Financial information and decisions

Finance 资金 means the money a business needs. A business needs finance to:

• start up — start-up capital 启动资金 to buy equipment and stock before it earns anything,
• grow — money for expansion 扩张, such as new shops or machines,
• run day to day — working capital 营运资金 to pay wages and suppliers while waiting for customers to pay,
• survive a cash-flow 现金流 problem, when more money is going out than is coming in.

Sources of finance

Finance can be short-term 短期 (paid back within a year) or long-term 长期 (over several years). It can come from inside the business (internal) or from outside (external).

Choosing a source

The best source depends on how much money is needed and for how long, the cost (interest and fees), the size and legal type of the business (only companies can sell shares), and how much risk and control the owners will accept.

Cash is not the same as profit

Cash 现金 is the money a business can use right now. Profit 利润 is revenue 收入 minus costs over a period. A business can be making a profit yet still run out of cash — for example, if customers have not paid yet. Running out of cash can force even a profitable business to close.

The cash-flow forecast

A cash-flow forecast 现金流预测 predicts the money coming in and going out each month. It uses:

• inflows 流入 — money coming in (sales, loans),
• outflows 流出 — money going out (wages, rent, materials),
• net cash flow 净现金流 — inflows minus outflows,
• opening balance 期初余额 — the cash held at the start of the month,
• closing balance 期末余额 — the cash held at the end of the month.

Worked example. A shop expects inflows of £12,000 and outflows of £9,000 next month, and starts the month with £2,000 in the bank. Find the net cash flow and the closing balance.

Working capital

Working capital is the money available for day-to-day running. It is the current assets 流动资产 (cash and things soon turned into cash) minus the current liabilities 流动负债 (debts due within a year).

To overcome cash-flow problems, a business can arrange an overdraft, delay paying suppliers, ask customers to pay sooner, sell spare assets, or cut spending.

An income statement 损益表 shows how much profit a business made over a period, usually a year.

Worked example. A business has revenue of £200,000, cost of sales of £120,000 and expenses of £50,000. Find its gross profit and its profit for the year.

Income statements are used by stakeholders 利益相关者: owners check the profit, lenders check whether their loans are safe, and managers look for problems.

A statement of financial position 财务状况表 (also called a balance sheet) shows what a business owns and what it owes (its liabilities 负债) on one day.

• non-current assets 非流动资产 — things kept for the long term: buildings, machines.
• current assets — short-term items: inventory 库存, money owed by customers, and cash.
• current liabilities — debts due within a year: an overdraft, money owed to suppliers.
• non-current liabilities 非流动负债 — debts due after more than a year: a long-term loan.
• owners' equity 所有者权益 — the money the owners put in, plus profit kept in the business.

It is used to check what the business is worth, how much it owes, and whether it can pay its debts.

You can judge a business by working out ratios 比率 from its accounts. A ratio compares two figures.

Profitability ratios

Profitability 盈利能力 ratios show how good a business is at making profit.

• gross profit margin 毛利率 — gross profit as a percentage of revenue.
• profit margin 利润率 — profit for the year as a percentage of revenue.
• return on capital employed 资本回报率 (ROCE) — profit as a percentage of the capital employed 所用资本 (money invested). It shows how well the investment is used.

A higher percentage is better for all three.

Worked example. The same business (revenue £200,000, gross profit £80,000, profit for the year £30,000) has capital employed of £150,000. Find its three profitability ratios.

Liquidity ratios

Liquidity 流动性 ratios show whether a business can pay its short-term debts.

• the current ratio 流动比率 compares current assets with current liabilities. Around 1.5 to 2 is healthy.
• the acid test ratio 速动比率 is stricter: it leaves out inventory, because inventory is not yet sold.

Worked example. A business has current assets of £40,000 (including £10,000 of inventory) and current liabilities of £20,000. Find its current ratio and acid test ratio.

Who uses account analysis

• internal users (owners and managers) use it to control the business and to plan.
• external users (banks, suppliers, the government and investors) use it to decide whether to lend, supply or invest.

• Cash is not profit: a profitable business can still run out of cash if customers pay late. Watch the closing balance on a cash-flow forecast.
• Separate internal sources (retained profit, sale of assets, owners' savings) from external ones (bank loan, overdraft, shares, leasing, trade credit).
• Key formulas: net cash flow = inflows − outflows; closing balance = opening balance + net cash flow; working capital = current assets − current liabilities.
• Profitability ratios (gross margin, profit margin, ROCE) — higher is better. Liquidity: the current ratio (healthy ≈ 1.5–2) and the stricter acid test (which leaves out inventory).
• Only limited companies can raise money by issuing shares; a sole trader or partnership cannot.