Improve Your Business: Workbook (ILO, 1986, 96 p.) 6. MANAGEMENT ACCOUNTING Part 1 - Questions The profit and loss account The balance sheet The cash flow budget Part 2 - Business practice Part 3 - Action programme How to construct your action programme Answers to business practice

Improve Your Business: Workbook (ILO, 1986, 96 p.)

6. MANAGEMENT ACCOUNTING

Part 1 - Questions

The profit and loss account

	Yes	No
1. Do you know the difference between cash and profit?
2. Do you try to calculate every month whether you have made a profit?
3. Can you think of two things which you could try to do in your business to increase your profits?
4. Do you know what is meant by depreciation?
5. Could you explain to another business person what the expression “value added” means?
6. Do you understand the connection between sales, costs and profits?
7. Do you know which items to include in a profit and loss account?
8. Is it important to study the profit and or loss figures for the last ten years if you want to get ideas on how to improve your business quickly?
9. Do you have a profit and loss account prepared once a year?
10. Are you sure that you understand how you can use the profit and loss account to improve your business?

The balance sheet

	Yes	No
1. Do you know what an asset is?
2. Do you know the difference between assets and liabilities?
3. Can you think of three liabilities which your business has?
4. Do you know the difference between your private assets and your business assets?
5. Do you regularly check your insurance policies and the valuations put on your assets?
6. Are your premises suitable for your operations and is there the possibility of expansion if your business grows?
7. Is a balance sheet prepared for your business once a year?
8. Are you sure you understand how you can use the balance sheet to make your business better?
9. Do you, the owner, sit down and talk to your accountant about the state of the business once the balance sheet and profit and loss account have been prepared?
10. Have you ever considered paying a fee to a business consultant to examine your business and give you a report about its strengths and weaknesses?

The cash flow budget

	Yes	No
1. Do you try to plan how money will flow in and out of your business month by month over a future period?
2. Do you know what is meant by working capital?
3. Do you prepare a cash flow budget at least twice a year?
4. Do you obtain a monthly bank statement from your bank so that you know how much money you have in the bank?
5. Can you tell how many months your debtors are taking to pay you the money they owe to you?
6. Is it true to say that if you find a big difference between the estimated cash position and the actual cash position, then you have a possible management problem?
7. Do you know how you can use the cash flow budget to improve your business performance?
8. Are you able to calculate your total estimated monthly wage bill for all your workers for each of the next six months?
9. Can you estimate how much you will spend on business travel and car expenses in each of the next six months?
You can ? Then write your estimate below and say briefly how you arrived at it:

_________________________________________________________________
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Part 2 - Business practice

1. THE PROFIT AND LOSS ACCOUNT AND THE BALANCE SHEET

Tin Smith Works Ltd. is just about to produce a profit and loss account for the period 1 January 1986 -31 December 1986 and a balance sheet for the year ending 31 December 1986.

In order to draw up the profit and loss account and the balance sheet, they have collected the following information from their bookkeeping system :

Information needed for the profit and loss account:

		(NU)
Sales		100,000
Payments for:
	Raw materials	30,000
	Wages	15,000
	Interest on loan	5,000
	Drawings	20,000
	Others	10,000
The value of the stock for raw materials and goods has increased by:		2,000
The amount of money due from customers (debtors) has increased by:		4,000
The amount of money due to suppliers (creditors) has increased by:		6,000
The reduction in value of machines and equipment (depreciation) during 1986 is:		8,000

Information needed for the balance sheet:

As at 31 Dec. 1986
	(NU)
Money in cash box	8,000
Money in bank	10,000
Money due from customers (debtors)	6,000
Value of stocks	40,000
Value of machines and equipment	30,000
Money owing to suppliers (creditors)	4,000
Loans	35,000
Owner's capital	40,000

Using the above information, try to complete the profit and loss account and the balance sheet which are given below.

After completion, try to answer the following questions:

(a) What was the profit in the business in 1986?

_________________________________________________________________

(b) How much profit was made and left in the business up to 31 December 1986?

_________________________________________________________________

Profit and loss account 1 January 1986-31 December 1986
	Money in	Money out
Sales
Raw materials
Wages
Interest
Drawings
Others
Change in stock
Change in creditors
Change in debtors
Depreciation	_______	_______
Profit	_______	_______

Balance sheet 31 December 1986
Assets	Liabilities
Cash	Creditors
Bank	Loans
Debtors	Owner's capital _______
Stocks
Equipment _______	Profit made and left in the business _______
_______	_______

2. THE CASH FLOW BUDGET

The information needed to draw up a cash flow budget is given below. Turn to the sheet called “ Cash flow budget, Tin Smith Works Ltd.”, over the page, and try to enter the following items:

· Period of forecast: 1 January 1987-30 June 1987 (ENTER IT)

· Money in the cash box and in the bank account on 1 January 1987: 20,000 NU (ENTER IT IN “MONEY PRESENT AT START OF MONTH”)

Now enter the RECEIPTS

· The average sales for the particular months as recorded in the last two years are as follows:

January	February	March	April	May	June
10,000	8,000	8,000	8,000	8,000	10,000

During 1987 sales will be approximately the same as the above for each month from January to June.

· Three-quarters of the sales each month are cash sales. (ENTER THEM)
· One-quarter of total sales each month are on credit. These are entered in the small triangle for each month under “Cash from credit sales”.

CREDIT SALES

· When credit is given by Tin Smith Works Ltd. it is for one month only. Customers usually pay in one month's time. Enter the cash from credit sales.

ENTER THEM

· The Tin Smith Works Ltd. will sell an old welding machine in March 1987. This will add 8,000 NU to “Other money in”. (ENTER IT)

Now enter the PAYMENTS

· Tin Smith have found out that when they buy raw materials each month, the value of the purchases is always half of the sales amount for that month. (WORK OUT THE PURCHASES)

Work out the purchases and enter them in the box below.

January	February	March	April	May	June

(ENTER THEM)

· Four-fifths of the purchases are cash purchases.
· One-fifth of the purchases are on credit. These are entered in the small triangle for each month under “cash paid for credit purchases”.

CREDIT PURCHASES

· Tin Smith always pay their creditors within one month. Enter the cash paid for credit purchases.

Figure

· Wages amount to 2,000 NU each month. (ENTER THEM)

· Drawings by Tin Smith amount to 1,000 NU each month. (ENTER THEM)

· Tin Smith have a 40,000 NU loan. They pay 100 NU as interest each month and make a repayment of the loan in March and June amounting to 1,000 NU in each of these months. (ENTER THEM)

· The item “Others” amounts to 1,500 NU each month. (ENTER IT)

· Tin Smith will buy an electronic calculator in March for 500 NU. (ENTER IT UNDER “PLANNED INVESTMENTS”)

(a) With the information you have been given, try to calculate how much money will be present in the business at the end of January. Write your answer below.

________________________________________________

(b) Now try to fill in each month and work out how much money will be present in the business at the end of June. Write your answer below.

________________________________________________

Cash flow budget, Tin Smith Works Ltd.

Period of forecast: ______________

Figure

Now that you have completed the business practice exercises, turn to the pages which follow the action programme. There you will find the answers. Check your answers against the answer solutions which are given. How many correct answers did you get?

CHECK YOUR ANSWERS!

THEN GO TO THE HANDBOOK FOR MANAGEMENT IDEAS

Now go to the Handbook and read thoroughly the management ideas in the same section there. You will then find that all the business practice exercises become easier to answer.

Part 3 - Action programme

How to construct your action programme

Count the number of times you answered “yes” or “no” for each set of questions. How many times did you answer “yes”? The more “yes” answers, the better you are in business management. Now look again at those questions you answered with “no”. Those are possible problem areas in your business. Choose the one which you think is the most important for your business. Take the most urgent problem first. Don't try to solve everything at once.

Now write the problem into the action programme opposite, as we have done with the example. Then write in What must be done, By whom and By when in order to solve your problem.

Finally, go back to your business and carry out the action programme.

Figure

Problem	What must be done?	By whom?	By when?
Example:
How to make sure there will be enough cash in the business by the end of August to buy a cash-register.	Draw up a six-month cash budget.	Myself	One week from now i.e. by 9/8/86.

Answers to business practice

Profit and loss account 7 January 1986-31 December 1986
	Money in	Money out
Sales	100,000
Raw materials		30,000
Wages		15,000
Interest		5,000
Drawings		20,000
Others		10,000
Change in stock	2,000
Change in creditors	4,000
Change in debtors		6,000
Depreciation		8,000
		94,000
Profit		12,000
	106,000	106,000

Balance sheet 31 December 1986
Assets		Liabilities
Cash	8,000	Creditors	4,000
Bank	10,600	Loans	35,000
Debtors	6,000	Owner's capital	40,000
Stocks	40,000		79,000
Equipment	30,000	Profit carried over from 1985	3,000
	______	Profit made in 1986	12,000
	94,600		94,000

Cash flow budget, Tin Smith Works Ltd.

Period of forecast: 1.1.1987 - 30.6.1987

Figure