Loughborough University Understanding Financial Management
Understanding Financial Management –ILM level 5 • Learning objectives – to understand: • The purpose of a set of accounts • The jargon used by accounts • The principles on which accounts are based
Understanding Financial Management –ILM level 5 • Learning objectives – to understand: • The purpose of the main financial documents • The main sources of finance into Loughborough University • The types of expenditure • Why cash flow is so important • Sources of financial information • Capital funding • Performance indicators
Timetable – Day One • A general introduction to Finance • Understand the purpose of accounting standards and the regulatory framework • Understand 4 key accounting policies • Understand two methods for calculating depreciation • Identify a range of financial objectives • Understand how a business is financed • Identify key sources of finance for an organisation
Timetable – Day One • Understand the relationship between the 3 main financial statements and apply them: cash flow forecast, profit and loss statement, balance sheet • Understand the relationship between the 3 main financial statements and apply them: cash flow forecast, profit and loss statement, balance sheet continued • Cash flow forecasting • Look at the Financial Statements of Loughborough University
Timetable – Day Two • Apply ratio analysis • Financial and Management Accounting • Understand the budgetary process and budgetary control • Consider the challenges facing Loughborough University • Consider the Economic climate in which we operate • RASCAL • Develop measures to populate a balanced scorecard • Financial Governance at Loughborough University • Review and discuss the module assignment
Work Based assignment • Title: Understanding financial management • Purpose: to develop a greater understanding of financial management within the organisation together with the tools and techniques used in your role as a middle manager at Loughborough • 3 parts: • Explain finance within the context of Loughborough
Work Cased Assignment – cont’d • Explain the role and value of management accounting • Explain the purpose of budgets and budgetary control • Suggested word count: 1,500 to 2,000 • Submission date: 19th December • Deadline for feedback from your tutor: 12th December
So this is accounts • What is the answer ?
So this is accounts • What is the answer ? • Zero
So this is accounts • What is the purpose of a set of accounts?
So this is accounts • What is the purpose of a set of accounts? • give a true and fair view of the state of the group’s and University’s affairs as at 31 July 2013 and of its surplus for the year then ended • It is a BSc here!
Why do we do accounts • To support business decisions • To identify trends • To explore opportunities • To use financial information to understand what is happening in a business
Lets start at the very beginning • Cash Accounting • Double Entry Book keeping • Trial Balance
Lets start at the very beginning • Debits • Assets • Expenses • Profits / Surpluses • Credits • Liabilities • Income • Losses / Deficits
A Page from an Accounting Ledger • Is the balance good news or bad news?
Why are there rules to accounting? • There are many users of a set of accounts • Who would use Loughborough University’s Financial Statements
Accounting and Financial Reporting Standards • About consistency across organisations • UK GAAP • Companies Act 2006 • Statement of Recommended Practise • Financial Reporting Standards • All change - New rules from 15/16
Accounting Principles - Consistency • Depreciation – use of the straight line method each year, rather than reducing balance one year and straight line the next. • When deciding on the treatment of any item, looking at what has been done before is justifiable as it provides consistency • Potential Flaw – Could be consistently bad!
Accounting Principles - Accruals • Recognition of income on research grants • Recognition of income from endowments • Accounting for goods or services received • Depreciation • Deferred Grants
Accounting Principles - Prudence • Accounting of Retirements • Recognition of losses on a contract • Where a range of potential costs are possible, selecting the “worst case scenario” if no reliable estimation exists.
Accounting Principles – Going Concern • The assumption that a business will continue in existence for an indefinite period. • Impairment of assets - • Giving up economic benefit – UPP Halls
Depreciation • Most fixed assets reduce in value over their lifespan – think of your own ‘assets’ • Deducted from the fixed assets annually in the Balance Sheet • Charged as an expense in the Profit and Loss Account • 2 methods: • Straight line method • Reducing balance method
Depreciation – Straight Line • The Straight Line Method: takes the original cost of the asset and deducts the same fixed amount each year, eg. • A machine costs £10,000 • There is no expected residual value at the end of its forecast 5 year lifespan. (Residual Value means how much the asset will be worth and for how much it is expected to be sold at the end of its useful life within the business.) • Depreciation will be £2,000 per year leaving a residual value of £0.
Depreciation – The Reducing Balance • The Reducing Balance Method: takes the original cost of the asset and reduces it by a fixed % each year • This method is used where the asset is expected to depreciate more heavily in the earlier years of its use. • Activity: (complete the table below) • A new vehicle costs £12,000 • It is decided that it will depreciate at a rate of 25% per year
Depreciation Question • The Finance Office purchase a super duper photocopier costing £24,000 on the 1st August. The University accounts for depreciation on a straight line basis with an expected life of 4 years. After three years, on the 1st August, the Finance Office sells the photocopier to the College for £5,000. • Required - Calculate the accounting entries resulting from this transaction.
Depreciation Answer • In Year 4, the book value of £6,000 would be written back to the I&E Account and show as expenditure. However, this would be matched by the receipt of £5,000 from the college. These two amounts would be netted against each other to produce a “loss on disposal” of £1k. • If the proceeds had been more than the £6k net book value then a “profit on disposal” would have been generated.
Repair or Fixed Asset • Broken Window? • Broken Window on the top floor of the Towers? • Additional Teaching Room on the side of Edward Herbert? • Roof Repair to Schofield?
Financial Objectives maximisation of return on capital employed survival maximisation of profit growth long-term stability security
The Business Cycle – Where can a business get funds • Your Own – Share Capital • Someone Else’s – Debt or Loans • From the profits of the business – Retained Profits / Reserves
The Business Cycle – How can it use those funds • Fixed Assets • Working Capital • Investments
Sources of Funds • Ordinary Shares • Rights Issue • Preference Shares • Debentures • Debt
Sources of Money for LU • We have no share capital • We borrow from banks • We have retained reserves • We use third party funders e.g. UPP
What makes up a set of financial statements? • Statement of principle accounting policies • 3 main statements - • Income and Expenditure account • Balance sheet • Cash flow incl STRGL • Notes to the accounts
What makes up a set of financial statements? • List of officers and staff • Providers of financial services • Operating and financial review • Statement of corporate governance • Responsibilities of Council • Auditors report to Council
Income and Expenditure account – what does it tell us? • Designed to answer the sustainability question • Brings together all the income and expenditure related to routine operations including subsidiary companies • It excludes capital items like new buildings, equipment and grants • It reports the total of income and expenditure for a financial year
Income and Expenditure account – what does it tell us? • It is based on costs committed not cash paid and income earned not just cash received • It includes depreciation – spreads the cost of a capital investment over its useful life • Exceptional items • If income exceeds expenditure a surplus results • What surplus is enough?
Income and Expenditure Account • Why does Loughborough University need to make a surplus?
Income and Expenditure account • To invest in new capital assets • Because our income is volatile • Because our income is more volatile than our expenditure • To be able to capitalise on opportunities
Income and Expenditure Account • Exercise in your workbooks
Balance sheet – what does it tell us? • Picture at a point in time of what the institution is worth • Report of what we own • What we owe • What we are owed • Indicator of ability to withstand a difficult period or capacity for development
Total recognised Gains and Losses • Catches changes in the valuation of assets or liabilities which have not gone through the Income & Expenditure account
Balance Sheet • Exercise in your work books
Cash Flow – Why is this so important • The lifeblood of the organisation • The cashflowforecast shows the cashflow of the business on a month-by-month basis • Shows the real money situation: • actual timing of cash outflows (cash and creditors) • actual timing of cash inflows (cash and debtors) • Variance Analysis Key Points: • Cash is not Profit • Profit is not Cash • Depreciation is not cash • For the period ended ….. • No cash – no business!
Cash Flow – Why is this so important No business goes bust through a lack of profits All businesses go bust through a LACK OF CASH!