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Basic Business Finance Textbook Summary
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A brief summary of the following textbook: Smith, MB. 2007. Basic Business Finance for short course CBBF01W - Basic Business Finance
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CHAPTER 1 - INTROThe Basic Business Function
ANALYSING THE FINANCIAL POSITION
➔ Monitoring liquidity & profitability
➔ Liquidity - firms ability to honour short-term financial commitments continually & on time
➔ Profitability
- ability to generate income that will exceed total costs by using assets for productive
purposes
- degree of success/failure of business operation
MANAGING THE ASSETS
➔ Investing in those that will add value to firm
➔ No unnecessary extras or large quantities raw materials inventories
➔ Optimum balance between long & short-term assets
MANAGING THE LIABILITIES
➔ Deciding best way to structure financing of assets
➔ Appropriate mix of short & long-term financing + individual sources of funds
➔ MUST HAVE ongoing access to sources of funds at best interest rates & repayment conditions
➔ Need in-depth analysis of available alternative sources & their costs & long-term implications
➔ 3 CORE PRINCIPLES MUST BE CONSIDERED WHEN MAKING FINANCIAL DECISIONS
Core Principles
COST BENEFIT
➔ Benefits should outweigh costs
➔ Used to
- Clarify objectives
- Calculate costs & benefits of different alternatives
- Determine standards for alternatives
- Thereafter decide on best course of action
RISK RETURN
➔ Higher risk = higher return required to take risk
➔ Return should exceed risk
TIME-VALUE-OF-MONEY
➔ Money value can increase by investing to earn interest
➔ Not apply to vehicles/equipment/inventories/other assets
, CHAPTER 2 - BASIC BUSINESS RECORDS
The Accounting Equation / aka Balance Sheet Equation
𝐴𝑠𝑠𝑒𝑡𝑠 = 𝐸𝑞𝑢𝑖𝑡𝑦 + 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
➔ Assets - a firm’s resources
➔ Equity - assets provided by owners
➔ Liabilities - assets provided by outsiders
Financial Transactions
CREDIT & DEBIT RULES
𝐸𝑥𝑝𝑒𝑛𝑠𝑒𝑠 + 𝐴𝑠𝑠𝑒𝑡𝑠 = 𝐼𝑛𝑐𝑜𝑚𝑒 + 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 + 𝐸𝑞𝑢𝑖𝑡𝑦
➔ Income + Liabilities -> excess income owed back to business
➔ Expenses + Assets -> need to spend money to acquire
Financial Statements
INCOME STATEMENT
Income Statement
R R
Sales +
Less: Discount Allowed (-)
Cost of Sales (-)
Purchases +
Opening Inventory +
Less: Closing Inventory (-)
GROSS PROFIT =
Other Operating Income +
- +
GROSS OPERATING INCOME =
Operating Expenses (-)
- +
PROFIT/LOSS BEFORE INTEREST AND TAX =
Interest Paid (-)
PROFIT/LOSS BEFORE TAX =
Tax (-)
PROFIT/LOSS FOR THE YEAR =
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