Understanding

Organisational Context 2e
Slides by Claire Capon
Chapter 6
Finance
Financial management
Management accounting
Financial reporting

Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004 6.1
 Financial management
Introduction
Profits and retained profits
Loans
Shares
Rights issues
Acquiring and using assets
Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004 6.2
 Introduction
• Financial management covers:
- raising capital to finance the
organisation’s operations
- ensuring the organisation
generates sufficient revenue
to cover the cost of capital

Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004 6.3
 Profits and retained
profits

• Current profits
• Profits from previous years
• Used to fund growth or
expansion of the business

Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004 6.4
 Loans
• Loans are:
- from banks as a long-term
loan or overdraft
- for a definite period and
repayable with interest
• If interest payments are not met,
eventually a receiver is called in
Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004 6.5
 Loans
• Loans are risky for the lender
and therefore secured against
company assets
• Securing loan reduces the risk
for the lender (bank)
• Borrower pays lower interest
rate for secured loan
Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004 6.6
 Loans
• Interest payments:
- come out of profits
- cannot be reduced, if
profits decline, unlike
dividends

Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004 6.7
 Shares
• Shares are issued to raise capital
and are aimed at:
- existing shareholders (a rights
issue)
- the general public and small
investors
- institutional shareholders
Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004 6.8
 Shares
• Ordinary shares:
- carry ownership rights
- give shareholders the right
to receive a dividend if the
company issues one

Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004 6.9
 Shares
• Dividends:
- come from dividing up a
portion of company profits
- can be raised or lowered
as company sees fit

Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004 6.10
 Rights issue
• In a rights issue:
- current shareholders are
offered the opportunity to buy
new shares in the company
- new shares are sold at a price
equal to or just below market
value
Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004 6.11
 Rights issue
• In a 1 for 10 rights issue
current shareholders can buy
1 new share for every
10 shares already owned
• If rights issue succeeds, then
retain the same shareholders
Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004 6.12
 Rights issue
• If rights issue fails, shares are
offered on open stock market by
underwriters and shareholders
may change
• Potential for predator to build up
stake in the company and mount
hostile take-over bid
Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004 6.13
 Acquiring and using assets

• Capital is used to acquire

assets
• Purchase of fixed assets is
capital expenditure
• Fixed assets remain in the
business long term
Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004 6.14
 Acquiring and using assets

• Fixed assets are used to run

the business and include:
- plant
- machinery
- office equipment

Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004 6.15
 Acquiring and using assets

• Current assets are sold or used

to make a profit directly and
include: raw materials;
components; work in progress;
finished goods
• Current assets remain in the
business for a short time period
Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004 6.16
 Acquiring and using assets

• Many companies are

concerned with using, not
owning, assets
• Leasing assets is an option
• Assets are acquired without
paying full price up front
Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004 6.17
 Acquiring and using assets

• Leased assets may include:

- cars
- photocopiers
- buildings
- IT hardware
Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004 6.18
 Management accounting

Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004 6.19
 Management accounting
• Management accounting is
the use of quantitative
techniques to provide data to
use in the management
decision making process

Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004 6.20
 Management accounting
• Management accounting
techniques include:
- budgeting
- cost accounting
- investment appraisal
- cash flow management
Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004 6.21
 Financial reporting

Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004 6.22
 Financial reporting
• Financial reports and accounts:
- are drawn up and audited
- are filed in Companies House
• The legal requirements are
specified in the Companies Acts
1981, 1985 and 1989
Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004 6.23
 Financial reporting
• Financial reports should contain:
- a directors’ statement showing
who the directors are, and
commenting on the company’s
performance over the previous
12 months and expectations for
the next trading year
Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004 6.24
 Financial reporting
- notes on accounts necessary
to explain any details, such as
how operating profit is
calculated
- financial statements, a profit &
loss account, a balance sheet
and cash flow statement
Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004 6.25
 Financial reporting
• A profit & loss account
gives a summary of income
or sales revenue and
expenditure, showing
resulting profit or loss

Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004 6.26
 Financial reporting
• A balance sheet shows
assets, liabilities and sources
of finance
• A cash flow statement shows
how money has been spent
over the trading year
Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004 6.27