Improve Your Business: Handbook (ILO, 1986, 144 p.) 6. MANAGEMENT ACCOUNTING (introduction...) The profit and loss account (introduction...) Finding out the change in the value of stock Finding out the change in the value of machines and equipment Finding out the value of debtors Finding out the value of creditors How to construct your profit and loss account The balance sheet (introduction...) Finding out the depreciation of machinery and equipment Finding out the value of stock Finding out the value of debtors Finding out the value of creditors Finding out the amount of the owner's capital How to construct your balance sheet The cash flow budget (introduction...) How to construct your cash flow budget

Improve Your Business: Handbook (ILO, 1986, 144 p.)

6. MANAGEMENT ACCOUNTING

Management accounting is using the information from your bookkeeping and other records to see whether your business is doing well or badly.

To be able to decide how your business is doing and whether it is going up or down, you must keep written records. If you do not keep records or if you think the way you keep your business records is poor, study the Bookkeeping section of Improve your business.

Good records will help you to make better decisions and manage the business better. You do not have to be an accountant to understand the basics of management accounting.

WITH GOOD INFORMATION YOU CAN SEE WHERE YOU ARE GOING

Management accounting provides information which makes it possible for you to know:

· what money has come in and how the money has gone out during a certain period. It tells you also if your business has made a profit or a loss;

· what money and things your business owns and what it owes on a certain date;

· how and when money will come into the business and how and when it will go out during the next few months.

· a profit and loss account;
· a balance sheet; and
· a cash budget.

This section of Improve your business will help you to put together each of these three documents. You can then use them to manage your business better.

TRY TO FIND OUT:

HOW MONEY CAME IN AND WENT OUT

WHAT YOU OWN AND WHAT YOU OWE

HOW MONEY WILL COME IN AND WILL GO OUT

THESE GIVE YOU INFORMATION

The profit and loss account

The profit and loss account tells you if the business has made a profit or a loss during a certain period (e.g. three months, six months or a year) and if the money which has come into the business during that period is greater or less than the money which has gone out.

Figure

The information about money in and money out which you write down in your profit and loss account comes from your bookkeeping, mainly from your ledger.

The account in your ledger which tells you what is the amount of money in during the period is Sales.

The accounts in your ledger which tell you what are the amounts of money out during the period are Raw materials, Wages, Interest, Drawings and Others.

Let us look at the example of a ledger below:

THE LEDGER TELLS YOU ABOUT YOUR MONEY IN AND YOUR MONEY OUT

Figure

The figure for money in (80,000 NU) is obtained by adding up the Sales column.

The figures for money out (Raw materials: 30,000 NU; Wages: 12,500 NU; Interest: 4,000 NU; Drawings: 15,000 NU; and Others: 6,000 NU) are obtained by adding up each of these columns in the ledger.

GET ADDITIONAL INFORMATION FROM YOUR SUBSIDIARY BOOKS

Figure

In your business, you also work with four other major things which help you to make your profit. These things are stock, people to whom you owe money (creditors), people who owe you money (debtors) and machines and tools (assets).

If you want to show the true figure for profit in your business, you have to show the increase in value (money in) or the decrease in value (money out) of these things in your profit and loss account. To record information on each of these things properly, you need to keep four subsidiary books (see the Bookkeeping section of this Handbook). These are:

· a stock book;
· an inventory book;
· a purchase journal;
· an invoice book.

THE STOCK BOOK GIVES CHANGES IN STOCK VALUE

Figure

From the stock book you find whether the value of your stock has increased or decreased during the period.

THE INVENTORY BOOK GIVES DECREASES IN VALUE OF EQUIPMENT

Figure

From the inventory book you find by how much the value of your machines and other equipment has decreased during the period.

From the purchase journal you find whether the amount which the business owes to its suppliers has increased or decreased during the period.

THE PURCHASE JOURNAL GIVES CHANGES IN 'MONEY YOU OWE TO SUPPLIERS

Figure

From the invoice book you find whether the amount which your customers owe to the business has increased or decreased during the period.

THE INVOICE BOOK GIVES CHANGES IN MONEY OWED TO YOU

Figure

We will now show you how to get the information you need for your profit and loss account out of these four books. Let us take an example of a profit and loss account for the period January to June.

Finding out the change in the value of stock

Whenever you check stock, you write the value of the stock into your stock book.

You need to know the change in the value of stock which has taken place between 1 January and 30 June, as shown below.

Figure

Figure

OPENING STOCK ON 1 JANUARY: 1,800

STOCK ON 30 JUNE: 2,800

INCREASE IN STOCK VALUE: 1,000

From the figures given in the stock book, you can see that there has been a 1.000 NU increase in stock. This means that 1.000 NU more has gone into the business. Put it into the Money in column of the profit and loss account.

Finding out the change in the value of machines and equipment

The machines and equipment you use in the business will sooner or later be worn out. The value of a machine you buy today is, for example, 15,000 NU. After five years of daily use it may be worn out and the value is nil.

It costs you 3,000 NU a year (15,000 NU divided by 5) to use that particular machine. If you divide 3,000 NU by 2 you will have the cost of the use of that machine for half a year or six months. This is money that goes out of your business. This reduction in value is called "depreciation".

When you buy a new machine you record the purchase value and the year of purchase in your inventory book. At the end of each year you deduct 20 per cent for depreciation. Look at the inventory book below:

Drilling machine	1983
Price...........	10,000
Depreciation per year.........	2,000
Value end of 1983	8,000
1984	6,000
1985	4,000
1986	2,000

Bandsaw	1985
Price...........	15,000
Depreciation per year.........	3,000
Value end of 1985	12,000
1986	9,000

Turning lathe	1984
Price...........	25,000
Depreciation per year.........	5,000
Value end of 1984	20,000
1985	15,000
1986	10,000

Milling machine	1985
Price...........	25,000
Depreciation per year.........	5,000
Value end of 1985	20,000
1986	15,000

DEPRECIATION = REDUCTION IN VALUE OF YOUR EQUIPMENT

Total depreciation per year: 15,000 NU; half a year: 7,500 NU

In this example the sum of the depreciations of the four machines is 15,000 NU per year. Divide that amount by 2 and you will have the cost for a six-month period; 7,500 NU.

This is value which has gone out of your machines and equipment. Put it into the Money out column of the profit and loss account.

Finding out the value of debtors

Whenever you send an invoice to a customer, you keep a copy in the invoice book. Therefore the total amount of money owed by your customers (i.e. the value of your debtors) can be found by adding the amounts on the copies of the unpaid invoices in your invoice book. Do this on 1 January and 30 June, as shown on the next page.

From the invoices you can see that the value of debtors (i.e. the amounts that customers owe) has increased from 3,500 NU to 4,500 NU, i.e. by 1,000 NU. This means that 1,000 NU more has gone into the business. Put it into the Money in column of the profit and loss account.

Figure

Finding out the value of creditors

Whenever you receive an invoice from a supplier, you write the details and the amount into the purchase journal.

Figure

OUTSTANDING BALANCE AT 1 JAN.:

500 + 300 + 200 = 1,000

OUTSTANDING BALANCE AT 30 JUNE:

400 + 500 + 1,200 + 900 = 3,000

The total amount of money that you owe to your suppliers (i.e. the value of your creditors) can be found at any time by adding up the unpaid amounts in the purchase journal.

Do this on 1 January and 30 June, as shown on the previous page.

According to the figures in the purchase journal, the value of creditors (i.e. the amount you owe to your suppliers) has increased from 1,000 NU to 3,000 NU, i.e. by 2,000 NU. This means that 2,000 NU has gone out of the business. Put it into the Money out column of the profit and loss account.

How to construct your profit and loss account

Now we have all the figures necessary to draw up the following profit and loss account:

Profit and loss account
1 January-30 June 1986
Money in
Sales	80,000
Change in stocks	1,000
Change in debtors	1,000
		82,000
Less Money out
Raw materials	30,000
Wages	12,500
Interest	4,000
Drawings	15,000
Others	6,000
Change in creditors	2,000
Depreciation	7,500
		77,000
Gives: Profit		5,000

NOW I KNOW IF MY BUSINESS HAS MADE A PROFIT!

Do this every six months and see your progress.

The balance sheet

A balance sheet shows the financial position of a business at one particular moment in time. It shows what a business owns and what it owes at that moment or, in other words, its assets and liabilities.

What the business owns

Cash Bank Debtors (people who owe money to the business) Stocks Equipment

What the business owes (assets) (liabilities)

Creditors (people to whom the business owes money)
Loans (owed to the bank)
Owners'capital (owed to the owner)
Retained profits (owed to the owner)

Like the profit and loss account, the balance sheet is drawn up with the aid of the accounts from your bookkeeping system.

The accounts in your ledger that tell you about your assets are Cash, Bank and Equipment.

The account in your ledger that tells you about your liabilities is the Loan account.

Let us look at the example of a ledger below:

THE LEDGER TELLS YOU ABOUT YOUR ASSETS AND LIABILITIES

ASSETS

LIABILITIES

Date

Particulars

Id.no.

Cash

Bank

Sales

Raw Mat.

Wages

Loans

Equipment

Interest

Drawings

Others

June

30

4,000

5,000

40,000

51,000

The figures for assets are Cash (4,000 NU), Bank (5,000 NU) and Equipment (51,000 NU).

The figure for liabilities is Loans (40,000 NU).

But there are a few more things to consider before you can draw up your balance sheet:

· the depreciation of machinery and equipment;
· the value of the stock;
· how much your customers owe to the business -your debtors;
· how much the business owes its suppliers-your creditors;
· how much money you, the owner, have put into the business - the owner's capital.

We will now show you how to get this additional information.

GET ADDITIONAL INFORMATION FROM YOUR SUBSIDIARY BOOKS

Finding out the depreciation of machinery and equipment

When we drew up a profit and loss account we had to consider the reduction in the value of your machines and equipment. This was called depreciation. When you are about to draw up a balance sheet you must also put in this reduction in value. Look at the sheets from the inventory book shown below:

Drilling machine	1983
Price...........	10,000
Depreciation
per year.........	2,000
Value end of 1983	8,000
1984	6,000
1985	4,000
1986	2,000

Bandsaw	1985
Price.....	15,000
Depreciation
per year	3,000
Value end of 1985	12,000
1986	9,000

Turning lathe	1984
Price.....	25,000
Depreciation per year...	5,000
Value end of 1984	20,000
1985	15,000
1986	10,000

Milling machine	1985
Price...........	25,000
Depreciation
per year.........	5,000
Value end of 1985	20,000
1986	15,000

Total value at end of 1985: 51,000

THE INVENTORY BOOK GIVES YOU THE VALUE OF YOUR EQUIPMENT

Figure

The total value of the four machines at the end of 1985 is 51,000 NU. The total depreciation per year is 15,000 NU. If we want to draw up a balance sheet on 30 June 1986 (six months after the end of 1985), we have to reduce the value noted in the ledger by 17.500 NU (half of 15.000 NU).

MAKE THE ENTRY FOR DEPRECIATION IN THE LEDGER

Whenever you draw up a balance sheet, you enter the amount of depreciation (for the period since the last balance sheet) in the ledger. Put it into the out column of the Equipment account and into the in column of the Others account, noting that it is depreciation. You make the entry like this:

DATE	PARTICULARS	ID.NO.
	Depreciation 1/2

OUT				IN
EQUIPMENT				OTHERS
In	Out			In	Out
51,000
	7,500			7,500
43,500

The depreciation reduces the value of the equipment in your assets to:

51.000 NU - 17.500 NU = 43.500 NU.

THE VALUE OF YOUR EQUIPMENT DECLINES MONTH BY MONTH

Figure

Finding out the value of stock

Look at the following stock-taking list which was also used to draw up the profit and loss account:

The total value of the stock at 30 June is 2,800 NU. This figure is an asset.

Stock-taking List Date:
Article	Qty.	Price	Total
Total stock value

Stock-taking List Date: 30.6.86
Article	Qty.	Price	Total
Wood 15 x 5 cm	10 m	10	100
Wood 10 x 5 cm	20 m	20	400
Glue	5l.	60	300
Nails	8 kg	25	100
Unfinished products			400
Chairs	8	100	800
Tablets	3	100	600
Total stock value			2,800

THE STOCK BOOK GIVES YOU THE VALUE OF YOUR STOCK

Figure

Finding out the value of debtors

You can find out the value of your debtors on 30 June from the invoice book, as shown above under" Profit and loss account". Add up all the unpaid amounts on the invoices outstanding to arrive at the total amount.

Figure

THE INVOICE BOOK SHOWS YOU HOW MUCH IS OWED TO YOU

Figure

The total value of unpaid amounts at 30 June is 4,500 NU. This figure is an asset.

Finding out the value of creditors

You can find out the value of your creditors from the purchase journal, as shown above under" Profit and loss account". Add up all unpaid and partly paid invoices to arrive at the total amount.

Date	Supplier	Inv. no.	Paid	Debt
9/4	Glue & Co	86 980		400
15/4	Nail Industry	62 001		1,000
15/5			500	500
18/6	Timber Ltd	413 41		1,200
20/6	Power & Light	14 017		900

THE PURCHASE JOURNAL SHOWS YOU HOW MUCH IS OWED TO YOUR SUPPLIERS

Figure

Outstanding balance at 30 June
400 + 500 + 1,200 + 900 = 3,000.

The total value of unpaid amounts at 30 June is therefore 3,000 NU. This figure is a liability.

Finding out the amount of the owner's capital

You probably have a rough idea about how much money you have put into the business yourself. However, if you are not satisfied with a rough estimate you should keep a record in a book, e.g. a business notebook. In this you can record every change in the amount of money that you have put into the business as shown on the next page.

Money put in by myself when started 1978	6,000 NU
Extra money put in 1986	5,800 NU

The total amount of money that you have put into the business up to 30 June is 11,800 NU. The business owes you this amount. It is a liability of the business.

Figure

THE BUSINESS NOTEBOOK GIVES YOU THE FIGURE FOR OWNER'S CAPITAL

How to construct your balance sheet

Now we have all the figures necessary to draw up the following balance sheet:

Balance sheet 30 June 1986

Assets			Liabilities
Cash		4,000	Creditors	3,000
Bank		5,000	Loans	40,000
Debtors		4,500	Owner's capital	11,800
Stock		2,800	Profit made
Equipment	51,000		1 Jan.-30 June	5,000
Less	7,500
		43,500
		59,800		59,800

The figure for profit, 5,000 NU, is obtained from the profit and loss account. Add the amount of profit to the liabilities side. It is again money which the business owes to you.

As you can see, the two sides of the balance sheet end up with the same amount. They are in balance.

NOW I KNOW MY POSITION!

Figure

The cash flow budget

A cash flow budget is a plan which shows how you think cash will flow into the business (cash receipts) and out of the business (cash payments) month by month during a future period.

If a business is to keep out of trouble, it must have enough cash flowing in to pay the day-to-day expenses like wages, suppliers, rent and electricity. Many businesses have gone bankrupt because they did not have enough cash even when they had full order books. If customers do not pay on time and creditors will not wait, and if the bank will not help, a business is in trouble.

A cash flow budget helps you to forecast or estimate your future cash situation. The information for your cash flow budget comes from your bookkeeping, mainly the ledger. By studying what has happened in the past you can forecast what may happen in the future. The longer you keep good records the better your forecasts will be.

It is often enough to write out the cash flow budget for the next six-month period. But do not wait until the end of the six-month period until you write out your next forecast. Sit down after three months and try to estimate ahead for another six-month period.

Look at the table on the next page. This is an example of a cash flow budget. We show you how it is filled in, step by step. Follow the directions given on the next few pages.

A CASH FLOW BUDGET IS A FORECAST OF YOUR FUTURE CASH SITUATION

WILL YOU HAVE ENOUGH CASH EACH MONTH DURING THE NEXT SIX-MONTH PERIOD? THE CASH FLOW BUDGET

			January	February	March	April	May	June
RECEIPTS	1	Money present at start of month
	2	Cash sales
	3	Cash from credit sales
	4	Other money in
		Money in this month
PAYMENTS	5	Cash purchases
	6	Cash paid for credit purchases
	7	Wages
	8	Drawings
	9	Loan repayment
	10	Interest
	11	Others
	12	Planned investments
		Money out this month
		Money present at end of month

How to construct your cash flow budget

1. Money present at start of month

How much money do you have in the cash box and in your bank account at the beginning of January? Add the amounts together and enter the total, 7,000 NU, into the first row as follows:

Figure

Figure

CASH: 2,000 NU+ CURRENT ACCOUNT: 5,000 NU

Now, look at the receipts.

2. Cash sales

Check your past cash sales from the cash receipt copies in the voucher file and then try to estimate the figure of cash sales that you will make in each month.

Figure

Figure

3. Credit sales

Again check in your invoice book to see how much you have sold on credit during each month of the past year. Estimate the amount you think you will actually sell on credit (i.e. the amount for which you will issue invoices) during each of the next six months. Enter these estimates into the small triangle in the top left-hand corner of each box.

Figure

Figure

You use these figures when you calculate the cash received from credit sales for each month. For example, if customers pay you a month after they receive your invoice you can then fill in the "cash from credit sales" row as follows:

Figure

Remember that if you made credit sales during the previous months, you will also need to include the cash received in January from these sales.

4. Other money in

If you are expecting to get cash as a result of the sale of a machine or other assets, enter your estimate of that amount in the column of the month when you expect the cash: e.g. you sell a machine for cash in April for 12,000 NU.

Figure

Figure

Now, look at the payments.

5. Cash purchases

Try to estimate how much you will spend on raw materials and parts for each of the next six months e.g. January: 2,500 NU; February: 3,750 NU; March: 5,000 NU; April: 3,750 NU; May: 3,750 NU; and June: 6,250 NU. Now try to work out how much of these purchases you will pay in cash. Enter these figures into the row for cash purchases as in the example below:

Figure

Figure

6. Cash paid for credit purchases

Deduct the figures which you entered into row no. 5 above from your estimates of your total purchases for each month, and enter the results in the small triangle in the top left-hand corner of each box in row no. 6. For example, the figure for January is 2.500 NU, minus 2.000NU (cash purchases), which equals 500NU.

Figure

Figure

You use these figures when you calculate how much of your credit purchases you will pay in cash each month. For example, if each time you are going to pay two months after you have received the invoice, row no. 6 will look as shown on the next page.

Figure

7. Wages

Look at your payroll and work out how many people you will employ and how much their wages will be for each month.

Enter the total wage bill for each month like this:

Figure

Figure

8. Drawings

Estimate how much you will draw from your business each month as a salary for yourself. Enter your estimates like this:

Figure

Figure

9 and 10. Loan repayment and interest

Check your loan document. Find out when payments are due and how much they are. For example, you make your loan repayment quarterly, in March and June. Each repayment is 1,000 NU.

Figure

Figure

You make the interest payments on a monthly basis. In this case, enter the amount you pay each month, e.g. 600 NU for January, February and March and 550 NU for April, May and June.

Figure

Figure

11. Others

Enter your estimate of how much you will spend in each month for all the other expenses which normally arise when you run a business, e.g. rent, telephone, insurance, electricity.

Figure

Figure

12. Planned investments

If you have planned any new investment, estimate when and how much you are going to pay:

Figure

Figure

We have now entered all the figures necessary to complete our cash flow budget. The cash flow budget now looks as shown on page 108.

All that is now left for us to do are some additions and subtractions:

· Start with the column for January. Add rows 1, 2, 3 and 4 together. Enter the total, 14,500 NU, in the row called "Money in this month".

· Next, add up all the payments for January (rows 5-12). Enter the total, 9,100 NU, in the row called "Money out this month".

· Subtract as follows:

Money in this month	14,500
- Money out this month	9,100
= Money present at end of month	5,400

Enter this figure in the bottom row. Also enter it in row 1, in the column for February.

· Add up the figures for February to June in the same way as you did for January. The result is your six-month cash flow budget as shown on page 109.

THE CASH FLOW BUDGET

THE CASH FLOW BUDGET

The cash flow budget shown on page 109 is a good example of what happens when a business does not have enough cash. You can see that, at the beginning of April, the business is actually 2,300 NU in deficit, and that by the end of June it has only 50 NU in hand. By making up a cash flow budget beforehand, you are able to see in advance the cash problems that you may run into. Take action in good time to avoid such a dangerous situation.

YOUR CASH FLOW BUDGET HELPS YOU TO SEE YOUR CASH SITUATION AND TAKE ACTION