Accounting & Financial Analysis 111 Lecture 11 Effective Financial Management Monitor Budget/Performance Report Cash Flow Statement Stock/Inventory Control Understanding Company Costs Recognised Accounting Practices Communication with Management & Staff

Effective financial management Budget preparation Budget preparation Effective financial management is when a management team is able to predict future trends either to their advantage or take corrective action where necessary. The preparation of a budget is the most fundamental exercise management can undertake in order to control business activities and introduce effective financial management. Budget preparation Budget preparation Effective financial management is when a management team is able to predict future trends either to their advantage or take corrective action where necessary. The preparation of a budget is the most fundamental exercise management can undertake in order to control business activities and introduce effective financial management.

Monitor budgets - Performance Reports A plan is of no value unless it is monitored and controlled. So together with the budget there needs to be a system in place that will monitor the business activities. This is generally done by monthly reports that will compare the actual activities to the budget expectations. Any differences between the two will be notified to the manager concerned for investigation. This report is called a "Performance Report" and will be discussed during the manager's monthly meetings. The feedback is designed to enforce the principle that a budget prepared by the participative approach is the responsibility of the team and that each individual manager has ownership of his department's budget and is responsible for the outcomes. A plan is of no value unless it is monitored and controlled. So together with the budget there needs to be a system in place that will monitor the business activities. This is generally done by monthly reports that will compare the actual activities to the budget expectations. Any differences between the two will be notified to the manager concerned for investigation. This report is called a "Performance Report" and will be discussed during the manager's monthly meetings. The feedback is designed to enforce the principle that a budget prepared by the participative approach is the responsibility of the team and that each individual manager has ownership of his department's budget and is responsible for the outcomes.

Performance report The three main features of a performance report are: 1) Compares actual performance against budget 2) Management is given feedback on performance 3) Management can take corrective action The three main features of a performance report are: 1) Compares actual performance against budget 2) Management is given feedback on performance 3) Management can take corrective action

Performance reports must be: Prepared regularly and promptly Simple and informative Highlight variances that are controllable Give accurate information Directed to accountable manager (See “Appendix A" for sample of a Performance Report) Prepared regularly and promptly Simple and informative Highlight variances that are controllable Give accurate information Directed to accountable manager (See “Appendix A" for sample of a Performance Report)

Cash Flow Statement Effective financial management also involves regular monitoring of the "Cash Flow Statement" with comparison to the budgeted cash flow statement. The cash budget indicates the estimated cash receipts and cash payments for the budget period. Its purpose is to monitor the cash flow and highlight periods of cash shortage or surplus. It relates to the liquidity of the company and supports the company's capital budget and development plans. The cash flow statement will monitor receipts from trade debtors and will alert management to check on slow /delinquent payers, thus avoiding the potential of bad debts and maintaining a regular inflow of cash. Effective financial management also involves regular monitoring of the "Cash Flow Statement" with comparison to the budgeted cash flow statement. The cash budget indicates the estimated cash receipts and cash payments for the budget period. Its purpose is to monitor the cash flow and highlight periods of cash shortage or surplus. It relates to the liquidity of the company and supports the company's capital budget and development plans. The cash flow statement will monitor receipts from trade debtors and will alert management to check on slow /delinquent payers, thus avoiding the potential of bad debts and maintaining a regular inflow of cash.

Stock / inventory control Inventory is one of the most important assets of a business; it could also be one of the most expensive. It should therefore be kept to a minimum whilst maintaining a safety level to protect against unusual events. Inventory is one of the most important assets of a business; it could also be one of the most expensive. It should therefore be kept to a minimum whilst maintaining a safety level to protect against unusual events.

Why is inventory necessary? To deliver sales made to customers To maintain stock for future sales To avoid stock shortages To negotiate price on order quantity - discounts To overcome supplier inefficiencies To sell bulk stock on special prices To use certain stocks as loss-leaders a type of pricing strategy where an item is sold below cost in an effort to stimulate other, profitable sales. It is a kind of sales promotion.pricing strategysales promotion To deliver sales made to customers To maintain stock for future sales To avoid stock shortages To negotiate price on order quantity - discounts To overcome supplier inefficiencies To sell bulk stock on special prices To use certain stocks as loss-leaders a type of pricing strategy where an item is sold below cost in an effort to stimulate other, profitable sales. It is a kind of sales promotion.pricing strategysales promotion

Effective Financial Management relating to Inventory will include: Inventory turnover Economic order quantity Ordering costs + Holding costs = Ordering costs + Holding costs = Total relevant costs Total relevant costs Re-order level Minimum inventory required to operate effectively Inventory turnover Economic order quantity Ordering costs + Holding costs = Ordering costs + Holding costs = Total relevant costs Total relevant costs Re-order level Minimum inventory required to operate effectively

Understanding of company costs In session 8 we discussed the calculation of break-even point in a business. The main features were the distinction between variable and fixed costs. The variable costs changed in direct proportion to sales and / or production, that means that every unit sold or produced had a cost of acquisition attached to it. E.G. If a unit is sold for $10 and the cost of purchase of that unit is $4 there is a contribution margin of $6 for every unit sold. Therefore a change in units sold will affect the profit by; (variance in units * $6) E.G. If a unit is sold for $10 and the cost of purchase of that unit is $4 there is a contribution margin of $6 for every unit sold. Therefore a change in units sold will affect the profit by; (variance in units * $6) In session 8 we discussed the calculation of break-even point in a business. The main features were the distinction between variable and fixed costs. The variable costs changed in direct proportion to sales and / or production, that means that every unit sold or produced had a cost of acquisition attached to it. E.G. If a unit is sold for $10 and the cost of purchase of that unit is $4 there is a contribution margin of $6 for every unit sold. Therefore a change in units sold will affect the profit by; (variance in units * $6) E.G. If a unit is sold for $10 and the cost of purchase of that unit is $4 there is a contribution margin of $6 for every unit sold. Therefore a change in units sold will affect the profit by; (variance in units * $6)

Understanding of company costs 2 On the other hand if a company has little or no variable costs (all fixed costs) the effect on the bottom line profit will be the full amount of the sale price. That is the contribution margin is virtually the same as the sale price. E.G. A cinema ticket has little or no variable costs attached to it. If the ticket costs $13 then a change in the number of tickets sold will effect the profit by; (variance in units * $13) E.G. A cinema ticket has little or no variable costs attached to it. If the ticket costs $13 then a change in the number of tickets sold will effect the profit by; (variance in units * $13) On the other hand if a company has little or no variable costs (all fixed costs) the effect on the bottom line profit will be the full amount of the sale price. That is the contribution margin is virtually the same as the sale price. E.G. A cinema ticket has little or no variable costs attached to it. If the ticket costs $13 then a change in the number of tickets sold will effect the profit by; (variance in units * $13) E.G. A cinema ticket has little or no variable costs attached to it. If the ticket costs $13 then a change in the number of tickets sold will effect the profit by; (variance in units * $13)

Understanding of company costs 3 Another example would be the school. Once a course is introduced and the minimum number of students required have registered, the costs would be virtually FIXED and one additional student would have an effect on bottom line profit to the full effect of the fees. An analysis of all expenses will help identify which are essential and which may be reduced or controlled. A reduction in expenses will have an equal increase in bottom line profit. Another example would be the school. Once a course is introduced and the minimum number of students required have registered, the costs would be virtually FIXED and one additional student would have an effect on bottom line profit to the full effect of the fees. An analysis of all expenses will help identify which are essential and which may be reduced or controlled. A reduction in expenses will have an equal increase in bottom line profit.

Effective Financial Management Management must be fully aware of the nature of expenses and their effect on operational performance. They must also be aware of their statutory responsibilities with regards to certain obligations such as: Superannuation contributions, Workers compensation insurance, Business activity statements and the payment of GST, Public liability insurance, Statutory employee entitlements. A clear understanding of their obligations will contribute towards effective financial management Management must be fully aware of the nature of expenses and their effect on operational performance. They must also be aware of their statutory responsibilities with regards to certain obligations such as: Superannuation contributions, Workers compensation insurance, Business activity statements and the payment of GST, Public liability insurance, Statutory employee entitlements. A clear understanding of their obligations will contribute towards effective financial management

Application of recognized accounting practices 1. Proper analysis and authorisation of source documents. 2. Use of computerised accounting package toimprove business performance reporting. 3. Design a quality system for processing of data. 4. Apply accrual accounting to match income to expenditure. 5. Regularly review aged debtors report to identify overdue accounts. 6. Make sure sufficient cash is available to meet payments made and direct bank debits. 7. Review banking procedures, and encourage daily banking of cheques. 1. Proper analysis and authorisation of source documents. 2. Use of computerised accounting package toimprove business performance reporting. 3. Design a quality system for processing of data. 4. Apply accrual accounting to match income to expenditure. 5. Regularly review aged debtors report to identify overdue accounts. 6. Make sure sufficient cash is available to meet payments made and direct bank debits. 7. Review banking procedures, and encourage daily banking of cheques.

Application of recognized accounting practices 2 8. Design financial reports to meet the specific business and management requirements. 9. Make sure that all financial reports and statements are accurate, valid and concise. 10.Make sure that all reporting conform to the accounting standards requirements 8. Design financial reports to meet the specific business and management requirements. 9. Make sure that all financial reports and statements are accurate, valid and concise. 10.Make sure that all reporting conform to the accounting standards requirements

11.Establish procedures and regularity for account reconciliations Bank reconciliation statement Debtors subsidiary ledger to Debtors control account Creditors subsidiary ledger to Creditors control account Value of stock count to general ledger inventory account Asset register to fixed assets accounts. Asset register depreciation charge to accumulated depreciation Cash flow statement to cash at bank a/c Bank reconciliation statement Debtors subsidiary ledger to Debtors control account Creditors subsidiary ledger to Creditors control account Value of stock count to general ledger inventory account Asset register to fixed assets accounts. Asset register depreciation charge to accumulated depreciation Cash flow statement to cash at bank a/c

Management Reports Required reports for management consideration and financial management. Monthly Income Statement - Statement of financial performance = Profit & Loss for current month and for year to date. Monthly Balance Sheet - Statement of financial position as at end of reporting period. Cash Flow Statement - to analyse application of funds Required reports for management consideration and financial management. Monthly Income Statement - Statement of financial performance = Profit & Loss for current month and for year to date. Monthly Balance Sheet - Statement of financial position as at end of reporting period. Cash Flow Statement - to analyse application of funds

Hold monthly management meeting To discuss performance and to keep managers informed of current trends. To discuss cash flow and confirm ability to proceed with capital expenditure. To communicate any new company policies and objectives. To discuss performance and to keep managers informed of current trends. To discuss cash flow and confirm ability to proceed with capital expenditure. To communicate any new company policies and objectives.

Inform Staff of any changes in policy either by: memo on staff notice board, memo attached to pay advice, to individual persons, staff gathering, or individual contact. either by: memo on staff notice board, memo attached to pay advice, to individual persons, staff gathering, or individual contact.

Conduct internal audits to confirm compliance Confirm compliance with procedures and systems make adjustments to systems to reflect industry practices and new technology and update to current statutory and internal control requirements Confirm compliance with procedures and systems make adjustments to systems to reflect industry practices and new technology and update to current statutory and internal control requirements

Some of this may be useful! PROJECT PROJECT CASE STUDY CASE STUDY See appendix A See appendix A PROJECT PROJECT CASE STUDY CASE STUDY See appendix A See appendix A