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Economia Aziendale in Inglese. Risorse CLIL per il V anno di un Istituto Tecnico Economico

red - Vengono di seguito proposti alcuni appunti di Economia Aziendale in Lingua Inglese, utili per strutturare due moduli CLIL per una classe V dell'Istituto Tecnico Economico per il Turismo. Le risorse sono rese disponibili sul sito dell'Istituto Comprensivo Primiero di Transacqua (TN). Alla fine è presente un questionario per la verifica degli apprendimenti.

The Balance Sheet and The profit and Loss Account

1) The Balance Sheet: introduction

Your balance sheet is a financial statement at a given point in time. It provides a snapshot summary of what your business owns or is owed - assets - and what it owes - liabilities - at a particular date.

The balance sheet therefore shows how your business is being funded and how you are using these funds.

There are two ways you may use your balance sheet:

  • to help you and other interested parties such as investors, creditors or shareholders to assess the worth of your business at a given moment
  • as a tool to help you analyse and improve the management of your business

2) Balance sheet reporting - who, when and where?

Limited companies and limited liability partnerships must produce a balance sheet as part of their annual accounts for submission to:

  • Companies House
  • HM Revenue & Customs (HMRC)
  • shareholders

As well as the balance sheet, annual accounts include the:

  • profit and loss account
  • auditor's reports
  • directors' report
  • notes to the accounts - these should provide any information you think may be relevant, eg supplementary financial information or additional detail

Other parties who may wish to see the accounts - and therefore the balance sheet - are:

  • potential lenders or investors
  • potential purchasers of the business
  • government departments carrying out inspections
  • employees
  • trade unions

Other key benefits of producing a balance sheet include:

  • if you want to raise finance, most lenders or investors will want to see three years' accounts
  • if you want to bid for large contracts, including government contracts, the client will  want to see audited accounts
  • producing formal accounts - including a balance sheet - will help you monitor the performance of your business

3) Contents of the balance sheet

A balance sheet shows:

  • fixed assets - long-term assets
  • current assets - short-term assets
  • current liabilities - what the business owes and must repay in the short term
  • long-term liabilities - including  shareholders' capital

Fixed assets include:

  • tangible assets - eg buildings, land, machinery, computers, fixtures  - shown at their depreciated value
  • intangible assets - eg goodwill, intellectual property rights (such as patents, trade marks and website domain names)

Current assets are short-term assets and  include:

  • stock
  • work in progress
  • money owed by customers
  • cash in hand or at the bank
  • short-term investments
  • pre-payments - eg advance rents

Current liabilities are amounts owing and due within one year. These include:

  • money owed to suppliers
  • short-term loans, overdrafts or other finance
  • taxes due within the year - VAT, PAYE (Pay As You Earn) and National Insurance

Long-term liabilities include:

  • creditors due after one year;
  • capital and reserves - share capital and retained profits, after dividends (if your business is a limited company), or proprietors capital invested in business (if you are an unincorporated business)

4) Interpreting balance sheet figures

A balance sheet shows:

  • how solvent the business is
  • how liquid its assets are - how much is in the form of cash or can be easily converted into cash, ie stocks
  • how the business is financed

A balance sheet is only a snapshot of a business' financial position on one particular day. The individual figures can change in a short space of time and the total net assets (assets less liabilities) would only change dramatically if the business was making large profits or losses. For example:

if you hold large inventories of finished products, a change in market conditions might mean their value is reduced. You may even need to sell at a loss.

Fixed assets

These are shown at their depreciated values. This is the method to calculate depreciation of an asset:

write off the same charge over the calculated life of the asset. For example, you may decide that a computer bought for £2,000 has a useful life of five years so that you will write off 20 per cent of its value each year.

Depreciation costs must be realistic and you may wish to approach your accountant for further help.

5) The Profit And Loss account: introduction

A profit and loss account is a summary of business transactions for a given period - normally 12 months. By deducting total expenditure from total income, it shows on the 'bottom line' whether your business made a profit or loss at the end of that period.

A profit and loss account is produced primarily for business purposes - to show owners, shareholders or potential investors how the business is performing. But most of the information is also used by HM Revenue & Customs to work out your tax bill.

6) Profit and loss accounting periods and financial years

For the purposes of profit and loss account, accounting periods and financial years vary depending on the type of business in question.

Accounting periods for the self-employed and partnerships

Self-employed and partnership accounts should ideally be made to 31st March or 5th April, although different accounting periods can be used in certain circumstances.

Accounting periods for limited companies

Limited companies can make their accounts up to any date. The accounting period is also referred to as the company's financial year. A normal accounting period will be 12 months, but sometimes it can be shorter - for example when a company started business in the middle of the year, but wants its financial year to end on December 31.

7) Do all businesses have to produce formal profit and loss accounts?

By law, if your business is a limited company or a partnership whose members are limited companies, you must produce a profit and loss account for each financial year.

Self-employed sole traders and most partnerships don't need to create a formal profit and loss account - the information they complete on the self-assessment tax return form amounts to the same thing.

However, there are key benefits to producing formal accounts. If you want your business to grow, or need a loan or mortgage, for example, most institutions will ask to see three years' accounts.

8) Keeping accurate records

Whatever your business type, by law you must keep accurate records of your income and expenditure. The self-employed must keep records for five years and limited company or partnership records for six years.

Accurate record keeping has important benefits. It:

  • gives you the information you need to manage your business and make it grow
  • enables you to report on your profit or loss easily and quickly when required
  • will improve your chances of getting a loan or mortgage
  • makes filling in your tax return easier and quicker
  • helps you or your company avoid paying too much tax
  • helps you plan and budget for tax payments
  • reduces the risk of interest or penalties for late tax payments
  • helps reduce fees if you use an accountant - your annual accounts will be far easier to produce

The basic records you will need to keep are:

  • a list of all your sales and other income       
  • a list of all your expenditure, including day-to-day expenses and equipment 
  • a separate list for petty cash expenditure if relevant
  • a record of goods taken for personal use and payments to the business for these
  • a record of money taken out for personal use or paid in from personal funds -  this applies to limited companies
  • back-up documents for all of the above

9) Business income: sales

Business income falls into two categories for profit and loss reporting:

  • sales or 'turnover'
  • other income

For information on the second category, see the page in this guide on business income: other.

Business sales or turnover

Your business' total sales of products and/or services in a trading year is referred to as turnover. This is the starting point for your profit and loss account.

How you record sales will vary according to your business type and size. You may use a simple list or 'ledger' in a book, a tailored spreadsheet, or a computer software program. Whichever system you use, you need to ensure that it is accurate and updated regularly. Read an example sales record for a sole trader service business - Opens in a new window.

Sales records back-up

The back-up records for your sales ledger fall into two categories, and will vary according to your business type:

Sales documentation:

  • copies of sales invoices issued by you
  • rolls of till receipts
  • records of money you pay into the business when taking goods out for personal use - note that if you take goods out of your business without paying for them you still owe the business for them, and so will have to add the retail cost of the items to your overall pre-tax profit figure

Proof of income relating to the above:

  • paying-in slips
  • bank/building society statements and similar

If you operate on a 'cash only' basis you must keep detailed records of your income in your sales book or ledger and be able to relate these to your expenditure, cash in hand and bank statements.

10) Business income: other

As well as reporting sales income, you need to report income to the business from other sources, for example:

  • interest on business bank accounts
  • sale of equipment you no longer need
  • rental income to the business
  • money you put into a limited company from personal funds

Recording other income

  • Record equipment sales in your sales ledger, or on a separate schedule of assets if you prefer.
  • Keep a record of any rental income, for example if you sub-let part of your office to someone else.

Back-up documentation

By law you must keep paying-in slips and/or bank statements to account for your additional business income. Ideally, you should be able to cross-reference this documentation to the above 'other income' records.

 5. The Profit And Loss account: introduction

A profit and loss account is a summary of business transactions for a given period - normally 12 months. By deducting total expenditure from total income, it shows on the 'bottom line' whether your business made a profit or loss at the end of that period.

A profit and loss account is produced primarily for business purposes - to show owners, shareholders or potential investors how the business is performing. But most of the information is also used by HM Revenue & Customs to work out your tax bill.

6. Profit and loss accounting periods and financial years

For the purposes of profit and loss account, accounting periods and financial years vary depending on the type of business in question.

Accounting periods for the self-employed and partnerships

Self-employed and partnership accounts should ideally be made to 31st March or 5th April, although different accounting periods can be used in certain circumstances.

Accounting periods for limited companies

Limited companies can make their accounts up to any date. The accounting period is also referred to as the company's financial year. A normal accounting period will be 12 months, but sometimes it can be shorter - for example when a company started business in the middle of the year, but wants its financial year to end on December 31.

7. Do all businesses have to produce formal profit and loss accounts?

By law, if your business is a limited company or a partnership whose members are limited companies, you must produce a profit and loss account for each financial year.

Self-employed sole traders and most partnerships don't need to create a formal profit and loss account - the information they complete on the self-assessment tax return form amounts to the same thing.

However, there are key benefits to producing formal accounts. If you want your business to grow, or need a loan or mortgage, for example, most institutions will ask to see three years' accounts.

8. Keeping accurate records

Whatever your business type, by law you must keep accurate records of your income and expenditure. The self-employed must keep records for five years and limited company or partnership records for six years.

Accurate record keeping has important benefits. It:

  • gives you the information you need to manage your business and make it grow
  • enables you to report on your profit or loss easily and quickly when required
  • will improve your chances of getting a loan or mortgage
  • makes filling in your tax return easier and quicker
  • helps you or your company avoid paying too much tax
  • helps you plan and budget for tax payments
  • reduces the risk of interest or penalties for late tax payments
  • helps reduce fees if you use an accountant - your annual accounts will be far easier to produce

The basic records you will need to keep are:

  • a list of all your sales and other income       
  • a list of all your expenditure, including day-to-day expenses and equipment 
  • a separate list for petty cash expenditure if relevant
  • a record of goods taken for personal use
  • a record of money taken out for personal use o
  • back-up documents for all of the above

9. Business income: sales

Business income falls into two categories for profit and loss reporting:

  • sales or 'turnover'
  • other income

Business sales or turnover

Your business' total sales of products and/or services in a trading year is referred to as turnover. This is the starting point for your profit and loss account.

How you record sales will vary according to your business type and size. You may use a simple list or 'ledger' in a book, a tailored spreadsheet, or a computer software program. Whichever system you use, you need to ensure that it is accurate and updated regularly.

Sales records back-up

The back-up records for your sales ledger fall into two categories, and will vary according to your business type:

Sales documentation:

  • copies of sales invoices issued by you
  • rolls of till receipts
  • records of money you pay into the business when taking goods out for personal use - note that if you take goods out of your business without paying for them you still owe the business for them, and so will have to add the retail cost of the items to your overall pre-tax profit figure

Proof of income relating to the above:

  • paying-in slips
  • bank/building society statements and similar

If you operate on a 'cash only' basis you must keep detailed records of your income in your sales book or ledger and be able to relate these to your expenditure, cash in hand and bank statements.

10. Business income: other

As well as reporting sales income, you need to report income to the business from other sources, for example:

  • interest on business bank accounts
  • sale of equipment you no longer need
  • rental income to the business

Recording other income

  • Record equipment sales in your sales ledger, or on a separate schedule of assets if you prefer.
  • Keep a record of any rental income, for example if you sub-let part of your office to someone else.

Back-up documentation

By law you must keep paying-in slips and/or bank statements to account for your additional business income. Ideally, you should be able to cross-reference this documentation to the above 'other income' records.

The Business Plan

1) Introduction

A business plan is essential for your enterprise. Whether your business is starting up or already established, it's the roadmap for future development.

However, perhaps most importantly, it's a key document when you are looking for business funding - whether applying for an overdraft or looking for new investment or capital. It must help investors and lenders understand your vision and goals, explain how you are going to spend the invested or borrowed money and set out how this will benefit both them and the business.

This guide explains what you should include in your business plan and how you should present it to potential investors, shareholders and your bank.

2) The essential elements of a business plan

Potential investors and lenders will examine your business plan closely to determine whether to risk their money.

There is no standard format but most plans include:

  • An executive summary highlighting the main points - to catch people's attention.
  • Details of key personnel with an organisational chart showing individual responsibilities.
  • Market research - details of competitors and how your product or service fits into the market - eg who your potential customers are and why you think they will buy your product or service.
  • Your marketing plan - how you are going to get your product or service in front of potential customers, together with any assumptions made when setting your targets.
  • Financial information - eg key ratios. These can be used to compare your business' performance against industry benchmarks. It's also a good idea to give details of any major expenditure you have made on long-term assets and explain the reasons behind any changes in working capital items, such as stock, debtors and creditors. Remember to include balance sheet and profit and loss account details. Many lenders ask for three years' financial information. If this is not available, supply details about trading to date.
  • How you will manage credit, expenditure, stock planning and control, and debtors and creditors.

When seeking funding, include:

  • A cashflow forecast indicating the amount of funding you need and why. For a start-up, include estimates of how much finance you will require for two to three years or until you start to make a profit. Indicate contingency funds that might be needed for rough patches. This is usually between 10 and 20 per cent of the total funding requirement. 
  • Financial forecasts for a three- to five-year period. Try to present this information in the same way as historical financial information, so that straightforward comparisons can be made.
  • How a loan will be repaid, how investors can get their money back, and when.

3) Tailor your business plan to the target audience

A business plan serves a number of purposes and you may have to modify information depending on your target audience.

Your bank will be interested in:

  • how you intend to repay a loan or overdraft
  • what you are going to do with the money
  • how the loan will help the business to grow
  • what other loan or debt commitments you have

Most lenders operate a credit-scoring system. Make sure you give up-to-date and relevant information. A good relationship with your bank manager will not influence the credit score - the manager may have discretion to negotiate terms but not to change the decision itself.

Tell potential investors about:

  • what you are going to do with the money
  • when and how you are going to pay it back
  • the expected return
  • your other sources of funding
  • your management's track record

Include a detailed forecast of your profits and cashflow.

Indicate to shareholders:

  • the prospects for the share price
  • how they may be able to sell their shares
  • what dividend they can expect on their shares
  • your management's track record
  • what say they might have in the business

Demonstrate how they can exit with positive returns within three to five years.

Many businesses with growth potential fail to raise funds because they lack investment readiness, ie they do not understand the expectations of investors, cannot turn proposals into attractive opportunities or are unaware of financing sources.

Common reasons why business plans and loan applications fail include:

  • a weak management team
  • a flawed marketing plan
  • unrealistic forecasts
  • incomplete financial history
  • poor presentation

4) Demonstrate your commitment to the business

If you want to attract outside funding, you need to show that you are committed to the business. You will also need to either show that you have a good credit history or, if not, explain why not.

Demonstrating your personal financial commitment

To attract funding, you need to invest your own money in your business. If you are not prepared to risk your own capital, a lender or investor is unlikely to want to risk theirs.

Therefore, your business plan needs to show the extent to which you are committing your own resources.

For example, you should mention that you are:

  • investing your own cash in the business
  • reinvesting profits from the business rather than taking dividends yourself
  • using your own assets and guarantees to raise funds, eg by remortgaging your house
  • finding funds from family, friends and existing investors

It is always helpful to detail the backing you already have from banks and other investors - especially independent investors. Remember that money attracts money. The more backers you have, the easier it is to attract new ones.

Demonstrating your personal credit history

Because your commitment and track record in meeting your obligations are so important, lenders and investors will want to know your personal credit history. Credit references will be taken up for sole traders and each partner in a partnership.

Find out what kind of information is held by credit reference agencies on the Experian website - Opens in a new window.

A credit reference agency will discover if you, or any partner or co-director of the business, have a poor credit history or county court judgments.

If you have a poor credit rating, use the notes supporting the business plan to state the facts and give your own version of how the poor credit history arose. This is much better than having the new investor find out without any explanation.

You should also state what you are doing to repair your credit history, such as paying your bills on time and managing debt responsibly.

5) Getting the best from your business plan - key considerations

Your business plan is a tool you can use to attract new funds or as a strategy document. Give yourself the best chance of success by following these suggestions.

Doing your research

Before writing your plan ensure that you:

  • check that the help you are applying for is still available - you may no longer qualify
  • back up any assumptions you have made with thorough research
  • find out your own credit rating by applying to Experian or Equifax for your credit file - a small charge is payable

Writing your business plan

Write your plan in a way that demonstrates your commitment to the business. Give it a professional feel by using graphs, pie charts, photos etc, but use only one font type and colour.

Your plan should:

  • Be realistic - make sure you can justify any assumptions or projections and avoid being overly ambitious.
  • Highlight any potential financial difficulties - warn your bank or lender if you anticipate that you may not be able to meet a repayment. There is every chance you may be able to come to some arrangement.
  • Show how you intend to devise and implement effective cashflow arrangements, eg have clear procedures for chasing up any accounts receivable.

Once you have finished writing your plan, get someone to read it to spot spelling and presentation errors, and to ensure it's set out logically.

Getting professional help

Seek the help of your business adviser or accountant in compiling your business plan or loan application form. They will ensure that the financial information is compiled and presented correctly and that key areas stand out.

You may also wish to contact a specialist broker who can help to find potential investors, usually for a fee and a percentage of funds raised.

Revising your business plan

Once you have presented the plan, ensure you review and revise it as your business grows.

If you are refused investment or a loan, take the criticism on board and consider how you might improve the plan for presenting in the future.

Questions on the Balance Sheet

  1. What are annual accounts?
    This document includes: balance sheet, profit and loss account, auditor’s report, director’s report and notes to the account.

     
  2. What is a balance sheet?
    A balance sheet is a financial statement at a specific time and gives information about assets, liabilities and net capital, it shows how the business is funded and uses these funds.

     
  3. Who must produce a balance sheet?
    Limited companies (SpA) and limited liability partnerships (srl)

     
  4. Who is the balance sheet submitted to?
    Companies House, HM Revenue and Customs and shareholders.

     
  5. What other parties are interested in the balance sheet?
    Potential lenders, potential investors, potential purchasers of the business, government departments, employees and trade unions.

     
  6. Why are the annual accounts important to the owner of the business?
    Because it will help the owner monitor the performance of the business.

     
  7. What does the balance sheet show?
    Fixed assets
    current assets
    current liabilities
    long term liabilities
    net capital, including owner’s or shareholder’s capital

     
  8. What are fixed assets?
    They include:
    - tangible assets, for example buildings, machinery, equipment and fixtures;
    - intangible assets, goodwill, patents, trademarks.

     
  9. What are current assets?
    They are assets that become cash within the year: stock, work in progress, money owed by customers, cash in the bank, pre-payments.

     
  10. What are current liabilities?
    They are amounts to pay within the year: money owed to suppliers, short term loans, overdrafts, taxes due within the year such as VAT (Valued Added Tax), PAYE (Pay as You Earn) and National Insurance.

     
  11. What are long term liabilities?
    They include money due after the year.

     
  12. What is net capital?
    It includes owner’s capital or share capital and reserves which are retained profits.

Questions on profit and loss account

  1. What is a profit and loss account?
    It is a summary of business transactions over the year. By deducting the expenditure from the income it shows the profit or the loss of the business.

     
  2. Who has to produce a profit and loss account?
    Limited companies (SpA) and limited liability partnerships (srl).
    But self-employed and sole traders don’t have to produce this document.

     
  3. What is the difference between the English and Italian accounting periods?
    In Italy it goes from 1st Jan to 31st Dec and in the UK from 6th April to 5th April the following year.

     
  4. What is the auditor’s report?
    It is a report produced by the auditor that certifies that the annual accounts are correct and have been produced according to the law.

     
  5. What is the director’s report?
    It is a report that clarifies the management of the business and future prospects.

     
  6. What are notes to the account?
    This information is useful in interpreting balance figures and explains which assessment standards have been applied.

Questions on the business plan?

  1. What is a business plan?
    A business plan is a roadmap for future development of  a running business or of a business that is starting.

     
  2.  What are the main parts of a business plan?
    The business mission
    Market research
    Marketing plan
    Financial information
    Cashflow forecast

     
  3. Who will be interested in a business plan?
    Banks (want to understand if the business can re-pay loans)
    Potential investors ( want to know if it is convenient to buy shares in that business))
    Shareholders ( want to know if the capital invested in the business is profitable)
    Management (wants to draw the roadmap of business strategy)
     
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