2. Abstract
This report had been written for business finance at University of Bolton, by student Iveta
Ermane. This report outlines approach for implementing new business systems and different
ways how to expand the business. Author will analyse different types of accounting
information, Break Even analysis, importance of pricing, benefits of financial and
management accounting systems and different ways how to raise money in business.
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4. Introduction
Accounting is a key business activity. There had a lot of different changes in accounting
within recent years. It has put a dramatic impact in accounting theories and types.
Mr. Smith owns a business manufacturing, where sells machine parts. Mr Smith went out of
country and asked to author manage manufacturing business in his absence. Business is
run as family concern business, with bad financial systems and financial decisions. This
report outlines how author will changed Mr Smith manufacturer.
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5. 1. Different types of accounting information
Accounting can be split into financial or management accountancy. Business can’t survive
without good financial and management accountancy. However, there is big difference
between accountancy and accountant.
If person get degree in accountancy then this person becomes a general accountant, but
mainly accountants specialised in different, specific areas. Such as: auditing, insolvency,
taxation, bookkeeping and management consultancy.
All of these types of accountancy will help author to develop Mr. Smith manufacturer.
Auditing is very high qualified accountants, who are independent of business and they check
does financial statements, what has been given is true or false. Sometimes tax offices may
even request audit of sole trader or partnerships.
Bookkeeping does basic accounts and balance sheets. In our days some companies don’t
have qualified bookkeepers, but they employ anyone and use bookkeeping computer
packages.
Financial accounting is much wider term than bookkeeping. Financial accounting does
annual reports, balance sheets and cash flow statements. It is most important key in any
business.
Jones M (2002) pp.31 describes that accounting principles can be split into: “accounting
conventions and accounting concepts. Accounting conventions is entity, money
measurement, historic cost, and periodicity. And accounting concepts is going concern,
matching (or accruals), consistency and prudence. “
Taxation is very complicated area. Tax accountants do annual income tax statements, and
always are up to date with tax regulations.
All of these types of accounting information will assist author in developing Mr. Smith
manufacturer.
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6. 2. Break Even Analysis
Lots of businesses making mistakes,- by selling the product in market, without knowledge in
pricing and total costs. Later as a result, business is not making profit, or even fails.
There are two different types of decision making: Short term and long term. One of short
term decision makings is break even analysis. (See chapter 4.)
Author to this report would like to describe more about break even analysis and how it could
assist us in Mr. Smith manufacturer and making business decisions.
Bridge P.(2011) describes the break even analysis is “Short Term Planning and Decision
Making Tool.”
It helps to business understand and find the lowest price on which product or services can
be sold.
Break even analysis requires good study in pricing and costs, and equation method is
calculated as:
Breakeven point = Fixed costs ÷ (unit selling price-variable costs).
Breakeven point is when all income covered all expenditure. And it is very important before
making price, first to identify breakeven point. When it is identified, then business can plan
about, how much % to add, and how much profit to make.
For to reduce break even volume, can make lower direct costs, cut expenses, or increase
prices.
Breakeven point is easier to understand in chart. First need provide chart with horizontal and
vertical axis- where horizontal axis is units, but vertical axis is price. On chart can see fixed
costs, and total costs, what starts at fixed costs and go up and based on variable costs, and
second line what is sales. For some reason both of them lines will cross in one point. And
that point is called breakeven point.
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7. Glautier et al. (2001)pp 425, describes that there is three methods how to work out break
even problems:
1. The equation method,
2. The contribution margin method,
3. The graph method.
The equation method outlines the relationships between variable and fixed costs, sales and
profit. As example,
Sales =net profit+variable costs+fixed costs
The contribution margin method outlines the variable profit or contribution margin unit of
which is covered all costs. It is shown as:
X= (Fixed costs + net profit) ÷ unit contribution margin
The graph method is known as –break even chart. (see above).
The margin of safety ratio =(margin of safety revenue ÷ actual sales)
3. Costs
Price is major element in any business. Pricing affects product features, promotion and
channel decisions.
Costs can be split into variable costs and fixed costs. (See appendices)
Variable costs are costs, what can rise or fall, example – raw materials; labour-where labour
is paid according to items produces.
Fixed costs mainly stay the same, example- insurance, rent, etc.
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8. Glautier et al. (2011) describe that “Cost-volume-profit analysis is related to a consideration
of four factors: fixed costs, variable costs, selling price and sales volume”.
For any type of business it is very important, to establish the right costs, not only for pricing
in business, but also costs- what is involved to run a business. Right cost helps identified
breakeven point (see chapter 2). Breakeven point is when income covered all expenses.
And when is identified breakeven point, then business can decide how much % they want to
add on top on breakeven point. There is no profit- if costs for to run manufacturer is higher
than income from machine parts, or with other words, there is no profit, if price to products is
less or the same as breakeven point.
The pricing decisions is most important in any business, for to survival and profitability.
Datar H. (2000)pp422, describes that there is three major influences what effect pricing
decisions- customers, competitors, and costs, what had been invested for to make typical
product or service. Then less expenses manufacturer need to pay, then cheaper products it
can offer, because breakeven point will be lower.
4. Good financial and management accounting systems
Together in accounting are three different types of accounting information:
Financial accounting,
Management accounting,
Tax accounting.
Financial accounting is profit and loss accounts, balance sheets, and cash flow statements,
and later they are used for to make ratios.
Management accounting is cost accounting and decision making. Cost accounting is costing,
planning, budgeting, and control. Decision making can be split into – short time and long
time decisions. One of short term decisions is Break-Even analysis. (See chapter 2).
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9. There is no business without financial and management accounting. Both of this type of
accounting is very important for managing business, financial accounting is also required by
law, but management accounting serves only internal needs.
Tax accounting also is important in business, but works different than management or
finances accounting. Tax accounting works with tax issues, filling tax returns, and another
tax obligations.
There is big difference between types of accounting and types of accountancy. Accountancy
is process, but accountant is person. Accountants does auditing, bookkeeping, financial
accounting, taxation, management accounting, consultancy and taxations. It is very
important to find good accountant for David Smith manufacturer.
5. Where to raise additional finance
There is quite a lot of ways how to raise some more finances to Mr. Smith manufacturer, but
some of these ways are less risky than other. Business can get loans from banks, sell
assets, get overdraft from banks, private loans and others.
First option where to ask for money is banks. Advantage borrowing money from banks is low
interest pay. It is about 2%-5% on top on base rate. However, mainly banks will give loan for
some security-such as, house, car, or other private assets. And must be very carefully taking
money from banks, especially if business has unlimited liability. Unlimited liability means
that business owner’s private assets are not separated from company. Other words, if
business fails, then Mr. Smith will lose all his private assets. Business can get secured loan
if Mr. Smiths is house owner, if him don’t have private assets, then can get only unsecured
loan, and if him has bad credit history then bad credit loan.
Unsecured credit loans mainly are approximately 14% higher than secured loans.
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10. Annual percentage rate (APR) to all banks is different,-example Alliance Leicester and
Nationwide it is 6.3%, if company will borrow £10000. Sainsbury finance will charge 6.7%,
but Santander 7.4%.
Manufacturer also may ask investment from business angels. Business angels mainly are
rich entrepreneurs. Typical business angels can see in TV show Dragons Den. A business
angel always knows that there may be risk, but in return they usually get large return.
Also any business can apply for grants. Business link describes that grant is “a sum of
money given to an individual or business for a specific project or purpose.” It usually covers
only some % of needed costs, but however it may help, because, the rest of money can
borrow from banks,- and then less money borrowing from banks, then less interest need to
repay back.
UK government provides loan opportunity -enterprise finance Guarantee (EFG) This scheme
offers loan between £1000 and even £1000000. Enterprise finance guarantee was before
known as Small firm loan guarantee (SFLG). Decision about lend or do not lend lends on
participating bank. In this type of loan Mr. Smith will pay money back to bank and also
quarterly fee to government. Advantage of this type loan is that there are no restrictions
about business age and number of employees. Also maximum term to borrow EFG is 10
years.
6. Delivery and monitoring of accurate and robust financial budget
For any type of business budget analysis is very important. The main responsibility for
budget analysis in Mr. Smith manufacturer is to research the budget and seek new ways to
improve effectiveness and increase profits.
For successful deliver and monitor financial statements organisations needs to provide
Income statements, balance sheets, cash flow statements and statements from
shareholders.
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11. Balance sheet describes all detailed information about business available assets,
shareholder interest and liabilities.
An asset is everything what company owns, even trademarks, patents, cars, money,
furniture, machinery, and equipment.
Liabilities outline everything what company owns to others. That includes all loans from
banks, rent, money to suppliers, salary to employees, taxed what is owned to government
etc.
Income statement outlines all business expenses and income over a period of time, and it is
also known as profit and loss statement.
Cash flow statements are divided in to three categories: investing categories, operating
activities and financing activities.
Shareholder’s statement outlines changes in shareholders’ equity.
All of them statements always are made in interval period of times- weekly, monthly and year
statements.
There are some steps what need to do, for to deliver an accurate and robust financial
budget. Firstly as author mentioned already – need always up to date balance sheets and
income statements. Also very important for to keep finances up to date is always read
business credit cards statements and take an advantage of automatic payments. Also very
important is to get overdraft protection.
Regular finance statements will give good understanding about financial situation in
business, and company will take quick action before small problems becoming bigger-
example, re-price machine parts in Mr. Smith manufacturer.
In our days there are available in network lots of different types budgeting softwares and
budget planners, example Quicken, IBM, Planguru, GnuCash etc.
It is very important for Mr. Smith manufacturer to find good accountant, who can provide with
this type financial statements.
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12. Conclusion
To summarise this report, author would like to outline very important things, what need to
know for to run any type of business.
Any business owner need knowledge not only about product or service what they offer, but
also what type of accountancy information is needed for to run business, need to
understand how to establish right costs, also how to find good management and finance
accountant. It is also very important to deliver an accurate and robust financial budget, for to
understand and increase price for products, as known price is major element in any
business.
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14. References
Bridge P.(2011) Handout on Break even analysis, Take in University of Bolton,
Bolton
Chooping D.(2007), Accounting standards 2007/2008, Surrey, Wolters kluwer
Limited
Datar H.(2000), Cost Accounting, tenth edition, Canada, Prentice Hall international,
INC.
Hand L.,Isaaks C.,Sanderson P.(2005), Introduction to accounting for Non-
specialists, London, Thomson learning
Ryan B., Scapens R., Theobald M.(2002) Research method and methodology in
finance and accounting, London,Thomson learning
Watts J.(1993), Accounting in Business environment, London, Pitman publishing
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