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Summary of the BE3 test of Basics of Financial Managment
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Basics of Financial Management | Summary | MAN4
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BE 3 summaryChapter 3, Financial Statements
Running a company requires resources. The needed resources will depend on the company’s
activities.
Fixed assets are either tangible or intangible, can serve a business over a long period of time (longer
than a year). E.g. vehicles or machines.
Current assets are present in a business for less than a year. The time between purchase and usage
of inventory is usually between a view months. Includes also accounts receivable, from customers
who have received deliveries, but didn’t payed yet.
Equity is capital made availability by the owners of the company. It concerns for example, savings of
the starting entrepreneur, or deposits by the shareholders to acquire new shares in an LLC or PLC.
also called Risk-bearing capital.
Liabilities is capital made available by creditors. accordingly its not linked to formal control of the
business. They are always temporary financial resources, in the sense that prior agreements on
repayment are made. Risk-avoiding capital.
Difference between equity and liabilities.
Equity Liabilities
Provided by Owners Creditors
Duration of availability Indefinite period Temporary
Compensation Depends on profit Usually fixed
By nature Risk-bearing Risk-avoiding
At any given moment a balance can be made, comparing the value of resources a company invested
in (assets) and the financial resources used to acquire these assets (liabilities). The capturing of such
moment is called the balance sheet. Left side = credit side. Right side = debit side.
A companies equity is equal to the difference between the value of its assets and its debts. in a new
business, equity can also be established by taking into account the capital invested by the owners.
After a business is up and running for some time, equity should increase as a result of profits made.
Income statement Profit can be further analysed by taking a closer look at sales and costs over
the period concerned.
The sales of a particular period do not necessarily have to coincide with the cash inflows. Sales are
assigned to the period during which the company delivered and invoiced goods or services to the
customers, regardless of whether the delivery of these goods of services resulted in payment during
this period.
The costs incurred during a period are not automatically equal to the cash outflows during that
period.
Repayment of debts are not included in the income statement, as they do not change equity; the
decrease in cash (debit side) is equal to the decrease in debt (credit side).
,Difference between cash flow and profit:
Depreciation:
In order to determine the annual depreciation, an estimate of the economic life and the value that
could remain after that period, should be made. In addition, a deprecation method should be
selected:
- Straight-line depreciation same amount is used for deprecation every year.
- Accelerated deprecation can be used if the asset yields higher benefits during the first
years than in later years. Results in higher depreciation during the first years than in later
years.
Two methods to achieve this:
- Sum-of-the-years-digits method annual deprecation is calculated by decreasing weighting
factor, being the years of economic life remaining.
- Declining balance method annual depreciation is calculated by a fixed percentage of the
book value of the asset on the balance sheet. The book value is the value after deducting
depreciation of previous years. Usually the percentage is double of what would be used in
straight-line depreciation.
Provisions:
Have to be recognized in the event of future obligations, as a consequence of business activities in
the past year. By creating provisions, costs will be recognized on the income statement before any
actually payment has taken place. Creative accounting provisions suit into this type of fiddling.
Direct equity transactions:
If the owner deposits money into, or withdraws money from, the company, these owner deposits and
owner withdrawals have no influence on profit, because either origin is not related to business
activities.
The owner deposits and withdrawals are not entered on the income statement as they are not the
result of business activities, but of the equity transactions between the company equity and the
owners private capital. Similarly, deposits made the shareholders in the event of issuing new shares
do not affect the profit, neither doe paying dividend affect the costs.
, Chapter 4, Business plan
A business plan helps with reflecting on whether the ideas are realistic or unrealistic. The activities a
company wishes to develop must be explained in the business plan, and also whether these activities
add something to the products or services already provided by other companies. Secondly, a good
business plan provides a starting entrepreneur with an overview of all the steps that need to be
taken before the business can start.
Possible required permits, the choice of the legal form, the investments needed and many other
aspects must be addressed in the business plan.
Financial Gap starter has to rely on others to close this ‘gap’.
Venture capital companies participate in starting companies and when the company reaches
‘maturity’ it disposes of its shares. In this context, the investment is considered as venture capital
because there are relatively large risks in financing starting companies.
European governments have implemented regulations allowing banks to partly pass on the risk that a
loan will not be repaid. In a government guaranteed loan, it is determined that if a company fails to
repay a loan, the government will compensate the bank.
Starting companies are often financed with subordinated loan; loans of which the interests and
principal sum repayments will only be made after all other obligations towards creditors have been
fulfilled. These loans bear a risk level somewhere between equity and other liabilities. To make the
financing of starting enterprises more attractive, special tax facilities are in place for subordinated
loans. Similar to providers of equity, creditors will use the business plan to assess the risk.
Each business plan is unique. A number of items that should always be included in the business plan
will be discussed.
The qualifications of the entrepreneur:
In this part, the starting entrepreneur describes his background, education and work experience. He
also describes his motivation for setting up and running the business. He will answer for example the
following questions:
- Why do I want to become and entrepreneur?
- What do I wish to achieve with my business?
- Which particular skills do I have to become an entrepreneur?
- How will I develop myself as an entrepreneur?
Business Idea:
The entrepreneur describes what he will be doing, how he will be doing it and for whom. The
feasibility of the plan will become clear. The following questions should be addressed:
- What type of company will I start and when?
- What need do I fulfil?
- How will I make my business successful?
- What are the advantages and what risks do I expect?
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