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  • 1. 1
  • 2. CHARTED MANAGEMENT INSTITUTE Diploma In strategic Management and leadership Individual Project Unit 5007 FINANCIAL CONTROL By Saif ullah Farhan BRADFORD REGIONAL COLLEGEDated: 03/05/2011 2
  • 3. TABLE OF CONTENTSerial no. Description Page no 1. Financial system 2. Purpose of Financial System 3. Webster book store 4. Relationship between a financial system and other systems/ functions 5. Systems of accounts and financial statements 6. Analysis of Financial Information 7. Budgeting for the Organization 8. Budgetary control systems 9. Corrective actions 10. Sources of Finance 11. Monitoring and Control of Finance 12. ReferencesQ: NO: 1Financial SystemIn finance, the financial system is the system that allows the transfer of money between saversand borrowers. (Sullivan, Arthur; Steven M. Sheffrin (2003) 3
  • 4. It comprises a set of complex and closely interconnected financial institutions, markets,instruments, services, practices, and transactions.Financial systems are crucial to the allocation of resources in a modern economy. They channelhousehold savings to the corporate sector and allocate investment funds among firms; they allowinter temporal smoothing of consumption by households and expenditures by firms; and theyenable households and firms to share risks. These functions are common to the financial systemsof most developed economies. Yet the form of these financial systems varies widely. (Allen, Franklin; Douglas Gale (2001)Purpose of Financial SystemFinancial systems help inform your organization’s planning and action plans. Financial systemsalso help to track and manage the resources required to successfully complete work. Theseprovide basic practices to build financial sustainability in any organization.Some other important purposes are as follows: • Financial systems and capacity help the organization to make sound decisions based on cash flow and available resources. • Monitoring funds, or comparing actual income and expenses versus budgeted amounts, helps managers ensure that the necessary funds are in place to complete an activity. • Most governments require that registered, charitable organizations create accounts that track income and Expenses. • Funders require reports that demonstrate that grants were used for intended purposes. • Establishing financial controls and clear accounting procedures help ensure that funds are used for intended purposes. • Transparency, clear planning and realistic projections contribute to the credibility of the organization.Organization Selected: Webster book storeThe organization I selected for the financial control analysis is the Webster book store. Websterbook store is the family owned store and now they want to start online selling of books to theircustomers by making an investment in the store.Functional Areas of Webster Book StoreFunctional Areas of Webster Book Store are as follows: 4
  • 5. • Finance and Accounts • Marketing • Human Resource Management • Customer relationship management • Access controlRelationship between a financial system and other systems/ functionsFinance is as blood in any organization and plays a vital role in the business activities. Withoutfinance, it is impossible to run a business. So, all organizations need to have finance. As far asfinancial systems are concerned, it is open secret that every organization tries to make itsfinancial system more and more efficient and accurate.There is a strong and direct relationship between financial and remaining other systems of theorganization. All the systems or functions of any business required finance and financial systemas well. Financial systems play the basic role for any functions of business and also createintegration between all functions of the organization.Systems of accounts and financial statementsIt is imperative that a business develop a reliable accounting system to capture and summarize itsvoluminous transaction data. The system must be sufficient to fuel the preparation of thefinancial statements, and be capable of maintaining retrievable documentation for each and everytransaction. In other words, some transaction logging process must be in place. In generalterms, an accounting system is a system where transactions and events are reliably processed andsummarized into useful financial statements and reports. Whether this system is manual orautomated, the heart of the system will contain the basic processing tools: accounts, debits andcredits, journals, and the general ledger.Company’s Last three years financials:The last three year financials of the Webster book store 2008, 2009 and 2010 are as follow: 5
  • 6. Analysis of Financial InformationIf we see the previous year financial plans it’s clear that the main product of the store is books onwhich the store has the highest sales margins.If we see the income statement of the Webster bookstore of 20X3 we see that the sales areincreased by 10% but the cost of sales is increased by 45% so this show that the customersdemand is increase day by day and the Webster need to increase the verity of books more andmore. If the business is going on the same track then the inventory is more and more and cost of goodssold increase so to sell the more books the Webster should start online selling of books.As the gross profit for the year 20X3 is £ 658000 which are 45% of the sales for that year and thecost of goods sold is 54% of the sales for that year. As in 20X3 the net profit for the year is £429797.1 which is 29.6% of the total sales for the year.If we compare the financial results for the year 20X3 of the Webster with the financial results of20X2 it is clear that the sales are increase from £ 1320000 to £ 1452000 and the cost of sales isincrease from £ 1232000 to £ 1787000. The gross profit of the Webster increases from £ 480000to £ 658000 and the indirect expenses are increase from £ 203000 to £ 228203 and the net profitof the firm £ 276910 to £ 429797. which shows that although the purchases of the firm increasesbut the Webster still increase its profits as compare to the last year.The result shows that there is a demand present in the market and if the Webster is focus on thesame market then the Webster can earn huge profits.If we compare the financial results for the year 20X3 of the Webster with the financial results of20X1 it is clear that the sales are increase from £ 1200000 to £ 1452000 and the cost of sales isincrease from £ 8502000 to £ 1787000. The gross profit of the Webster increases from £ 540000to £ 658000 and the indirect expenses are increase from £ 181000 to £ 228203 and the net profitof the firm £ 359000 to £ 429797. which shows that although the purchases of the firm increasesbut the Webster still increase its profits as compare to the last year. 6
  • 7. Q: NO: 2Budgeting for the OrganizationAs the store management analysis, that the sale of the store is increased by 20 percent by startingthe online selling of the books. For that the Webster book store need to develop a comprehensivefinancial plan as well as also able to control the financial inflows as well out flows in the future.If the Webster is fail to interstate the expected cash flows in the right sense then the companyfaces the huge loss of the investment as well as the current company situation is also disturbed.From previous year financial plans and having a look over financial statements it is clear that theonly one act that is selling of books play major part in the profits .sales are not increasing withhigh rate as the cost of goods sold is increasing. Form previous data it is clear that sales areincrease only 9% to 10% but cost of goods sold increase 40% to 45%. The main reason is thechange in the trend. Now people want to have through online purchase that is not offered yet thestore. So to increase the sales the online system is essential. As online setup will be created byone time then it will support for upcoming years. The results will be positives for the upcomingyears and sales will increase and Webster book store will sustain the position of top sellerThe Budgeted/forecasted income statement for the next year “000” £Sales 1713.36Less: cost of salesOpening inventory 458Purchases 979Closing inventory - 503.8 -933.2Gross profit 780.16Other expenses 186.34Staff cost 34.38Marketing cost 16.28Technology 87 -324Net profit 456Forecasting of sales Through previous data analysis you can easily understand that there is increasing trend in sales.In 2001 sales were 1200, 000£ that is increased up to 1320000£ in 2002. Total sales of 2003 are 7
  • 8. 1452000£ if we go with the same trend the next year sales become 1600000£. As it is mentionedin the proposed changed that management is making online system to sell to the sales will be1713000£ in 2004 means 17% to 18% change in sales. 10% is a general increase as sales areincreased with this ratio every year, remaining 8% increase is the result of having online system.On the bases of sales I made the projected income statement. All the expenses are increased by10% on the bases of sales but technology cost increases a lot as mention in the details given.The cost will also increase as management is thinking of having variety of products for kids alsoso it will increase the cost of goods sold.The purchases will increase so the cost will also increase if we make projections on the bases ofsales the purchases cost will become 979£The last year closing inventory will be the opening of the current year. As sales are increased sosame trend will go for finished goods inventory. Management will have different inventory levelcheck with the help of that store keeper can take good decisions.Order level This level alert shows that the particular inventory is going too finished and the new order is to be made to the supplier so that the inventory should be in the restaurant on time without ant disturbance.Danger level This level shows that if inventory order is not made then the inventory will be late and there should be a break in the supply of particular product.Emergency levelThis level shows that the particular inventory is finished and there a gap is produce in the supplyof a particular product.Closing inventory will also increase as purchased inventory is increased if we take on the basesof sales increased then inventory will become - 503.8£Staff cast will increase with reference to sales and as it is mentioned in the proposed plan thatmanagement will hire new personnel so it will further add up a litter bit. According to sale andnew cost of management it will become 34.38£. Other expenses will also become 18.As the change is going to implement in the business and it is also mandatory that change must becommunicate to the people so that people can see what kind of change has occurred and analyzethe business. So marketing expenses will increase in this year and will become 186.34£, otherexpenses also includes the expenses of proposed change in the interior of the stores.Technology cost is also going to increase as online system and home delivery system is going tointroduced to in will become 87£. It includes installation cost and this is also depreciated by 10% 8
  • 9. because we are using straight line depreciation method. The maintenance cost is 33% so theoverall charges for the year come 87£.The above projected statement shows a net profit. But if you compare this net profit with theprevious net profit then this is low than it just because of high cost occurred for technologyimprovement, marketing expenses and staff expenses. These expenses were capital expenses innature and give benefits over longer period of time. Although technology cost decrease the netprofit margin but this is the need of the time. If management takes such kind of changes onregular bases then firm didn’t pay the all cost in lump sum form.Now firm have on line setup this will increase the sale in the coming year. Management can reapthe benefits of market leader in the market and can also get maximum market share.Management will hire new personnel on the bases of knowledge that will increase themanagement skills and there will promote of human power in the stores. These people will makethe strategic guide line for business to achieve its goals and objectives.Firm is making budget for promotional activities for the first time so this will increase the salesWith the increase in sales profit will also increase and firm can use that earning on expansionpurposes and will open new stores at different other locationsFinancial budget also include the finance for bringing variety in the product line so by changingin product line management can also focus on other target market. New management will alwaysfocus on change instead of making management operations, tasks, activities etc in traditionalway.High risk component of the planThe risk is always there. Chances are there that the proposed changed cannot bring desire resultsbecause trend is always going to change. Future is not certain and the demands of consumersalways subject to change. As the trend is for online selling so we assume that small no of buyerswill visit the stores and mostly they will buy online so change in interior of the stores may notaffect the people. 2nd it is mentioned in the proposed change plan that we are bringing change inthe product line and increasing the products and targeting the kids and young people. Chancesare there that they will not attract and sales will not increase. Similarly management is hiringnew personnel and increasing the cost, management is also taking some steps for the marketingcampaigns so this step increases the cost but future is not certain whether this thing will increasethe sales are not.Budgetary control systemsA budgetary control system is a control technique whereby actual results are compared withbudgets. Any differences (variances) are made the responsibility of key individuals who caneither exercise control action or revise the original budgets. 9
  • 10. Difference between the actual figures and budgeted figures will be measure with the help offollowing budgetary control system:Items Actual budgeted VarianceSalesOpening inventoryPurchasesClosing inventoryGross profitOther expensesStaff costMarketing costTechnologyNet profitCorrective ActionsA variance in budget always does not matter a lot. Actions that can be taken when a significantvariance has been revealed will depend on the nature of the variance itself. Some variances canbe identified to a specific department and it is within that departments control to take correctiveaction. Other variances might prove to be much more difficult, and sometimes impossible, tocontrol.Best corrective action is to develop more than one plan at the same time. So that whenorganization finds itself in trouble with the existing plan, it can easily switch to other possibleplan. Webster will also follow the same strategy to avoid any kind of loss and also to minimizeits risks.Q: NO: 3Sources of FinanceFinance is essential for a business’s operation, development andexpansion. Finance is the core limiting factor for most businesses andtherefore it is crucial for businesses to manage their financial resourcesproperly. Finance is available to a business from a variety of sources bothinternal and external. It is also crucial for businesses to choose the mostappropriate source of finance for its several needs as different sourceshave its own benefits and costs. Sources of financed can be classified 10
  • 11. based on a number of factors. They can be classified as Internal andExternal, Short-term and Long-term or Equity and Debt. It would beuncomplicated to classify the sources as internal and external.Internal SourceInternal sources of finance consist of: • Personal savings • Retained profits • Working capital • Sale of fixed assetsExternal SourceSources of finance that are not internal sources of finance are external sources of finance.External sources of finance are from sources that are outside the business. External sources offinance can either be: • Ownership capital - Ordinary shares - Preference shares • Non-ownership capital - Debentures -Bank overdraft -Loan -Hire-purchase -Lease -Grant -Venture capital -Factoring -Invoice discountingMonitoring and Control of FinanceFinancial controls and monitoring methods have a dual role in supporting internal needs andexternal requirements. There are five key aspects to financial controls and monitoring. Theseinclude: 11
  • 12. Accounting Records (or Accounts Receivable and Payable):Establish a process that records every financial transaction by maintaining paper files, anelectronic database, and copying all records in a virtual library. Any organization needs to beable to demonstrate what funds were received and how funds were spent. Accounting recordsshould be consistent. Choose a method and regular schedule for tracking income and expensesthat works for your organization. This is important in case the organization is audited or if afunder requests information for a specific item or transaction. A system should also be developedto track donations from individuals to keep donors updated of the organization’s progress or tosolicit annual and repeat contributions. A separate accounting system should be developed forfunding from foundations with the original proposal and budget, dates of receipt of funds, noteson allowable expenditures, and reporting requirements so that you can respond to funders’requests for financial records or in case of audits.Financial Planning:Financial planning converts your organization’s objectives into a budget. The budget serves as acritical planning guide for your staff and governing board. It is a public record for funders ofhow you intend to spend the funds received. Financial planning allows you to review yourorganization, examining successes and challenges in the past. Planning also enables you to makeprojections and set targets, informing strategies for future success.Financial Monitoring and Reporting:Drawing from the information in the accounting records, your organization can create internalreports that help monitor progress by comparing budgets to actual expenses. Frequent reviewsand monitoring allows the governing board and staff to measure your organization’s progressand helps inform decision-making about the organization’s or a project’s future. Internal reports,sometimes called management reports allow you to be forward thinking as you assess thefinancial status of the organization and what will be needed to realize your goals. Accountingrecords are also the source for creating external financial reports that demonstrate to funders andother stakeholders how funds have been spent. Funders may require financial reports at thecompletion of the project or periodically during the project’s implementation.Governing Board:A governing board, whether comprised by a board of directors or leadership from thecommunity, serves as stewards of an organization’s resources. Governing boards shouldparticipate in approving budgets, financial monitoring and reviews, and agree upon and ensure 12
  • 13. that internal controls are implemented. The board treasurer who has skills in accounting shouldbe the lead person in working with the staff in ensuring financial accountability.Internal Controls:Controls are organizational practices that help safeguard your assets and ensure that money isbeing handled properly. Controls help detect errors in accounting, prevent fraud or theft, andhelp support the people responsible for handling your organization’s finances.References 1. Sullivan, Arthur; Steven M. Sheffrin (2003). Economics: Principles in action. Upper Saddle River, New Jersey 07458: Pearson Prentice Hall. pp. 551. ISBN 0-13-063085-3. http://www.pearsonschool.com/index.cfm? locator=PSZ3R9&PMDbSiteId=2781&PMDbSolutionId=6724&PMDbCategoryId=&P MDbProgramId=12881&level=4. 2. Allen, Franklin; Douglas Gale (2001). Comparing Financial Systems. 55 Hayward Street, Cambridge, MA 02142-1493, USA: MIT press. pp. 520. ISBN 978-0262511254 13