Unit 1 Topic 1Page

Why Do Organisations Need Financial Information?

For various reasons; to manage the business, to make decisions, to satisfy investors or people
who are lending money (creditors), for legal reasons.
See http://en.wikipedia.org/wiki/Financial_statement
There are 3 basic essential pieces of information.
o
o
o

How much do we own and how much do we owe at any one moment The Balance
Sheet
What money is coming in and what is going out the Income Statement
How much cash do we have the Cash Flow Statement.

Definition of 'Balance Sheet'

A financial statement that summarizes a company's assets, liabilities and shareholders'
equity at a specific point in time. These three segments give investors an idea as to what the
company owns and owes, as well as the amount invested by the shareholders.
The balance sheet must follow the following formula:
Assets = Liabilities + Shareholders' Equity
Watch this video for an explanation of the Balance Sheet.
https://www.youtube.com/watch?v=Nu6sCQ91HUc
Here is an Example of the Balance Sheet
https://www.youtube.com/watch?v=U5OLe5ZpqsU

The Income Statement

Definition of 'Income Statement'
http://www.investopedia.com/terms/i/incomestatement.asp#axzz29T1cUzKC
A financial statement that measures a company's financial performance over a specific
accounting period. Financial performance is assessed by giving a summary of how the business
incurs its revenues and expenses through both operating and non-operating activities. It

also shows the net profit or loss incurred over a specific accounting period, typically over a
fiscal quarter or year.
Also known as the "profit and loss account", or "income and expenditure account" or "statement
of revenue and expense"

Watch this video for an explanation of the Income Statement

https://www.youtube.com/watch?v=Bpcn7QYOTx0

Here is an Example of the Income Statement, or Profit & Loss Account

https://www.youtube.com/watch?v=8_cjoEVibqA

The Cash Flow Statement

Definition of 'Cash Flow Statement'
http://www.investopedia.com/terms/c/cashflowstatement.asp#ixzz29T67lUih
The document provides aggregate data regarding all cash inflows a company receives from
both its ongoing operations and external investment sources, as well as all cash outflows that
pay for business activities and investments during a given quarter
Watch this video for an explanation of the Cash Flow Statement
https://www.youtube.com/watch?v=JGcbsj6FN6c

Here is an example of the Cash Flow Statement

https://www.youtube.com/watch?v=NNX6YIl66ac
Unit 1 Topic 2
Analysis of Financial Data
OK, from Unit 1 Topic 1 we know what sort of financial data is available, especially; the
Balance Sheet, and the Income and Expenditure Account (in all its many names). BUT, what do
we do with that data? How can we turn that data into useful financial information?
In this Topic we will look at some useful forms of information. If you have ever watched
"Dragon's Den" you will know that the Dragons ask some pretty searching questions about the
accounts.

Follow this link http://www.bized.co.uk/compfact/ratios/index.htm and we will look at some

ways we can use the financial data. Not sure that I agree that "Financial Ratio analysis is a
fascinating topic" but each to his/her own!.
Go through the first few pages, from "Welcome" to "Brief Review of the Accounts"
Profitability
One of the first things we want to know is, "Is the business/organisation making a profit?".
Even if it is a non-profit making organisation, we want to know that it is breaking even and not
losing money.
Follow this link: http://www.bized.co.uk/compfact/ratios/profit2.htm and follow the links at
least as far as Activity 2 (you can go further if you find this interesting).
Returns
ROI
Another question the Dragons ask is "How much return will I get for my money?" This is known
as the Return on Investment, or ROI
Follow this link and watch the video (sorry about the annoying music) for an explanation of
ROI.
http://www.investopedia.com/video/play/return-on-investment-basics/#axzz29T1cUzKC
ROCE
Another analysis that might be useful could be the Return on Capital Employed (ROCE). The
enterprise might be making money, and might represent a good return on investment, but it
might also be using capital which could be more usefully employed elsewhere.
Follow this link http://www.bized.co.uk/compfact/ratios/ror3.htm as far as Activity 6.
ROFA
A ratio which is of interest to facilities Managers is Return on Fixed Assets (ROFA). A Fixed Asset
is defined as
Definition of 'Fixed Asset'
"A long-term tangible piece of property that a firm owns and uses in the production of its
income and is not expected to be consumed or converted into cash any sooner than at least
one year's time."
Fixed assets are sometimes collectively referred to as "plant".
Read more: http://www.investopedia.com/terms/f/fixedasset.asp#ixzz29TVB3PGc"
Just as, if you own your own home, that is probably your most valuable item, so an
organisation's buildings are normally its most valuable asset.
(If anyone ever tells you that "our people are our most valuable asset", that shows that they:

have never read a balance sheet, have no understanding of "asset," and treat people as if they
can be bought and sold like any other asset!)
Facilities Managers are responsible for their organisation's real estate and should have some
idea of how those assets are performing.
Measures relating to Fixed Assets can include sales or turnover compared to Fixed Assets. Two
examples:
o

A retail organisation may want to consider the sales generated by individual shops,
compared to the value of the individual shop, or the operating costs of the individual
shop. This is very topical as internet shopping is hitting the High Street. This has
the double blow, not only are sales falling, but as the High Street declines, so the
value of those stores declines.
A manufacturing organisation may want to consider the cost of new plant compared
to the increased output from that plant. We will consider this in more detail in
Assignment Two.

There are many other ratios - but fortunately, we'll stop there.