In my business (Fie Consultants), the finance function incorporates all other tasks and activities. Without funding, the company would be unable to fulfill its goals, meet shareholder demands, and maintain regulatory compliance. To achieve the key goal of raising sales, the various agencies must work together to complete the assigned tasks. Sales, communications, human resources, and manufacturing are some of the divisions that ensure the company runs smoothly (Needham and Dransfield 30). To begin, financing is related to other departments because of its role in the establishment. Without a proper financial plan, the business would most likely not function. For instance, the purpose of top management is to procure for equipment, lease properties, buy materials, perform, authorize mergers and control other departments such as marketing as well as HR. Finance also plays a huge role in the growth of a company. Without orders and payment the company’s growth cannot be as effective as it should be. All these roles fall under the category of top level management.
Secondly, Finance and sales function are two sectors that can spur or retard the growth and profitability of a company. In the organization the sales function emphases on increasing proceeds by marketing the enterprise’s products and services. In conjunction with the marketing department, the two functions are able to develop strategies that attract new customers (Needham and Dransfield 30). On other hand, the finance department focuses on developing new credit policies that ensure the sales department meets its customer demands. The link between the two functions are established through development of operational budgets and provision of efficient invoicing and quality customer service delivery.
In addition, finance serves the purpose of budgeting and financing of market operations. The promotion of a business should be strategic and therefore, an efficient marketing strategy can only be achieved by proper financing and allocation of expenditure. Also, at Fie Enterprises, finance function enables production department in anticipation of demand. The cost per unit is monitored by the finance department. This is considered to be an incredibly important function because it gives the production unit an idea on how to go about creating the product without imposing financial loss on the company (Needham and Dransfield 23).
Lastly, a key function in the organization is HR. In the past, CFOs were viewed as naysayers by the HR team. HR professionals in the company are dedicated to efficient deployment of human capital while finance is seen as a revenue generating center. Therefore a good link between HR and Finance in the company is tagged to profitability as well proper functioning of the workforce. There is no good employee-organization relationship if there is no deserving salary and motivational benefits. Allocation of HR budgets are done by the finance department. Therefore, it is safe to conclude that relationship between HR and finance at Fie Enterprises is directly proportional to its success and competitiveness.
Systems of Accounts and financial statements
The elements of the firm’s financial statements includes assets, liabilities, equity, revenues, expenses, gains and losses. All these parameters are controlled through a properly structured financial system (Kimmel et al., 12). The firm has a control and risk management system pertaining how the financial statements should control the functions of the company. Financial statements ensure management has proper control by monitoring processes such a purchasing and sales process, payroll system, taxation costs, quarterly reporting and auditing of all processes. The financial framework of the firm encompasses the following components:
Control environment or basis of internal control – This section consists of values that are communicated by the management. Systems of controls and financial management enforced by the firm includes:
Accounts Receivable, credit and collections – This section strives to guarantee funds intended for the organization are received, reconciled, audited and provided with adequate security controls. It also entails proper efficient review of customer complaints and proper credit reporting. Among other functions include establishment of limits in credit issuance and sequential memo adjustments.
Accounts Payable Controls – This department ensures that fund are disbursed upon proper authorization of the management. Policies and procedures that govern purchasing are maintained under this department.
Management and Staff Control – Accounting and finance staff ensure relevant accounting standards are followed. Therefore, there is a body that reviews the performance of these employees (Needham and Dransfield 34).. A clear segregation of duties between sales, HR, production and marketing has been done in the company. Among other control systems established at Fie Enterprises includes include payroll control and fixed system.
The second component is the risk assessment framework. The company has set objectives to conduct assessment in order to identify risks such as fraud and misappropriation. By use of the above mentioned controls, the company is able to assess the risks imminent to the financial framework. A proper financial framework relies on a number of qualitative characteristics and they include: understandability, relevance, comparability and measurability.
Management Information Systems – The third component of the financial framework is the company’s MIS (Kimmel et al., 16). Dissemination of information is effective in ensuring proper communication channels are established throughout the organization. MIS serves the function of providing information support for decision making as well as providing an integrated system whereby man and machine can ensure efficient operations and management. More so, control is effected through monitoring observation and evaluation of internal control systems. This can only be perfected if the ICT systems and MIS are working effectively. Financial framework requires MIS for the purpose of generating computerized business processes which provides financial information in order to make decisions on where to allocate resources.
Financial Information contained in the financial statements
The statements includes cash flows, comprehensive income and balance sheet. Financial information is derived from the final statements by performing a pro-forma analysis. This could be done in the form of forecasting the company’s income statements and balance sheets. Financial performance of the company can be simply deduced from looking at the statements. Some of the components looked into when analyzing financial information includes:
Revenue – This is simply the money that the entity receives after selling its goods and services.
Gross Profit – This component represents the difference between revenue and cost of goods sold.
Operating income – It is the revenue minus the cost of sales and expenses. It measures the profits after operations (Needham and Dransfield 20).
Profit – Net profit is the ultimate measure of analyzing financial information. It represents the revenues less all expenses.
Task 2
Budget
Budgets are essential in defining the company’s financial goal, communicating future plans, coordinating activities, uncovering potential bottlenecks, as well planning for the future resources. The company divides its budget into sales budget, production budget, direct labor, finished goods and cash budget. The master budget for the company over the next three months is illustrated in the excel tables below;
Budget
Budgeted Sales For:
Units
at 10 per unit
May
20000
200000
June
30000
300000
July
50000
500000
Sales Budget
May
June
July
Quarterly Budget
Budgeted sales in Units
20000
300000
50000
100000
Selling Price per unit
10
10
10
10
Total Sales
200000
30000
500000
1000000
Production Budget
May
June
July
Quarter
Budgeted Sales
20000
30000
50000
100,000
Add: Desired Inventory
10000
6000
5000
21000
Total needed
30000
36000
55000
121000
Less: Beginning invendtordy
5000
10000
6000
21000
Required production
25000
46000
61000
132,000
Selling and Admin
May
June
July
Quarter
Budgeted Sales
20000
30000
50000
100000
Variabale rate
0.5
0.5
0.5
0.5
Variable expenses
10000
15000
25000
50000
Fixed Expenses
5000
5000
5000
50000
Total expenses
15000
20000
30000
65000
Budgeted Income Statement
Sales
1000000
Cost of sales
490,000
Gross profit
510,000
Selling and admin
65,000
Operating income
445,000
Interest
10,000
Income before tax
435,000
Tax at 30 percent
130,500
Net profit after tax
305,000
Budgeted Balance Sheet
Current Assets
120,000
Cash
105,000
Accounts Receivable
120,000
Raw Materials
190,000
Inventory
205,000
Total Current Assets
740,000
non-Current Assets
Property, plant and Equipment
205,000
Land
1000000
Total Assets
1,945,000
Liabilities
100,000
Accounts Payable
120,000
Loans
1,565,000
Common stock
20000
Retained Earnings
140,000
Total Liabilities and Equity
1,945,000
Identify reasons for actual income may differ from the budget
There are a number of reasons why the actual statements may differ from the budgeted statements. Some of these reasons includes:
Change in the economic factors or industry of which the company belongs.
Change in consumer needs and preferences (Kimmel et al., 12).
Actions by competitors.
Technological changes
Lower or higher selling prices
Dated or outdated products
More promotion in terms of advertising or personal selling
Change in market prices
Increase or decrease in cost of raw materials
Corrective Action
Depending on the actual results achieved, business owners can make adjustment to the budget. For instance, if the results are adverse, the company can consider modifying the ongoing expenditure and strategies. Such practices can include cutting backs on spending in situations such as marketing, advertising and reduction of administrative expenses. In addition, to minimize costs, the company can improve the actual results through proper planning, monitoring and controlling of its key activities. It is worth noting that external factor such as change in pricing and technological factors can be hard to change. The best way to deal with such macro-factors is to come up with ways in which the company can adapt.
Budgetary control systems comparing actuals with planned expenditure
Budgetary control methods and systems to be used in comparison includes:
Responsibility centers – These are the functional units that are headed by the manager. For instance, the revenue centers measure units of output in monetary terms and they are not directly compared to the costs of input (Kimmel et al., 12). Expense centers measure inputs in monetary terms. Profit centers measure the difference between revenue and expenditure. Transfer pricing is classified under this option. Lastly, investment centers compare outputs with the assets producing them.
Budgetary control systems – This control technique involves comparing actual from budgeted by checking the variances. Ultimately, it enables the management to make a decision on whether to change the budget or not. As explained earlier, some of the control systems that can be used in comparing the actual and budgeted included control systems governing receivables, cash collections, materials, cash control, MIS, among others.
Conflicts in setting and monitoring financial performance against a budget
The conflict experienced during the process is ethical dilemma arising from preparing a budget using a bottom-up budgeting approach. This means that the management elicit inputs from employees from different departments across the company. The moral dilemma occurs when choosing between divisions or branch manager’s interests, and what is good for the company.
Another problem is the tension and disagreements that emanates when creating a budget especially in situation where one department has been allocate more resources that the other. More so, while coming up with the budget, the control phase requires evaluating of employee performance by comparing previous actual results of the operating budget. Therefore, employees may be biased in deciding between their interests and organization’s goals. In addition, an inherent conflict exists during the planning and control phases of the organization. For instance, during the planning phase, management accountants are concerned with getting accurate estimates that must depict positive result. This may not be beneficial to the company because the projected sales could actually harm the company’s future outlook. Use of constructive controversy and research can be employed to solve budgeting conflicts. For instance, the CEO or COO can call a meeting to discuss how to cope with the disagreement of working with a certain budget. Each manager will be able to raise their concerns and eventually a mutual agreement can be reached. The managers can also combine the most reliable and efficient information to come up with high quality decisions on how to prepare the budget.
Task 3
Sources of Finance
Some of the current methods used by the organization in accessing financing includes:
Bank Loans – Bank loan is a short term source of financing that the company uses currently. This method requires an assurance of repayment and this is provided by use of collateral. The company’s fixed assets such as buildings and land are used as security for the assets. More so, the company has accessed federally sponsored loans. These kinds of loans are popular because it loosens the flow of credit and it guarantees the lender against any kinds of losses incurred. The company prefers this kind of loan because they are accessible and the interest rates are relatively fair.
Equity Financing – The Company uses this as a long term strategy for financing purposes. Equity financing is basically exchanging a portion of ownership for a financial investment from outside entrepreneurs (Kimmel et al., 10). The ownership allows the investor to take a stake of the company’s profits as well as a percentage of ownership of the company. At Fie, investment is properly defined and equity stake comes in the form of ordinary shares or preferred stock. There are different classes of stock and voting rights are accorded to the owners of these stock. In addition, the firm sources funding through continuous sale of shares to the public, also known as equity offering. In the past, equity offerings have raised substantial amounts of funds. The structure of the offering is done privately or publicly depending on the decision of management and demand by customers.
Methods of distributing Financial resources
Budget allocation and resource planning are the key methods of distributing resources in an organization. A budget contains the patterns of expenditure and revenue expected from the entity’s productive departments. The firm’s budget is developed over a period of 12 months and the revenues are estimated to determine the resource level available for the distinct departments. The methods used to distribute these resources includes dividing the funds into program units and departments (Kimmel et al., 11). This allows the company’s financial personnel to easily identify the resources used for specific functions or programs. Each category may have a number of line items, expenses or specific needs necessary to support the overall operation of the departments.
Routine monitoring of the resources distributed should be done to ensure that the amounts budgeted for are able to meet the set expenditures. Purchase orders and bills should be continuously matched with the allocated budge. This ensures that sufficient funds exist for all the funding of any auxiliary services and expenditure.
Monitoring and control of finance
Financial monitoring provides the organization with warning systems in accordance with the level of internal controls present in the organization. The main objects of financial checking is to monitor high risk areas and continuously review receipt and payments related to exact projects. Some of the financial monitoring and controls services includes:
A continuous review of quarterly and half-yearly financial statements prepared by the company’s accounting department.
To identify internal control problems and provide solutions and measures to implement such controls.
Financial analysis is carried out to highlight the major observations and clarifications for the shareholders of the company.
Monitoring controls also ensures that regular feedback is provided for funders in order to ensure continued capital inflow.
In a bid to support the organization’s functions, the company needs to employ external advisors to carry audit on expenses, financial records and other supporting documents on a regular basis (Kimmel et al., 12).
Other methods includes preparation of reports highlighting some of the areas of improvements and provide recommendations on ways to share these reports with the shareholders.
Works Cited
Kimmel, Paul D, Jerry J. Weygandt, and Donald E. Kieso. Accounting: Tools for Business Decision Making. Chichester: John Wiley, 2008. Print.
Needham, David, and Robert Dransfield. Business Studies. Cheltenham: Stanley Thornes, 2010. Print.
We will email this sample to you with pleasure!
Type your email