company utilize their ain money to get down their concern. Peoples use their ain salvaging money to finance a little intelligence agent. Retain net income besides is one sort of an internal beginning. When the company got the net income, they do non pay all the net income back to the stockholders and spouses alternatively of usage the net income to a following investing, this call the retain net income ( Bized 2009a ) .

The on the job capital and the sale of assets besides can be seen as the internal beginning of finance ( Bized 2009a ) . Working capital means the capitals and money which company keeps for a short period to pay for day-to-day activities runing by the concerns, like demands of office equipments, staff payments, cost of rent, measures, provider payments and something like that.

Other internal beginning of finance is the sale of assets. Sometimes companies got some fixed assets like edifices, lands, warehouses and so on. Harmonizing to Bized ( 2009 ) , all these may sell or lease by company and the money from the trading can be used to finance the concern.

The external beginning is the beginning from outside of company. It can be seen as ownership capitals and non-ownership capital ( Bized 2009 ) . Ownership capital means portions of the people or establishments that are the keeping portions in a limited liability company. There are two sorts of portions the ordinary portions and penchant portions. Ordinary one is a portion which has limited liability and has no right to the articulation in the direction of the company. This sort of portion can be merchandising in the stock exchange and small flexible dividend.

The penchant portion is rather different from ordinary 1s. It has a fixed dividend rate which is higher than ordinary portion, and the penchant stockholder have no right to vote at the general meeting. Bized ( 2009 ) besides province that a penchant portion could be changed into an ordinary portion in some particular state of affairss.

The non-ownership capital means these beginnings non related to the company ‘s ownership ( Bized 2009 ) . Loans, hire purchase, unsecured bond and rental are the some beginnings of the non-ownership capital. Unsecured bond is a long term with fixed rate of rate and refund loan which is rise and secure by the company. This loan was rely on the company ‘s recognition, if company ‘s recognition is good they can acquire more money, frailty versa

Hire purchase and loans are rather similar. These two beginning have fixed period and which different is the purpose of loan is fixed such as the refund day of the months and costs, it is besides about issued by a bank ; hire purchase is a method which can give company utilize an assets without a full investing, which means company can purchase usage of an plus for a period and they can pay the hole investing individually during that clip ( Bized 2009 ) .

Renting agencies company lent its ain assets to the clients or other company to derive money from the clients who rent the assets ( Bized 2009 ) . It has a fixed clip ranges, besides the payment.

All these beginnings are easy to happen in the one-year study of company: the internal beginning frequently can be seen on the income statement and the external 1 can be shown on the balance sheet called liability.

Because of the internal beginning could non alter really rapidly, most internal finance beginning can be seen as a fixed cost. By contrast, the external beginning is could be changed easy by finance state of affairs of company or company ‘s program, so it more like a variable cost.

Topps Tiles plc programs to open a new supermall in Welwyn Garden City ; they need the money to get down this program. The company has several ways to raise money. First, company could publish some unsecured bond. Topps Tiles plc is the biggest company which gross revenues tile and wood floor ( Topps Tiles 2009 ) , the company ‘s repute is really good, which means the recognition of the company is besides really good. Open a new shop need a immense sum of money, it means utilizing bank loan besides is a manner to work out the money job. Besides Topps Tiles could rent parts of this shop and pull other company to put this building.

Harmonizing to the state of affairs of the company, the possible solution is to necessitate loan from bank and publish some unsecured bonds. It could be a long clip for deriving net income, which means this liability could be a long term liability, and the company need a stable and fixed manner to cover with these money. It may go a good pick for the company to construct their new superstore in Welwyn Garden City.

Investing assessment

There are three methods which used to measure company ‘s investing state of affairss: the payback period, mean rate of return and discounted hard currency flow

Payback period is an easy tool which is used to measure the investing undertakings ( Bized 2009 ) . It requires the undertaking cost and net hard currency flows or income watercourses in a period of clip which covers its whole life-time. Compare the money return and its costs and reason the clip which the investing takes money back equals to the cost. It is rather simple and convenient to happen the clip period of get net income. It besides can happen how speedy the company can have the investing cost and rapidly specify how speedy the hard currency flows on the undertaking can be positive which is helpful to company which has a hard currency flow job

But it besides has some negative points ; it is excessively simple to supply position merely with the clip period ; it is besides deficiency of qualitative point of view ; it merely can happen the clip period of get investing cost back without how much hard currency has been received after make the cost.

The mean rate of return agencies to measure the investing via observed the net hard currency flows, use ratio between cost and norm returns which is over the whole life-time of the undertaking ( Bized 2009 ) . Finally, conclude the consequence from the ratio to measure the investing undertaking. The advantage of this method is that it can demo the investing net income clearly, see the alteration of history involvement and it is much easier to compare with other different investing undertaking, to happen out different of the rate of return between these undertaking

However, it besides has its failing, it can non happen out whether the undertaking is valuable or non ; like the payback period method, and it besides has ignored the qualitative facets.

The discounted hard currency flows is more complex than other two method, it has combine the old two methods it has considered the fact of whether the investing worth or non in the hereafter via analyze the information of net hard currency flows and present value ( Bized 2009 ) . The consequence will demo whether the investing have a return or non. This method has take advantage of usage the history involvement, observe the profitableness of the undertaking and besides see the chance cost of the money. However, there is still the job on the qualitative positions of determination devising.

The Gamma plc the electronic division ‘s payback period is 3 twelvemonth 6 months. The belongings division is 3 old ages, and mining belongings is 2 twelvemonth.

Electronicss first twelvemonth is got loss for purchasing installations. Harmonizing to the hard currency flow electronic Begin to derive money from 2nd twelvemonth, others form first twelvemonth can derive money, and besides there is a 2nd invest on excavation division at 4th twelvemonth for environmental harm rectify.

Harmonizing to the hard currency flows between electronics and belongings division, they all have 4 old ages life clip, the concluding net income of electronics is 1.2 million lbs and the belongings is 400 1000 lbs. It means this two division addition 400 thousand lbs net income. There is an800 thousand lbs for 5th twelvemonth but no net income for belongings division. Electronicss is a good pick.

Compare with belongings and excavation, the investing of excavation is more than belongings. And concluding net income is mining is 50 1000 lbs and belongings is 400 1000 lbs. The belongings is good pick

If the company want to utilize same standard for these three divisions it is non wise pick because the life clip for these three divisions is non the same and use same standard can non run into the maximal net income the company can acquire.

There are some methods which used to measure the company ‘s finance state of affairs ; return on capital employed is one of this methods. Harmonizing to Atrill ( 2005 ) , the return on capital employed is a basic manner to analyse concern public presentation. Bized ( 2009 ) besides has pointed out that this method has shown the state of affairs of company utilizing its capital to run concern and the returns. It means this method is demoing the gaining and losing for company ‘s assets and liabilities

As one of widely used methods, harmonizing to companyref ( 2009 ) ROCE got three major advantages: foremost one is utilizing per centum rate to measure the undertaking. There is a ratio between company ‘s net income before revenue enhancement and equity stockholders ‘ financess ( bized 2009 ; Atrill 2005 ; techtarget 2009 ) . This ratio between these two parts named ROCE ratio. It is easy to utilize this ratio to measure company ‘s undertaking. The other 1 is this method measuring the undertaking normally based on company ‘s ability of gaining net income. The 3rd one is that this method does non impact the company operating.

However, there are several disadvantages of ROCE: foremost, the nature of ROCE has been confused by people. Harmonizing to Google ( 2009 ) there are many ways to cipher the capital employed and each method has different consequence. The 2nd 1 is this method has ignored the clip value of the money.

By contrast, the payback method has considered the money ‘s clip value ; the discounted payback has been used to cipher the clip value.

There are many ratios which used to analysis the company ‘s state of affairs. There are the profitableness ratios, efficiency ratios, liquidness ratios, pitching ratios and investing ratios. Atrill ( 2005 ) pointed out that it is simple and easy to cognize whether the operating state of affairs of the company via analyzes these ratios.

The Topps Tiles plc is the biggest company in UK which gross revenues tile and wood floor. Harmonizing to the company ‘s one-year study, there are the ratios for this company.

Profitability ratio

2008

2007

Gross Profit Ratio

61.78 %

62.80 %

Decreased

Net Net income

7.86 %

12.38 %

Decreased

ROSF

50.30 %

69.01 %

Decreased

ROCE

61.86 %

72.79 %

Decreased

This subdivision shows the profitableness point of view of Topps Tiles plc. The profitableness portion shows the company ‘s success in range the end of making more wealth ( Atrill 2005 ) . Atill ( 2005 ) besides indicate out that this ratio is of import ; the company has usage net income to associate other figures in finance statement.From the chart all the ratios has decreased. The gross net income has decrease 1.02 % . But harmonizing to the one-year study, company ‘s gross net income still increasing about one million ( Topps Tiles 2009 ) It means the company has show down its net income growing. This is more evidently in the net net income ratios, there is a about 5 % lessening between twelvemonth 2007 and twelvemonth 2008.

The ROCE lessening shows the company do non good on the runing the company ‘s investing.

Liquidity ratio

2008

2007

Current Ratio

1.08:1

1.19:1

Quick ratio

0.45:1

0.5:1

This subdivision is about the liquidness facet of the company. Harmonizing to Atrill ( 2008 ) , these two ratios show the company ‘s ability to make the end of finance in short period. Topps tiles plc ‘s current ratios has shows a lessening in about 10 % but still at the higher than 1:1 which means the company can make their payment on clip, which could fulfill by company ‘s stockholders and have more chance to pull more clients and some who wants to put this company.

Quick ratio in this company besides meets a lessening between these two old ages. The safety ratio for this company is 1:1 ( Dyson 2007 ) , but the company ‘s ratio is below that safety degree. It means that the company ‘s hard currency flow is hapless in these two old ages. It besides means the Topps should travel into an immediate settlement

Efficiency ratio

2008

2007

Inventory Turnover Period

139.95

146.61

Decreased

age of receivable

13.87

12.29

Increased

Age of collectible

137.49

146.37

Decreased

This subdivision shows the how the resource be managed in concern.

The stock list turnover periods shows the clip period of company sell its stock and do a new order. The ratio shows that the period has decreased. It means the period has been shorted and shows the company ‘s gross revenues may increase.

Age of receivable shows the clip of clients to pay for their purchase. The age of receivable ratio of this company has addition between 2007 and 2008. The clip has been increased. It means the company has received money later.

The age of collectible shows the clip of company wage for the supplies. The ratio has been decreased between 2 old ages which means the company has pay money to providers more rapidly.

Gearing ratio

2008

2007

Gearing Ratio

222.98 %

226.67 %

Increased

Debt Ratio

159.25 %

156.22 %

Increased

Interest Screen

4.50

4.85

Decreased

This subdivision is the pitching ratio, pitching ratio was used to analysis the hazard of the company and it shows ( Atrill 2008 ) .the ratio show some lessening on these ratios.

Gearing ratio of this company is excessively high. In 2007, the geartrain ratio is 223 % .this means the adoption is 2.23pound and therefore equity is negative 1.24 lb, it is excessively high due to the fact that the equity of company is negative. This ratio suggests this company is transporting high fiscal hazard and it will be hard to the concern to increase its finance

The debt ratio shows how the assets of concern are financed. This ratio is besides excessively high to this company ; the ratio in twelvemonth 2008 is about 159 % , which means that every one lb of assets the concern has in this twelvemonth. The adoption is 1.59 lbs. It besides means that company will acquire negative equity. The company besides will run into finance hazard.

The last ratio is shows the ability of concern to pay involvement responsibility. This ratio shows the company has adequate net income before revenue enhancement and involvement which is able to pay the involvement without any hard.

Investing ratio

2008

2007

gaining per portion

9.56

15.09

Decreased

dividend payout ratio

31.38 %

70.91 %

Decreased

price-earning ratio

6 times

12 times

Decreased

This subdivision shows if the merit of the concern to put

Gaining per portion has decreased this two twelvemonth. The ground might be the recognition crunch. The portion monetary value has been decreased.

Other two ratios besides show diminishing in this two twelvemonth. Credit crunch besides might be the ground of lessening.

Decisions

There are several accounting analysis techniques which used to assist directors to do determinations. Directors can utilize forecasting analysis to reason the company ‘s or challenger ‘s cost and gross prediction in hereafter, which can assist director to make up one’s mind to maintain or alter their hereafter programs. The investing rating can assist directors to specify they got net income or loss in an investing undertaking, and make up one’s mind to go on or stop it. The ratio analysis can assist company to specify their job.

Mention

Book

Atrill P & A ; Mclaney E ( 2008 ) accounting and finance for non-specialists 6th edition FT Harlow

Atrill P ( 2005 ) Accounting an debut 3rd edition FT Harlow

Dyson J. ( 2007 ) Accounting for Non-Accounting Students 7th edition

Financial Times Prentice Hall

Website

Answer ( 2009 ) calculating [ online ] available at: hypertext transfer protocol: //www.answers.com/topic/forecast [ entree day of the month: 20 11 2009 ]

Answer ( 2009 ) Tax return on Capital Employed Ratio [ online ] available at hypertext transfer protocol: //www.answers.com/topic/return-on-capital-employed-1 [ entree day of the month: 20 11 2009 ]

Answer ( 2009 ) scattgraph-method [ online ]

Available at hypertext transfer protocol: //www.answers.com/topic/scattergraph-method [ entree day of the month: 20 11 2009 ]

BBC ( 2008 ) Leaders in ‘VAT bombshell ‘ clash [ online ] available at hypertext transfer protocol: //news.bbc.co.uk/1/hi/uk_politics/7749195.stm [ entree day of the month: 20 11 2009 ]

Bized ( 2009 ) finance beginning [ online ] available at hypertext transfer protocol: //www.bized.co.uk/learn/accounting/financial/sources/index.htm [ entree day of the month: 20 11 2009 ]

Bized ( 2009 ) investing [ online ] available at hypertext transfer protocol: //www.bized.co.uk/virtual/bank/business/finance/investment/theories.htm [ entree day of the month: 20 11 2009 ]

Bized ( 2009 ) Tax return on Capital Employed Ratio [ online ] available at hypertext transfer protocol: //www.bized.co.uk/compfact/ratios/ror3.htm [ entree day of the month: 20 11 2009 ]

Companyrdfs ( 2009 ) Tax return on Capital Employed ( ROCE ) [ on-line ] available at hypertext transfer protocol: //www.companyrefs.com/Guide/keyROCE.htm [ entree day of the month: 20 11 2009 ]

Dteg ( 2009 ) clip series [ online ]

Available at hypertext transfer protocol: //www.dtreg.com/TimeSeries.htm? gclid=CJjhqs-4lZ4CFU0A4wodgBSCpA [ entree day of the month: 20 11 2009 ]

Google ( 2009 ) Investing assessment and funding determinations [ on-line ] available at hypertext transfer protocol: //books.google.co.uk/books? id=aS8-AAAAIAAJ & A ; pg=PA32 & A ; lpg=PA32 & A ; dq=advantage+and+disadvantage+of+ROCE & A ; source=bl & A ; ots=7rL8brdowc & A ; sig=24GMywwx97xtBNrlnol_QHjOiiU & A ; hl=zh-CN & A ; ei=bYMIS8HyCOaOjAeVwKX3AQ & A ; sa=X & A ; oi=book_result & A ; ct=result & A ; resnum=5 & A ; ve d=0CB4Q6AEwBA # v=onepage & A ; q= & A ; f=false [ entree day of the month: 20 11 2009 ]

Techtarget ( 2009 ) definitions NPV IRR ROI and payback [ online ] available at hypertext transfer protocol: //searchcrm.techtarget.com/answer/Definitions-NPV-IRR-ROI-and-payback [ entree day of the month: 20 11 2009 ]

Topps tiles ( 2009 ) home page [ online ] available at: hypertext transfer protocol: //www.toppstiles.co.uk/ [ entree day of the month: 20 11 2009 ]

Wikipedia ( 2009 ) line drive arrested development [ online ]

Available at hypertext transfer protocol: //en.wikipedia.org/wiki/Linear_regression [ entree day of the month: 20 11 2009 ]

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