The 3 main financial statements

How they give us different kinds of information about

organisational performance

Profit and Loss or Income and Expenditure

‣ Show the results over a particular period, normally a year

‣ Compare the income against the expenditure needed to create that income during that period

‣ Grant income is normally released against expenditure associated with the grant

‣ Income and expenditure are based on when items are invoiced, not when they are paid

‣ Includes non-cash items such as depreciation‣ Adjusts for accruals and prepayments‣ The surplus or deficit is carried forward to the

next year through the balance sheet

Format of P&L accounts

Sales

Cost of Sales

Gross Profit

Fixed costs/overheads

Operating profit

Tax and interest charges

Earnings/net profit

Cashflow statement

‣Shows how money has flowed through the organisation in a particular period, normally coinciding with the P&L

‣Records incoming and outgoing cash at the time it is paid/received

‣Shows debtors (people who owe you money) and creditors (people you owe money to) at a particular date

‣Cash is not the same as profit‣The majority of businesses fail due to poor

control of cash

Opening trade debtors

Sales

Cash received

Closing trade debtors

Jan – March

120

90

150

60

April – June

60

120

100

80

July – September

80

150

130

100

Oct – December

100

120

140

80

Cash received

Cash payments

Net cashflow

150

(80)

70

100

(160)

(60)

130

(180)

(50)

120

(160)

(20)

Opening cash balance

Net cashflow

Closing net balance

Cumulative cashflow

5

70

75

75

75

(60)

15

15

15

(50)

(35)

(35)

(35)

(20)

(55)

(55)

Cashflow Matrix

Balance Sheet

‣ A summary of an organisation’s assets, and how those assets have been financed, at a particular date

‣ A summary of an organisation’s assets and liabilities, the basis for deciding if it is solvent or not

‣ The net assets balance with the financing of the organisation

‣ Includes liabilities i.e. cash owed to others, loans

‣ Assets can be tangible – cash, equipment, stock, buildings – or intangible – goodwill, reputation

‣ ‘Liquid’ assets are assets which can be converted into cash within a year

Typical balance sheet

Fixed assets (e.g. equipment)

Current assets (stock, cash, prepayments, debtors)

Current liabilities (creditors, bank overdraft)

Current assets less current liabilities = net current assets, or working capital

Fixed assets + net current assets = reserves, or equity

Costs & Pricing

Costs

‣What are your costs?

‣How do they arise?

‣How do you analyse them?

‣What factors affect them?

‣How do you organise/allocate them?

‣How do you report them?

Cost centres

‣ What are your cost centres?

»Projects

»Physical locations

»Activities

»Departments

‣ Do they make sense to your funders?

‣ Do they make sense to your business?

‣ Do they make sense to your accountant?

Types of Costs

‣Variable or direct costs – the costs that change with activity levels

‣Fixed costs – overheads or costs which do not vary with the activity levels

‣Semi-variable costs – e.g. temporary staffing brought in for a particular contract

‣ Indirect or core costs – e.g. a manager’s salary, rent, marketing budget, etc

Break even

Breakeven point =

fixed costs

Selling price per unit - variable costs per unit

‣ Break even is achieved when the number of “things” sold less the cost of producing these “things” is the same as the fixed costs

‣ key information is what does it cost to produce each unit e.g. each trainee trained, each chair sold, each support session delivered?

‣ Profitability is reached when sales or income cover all costs, both variable and fixed.

Full Cost Recovery – what is it?

‣Knowing the full cost of each activity

‣Recovering this full cost from funders, or through trading activity (which is normally called pricing)

‣ Involves analysing each activity and understanding its direct costs

‣ Involves apportioning or calculating the proportion of overheads that ‘belong’ to each activity

How to do it

‣ Get a set of accounts for the previous year and forecasts for the following year

‣ Analyse your accounts by:

» Identifying all the direct costs for a project

» Identifying all overheads costs

‣ Decide a threshold below which you won’t analyse

‣ Decide on the way in which you will allocate overheads costs

‣ Review it in light of actual results and regularly

‣By number of staff involved in each activity

‣By the floorspace needed for each activity

‣By the time needed to run each activity

‣By expenditure

‣By income

‣Using different methods for different kinds of overheads costs

Apportioning Overheads

Ways of apportioning overheads – arriving at a percentage to allocate to each project

Allocation of fundraisingcosts

Allocation of premises costs

Full Cost of Project

Allocation of governance/strategic costs

Allocation of support costs

Allocation of CEO costs

Direct Project Costs

The Full Cost