Financial Management Concepts and Business Situations Case Study

Financial management theory

The constituents of an effective financial management process

An effective financial management system consists of essential elements such as accounting records and source, financial reporting, documentation, budget control, allowable costs, compliance, and cash management. For example, financial reporting is related to current, accurate, and complete disclosure of financial results, which must be done as per the financial reporting requirements. Regarding internal controls, the managers must maintain effective controls and accountability.

The examples of financial reports

The following are the four financial records I am responsible for:

1. Cash flow: Cash flow is a stream of expense and revenue, which changes a cash account during a particular period. The source documents include bank statements, receipts, and payment vouchers.
2. Ledgers: A ledger is a summary of financial information that is categorized by allocation to certain account numbers through a chart of accounts. An example of a source document is a sales receipt.
3. Invoices: An invoice is a statement delivered by services or product’s provider, the purchaser, reminding the purchaser to pay – it leads to the formation of accounts receivable. An example of a source document is a check.
4. Profit and loss: A profit and loss statement is a financial statement that contains the expenses, costs, and revenues for a particular period. The statement aims to offer the ability of an entity to make profits by reducing costs and increasing revenues. Examples of source documents include sales invoices and bill vouchers.

The purpose of preparing financial performance reports

The purpose of preparing financial performance reports is to show the financial position of assets, liabilities, capital, and income and expenses.

The accuracy of financial management reports

The accuracy of a financial management report can be done through reconciliation. For example, a cash flow statement can be reconciled through a direct method.

Timing for preparing financial statements

Timing is very crucial while preparing financial reports because many financial records are prepared on fixed durations. It is therefore important to be keen on timing to enhance the comparability of these reports.

An improvement of the financial management process

The financial management process can be improved by ensuring that those who are concerned with program and finance convene regularly to discuss the budget monitoring reports and chart the way forward. This also involves that all payments that are made by the cashier are authorized accordingly. Every month, reconciliations should be carried out. A monitoring strategy to ensure that the process is executed successfully should start with a definition of the objectives of the monitoring, followed by the selection of a suitable monitoring strategy.

Financial management in practice

The contingencies that could reduce cost overruns

1. Salary contingency to cater for additional salary negotiations.
2. Contingency to cater to an increase in lease payments for the buildings occupied.
3. Contingency for travel expenses should be set aside to cater to those travel expenses that are not projected.
4. Contingency for purchase of assets that are not budgeted for.
5. Contingency to cater for losses incurred when orders are made on incorrect items.

The procedure to process documentation for data entry into the finance system

Salary and wages

• Record the hours worked to establish the gross salary for each employee.
• For a fixed hour, ensure that all the employees worked for the time designated.
• In case the employees work on a variable amount of hours per week, then a timesheet should be approved by a manager.
• The timesheets should be assembled at the end of each pay period and should be approved as precise, by a senior official and then released to the department of payroll for processing.

Travel claims using employees’ vehicle

Sufficient records must be offered to meet the criteria for a business standard mileage rate. The documentation must meet the employer’s accounting practices. In case the worker is not required to justify the expenditure to the employer or if they maintain some funds over the expenses, then this should not be taken as mileage compensation.

Ordering equipment

• The person responsible should sign off the invoice if the equipment has arrived – this acts as an approval of the good’s arrival.
• A senior person can be called upon to approve the invoice as well, if the amount invoiced is very large, depending on the organization’s policy.
• When the invoice is completely approved with no issues left unsettled, it is posted into the accounting system.

String of source documentation including time frames for storing the records

• All the fundamental facts about the transactions including the date, the purpose, the person it is made, and the number of transactions is described.
• The suitable accounting journals are used to record the source documents when the transaction is completed.
• After posting is done, all the source documents are filed in a way they can be retrieved easily.

The importance of the procedures in improving financial management

These procedures ensure that documents are retrieved easily when a need arises. They also ensure a high level of transparency and keeping of evidence to be used for purposes such as tax assessment and loan application.

The initiatives that could improve financial management

A budget manager should ensure proper authorization of major transactions. He/she should also ensure that the process of budget making is more participative, with all the stakeholders contributing their views in regards to revenues and expenditure. A budget manager should ensure that some contingency fund is set aside to cater for unexpected expenditure.

Essential knowledge in accounting and financial management

Basic accounting terms and principles

Charts of accounts

A chart of accounts is a list of accounts used by a company to define each category of items, which involve receipt or expenditure of money or its equivalent.

Revenue expenses

Revenue expense is the cost that is allocated to the expense immediately it is incurred.

Profit and loss statement

A profit and loss statement is a financial statement that contains the expenses, costs, and revenues for a particular period.

Liabilities

This is an entity’s legal obligations or debts that are incurred in the course of doing business.

Invoices

An invoice is a statement delivered by services or product’s provider, the purchaser, reminding the purchaser to pay – it leads to the formation of accounts receivable.

Ledgers

A ledger is a summary of financial information that is categorized by allocation to certain account numbers through a chart of accounts.

Cash flow

Cash flow is a stream of expense and revenue, which changes a cash account during a particular period.

Financial audit

A financial audit is the confirmation of a legal entity’s financial statements, to form an audit opinion.

Financial management processes flow chart

Compliance with the legislative requirements for financial management

The managers ensure that the entity complies with disclosure of financial data, as per the legislative requirements. The managers also ensure that the company is audited for compliance with the legislative requirements. The manager can also arrange seminars to educate the employees on the available legislative requirements and the importance of complying.

The items reported to the Australian Taxation Office for tax purposes include the income and expenses, payroll information, and sale of assets for assessment of capital gains. In my organization, those who are responsible for conducting certain tasks, undertaking tasks that involve certificates of competency requirement, licenses, notification to regulatory department, approval, legislations, exemption, or anything required by law will make sure observance with applicable legislative and related obligation.

Procedural outline for a team member that explains their responsibilities

Invoicing clients

1. The process of invoicing commences when the clients send in invoices to the organization. Here, the team member verifies to ensure that, indeed, the document is an invoice. They then sort and classify the invoices into different classes.
2. The person responsible should sign off the invoice if the goods have arrived – this acts as an act of approval for the good’s arrival.
3. A senior person can be called upon to approve the invoice, as well, if the amount invoiced is very large depending on the organization’s policy.
4. When the invoice is completely approved with no issues left unsettled, it is posted into the accounting system by the person concerned.

Making purchases

1. The purchase of goods is approved by the approver.
2. The buyer obtains quotes and bids, performs vendor analysis, and authorizes purchase orders based on internal authorization boundaries.
3. The business manager or the department administrator approves, initiates, and hands over purchasing deals for their departments based on the monetary value limit
4. The initiator takes over the responsibility of documenting the whole process and verifies that the cost is allowable and reasonable.
5. The initiator directs the preparer on how to place orders for the goods and services.
6. Finally, the purchasing operation is supervised by the purchasing service director.

Maintaining journals

1. Journal entry: an individual responsible inputs the transaction directly into the system.
2. A journal edit occurs following the entry of the data. This is done to confirm that the journal is correct.
3. Journal budget check is done manually to confirm that a budget is existing
4. Once the journal has passed the budget check and the edit, it is submitted manually for approval.
5. Once the journals are approved, they can be posted manually or automatically.

A communication strategy for disseminating the budget to the team members

Plan development

The plan starts by identifying the goals and any challenges that the team is expecting to encounter. The proposed results for the project are identified. All the tools and activities are explained to the team members, and the time and requirements are determined. Then, the final evaluation is used to identify how the success of the project will be measured.

Information gathering

All the information that is required is collected in person. Any cost of traveling is recorded. If the project will involve the hiring of people, the costs of labor are estimated. However, the cost of resources and time is used if the project uses existing employees and resources. Other possible information that needs to be collected includes making phone calls, gathering surveys, and tracking website hits.

Communication Strategy

All the team members are served with the budget information, which is related to the proposed project. The team members also explain how all the funds are used to win their support. The objectives are also clearly stated to the members. They are then allowed to give their views.

Project Tracking

To make sure all the team members understand how all the funds are spent, it is important to be transparent and consistently update them on the ongoing budget. Each role played in each of the plan’s steps should be recorded.

Team members’ potential questions after reading the budget

What is the difference between “gross profit” and “net profit”?

Gross profit is the total sales less cost of goods sold while net profit is found after netting operating expenses from gross profit. In other words, gross profit does not allow for operating expenses.

Why do we have to know about the budget?

A business uses a budget to evaluate the amount of money that is flowing into the business in a given period and consider the best way to spend it among different categories of commitments. Incidentally, an entity normally designates a suitable amount of funds to capital expenditure, recurrent expenditure, and other categories. By keeping track of where and how money is spent, a business is less likely to overspend; and hence meeting the intended financial objectives.

What support will you give us to help us achieve budget?

I will identify the goals and any challenges that the team members are expecting to encounter and advise them on how to face them. Also, the proposed results for the project will be identified to ensure that the team members work hard to achieve them. All the tools and activities will be explained to the team members, and the time and requirements determined. Then, the final evaluation will be used to identify how the success of the project will be measured.

I can’t operate with the budget allocation given to me!

When the budget is prepared, it must be ensured that the sources of revenue match the expenditure. The budget plan should not be a deficit. Therefore, the expenses estimated for this particular budget area should be reduced, or seek additional sources of revenue.

Actions in various financial situations

Need for more resources

Since the budget needs more resources if it is to be delivered on time, then it is very important to evaluate the effect that it will have if it fails to meet the deadline to extend the timeline so that the available resources could be adequate. Similarly, we can lobby for additional funds so we can complete the project on time if the deadline is very critical.

Incorrespondence between different cashflow predictions

To undertake cash flow reconciliation, I will use the direct method. This will start with the net income amount shown as per the income statement. The figure in the accounts receivable is netted from the net income, and the accounts payable amount totaled with the net income. The outcome is what is received from operating activities, which is compared with our figure and that of the manager to establish who is wrong.

Contingency plans for reducing the budget

Salary contingency to cater to additional salary negotiations and to cater to sick leaves. I will negotiate with all the stakeholders including the management and the team members, explaining the importance of such plans.

The processes to identify the cause of unfavourable variance in expenditure

1. Assess the level of skills, speed, and knowledge base from the employees’ database register, which could cause complexities in establishing precise salary projections.
2. The behavior of employees is assessed. This information will help establish the level at which employees report to work late, leave for alternative employment, or call in sick. Large variations are expected if most of the skilled employees left the company during the current period.
3. Also, overtime should be analyzed because it could be a cause of significant salary variation.
4. The project duration could be another cause of salary variation, and hence, the project plans should be assessed to establish if they took longer than was anticipated.
5. Labor relation reports should be analyzed to find out if there are changes in union contracts, which could cause significant unfavorable salaries projections.

Financial records and monitoring process in a new trading company

To record petty cash in an official record, a check can be written. This will ensure that cash is not taken from the cash receipts to pay for operating costs. The records should be used to validate the receipts. A separate ledger should be maintained for the petty cash to make sure transactions are recorded properly. To record all the transactions, a ledger should be set up. This can be generated by a computer or handwritten.

Each financial record should be tracked, and appropriate categories allocated to each entry. For example, various types of transaction categories can be allocated to each type of business. If there is a need to file returns for taxes, then the income and expenses should be classified in a manner that will facilitate reporting for tax purposes. To avoid forgetting details, it is very important to maintain the ledgers up-to-date daily. The credit statements and bank statements should be checked monthly, which requires the credit card statements to be cross-referenced with the procurement receipts and balancing the checkbooks.

A monitoring strategy to ensure that the record-keeping is executed successfully should start with the definition of the objectives of the monitoring, followed by the selection of a suitable monitoring strategy. Then, the tools required for strategy execution should be developed, for example, surveys and observation guides among others.