The Basic Rules of
Business
Finance
Key Terms & Concepts
Accountancy
The communication of financial information about a business to
shareholders and managers. This generally takes the form
of financial statements
Asset
Assets are economic resources owned or controlled by the
business which are capable of producing value (or cash)
Liability
Liabilities are the funds (including borrowings), services or products
owed by a business at a specified date
Capital & Reserves (or Owner’s Equity)
Funds put into the business by the owners or shareholders and
retained on their behalf
Profit/Loss Statement (past financial performance)
Shows the performance of the business over a given time period
The Profit/Loss = Total Income – Total Expenditure
Gross Profit = sales revenue (and other income) – cost of making the
product before deducting overheads, payroll, taxation and other
costs for the period
Net Profit = gross profit – all costs (e.g. manufacture/sales, operating
costs, taxes etc.) i.e. after subtracting all costs, expenses and
losses for the period
Balance sheet (present financial position)
The balance sheet is a summary of the financial balances of
a business as of a specific date, such as the end of the financial
year. It typically includes a list of the business assets, liabilities and
ownership equity
Cash Flow Forecast (future financial liquidity)
Describes the short-term cash requirements of a business to ensure
the future availability of a suitable quantity of liquid cash
Liquid (available) cash = cash in the bank + short-term
investments – short-term debts (e.g. bills, payroll)
Cost, Price and Value
Cost
“How much it cost you to produce/manufacture”
Price
“How much you are selling the product for”
Value
“How much the customer is prepared to pay for it”
The Profit/Loss Statement
A Personal Example
This shows the profit/loss that has been achieved over a given period
of time (i.e. in the past). Profit = Total Income – Total Expenditure
You have your own monthly profit/loss statement – A bank statement
e.g. Alan Sugar’s Personal Bank Statement for December
Item
Apprentice income
Credit (£)
75,000
Loan repayments
10,000
Electricity and Gas bill
T.V. and advertising appearances
600
50,000
Other bills
1,250
Cleaning Co. household cleaners
350
Credit card bill (food, entertainment, clothes, travel)
Total Credit/Debit
Balance carried forward to January
Debit (£)
15,550
125,000
27,750
97,250
Alan Sugar is in
profit for December
Profit and Loss
Case Study for Chemistry Co.
Q. Fill out the table below and calculate how much profit/loss Chemistry Co. has
generated in the first quarter?
Note: Think carefully about how we account for the £50,000 of stock in the store?
Item
Credit (£)
Sales income of chemical products
185,000
Debit (£)
Business and Laboratory running costs
50,000
Staff salaries
55,000
Invoice paid to chemical suppliers
25,000
Repayment of loans to bank
25,000
Total Credit/Debit
Net Profit or Loss for 1st Quarter
185,000
155,000
£30,000
The company is in profit in quarter 1
What about the £50,000 of products in the store?
The £50,000 of saleable products in the stores are not included – they were made outside
this time period and would have been accounted for in the previous profit/loss report
The Balance Sheet
A Personal Example
Understand your own present financial circumstances
 What is likely to be your principal asset?
 Do you own it outright or is it financed (i.e. a liability)?
House value
£200,000
Mortgage from the Bank £120,000
Your equity (profit)
£80,000
£200,000
Your personal balance sheet balances
The Balance Sheet
Asset – Items of value owned or controlled by the business
Liability – Amounts or servises owed by the business
Capital & Reserves – Amounts input by the owners/shareholders
Stock,
Fixtures & Fittings
Resources
e.g. Vehicles, I.T. etc.
Cash
Reserve
Bank Loans
The Balance Sheet
Case Study for Chemistry Co.
Using the information below complete the following balance sheet
Q. Label each item as an asset (fixed/variable), liability or as capital & reserve
£
Asset, Liability
or Capital & Reserve
Freehold of laboratory
350,000
Asset (fixed)
Equipment used within the business (inc. chemistry, I.T. etc.)
775,000
Asset (fixed)
Business fixtures and fittings
175,000
Asset (fixed)
Amount owed to chemical suppliers/other bills
25,000
Liability
Stocks of chemicals within the laboratory
25,000
Asset (variable)
Stocks of saleable chemical products
50,000
Asset (variable)
Loan from bank (repayable in 5 years)
250,000
Liability
Venture capitalist investment
500,000
Liability
Cash in the bank
125,000
Asset (variable)
Capital invested by the owner
375,000
Capital & Reserve
Accumulated profits (after 5 years trading)
350,000
Capital & Reserve
Item
The Balance Sheet
As of 31st December
Q. Using the information in the previous table, complete the following balance sheet
£
Fixed Assets
1. Freehold of laboratory
2. Equipment used in business
3. Business fixtures and fittings
£
Variable Assets
1. Stocks of chemicals
2. Stocks of saleable products
3. Cash in the bank
Total Assets
350,000
775,000
175,000
25,000
50,000
125,000
1,500,000
Liabilities
1. Amount owed to suppliers/other bills
2. Loan from bank
3. Venture capitalist investment
Capital and Reserves
1. Capital invested by the owner
2. Accumulated profits
Total Liabilities & Capital
So the balance sheet balances
£
25,000
250,000
500,000
£
375,000
350,000
1,500,000
Cash Flow Forecast
Many businesses make a profit but fail because they
run out of CASH!!
Making a profit is the key to a successful business
However….
If you run out of the liquid cash required to pay running
expenses (e.g. invoices, salaries and make purchases)
you’re business may not be able to operate
Cash Flow Forecast
The Cash Flow Forecast describes the short-term cash
requirements of a business to ensure the future
availability of a suitable quantity of liquid cash
Liquid (available) cash = cash in the bank + short-term
investments – short-term debts (e.g. bills, payroll)
“CASH IS KING”
Without liquid cash your business can’t operate
Summary
 Profit/Loss Statement (past)
Lists transactions for a given period (e.g. a year) and shows
whether the business is making a profit or loss
 The Balance Sheet (present)
Shows whether the finances balance on a given date
 Cash Flow Forecast (future)
Describes the short-term cash requirements of a business
“CASH IS KING”
Authors
Dr. Trevor Farren, Dr. Simon Mosey & Dr. William Drewe
Organisation
School of Chemistry, University of Nottingham, U.K.
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