Financial_Control

Table of contents Introduction………………………………………………………………… 2 Relationship between the financial system and other systems……………... 2 Learning outcome 1.2………………………………………………………. 3 Learning outcome 1.3………………………………………………………. 4 Learning outcome 2.1 Creating a budget…………………………………. 5 Learning outcome 2.2 Budgetary control system...…………………………. 6 Learning outcome 2.3 Budgetary variations......……………………………. 7 Learning outcome 2.4 Conflicts in management control system…………….. 8 Learning outcome 3.1 Sources of finance …………………………………… 9 Learning outcome 3.2 Distribution of finance……….……………………… 10 Learning outcome 3.3Monitoring and control….…………………………… 11 Conclusion Bibliography Financial control Introduction: Finance is the basic for any business, without having revenues or profit no one can operate their business, without capital no entrepreneur can start a business. If you have great idea in mind for a business and you want to implement it, the first thing you would ever need is the finance, which may be in the form of money, cash, or credits etc. Within an organisation finance ensures that there are adequate capital and funds are available in the organisation to support the activities of the business. (Mcgowan, 2008) Company over view: Suppers’ & Co, is a regional retail store, located in the main city of London, the store was founded by Josephs stone in 1990, He opened the store as a bakery operating himself as a baker in one of the multinational retailer, expanded it later on to a retail store. I work as a manager in the following organisation and have assigned to manage the accounts of the store for the next fiscal year. 1.1) Relationship between a financial system and other systems: Financial system: A firm’s financial system is a set of events which keeps record of the financial operations of and organisation. At a local level it is a system which enables borrowers and lenders to exchange funds. It can be properly defined as “the process and procedures used by an organisations management to exercise financial control and accountability, these measures include recording, verification, and timely reporting of transactions.” According to investopedia ‘the firms financial system is the set of implemented procedures that track the financial activities of the company, on a regional scale it is a system of the company which enables lenders and borrowers to exchange funds. The financial systems enables the organisation to save money and reduce the excess of costs and expenses (Gilberto Fuentis, 2012) For the development of the organisation there are two basic ingredients that are used that are planning and controlling and financial data helps to make useful and cost effective planning, whether it is for the product planning or total planning of the organisation. (Cindy, 2011). For example if the sales and production team launched a new product or services this will affect directly on the cash flow and finance and their will be nothing left when the need arises. Similarly when place order and don't have enough funds to pay the suppliers then it will affect the relationship with the suppliers. 1.2) Describe the system of accounts and financial statements used to control a financial system For the management of the finance of my store I use the following system of accounts. 1) Revenue and loss account: In this statement an organisation shows the profit and loss they have made. It depends on the company after how long they review this statement some companies do it on monthly basis as well. (Fred Wilson, 2010). There are various entries in this statement as well these are; ➢ Total sales/ revenue or turnover ➢ Gross profit ➢ Variable or direct costs ➢ Fixed/indirect costs ➢ Operating profit ➢ Post and pre tax profit 2) Balance sheet: the balance sheet show the assets and liabilities of the company , that how much does it own and how much it owes to others. The assets are things which the company owns and the liabilities are the debts. (Graeme paitsez, 2012). The balance sheet gives an idea about the company and its current financial status. Both the assets and liabilities are long and short term. Machinery, plant, land etc these are long term assets, cash and current accounts are the short term assets. 3) cash flow statement: In this statement the amount which goes in and out of the business is shown inside a definite period of time. It contains opening and closing balance. Like for example if a company does its all transactions through the bank the8 bank statements are the company’s cash flow statement. Sometimes organisation prepares a forecast for the cash flow to expect the expected cash flow for the coming year. The cash flow statements actually analyzes for the company whether it is running out of money while still in profits. (Josh Patrick, 2010). This helps them to identify whether they have enough cash or money to pay the bills or not. If the forecast indicates any kind of shortage then the organisation can prepare themselves. 1.3) Analyse financial information contained in a set of accounts or financial statements The information which is contained within the financial statements helps the organisation to; ➢ to asses the performance of the organisation with the budget ➢ reallocate the funds for the business activities ➢ identify strengths and weaknesses (Marie Lougran, 2011). The financial analysis mainly involves the mathematical calculations, like ratios calculations with the previous periods and other organisations. As an example here we would evaluate the income statement of my company for the 10,000 units of bread sold in the fiscal year 2012. In the above income statement table we are able to analyze whether the company had a loss and earnings statements defines that the company had loss in comparison to the total revenues for the sold units of the breads. So information plays an important role in the management of the financial system. (Adharsh K, 2011). | Income Statement | |Fiscal Year 2011 | |Revenue (10,000 units) £10,000,00.00 | |Cost of goods | | |Inventory | £0.00 | | |£ 345,234,00 | | |£ 345,234.00 | | |£ 0.00 | | |£ 345,234.00 | |Manufacturing costs | | |Available sale goods | | |Ending inventory | | |COGS Total | | |Gross Profit | £ 520,230.32 | |Operating Expenses | | |Adverts | £ 90,000.00 | | |£ 40,000.00 | | |£ 35,000.00 | | |£ 0.00 | | |£15,000.00 | | |£ 11,000.00 | |Development & research | | |Sales support | | |Market research | | |Office expense | | |Leasing | | |Total Operating expense | £ 191,000.00 | |Without interest and tax income | £ 543,291.22 | |Net income –income Tax | £ 95,000.00 | |Earnings | £ 5,683,900.00 | | |£ 95, 000.00 | | |£ 5,588,900.00 | |Net income | | |Total Earnings | | 2.1- Construct a budget for an area of management responsibility. Budget is a thorough plan which deals with the distribution of physical property but is uttered in quantitative terms it projects the future needs and expenses. (Jean murray, 2012) There are two kinds of budgets, incremental and zero based, in zero based every thing is started from the beginning no reference is taken from the history, while in incremental based budget the current budget is used to get an idea for the next year. Both of these systems have their own advantages and disadvantages. (Mellissa bushman, 2012). Incremental based budgeting: Advantages: easy and quick, can work with lower skill level, easy availability of data Disadvantages: poor allocation of limited resources, more waste is generated Zero Based Budgeting Creating a budget: When creating a budget for an area the following steps should be taken into consideration: • Collection of all kind of financial statement • Record all the sources of income • List of monthly expenses • Divide the expenses into two categories; fixed and variable • Total the monthly income and expenses • Adjustment to the expenses • Monthly review of the budget Here as a manger for my store I was given a task to create a budget for the store for the next three months. As analyzing the financial statements for the last year I have created the following budget. The following budget shows all the possible expenses including all the costs. From the budget we have analyzed the company is going to gain profit but as comparison to the last year result it will be still in loss. Supper’s & Co ltd Budget Jan – mar, 2013 |Inflows | Actual |Budget |Difference | | |£480,000.00 |300,000.00 | | |Net sales | | | | |Merchandize inventory | £ 110.800.00 |£160,000.00 |£948,00.00 | |Purchases |£ 120,000.00 |£ 170,000.00 |£50,000.00 | |supply Charges |£ 6,000.00 |£ 7,000.00 |£ 1000.00 | |Total merchandize |£126,000.00 |£177,000.00 |£51,000.00 | |Inventory |£90,000.00 |£100,000.00 |£10,000.00 | |Cost of sold goods |£ 180,000.00 |£ 135,000.00 |£ 45,000.00 | |Gross Profit |£ 270,000.00 |£235,000.00 |£ 35, 000.00 | |Total income with interest | | | | | |£ 270,700.00 |£235,800.00 |£34,900 | |Expenses | | | | |Salaries |£68,000.00 |£ 50,000.00 |£18,000 | |Utilities |£ 10,000.00 |£15,000.00 |£5000.00 | |Office supplies |£7,600.00 |£ 8,000.00 |£400.00 | |Advertising |£10,000.00 |£ 9,000.00 |£1000.00 | |Insurance |£ 1500.00 |£ 2500.00 |£ 24,000 | |Maintenance & repairs |£ 1,200.00 |£ 1000.00 |£ 200.00 | |Credit expenses |£ 3000.00 |£ 4000.00 |£1000.00 | |Loans and other expenses |£ 7650.00 |£ 8,000.00 |£ 350.00 | |Net income |£ 108,950.00 |£975,00.00 |£ 11,450 | 2.2) Develop budgetary control systems and compare actual with planned expenditure Main benefits of the budgetary control system are given below; • It reflects the financial objectives of the firm • Helps to measure the efficiency of the various parts of the organisation • Provides a guide for remedial actions • Facilitate centralised control with delegated accountability Companies give more importance to the budgets as a source of managing the operations of their business, where the system of cost codes and costs centre are used. It is a strong tool for increasing profit. (Suraj, 2009). Like for example each staff costs are assigned different codes, all the IT related expenses will have their own different codes and each department will have their own codes which will track each expenses. (vinod Kumar, 2010). At Suppers & co we also follow the same code structure. By assigning these codes it enables us and the organisation to clearly determine the use of the system. The budgetary control system enables us and the organisation to maximize the profits and to coordinate between different departments and members, to formulate a more correspondent and efficient team. It also provides a measurement tool for the performance of the different departments. (Preethabh, 2010). Each objective of our organisation is indicated by our budgeting system, the objectives of this system are compelling for planning; the plans and communication of ideas are affected by this system. A control system is built in our store which is used to plan all the given objectives. From the income table of three months budget we have analyzed the needs and expenses for each department, these information has been taken from the last year expenses done by each part of the store, this is a code system through which each department leader is given computerized programme where they have to enter each expenses through the codes they are assigned and the amount of money spent, which is automatically added to the main system of the company and results in the total expense. 2.3) Discuss corrective actions to be taken in response to budgetary variations The budgetary variations depend on two factors; • Favourable/adverse • Controllable and uncontrollable In favourable variance, this involves positive feedback, motivation and encouragement, for the management it is important to offer bonuses in the form of motivation to keep the employees morale high. It becomes uncontrollable if the management don’t take necessary steps when required and should identify about the things which resulted as a negative variance. (Jim Riley, 2012). This could result mostly because of faulty assumptions, it is said to be a good practice which would analyze any trends that would appear as a result of the monthly accounts. As example if we analyse the Suppers & co financial report. The comparison of the budget with actual is known as variance analysis. This variance is analyzed by measuring the difference between budgets and actual these corrective actions depends on the report results. (Jay way, 2010) This would result in saving a lot funds and utilization of development funds in proper places. Same like this the timing of the Budget is very crucial and it can take the management somewhere else if the whole picture is not taken into consideration. To get a longer view of the expenses some of the organisation reviews their budgets on quarterly and yearly basis in a longer term. In case of the uncontrollable costs, it is useless for blaming someone for that because these kinds of costs are not controlled. This could result in negative effects like hatred and nuisance. Every organization would try to reduce their controllable costs as much as likely. It is very necessary to properly assign liability for each cost to avoid any disorder. Budget holders possess the authority to issue buy order numbers and can refuse expenses which are not required. This is the best way to keep a control over the expenses. 2.3) classify conflicts that can occur with management control systems and how these could be resolved or minimized. There are no of conflicts that can occur within our organization depending on the situation and the relationships between the members of the staff. These could include conflicts on the duties performed as well as responsibilities, conflict of interest between the stakeholders. (Janie Sulivan, 2011). Some possible methods to resolve the conflicts of interest within the financial systems of an organization are given below: Longer and shorter term conflicts: To maintain the short term profitability the management should cut down the immediate expenses. The main goal of the administration at the suppers & co is to be at the front position of their bakery lines and provide good services to its customers. applying rationality at these conflicts helps to manage a lot. (Roger, 2007) The company is at the top of the market, other competitors are trying to chase the new technology and so during the current global recession the management took a decision of expanding the lines of bakery and home made sandwiches. Conflicts of the Departments: Each manager of the department will argue that their needs are most important. This issue can be resolved when all of the managers are convinced to work towards the same objective of the organization and all of them should be given the same amount of budget. Charles green describes three basic approaches used for resolving business conflicts; competing approach, accommodating approach, avoiding approach collaborating and compromising approach. (2010). Control and flexibility conflicts: Strict management system would control the flexibility of the new ideas and it would never come out. Hence it is essential for the managers within the organization to adopt a kind of system which is flexible so that the organization becomes bendable towards the changes. Controllable and uncontrollable conflicts: To assign managers with the costs to their budgets is said to be not a good practice. This can result in frustration; similarly these out of control costs need to be allocated somehow. As said by James Richardson “ thinking of the word conflict actually means more than it sounds, which is more than just an agreement” (2005). It is the liability of the management to continually monitor the cost without making one person responsible. Periodic review meetings are very essential and have discussion on minimizing these kinds of extra costs and to check the variations to make it convenient. (Jouycee, 2005). 3.1) identify the current and potential sources of finance that supports organizational activities The main sources of finance are capital and income but these are internal sources as some of the external sources utilized for our company are given below; 1) Banks: The bank is one of the basic source of finance providing the organization with loans and credits which are provided for a fixed term like a year or more than that and the repayment is also fixed which is pad monthly by the organization with the interest which is fixed or variable decided by the bank.(jim Riley, 2012). Overdrafts are provided for a limited time period as long as they stay within the decided limit the organization will pay the debits according to the agreement. 2) Owners funds: The owner’s funds are those which the owner of the business possesses personally which are used in certain business activities. But for the transactions the records should be separate. In case of private limited companies the owners sustain there business by buying shares and in return they are given a certificate which shows the total shares worth and number. Dileep Rao has extended the list of sources by describing equity and leases. (2010) 3) Project Capital companies: Venture capitalists are one of the sources of revenue for better amount of money. They always invest in companies who have a good rate of return; they target companies with high growth potential. 4) Grants: These are source which the organization gets by supporting some social costs, they will be willing to provide funds example. Initially within our company most of the sources of finance is the income and profits. The other forms of sources include family and friends, sales of assets, retained profits. 3.2) evaluate the distribution of finance in support of organisational activities For an organisation it’s very essential to assess its investment options to get a good profit as a return on the invested money. There are certain factors which are important to consider; • planned investment scale • Pay back period • Expected profits Before doing any kind of investment, it should be justifiable and should be thoroughly used for the company, to confirm this there is an evaluation done which will give an idea of the risks involved. The most common technique used is the Pay back period in which where the time for the initial costs on the investment is calculated. (arun, 2011). Suppers & co works under the same management scheme for finance. For the investment in the bakery expansion project the total contribution was £130,000 followed by more contribution of £90,000 for the covering of extra expenditure which is described in the budget of the company. Thus this includes a total investment from the company £ 220,000.00. 3.3) Discuss control and monitoring of finance employed in support of the organisational activities. Organisations can control and monitor its finance employed by adopting several methods, investment appraisal is a method used to identify to use these finances in a best way. The techniques which were discussed before like budgeting purchase order system and cost codes are the tools which can be used to control and monitor the expenditure. Variance analysis examples have also been presented which is another technique of controlling. As the main objective of the organisation is to provide exceptional service to their customers as well as gain profits through the innovation of the store it is important to monitor and control the finance at over all, there are certain methods which I use as manager of the store to stay in budget as suggested by J.D.Roth; “setting financial goals which can be possibly done through budgeting and other income statements” (2005) like for example the goal of our fiscal year 2012 is to minimize costs and expenses while introducing new lines of products. Here comes the monitoring of the financial status of the organisation, this could be done by the efficient use of the resources, demonstration of the accounts occasionally and taking possible actions to solve issues before it gets too high, as timely demonstration could help the organisation to safe itself from huge failures.(Joe Kelab, 2009). Conclusion For a human the consumption of food on daily basis is very important as their health and survival depends on it. A same thing happens with the organisations as well they need proper finance for their each activity to operate. From the above paragraphs we can conclude that finance and its systems plays a major role in the normal and efficient functioning of the organisation. We discussed how these finance contribute to the success of an organisation and how it can be controlled and managed. Reflective statement: Until now we know that finance is the one of the major parts of the organisation and an organisation cannot function properly without the supply of the sufficient funds, form the above paragraphs so far I have learned the major functioning of finance within the organisation its importance and how it can be used effectively, I have identified some of the major sources of finance and how it can be controlled and monitored, as well as its distribution. The financial system and the creating of the budget is one of the major part which is the basics for the finance.