Accounting & Financial Analysis 1 Lecture 9 Manage finances within a budget (THHGLE13B)

The Participative approach applied by modern management. Easier for one person to be responsible for all business decisions and developments of the company? The participative approach does not diminish the responsibility of the general manager -she is still responsible for the ultimate performance of the company. The participative approach helps the general manager to arrive at a more informed decision with the help of her colleagues. applied by modern management. Easier for one person to be responsible for all business decisions and developments of the company? The participative approach does not diminish the responsibility of the general manager -she is still responsible for the ultimate performance of the company. The participative approach helps the general manager to arrive at a more informed decision with the help of her colleagues.

Advantages of the Participative approach Management is aware of company goals. Management sets priorities on allocation of resources. Creates a strong management team. Decisions take into account the interdependence of departments. Management participate in the running of the business. Management accepts responsibility for the performance of their department. Management gets feedback on actual performance and can monitor progress. Consult and inform all relevant personnel in relation to resource decisions. Management is aware of company goals. Management sets priorities on allocation of resources. Creates a strong management team. Decisions take into account the interdependence of departments. Management participate in the running of the business. Management accepts responsibility for the performance of their department. Management gets feedback on actual performance and can monitor progress. Consult and inform all relevant personnel in relation to resource decisions.

Consult and inform all relevant personnel in relation to resource decisions The board of directors together with the general manager decide on the direction they want the company to take. This could influence the allocation of resources: Budget for an increase in profit margin to a predetermined figure. (current profit of say $480,000 to be increased to $720,000) Expansion of current business or purchase of other business. (how to achieve the increased profit) Influence public image of company (increase or decrease advertising) Improve social awareness. (assist in social development, playgrounds, hospitals, schools, elderly activities and transport) The board of directors together with the general manager decide on the direction they want the company to take. This could influence the allocation of resources: Budget for an increase in profit margin to a predetermined figure. (current profit of say $480,000 to be increased to $720,000) Expansion of current business or purchase of other business. (how to achieve the increased profit) Influence public image of company (increase or decrease advertising) Improve social awareness. (assist in social development, playgrounds, hospitals, schools, elderly activities and transport)

Consult and inform all relevant personnel in relation to resource decisions - 2 Improve health & safety. (improve shortcomings, or to meet new legislative requirements) Consider environmental issues. (energy saving, waste disposal) All expenditure to conform to preset percentages as per vertical analysis. Contribution to be 65% of sales value. Gross profit to be 48% of sales value. Sales & marketing to be 10% of sales value, Administration to be 25% of sales value. Borrowing costs to be 5% of sales value. Net profit to be 8% of sales value Restriction on Capital budget expenditure. Improve health & safety. (improve shortcomings, or to meet new legislative requirements) Consider environmental issues. (energy saving, waste disposal) All expenditure to conform to preset percentages as per vertical analysis. Contribution to be 65% of sales value. Gross profit to be 48% of sales value. Sales & marketing to be 10% of sales value, Administration to be 25% of sales value. Borrowing costs to be 5% of sales value. Net profit to be 8% of sales value Restriction on Capital budget expenditure.

Management Participate Once the direction has been established by the Board the general manager will then advise his management team of the company goals, and together they will formulate a plan to achieve these goals. (participative approach). Once the direction has been established by the Board the general manager will then advise his management team of the company goals, and together they will formulate a plan to achieve these goals. (participative approach).

Monitor financial activities against budget Since management has formulated the budget and got it approved by the Board it is management responsibility to monitor activities to confirm that they are on track. Since management has formulated the budget and got it approved by the Board it is management responsibility to monitor activities to confirm that they are on track.

Performance Reports The purpose of a Performance Report is to highlight the performance of a business, or section of a business over a specified period of time. The object is to compare the actual results to the budget plan. Any differences should be brought to the attention of the manager responsible; either for explanation, or corrective action where possible. The comparison of actual to budget has to be done regularly, usually monthly, at the end of each accounting period. The purpose of a Performance Report is to highlight the performance of a business, or section of a business over a specified period of time. The object is to compare the actual results to the budget plan. Any differences should be brought to the attention of the manager responsible; either for explanation, or corrective action where possible. The comparison of actual to budget has to be done regularly, usually monthly, at the end of each accounting period.

Performance Reports -2 Since the budget was originally prepared using the participative approach each department manager is responsible for the outcome of his department. Any variance from the plan, whether favourable or unfavourable, needs an explanation. Since the budget was originally prepared using the participative approach each department manager is responsible for the outcome of his department. Any variance from the plan, whether favourable or unfavourable, needs an explanation.

Performance Reports -3 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 -4 Performance reports must be: Prepared regularly and promptly (monthly) Simple and informative Highlight variances that are controllable Give accurate information Directed to accountable manager Performance reports must be: Prepared regularly and promptly (monthly) Simple and informative Highlight variances that are controllable Give accurate information Directed to accountable manager

Financial Commitments A business will have various financial commitments that occur at different intervals during the year. Management will need to monitor these commitments and make sure that funds are available when required. A business will have various financial commitments that occur at different intervals during the year. Management will need to monitor these commitments and make sure that funds are available when required.

Financial Commitments - 2 Accurate documentation needs to be kept and regularly reviewed. Schedules of financial commitments are to be electronically diarised for notification prior to the event. The cash flow statement is to be updated regularly and all financial commitments included in future month’s cash payments. This will highlight months that will be short of liquidity and require corrective action. The Cash Flow statement and the schedule of financial commitments should be monitored and reviewed regularly Accurate documentation needs to be kept and regularly reviewed. Schedules of financial commitments are to be electronically diarised for notification prior to the event. The cash flow statement is to be updated regularly and all financial commitments included in future month’s cash payments. This will highlight months that will be short of liquidity and require corrective action. The Cash Flow statement and the schedule of financial commitments should be monitored and reviewed regularly

Financial Commitments - 3 Financial commitments are either: normal operating expenses such as rent, wages, payments to trade creditors, etc. Or, other financial commitments, some times large in nature and at irregular intervals:- GST payments (when paid quarterly) Insurance on property or third party liability Income tax due Purchase of equipment (Capital budget) Loan repayments Financial commitments are either: normal operating expenses such as rent, wages, payments to trade creditors, etc. Or, other financial commitments, some times large in nature and at irregular intervals:- GST payments (when paid quarterly) Insurance on property or third party liability Income tax due Purchase of equipment (Capital budget) Loan repayments

Making a Budget too Hard or too Easy Management will not take the budget seriously. Staff will lose interest, and effect morale. The performance report will have many variances. Will involve explanations each month for same variances. Management will appear incompetent since they were responsible for the preparation of the budget in the first place Management will not take the budget seriously. Staff will lose interest, and effect morale. The performance report will have many variances. Will involve explanations each month for same variances. Management will appear incompetent since they were responsible for the preparation of the budget in the first place

Performance Variance Analysis The performance report will highlight the difference (variance) between the budget and the actual. That means it will point out the area where the business is drifting from the plan. A variance analysis will show the area that requires corrective action and early management attention The performance report will highlight the difference (variance) between the budget and the actual. That means it will point out the area where the business is drifting from the plan. A variance analysis will show the area that requires corrective action and early management attention

Management by Exception The variances in performance reports highlight the areas that need management attention. Management cannot attend to every aspect of the business, but they must concentrate on the areas that are drifting from the budget. The performance report will direct attention to where it is most urgently required and these issues need to be corrected as soon as possible. This is what is meant by management by exception: management concentrates on solving the most urgent problems, other issues that require less attention are left for later. The variances in performance reports highlight the areas that need management attention. Management cannot attend to every aspect of the business, but they must concentrate on the areas that are drifting from the budget. The performance report will direct attention to where it is most urgently required and these issues need to be corrected as soon as possible. This is what is meant by management by exception: management concentrates on solving the most urgent problems, other issues that require less attention are left for later.

PRACTICE ACTIVITY! Finish Activity 2 Finish Activity 2 Have you done the Bank Rec? Have you done the Bank Rec? Have you answered all the Report Questions? Have you answered all the Report Questions? THEN Do Activity 7 Horizontal & Vertical Analysis Make sure you answer the questions. GOOD LUCK! GOOD LUCK! Finish Activity 2 Finish Activity 2 Have you done the Bank Rec? Have you done the Bank Rec? Have you answered all the Report Questions? Have you answered all the Report Questions? THEN Do Activity 7 Horizontal & Vertical Analysis Make sure you answer the questions. GOOD LUCK! GOOD LUCK!