Business Administration-Finance

In this session we focused on some financial controls that are commonly used in organisations. 
We tend to use trading profit and loss accounts and balance sheets to understand the use, flow and control of organisational assets.
There are three main categories of financial controls, these are:

1. Budgetary controls
2. Break even analysis
3. Ratio analysis

Budgetary controls
Budgeting is used to express in quantifiable terms, plans for a particular future period.  There are four main types of budgetary controls:

1. Revenue and expense budgets
2. Time, space, material and production budgets
3. Cash budgets
4. Capital expenditure budgets

Break even analysis

When calculating the break even point it is necessary to look at fixed and variable costs.  The break even analysis aims to identify the point at which it becomes profitable to produce a product or service.  There are a number of reasons why an organisation conducts a break even analysis:

• It facilitates long term planning
• It can identify the minimum sales or volume of business that the organisation must achieve to remain in profit.
• It also provides essential information for decision making such as which products to eliminate.

Ratio Analysis
There are four main types of financial ratios which include:

1. Liquidity
2. Activity Ratios
3. Profitability
4. Leverage or gearing ratios

Liquidity Ratios
These ratios measure the organisation's financial stabilty.
These are two common types of liquidity ratios:

1. Current ratio
2. Acid test ratio

The formulae for current ratio is:
Current Assets
___________
Current Liabilities


Assets Test Ratio

Quick Assets (current assets less stock)
_______________________________
Current Liabilities


Activity Ratios
These indicate how efficiently an organisation is using its resources.  The three main ratios we covered were:

• Inventory turnover
• Debtors to sales ratio
• Creditors turnover

Profitability Ratios
This informatoin can be found in the profit and loss accounts.

Leveraging and Gearing Ratios
This looks at the long term funding of the organisation.  There are three main gearing ratios:

1. Debt ratio
2. Debt equity ratio
3. Times interest earned ratio