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Monitor And Control Finances

MONITOR AND CONTROL FINANCES

IMPLEMENT PROCESSES TO MONITOR ACTUAL EXPENDITURE AND TO CONTROL COSTS ACROSS THE WORK TEAM

Businesses need to ensure there are effective means of monitoring and reporting of budgets.  In order for this to occur the following needs to take place;

  • Develop and implement a budget timetable. This timetable needs to include the monitoring of budgets and strict controls in place to ensure it is met.  This system needs to ensure that financial and activity data be current, accurate and available to management in a timely manner.  The timetable also needs to enable regular reports to be produced and acted upon.  
  • As a minimum, these reports need to be developed and circulated monthly, although more regular timeframes often exist. In order to do this, it is necessary to implement an efficient approach to the closure of accounts and incorporating essential information such as outstanding accounts receivable and payable into the next period.

This will ensure that accurate information exists for early monitoring.

  • Whilst reporting arrangements need to be ‘bottom up’, the response to monitoring information needs to be from the ‘top down’ (see an explanation of these terms previously mentioned in the notes). Budget holders need to be seen as the persons accountable for taking action whilst it may actually be performed by less senior managers within the business.
  • The monitoring of reports needs to include statements of actual expenditure and forecasts of expenditure to the year-end arising from known commitments and expected changes in terms of new commitments and the termination of product or services.

COMPUTERISED SYSTEMS

The introduction of computers into businesses has opened up the ability to generate meaningful reports, in many cases, at a touch of a button.  Computers are in many regards far more accurate in recording and collating information than humans. However they are still fallible and steps need to be taken to ensure they remain accurate and a useful tool to businesses.

Apart from this, the following information is desirable in the businesses computerised financial system;

  • Record financial commitments when a plan is authorised or amended
  • Record actual expenditure and income
  • Automate as far as possible the processing of payments to creditors
  • Record costs of services at the individual level, irrespective of whether the sources of service are an external or internal provider
  • Support the financial assessment and billing processes
  • Provide financial projections
  • Integrate seamlessly financial management systems, including automatic recognition
  • Provide appropriate management, audit and exception reports
  • Export data to spreadsheets or other data systems
  • Enable sharing of information with other agencies and individuals

PRINCIPLES OF SPREADSHEET USE

  1. Determine what role spreadsheets play in your business, and plan your spreadsheet standards and processes accordingly.
  2. Adopt a standard for your organisation and stick to it.
  3. Ensure that everyone involved in the creation or use of spreadsheets has an appropriate level of knowledge and competence.
  4. Work collaboratively, share ownership, peer review.
  5. Designing and building your spreadsheet
  6. Before starting, satisfy yourself that a spreadsheet is the appropriate tool for the job.
  7. Identify the audience. If a spreadsheet is intended to be understood and used by others, the design should facilitate this.
  8. Include an ‘About’ or ‘Welcome’ sheet to document the spreadsheet.
  9. Design for longevity.
  10. Focus on the required outputs.
  11. Separate and clearly identify inputs, workings and outputs.
  12. Be consistent in structure.
  13. Be consistent in the use of formulae.
  14. Keep formulae short and simple.
  15. Never embed in a formula anything that might change or need to be changed.
  16. Perform a calculation once and then refer back to that calculation.
  17. Avoid using advanced features where simpler features could achieve the same result.
  18. Spreadsheet risks and controls
  19. Have a system of backup and version control, which should be applied consistently within an organisation.
  20. Rigorously test the workbook.
  21. Build in checks, controls and alerts from the outset and during the course of spreadsheet design.
  22. Protect parts of the workbook that are not supposed to be changed by users.

MONITOR SALES, REVENUE AND EXPENDITURE DATA

Early in the budget cycle the managers should create key financial documents for the coming budget period.

The required documents are:

  • Balance Sheet
  • Profit and Loss
  • Cash Flow reports

The key financial target areas are cash flow and profitability and they need to be tested to evaluate whether targets are likely to be met. If results fail to meet targets they must either change their plans or revise their targets, or both.  

Once it appears that the targets will be met, more detailed budgets can be built with plans for running the business, (such as a category buying plan, a marketing plan, and training plan etc.).  When these three reports are used in this way, they are often called Pro-forma Budget Statements.

At the end of the budget period, these statements are again prepared, this time comparing actual performance with the budgeted figures for previous periods.

The use of proforma budget statements can assist managers in monitoring sales, revenue and expenditure data throughout the financial period in question. This is important as a frequent comparison of actual performance against budget targets allows managers to have an up to date take on the performance of their business relative to targets and a perspective on business that addresses areas of concern proactively.

CASH FLOW

One of the biggest problems facing small to medium sized businesses is the level of liquidity they have, or, in other words, their ability to meet their financial obligations when they fall due.  Often these businesses will still be trading and may show a profit on paper but find themselves insolvent.  

The Cash Flow Statement tells how a business uses and generates its most important asset – cash.  Without cash to pay the bills when they are due, a business cannot continue and must go into liquidation.  Consequently, cash management is just as important as being able to generate profit.  Some argue that it is more important, because it is possible to be profitable and still not have enough cash to continue to operate.  However, being profitable does not by itself pay the bills.  If cash is squandered (for example, by building a new office that costs a lot, but does not produce an increase in revenue) then the business will have to close if it has insufficient cash to pay its debts and meet its obligations.

The table below shows a basic cash flow from operations report for a retailer in the month of July. This report includes cash in (receipts), cash out (expenditure) and the cash balance as a result of the inflows and outflows.      

Fashion Store X

Statement of Cash Flows for March

Receipts

 

Cash received from previous credit sales

$   7,500

Cash received from cash sales

$ 55,000

(1)

$ 62,500

Expenditure

 

Cash paid for labour

$ 11,000

Cash paid for rent

$   8,500

Cash paid for marketing services

$      800

Cash paid for stock

$ 31,300

Cash paid for Equipment

$      750

(2)

$ 52,350

Cash increase during March (1) minus (2)

$ 10,150

Cash at start of March

$ 17,200

Cash at end of March

$ 27,350

As well as the core operations of a business, the Cash Flow Statement considers all other elements of the cash movement within an organisation. These can be grouped into three separate sub-headings:

  • Cash flow from operations (trading, or carrying out the core business).
  • Cash flow from investing (buying and selling non-current assets).
  • Cash Flow from financing activities (raising or retiring equity, or long-term debt).

The diagram below illustrates the movement of cash within a retail business.  The primary movement is from ongoing operations; however businesses may have other income and payments.  Where business rely on receiving cash from third parties (accounts receivable), it is important that this money is paid in a timely fashion.  If businesses have to wait a long time to receive their cash payments, they may find themselves running out of cash and having cash-flow difficulties.

In the following spreadsheet we illustrate the peaks and troughs of a trading year and the importance of working capital to ensure that the business can manage the cash outflow requirements that come with the seasonality of the retail calendar.

Sample Cash Flow

 

July

Aug

Sept

Oct

Nov

Dec

Jan

Feb

Mar

Apr

May

June

Cash in-flow (Sales)

$70,00 0

$60,00 0

$55,00 0

$75,0 00

$95,0 00

$250, 000

$65,00 0

$50,00 0

$55,00 0

$60,0 00

$65,0 00

$60,0 00

Owners Funds Injection

                       

Total Cash InFlow

$70,00 0

$60,00 0

$55,00 0

$75,

000

$95,0 00

$250, 000

$65,00 0

$50,0 00

$45,00 0

$60,0 00

$65,0 00

$60,0 00

Expense Payments

                       

Cash Out-

Flow- Stock

$35,00 0

$30,00 0

$27,50 0

$65,0 00

$110, 000

$30,0 00

$32,50 0

$25,00 0

$27,00 0

$30,0 00

$28,0 00

$30,0 00

Rent & Outgoings

$12,91 7

$12,91 7

$12,91 7

$12,9 17

$12,9 17

$12,9 17

$12,91 7

$12,91 7

$12,91 7

$12,9 17

$12,9 17

$12,9 17

Power

$700

$700

$700

$700

$700

$700

$700

$700

$700

$700

$700

$700

Staff Amenities

$100

$100

$100

$100

$100

$100

$100

$100

$100

$100

$100

$100

Internet

$79

$79

$79

$79

$79

$79

$79

$79

$79

$79

$79

$79

Printing and Stationary

$167

$167

$167

$167

$167

$167

$167

$167

$167

$167

$167

$167

Insurance

$517

$517

$517

$517

$517

$517

$517

$517

$517

$517

$517

$517

Workcover

$333

$333

$333

$333

$333

$333

$333

$333

$333

$333

$333

$333

Accounting and Legal Fees

$186

$186

$186

$186

$186

$186

$186

$186

$186

$186

$186

$186

Local Area  Marketing

$760

$760

$760

$760

$760

$760

$760

$760

$760

$760

$760

$760

Bags and  Wrapping

$700

$700

$700

$700

$700

$700

$700

$700

$700

$700

$700

$700

Franchise Fee

$3,500

$3,000

$2,750

$3,75 0

$4,75 0

$12,5 00

$3,250

$2,500

$2,750

$3,00 0

$3,25 0

$3,00 0

Advertising Levy

$2,100

$1,800

$1,650

$2,25 0

$2,85 0

$7,50 0

$1,950

$1,500

$1,650

$1,80 0

$1,95 0

$1,80 0

Telephone

$700

$700

$700

$700

$700

$700

$700

$700

$700

$700

$700

$700

Rates and Taxes

$597

$597

$597

$597

$597

$597

$597

$597

$597

$597

$597

$597

Sub-Total Cash Out-flow

$58,35 6

$52,55 6

$49,65 6

$88,

756

$135, 356

$67,7 56

$55,45 6

$46,7 56

$49,15 6

$52,5 56

$50,9 56

$52,5 56

GST

                       

GST Paid

(Credits)

$5,306

$4,778

$4,514

$8,06 9

$12,3 06

$6,16 0

$5,041

$4,251

$4,469

$4,77 8

$4,63 2

$4,77 78

GST Collected

$6,364

$5,455

$5,000

$6,81 8

$8,63 6

$22,7 27

$5,909

$4,545

$4,091

$5,45 4

$5,90 9

$5,45 5

Net GST

   

$2,221

   

$11,6 48

   

$785

   

$2,63 0

PLUS:

Other

Payments

                       

Bank charges

$662

$662

$662

$662

$662

$662

$662

$662

$662

$662

$662

$662

Salaries, Wages

$8,000

$7,000

$7,000

$7,0 00

$8,00 0

$18,0 00

$10,00 0

$7,00 0

$7,000

$7,00 0

$7,00 0

$7,00 0

Staff 

Superannuation

$720

$630

$630

$630

$720

$1,62 0

$900

$630

$630

$630

$630

$630

Loan Repayments

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

Proprietors Wages

                       

Total

Other

Payments

$9,382

$8,292

$8,292

$8,2 92

$9,38 2

$20,2 82

$11,56 2

$8,29 2

$8,292

$8,29 2

$8,29 2

$8,29 2

Total

Payments

(outflow)

$67,73 8

$60,84 8

$60,16 9

$97,

048

$144, 738

$99,6 86

$67,01 8

$55,0 48

$58,23 3

$60,8 48

$59,2 48

$63,4 78

Cash In flow – Cash Outflow

$2,262

-$848

-

$5,169

-

$22,0

48

-

$49,7

38

$150, 314

-

$2,018

-

$5,048

-

$13,23

3

-$848

$5,75 2

-

$3,47

8

Cash at Bank

(Month beginning)

$0

$2,262

$1,414

-

$3,75

5

-

$25,8

03

-

$75,5

41

$74,77 3

$72,75 5

$67,70 7

$54,4 74

$53,6 26

$59,3 78

Cash at Bank (Month End)

$2,262

$1,414

-

$3,755

-

$25,8

03

-

$75,5

41

$74,7 73

$72,75 5

$67,70 7

$54,47 4

$53,6 26

$59,3 78

$55,9 00

If we simplify this table to show just the key lines, we can see the inflow of cash, the outflow of Stock Purchases, wages and then total cash outflows. If we view the result of all this inflow and outflow as the cash in the bank at the end of each month, we can see that some months increase the amount of cash in the bank and some months reduce the amount of cash in the bank.

 

July

Aug

Sept

Oct

Nov

Dec

Jan

Feb

Marc h

April

May

June

Total

Cash

In-Flow

$70,0 00

$60,0 00

$55,0 00

$75,0 00

$95,0 00

$250, 000

$65,0 00

$50,0 00

$45,0 00

$60,0 00

$65,0 00

$60,0 00

Expense Payments

                       

Cash Out-

Flow- Stock

$35,0 00

$30,0 00

$27,5 00

$65,0 00

$110, 000

$30,0 00

$32,5 00

$25,0 00

$27,0 00

$30,0 00

$28,0 00

$30,0 00

Sub-Total

Cash Outflow

$58,3 56

$52,5 56

$49,6 56

$88,7 56

$135, 356

$67,7 56

$55,4 56

$46,7 56

$49,1 56

$52,5 56

$50,9 56

$52,5 56

Salaries,

Wages

$8,00 0

$7,00 0

$7,00 0

$7,00 0

$8,00 0

$18,0 00

$10,0 00

$7,00 0

$7,00 0

$7,00 0

$7,00 0

$7,00 0

Total

Other

Payments

$9,38 2

$8,29 2

$8,29 2

$8,29 2

$9,38 2

$20,2 82

$11,56 2

$8,29 2

$8,29 2

$8,29 2

$8,29 2

$8,29 2

Total

Payments

(outflow)

$67,7 38

$60,8 48

$60,1 69

$97,0 48

$144, 738

$99,6 86

$67,0 18

$55,0 48

$58,2 33

$60,8 48

$59,2 48

$63,4 78

Cash In flow – Cash

Outflow

$2,26 2

-$848

-

$5,16

9

-

$22,0

48

-

$49,7

38

$150, 314

-

$2,01

8

-

$5,04

8

-

$13,2

33

-$848

$5,75 2

-

$3,47

8

Cash at Bank

(Month beginning)

$0

$2,26 2

$1,41 4

-

$3,75

5

-

$25,8

03

-

$75,5

41

$74,7 73

$72,7 55

$67,7 07

$54,4 74

$53,6 26

$59,3 78

Cash at Bank

(Month

End)

$2,26 2

$1,41 4

-

$3,75

5

-

$25,8

03

-

$75,5

41

$74,7 73

$72,7 55

$67,7 07

$54,4 74

$53,6 26

$59,3 78

$55,9 00

This table shows that the business started the year with $0 in the bank and finished the year with $55,900 so the business did contribute a positive cash flow; however the month by month performance shows that in the three months leading up to Christmas the business was in a negative cash position as it funneled money into stock and wages.  This illustration highlights the cash-flow pattern of many Australian retail businesses.

This example illustrates the need for managers to be on top of their cash position and effectively manage their cash flow in addition to the management of sales revenue and expenditure. Together they form the basis of effective financial monitoring.

MONITOR EXPENDITURE AND COSTS ON AN AGREED CYCLICAL BASIS TO IDENTIFY COST VARIATIONS AND EXPENDITURE OVERRUNS

Organisations monitor and evaluate actual results against approved budgets to guide current and future decision-making and hold managers accountable for performance.

Key processes to effectively manage approved budgets include:

  • Monitoring and reporting against internal budgets on a consistent and regular basis to assess whether targets are being met, to guide decision-making and enforce accountabilities
  • Revising the internal budget through a controlled and coordinated process that maintains clear lines of accountability between budget estimates and actual results;
  • Forecasting to manage gaps between budget estimates and actual results to quickly identify and respond to changes in the external environment or internal activities
  • Reviewing and improving internal budget processes by monitoring the accuracy and timeliness of budget setting processes to identify areas for improvement

To monitor your expenditure and costs, you could use a simple cash book to record all your business expenses and sales. This should be done regularly and compared, month by month, against your projections. This way you can see if you are on target.

The best way to monitor business expenditure is to have it recorded on your computer. There are many software programs specifically designed to help monitor money in and money out of the business. In larger organisations, you will always have a computerised system for monitoring.

Beginners in business often think that it is easiest to record all financial matters in one document or book. However, if documents are going to provide information and ensure control, you will need separate documents for each specific type of transaction.

Financial transactions include:

  • Cash sales and purchases
  • Purchases of business assets
  • Petty cash
  • Cheque purchases
  • Credit card sales and purchases

A Cashflow forecast is the best way to understand and prepare for business expenses over a twelve month period.

The Cashflow forecast shows the monthly flow of cash into and out of the business over a twelve month period. It shows when money ought to be paid out, and when you would expect to receive money into the business.

The Cashflow forecast predicts liquidity, which means having enough cash to pay all bills when they are due.      

IMPLEMENT, MONITOR AND MODIFY CONTINGENCY PLANS AS REQUIRED TO MAINTAIN FINANCIAL OBJECTIVES AND REPORT ON BUDGET AND EXPENDITURE IN ACCORDANCE WITH ORGANISATIONAL PROTOCOLS

CONTINGENCIES

Many businesses use budgeting as a management tool to plan for future activities, allocate competing resources and evaluate team performance. Budgets mostly deal with estimates and projections that management makes based on what is known, as well as projected future uncertainties. The budget contingencies method purposely incorporates certain risk factors into the budgeting process to help a business better prepare for potential contingencies. Management may also use the budget contingencies method to its own advantage for meeting performance goals.

Once you have contingency plans in place, you may need to monitor and change them as required. 

Be careful not to rely too heavily on contingency plans as they may overstretch a business's resources and result in unrealistic projections.

RISK MANAGEMENT

Compared to non-contingency budget methods that do not plan for potential unknowns, the budget contingency method sets aside additional resources that can be drawn on if the unexpected happens in future business activities. Using the budget contingency method, a business has the advantage of carrying out better risk management. Business risks are perceived future uncertainties based on management past experiences, such as price fluctuations, changes in cost structure due to product or service modifications or other projection errors and omissions. Management often is aware of these risk factors, and not including them as part of the estimates could render a budget potentially unreliable.[1]

MEASURING PERFORMANCE

In measuring budget performance, organisations monitor how closely budget estimates match the actual results. This ensures financial control and allows for the identification of necessary changes. Monitoring budget accuracy is the responsibility of all managers.

Effective monitoring of budget performance requires that managers are provided with relevant, accurate and timely information appropriate to their level of responsibility.  Managers to providing clear and consistent feedback in a timely manner about underlying causes of variations, as well as planned actions to manage variations for which they are accountable,  are also imperative for effective budget monitoring.

REPORT BUDGET PERFORMANCE

Internal reporting processes which follow the monthly financial close and may involve the finance departments preparing or releasing the details of actual results against budget to line management. These are then evaluated and explained. Results are summarised and provided to senior management. These assist senior management in decisions at the organisation level. Importantly, senior management’s review and analysis of budget performance are then communicated to relevant operational managers.

Budget estimates and actual results are reviewed on a regular basis - monthly for most organisations. The process needs to be understood across the organisation and is critical to effective monitoring and reporting of budget performance. Careful designing of financial reports is necessary for effective review and analysis of budget versus actual information.  Financial reports should be easily relevant, easily understood, and user-friendly.

Effective financial reporting is likely to be enhanced when reports are prepared specifically for each level of budget accountability and summarised for each level of management as. When organisational accountabilities and output differ (for example, where a manager has both branch and output responsibilities), budget-to-actual financial reports should be designed to enable the accurate budget assessment against both accountabilities.[2]

The final piece of effective financial management in a business context is the reporting to key stakeholders of business financials for the period in question. 

Whilst commonly we focus upon the dissemination of information to key stakeholders such as:

  • CEO
  • CFO
  • Regional manager
  • Departmental managers
  • Shareholders (via other formalised avenues)

…it is important not to forget those who made it all happen.

Sharing successes with teams is one of the most rewarding parts of business management and taking the time to celebrate achieving budget is an investment in team camaraderie and performance in the following period.

It is essential also to share challenges, and in periods when budget has not been achieved an open discussion with teams as to the reasons behind poorer than expected performance can help heal wounds, source potential strategies for the future, and regroups with renewed focus for tomorrow.

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