Chapter 20 FINANCE AND BUDGETARY CONTROL

Transcription

1 Slide 20.1 Chapter 20 FINANCE AND BUDGETARY CONTROL Slide 20.2 Management needs external finance Reporting financial performance The difference between profit and cash Managing financial performance internally Using budgets as a means of control Budgeting considerations Cases and examples 1

2 Slide 20.3 Finance is central to managing Finance a major input to organisations: understanding basics essential to management. External and internal reporting systems affect managers and their work (e.g. decision making, motivating). Understanding the assumptions beneath data and practice enables you to question them and to consider alternatives. Slide 20.4 Why seek a profit? Reward investors (capital market) Pension funds Life assurance companies Investment funds Directors, employees Society Continued service or product. 2

3 Slide 20.5 Raising capital Ownership shares (equity) Prospectus (purpose of raising capital) Right to share in profits Limited liability Appoint directors (responsibility to shareholders). Debt borrowed funds Bank Marketable debt. Slide 20.6 Limited liability Shareholder has no further financial liability after shares fully paid up (limited risk). No guarantee of any profit or capital repayment (ordinary shares are risk capital). Shareholders expect reward: dividends, share price growth. Subject to regulation Corporate law Stock exchange National regulatory authority. 3

4 Slide 20.7 Information flow Companies report to shareholders (and the market) Annual report and financial statements Periodic summary financial reports Websites and s now common. Slide 20.8 Financial reports Statement of cash flows Profit and loss statement (statement of financial performance) Balance sheet (statement of financial position). 4

5 Slide 20.9 Cash flow statement Sources from which cash has been received during a period (sales) Uses to which cash put (purchases, administration and marketing) Sources of capital raising to fill the gap or repayment of capital (financing flows) To survive, business has to generate cash. Slide Profit statement Revenue (usually sales) From which subtracted Cost of goods sold or of service provided Costs of administration and management Cost of marketing and product/service delivery Cost of financing the business (interest on debt) Taxation. 5

6 Slide Balance sheet Assets Property Production equipment Inventories Financial assets (cash, customers accounts). Liabilities Debt obligations Expected future obligations (pensions). Slide Balance sheet (Continued) Assets liabilities = shareholders equity Shareholders equity represents proportion of assets financed by: share capital contributed; past profit retained in the business; revaluation of assets. 6

7 Slide Subjectivity in measurement Apart from cash, most elements in financial reports are measured subjectively, for example: Expected revenue from credit sales Expected claims for faulty products Use of long-term resources (depreciation) Intangible assets (newspaper mastheads) Future pension liabilities. Slide Measuring performance Compare with competitors Compare with previous periods How well has investors capital been used? Profit (profit statement)/shareholders funds (balance sheet) Based on market data: Profit per share/price per share in the open market (earnings per share or EPS). 7

8 Slide Planning for growth and profit Profit has to be planned Budget External pressure translated to operating plan Begins with objective (e.g. profit, rate of return) Elements within organisation make inputs (e.g. sales, expenses and capital requirements) Process of negotiation to agree acceptable coordinated combination of resources and activities Budget becomes operating plan. Slide Monitoring performance Financial control is based on setting budget Actual spend is compared with the budget to assess financial performance Performance is questioned if targets are consistently not met Each management function can be allocated a budget Or in project-based organisations each project will have a budget. 8

9 Slide Project budgeting Cost breakdown structures are used in project to set budgets. A cost breakdown structure is a system for categorising and collecting costs which allows cost to be attributed and analysed by activity rather than function. This method of budgeting allows each part of the project to be assessed individually for overspend. Slide Decisions If budgets are not being met decisions must be taken: on the basis of the budget; is it realistic or must it be reset? on the work carried out; the activities that generate cost must be made more efficient. If functional budgets are not being met the resources and processes should be analysed. If project budgets are not being met the scope of the project may need to be reduced. 9

10 Slide Integrating themes Entrepreneurship Raising finance is the most critical task, and research identifies strategies entrepreneurs use to secure it. Sustainability Sustainability accounting methods enable companies to measure operating performance from this perspective. Internationalisation International accounting standards make it possible to compare companies performance. Governance A study of the RBS failure shows it had adequate governance systems, but people did not use them. Slide Summary Every organisation needs finance to survive. Managers must present Information about their financial performance to those who supply the funds. An unprofitable business will not survive, as it will not have the funds to secure resources. Internal budget systems are a major form of control, and take account of human factors. 10