King’s Fund - 13 January 2011 Dr. Tom Kirchmaier Manchester Business School & Financial Markets Group London School of Economics • Learn how to use the information provided in financial statements. • Gain confidence in dealing with Finance professionals on your board. … and what not to expect: • Become an accountant. 26/01/2011 2 (Your) Role on the Board 26/01/2011 3 Role of the Board 26/01/2011 4 Functioning of the Board 26/01/2011 5 Accounts provide a large amount of independent information about the performance of any organisation 26/01/2011 6 You don’t have to be an accountant to: • use accounts as a source of information • identify some underlying trends • get pointers for interesting questions 26/01/2011 7 How the accounts are presented to you will determine how much you can read out of it! 26/01/2011 8 26/01/2011 9 1. Balance Sheet  2. Income Statement  3. Also Profit and Loss Statement (P&L). Shows the profitability of the trust Statement of Retained Earnings  4. Shows the financial position of the trust Shows the financial ‘buffer’ of the trust Cash-flow Statement  Shows the cash position of the trust divided by operating, investing, and financing activities 26/01/2011 10  Shows the financial position of the trust at a point in time  Assets = Liabilities + Equity The liabilities and equity sections show where the business gets its funds from while the assets section shows how those funds have been used  Long Term Assets Requires careful monitoring as wrong long term investment may negatively affect organisation for many year  Debt and Equity Main sources of funding 26/01/2011 11 ASSETS Long term asset • Long term investments • Other intangibles • Property, plant and equipment Current assets • Cash • Short term investments • Accounts receivables • Inventories • Other Current Assets 26/01/2011 LIABILITIES Long term liabilities • • Long term debt (due after one year) Provisions Current Liabilities • • • Short- term debt (due within one yr) Accounts payables Accrued expenses Taxpayer’s EQUITY 12 • Measures the profitability of the trust: Income (Recognised when the product is delivered, not when the cash is actually received) ./. Costs 1. 2. Operating costs Interest expenses - cost of financing the business = Profit / Net income / Surplus (deficit) for the financial year 26/01/2011 13 • Key indicators of profitability 1. EBIT (Earning Before Interest and Tax) 2. EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation) 3. Net Income (Surplus (deficit)) Comparing financial performance • • 26/01/2011 To compare the performance (of all organisations), you divide the surplus for the financial year through equity. 14 Total income = Operating costs OPERATING PROFIT + Interest income / expense = SURPLUS / (DEFICT) - Public Dividend Capital dividends = 26/01/2011 RETAINED SURPLUS/(DEFICIT) 15 What questions would you ask in this case? 26/01/2011 16