Nursery ManagementUnderstanding and Managing Finance

Session 2

Financial Statements

Apart from day-to-day bookkeeping, there are three different types of ‘official’ financial statements which are used by an organisation:

The Cash-flow Statement is designed to answer the question “What happened to all the money?”

The Profit & Loss Account is designed to answer the question “How much money did we make (or lose)?”

The Balance Sheet is designed to answer the question “Do the books balance?’

Financial StatementsStatement Purpose Terms used

Balance Sheet To assess the financial position of the business at one moment in time

Assets, claims, liabilities, capital, retained profit etc.

Profit & Loss Account

To measure & report on how much wealth the business has created over a period.

Sales, Turnover, Cost of Sales, Operating Costs, Overheads, net profit etc.

Cash Flow Statement

A summary of all cash transactions over a period

Cash inflow, Taxation, expenditure, dividends, net increase in cash

Net Cash-Flow from Operating Activities 300,000

Returns from investment and servicing of finance 100,000-

Taxation 30,000-

Capital Expenditure 150,000-

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Subtotal 20,000

Equity Dividends paid 30,000-

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Subtotal 10,000-

Management of liquid resource - disposal of investments 10,000+

Financing - additional long-term loan 50,000+

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= Increase or Decrease in Cash over Period 50,000+

EXAMPLE OF A CASH FLOW STATEMENT

EXAMPLE OF A CASH FLOW STATEMENT

Turnover (Sales) (Income) £ 100,000

Cost of Sales (Direct Costs)Materials £10,000

Transport £ 5,000

Labour £15,000

Total Cost of Sales £ 30,000 30%

Gross Profit (Gross Margin) £ 70,000 70%

Overheads (Indirect Costs)Administrative salaries £18,000

Advertising £ 5,000

Rent & Rates £ 4,000

Total Overheads £ 27,000 27%

Operating Profit (Net Margin) £ 43,000 43%Interest on loans £ 3,000

Profit before tax £ 40,000 40%Corporation tax due £10,000

Profit after tax & interest £ 30,000 30%Dividends payable £22,000

Retained Profit (Earned Surplus) £ 8,000 8%

EXAMPLE OF A PROFIT & LOSS ACCOUNT

EXAMPLE OF A PROFIT & LOSS ACCOUNT

ASSETS CLAIMS

Fixed Assets Capital & ReservesLand £ 120,000 Share capital £ 100,000Buildings £ 150,000 Retained profit £ 120,000Fix & Fit £ 75,000 Total £ 220,000Total £ 345,000 L/T Liabilities

Loan £ 250,000Current Assets Total £ 250,000Stock £ 55,000 Current LiabilitiesDebtors £ 75,000 Creditors £ 22,000Bank £ 25,000 Tax & VAT £ 8,000Total £ 155,000 Total £ 30,000

________ ________£ 500,000 £ 500,000

EXAMPLE OF A BALANCE SHEET

EXAMPLE OF A BALANCE SHEET

Activity 1

On which of the three main financial statements would you find: The assets of the Business The costs of running the Business The profit made by the business this year The profit retained by the company from previous years The amount the company has borrowed The amount paid out in dividends The interest paid on loans this year The amount of cash currently held in the Bank The amount of surplus cash generated this year

Activity 1 - Solution

The assets of the Business Balance Sheet The costs of running the Business Profit & Loss The profit made by the business this year Profit & Loss The profit previously retained by the company Balance Sheet The amount the company has borrowed Balance Sheet The amount paid out in dividends Cash Flow The interest paid on loans this year Profit & Loss The amount of cash currently held in the Bank Balance Sheet The surplus Cash generated this year Cash Flow

Financial Statements - Example

You decide to run a stall at a car boot sale to earn some extra money for your mums’ and tots’ group. You borrow £50 from a friend and you buy 200 pens at 20p per pen. It costs you £5 entry fee, and on the first day you sell 150 of your pens at 50p each.

Financial Statements – Activity 2

• You decide to run a stall at a car boot sale to earn some extra money for your mums’ and tots’ group. You borrow £50 from a friend and you buy 200 pens at 20p per pen. It costs you £5 entry fee, and on the first day you sell 150 of your pens at 50p each

Some Questions How much did you start with? How much did you borrow? How much did you pay back? How much did you spend? How much were your takings? How much money have you now? What is the value of any unsold stock?

Financial Statements Activity 2- Solution

You decide to run a stall at a car boot sale to earn some extra money for your mums’ and tots’ group. You borrow £50 from a friend and you buy 200 pens at 20p per pen. It costs you £5 entry fee, and on the first day you sell 150 of your pens at 50p each.

Some Questions How much did you start with? Nothing How much did you borrow? £50 How much did you pay back? Nothing How much did you spend? £45 (£40 Pens + £5 entry) How much were your takings? £75 How much money have you now? £80 What is the value of any unsold stock? £10 (50 x 20p)

Cash Flow Example

You decide to run a stall at a car boot sale to earn some extra money for your mums’ and tots’ group. You borrow £50 from a friend and you buy 200 pens at 20p per pen. It costs you £5 entry fee, and on the first day you sell 150 of your pens at 50p each.

Produce a statement showing accounting for the Cash which your business has received and has been spent. You should start with an opening balance (what you had at the beginning of the day), record each item of cash as it comes in and goes out, and end with a closing balance (the cash you have at the end of the day).

What happened to all the money?

Opening Balance: £ 0

Loan from friend: £ 50+

Goods purchased: £ 40- (200 x 20p)

Entry Fee: £ 5-

Cash received: £ 75+ (150 x 50p)

Closing Balance: £ 80

This is an example of a Cash-flow Statement

Financial Statements – Activity 3

On the second car boot sale that you attend, you purchase another 150 pens at 20p per pen. There is another £5 entry fee, and you sell 100 of your pens at 50p each. You decide that you will pay back £30 of the original £50 that you borrowed.

Construct a cash flow statement for the second day.

Activity 3- SolutionCash Flow Statement Day 2

Opening Balance: £ 80

Loan from friend: £ 30- (paid back)

Goods purchased: £ 30- (150 x 20p)

Entry Fee: £ 5-

Cash received: £ 50+ (100 x 50p)

Closing Balance: £ 65

Profit & Loss Example

• You decide to run a stall at a car boot sale to earn some extra money for your mums’ and tots’ group. You borrow £50 from a friend and you buy 200 pens at 20p per pen. It costs you £5 entry fee, and on the first day you sell 150 of your pens at 50p each

Produce a statement showing accounting for any Profit your business has made. You should start with the takings, and subtract from this any expenses (outgoings). The final figure should give you the profit that has been made in the course of the day’s tradings.

How much money did we gain or lose?

Sales: £ 75 (150 x 50p)

Cost of Sales: -£ 30 (150 x 20p)

Entry Fee: -£ 5

Net Profit: £ 40

This is an example of a Profit & Loss Account

Notice here that we only account for what the sales have originally cost us.

Notice here that we only account for what the sales have originally cost us.

Financial Statements – Activity 4

On the second car boot sale that you attend, you purchase another 150 pens at 20p per pen. There is another £5 entry fee, and you sell 100 of your pens at 50p each. You decide that you will pay back £30 of the original £50 that you borrowed.

Construct a Profit & Loss Account for the second day.

Activity 4 -SolutionProfit & Loss Account – Day 2

Sales: £ 50 (100 x 50p)

Cost of Sales: -£ 20 (100 x 20p)

Entry Fee: -£ 5

Net Profit: £ 25

Balance Sheet Example

• On the second car boot sale that you attend, you purchase another 150 pens at 20p per pen. There is another £5 entry fee, and you sell 100 of your pens at 50p each. You decide that you will pay back £30 of the original £50 that you borrowed

Produce a statement of two halves, one side of which shows what the business owns (money, unsold stock etc.), and the other side showing what the business owes. You should try to ensure that you Balance one side with the other. The left hand side should show your assets, (what is owned); The right hand side should show the liabilities (what is owed). (NB Any profit made by your business is owed to you as a person!).

Do the Books Balance?

Assets:

Cash: £ 80

Stock: £ 10 (50 x 20p)

Total: £ 90

This is an example of a Balance Sheet

Liabilities (Claims):

Loan outstanding: £ 50

Retained profits: £ 40

Total: £ 90

Financial Statements – Activity 5

• On the second car boot sale that you attend, you purchase another 150 pens at 20p per pen. There is another £5 entry fee, and you sell 100 of your pens at 50p each. You decide that you will pay back £30 of the original £50 that you borrowed.

Construct a Balance Sheet for the second day.

Activity 5- SolutionBalance Sheet Day 2

Assets:

Cash: £ 65

Stock: £ 20 (100 x 20p)

Total: £ 85

Can you see where all the figures are from?

Liabilities (Claims):

Loan outstanding: £ 20

Retained profits: £ 65

Total: £ 85

Balance Sheet Day 2

Assets:

Cash: £ 65

Stock: £ 20 (100 x 20p)

Total: £ 85

Liabilities (Claims):

Loan outstanding: £ 20

Retained profits: £ 65

Total: £ 85

CASH:

Final Line on the Cash Flow Statement

CASH:

Final Line on the Cash Flow Statement

ASSETS:Opening Stock: 50 pensStock Purchased + 150 pensStock Sold - 100 pensClosing Stock: 100 pens

ASSETS:Opening Stock: 50 pensStock Purchased + 150 pensStock Sold - 100 pensClosing Stock: 100 pens

Balance Sheet Day 2

Assets:

Cash: £ 65

Stock: £ 20 (100 x 20p)

Total: £ 85

Liabilities (Claims):

Loan outstanding: £ 20

Retained profits: £ 65

Total: £ 85

LOAN:

Original Loan £50 Paid back -£30 Amont Owing £20

LOAN:

Original Loan £50 Paid back -£30 Amont Owing £20

PROFITS:Previous £40Today £25 (see P & L Account)Total £ 65

PROFITS:Previous £40Today £25 (see P & L Account)Total £ 65

Financial Statements – Some Terms

There is a difference between cash and profit.

Cash is simply the money which flows into and out of the business

Profit is the amount that the business earns for itself at the end of some period of time by carrying out its normal trading activities.

Financial Statements – Some Terms

Assets and claims (or assets and liabilities)

Assets are what the business owns. This can be anything: money in the bank, nursery equipment, stock held for example food and art materials buildings, equipment etc. and also any money owed to a crèche for example by parents as fees.

Claims are what the business owes. This can be bank loans, unpaid bills, profits which can be claimed by the owner or shareholders

Financial Statements – Some Terms

Businesses usually buy things on credit (as many people do using a credit card), then pay later.

Creditors are the people you owe money to. Note that these are part of the claims on your business.

Debtors are the people who owe you money.Note that these are part of the assets of your business