Ideadeluge finance for non-financial managers

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  • decreased as well?
  • INTERACTION : What does the TLA FTE mean?Have you been involved in setting any of these? Could you be asked to?
  • INTERACTION : Why is it important when setting a budget? Why is it important when reviewing actuals? (recurring differences, amend expectations)An easy way to think of variable cost? Cost is usually a price per unit x number of units of something. If those number of units can change during the year, it’s a variable cost.
  • INTERACTION : Is there enough money to run this department?Revenue = CashRelationship between line items..
  • Expand on the points….WHY do we do this?
  • Ideadeluge finance for non-financial managers

    1. 1. What financial managers wishnon-financial staff understood Finance for Non-Financial Managers 01/11/2011 1
    2. 2. Fundamental accounting conceptsidea deluge 2
    3. 3. The accounting equation Owner’s Assets Liabilities Equity This will be the case after every single transactionidea deluge 3
    4. 4. What is an asset?Something we own or use that should generate income. We bought it It’s an asset! We receive revenue for doing scansidea deluge 4
    5. 5. What is a liability?Something we owe because of something we did and weare going to have to pay. Owe money as we bought on credit Purchase nurses It’s a liability uniforms on credit We are going to payidea deluge 5
    6. 6. What is Owner’s Equity?The residual interest in the assets of the entity afterdeducting all its liabilities. Owner’s Assets Liabilities EquityIs increased by: Revenue and capital contributionsIs decreased by: Expenses and drawings/ dividendsidea deluge 6
    7. 7. Income and expensesIncome: Any increase in equity resulting from increases inassets or decreases in liabilitiesExpense: Any decrease in equity resulting from decreasesin assets or increases in liabilitiesidea deluge 7
    8. 8. Accounting equation example1. The department receives a grant (in cash) of $20,0002. The department incurs expenses of $1,0003. The department pays employees’ salaries of $5,0004. The department pays the creditors. Owner’s Equity Assets Liabilities 1 Revenue +$20k Cash +$20k 2 Expenses -$1k Creditors +$1k 3 Expenses - $5k Cash -$5k 4 Cash -$1k Creditors -$1kidea deluge 8
    9. 9. Overview of the accounting equation Owner’s Assets Liabilities Equity Assets Liabilities  Buildings  Accounts Payable  Accounts Receivable  Accruals  Computer Equipment  Bank Overdraft  Motor Vehicles  Long-term Debt Revenue Expenses  Government funding  Staff Salaries  Interest received  Consumables  Private Donations  Electricity  Consultants (not always)idea deluge 9
    10. 10. Accrual accountingFinancial reports are prepared on an accrual basis.Expenses and revenue are recorded when they are incurredor earned, not when cash is paid or received.idea deluge 10
    11. 11. Accrual accounting exampleExample: Purchase of medical supplies1. Supplies are ordered on the 30 September.2. They are delivered on the 24 October.3. Cash paid for the supplies on the 25 November. September October November Goods Goods Pay ordered received creditoridea deluge 11
    12. 12. Accrual accounting example September October November Goods Goods Pay ordered received creditor When the goods are ordered – there is no transaction When the goods were received, the expense was recognised The cash was only paid later, the transaction affecting only the cash balance and the accounts payable / creditor balance.idea deluge 12
    13. 13. Cash flow vs revenueCash flow is the physical cash received or paid out in therunning of the business. Revenue CashRevenue and expenses may be recognised when there hasbeen no cash flow. Cash may also be received / paid withno revenue /expense recognition.idea deluge 13
    14. 14. OPEX and CAPEX Capital expenditure (CAPEX) Operational expenditure (OPEX) Initially captured in the balance Initially captured in the income sheet statement Recognised as an expense of a Recognised as an expense in the year number of years of expenditure Is an asset Is an expenseThe matching principle features again, as a keydeterminant in whether an expenditure item is OPEX orCAPEX.idea deluge 14
    15. 15. Capital expenditure (CAPEX)What expenditure should be capitalised?Expenditure that is expected to provide benefits to an organisation over anumber of years (e.g. an MRI scanner operates for years)Implications Capitalised expenditure eventually needs to be expensed. This is done a little bit every year until the asset is no longer useful. The accounting term for this is depreciation. Profit for the period is relatively higher as only a portion of the cost is recorded as an expense not the whole cost of the asset.Examples of expenditure that can be capitalised:MRI scanners, X-ray machines, computing equipment and motor vehicles (inother words – assets).idea deluge 15
    16. 16. Operational Expenditure (OPEX)What expenditure should be expensed immediately? Expenditure that provides benefits in the short term (e.g. staff salaries represent the services provided in the past fortnight). Expenditure which has minimal benefit (e.g. stationery). Organisations will often have a policy of expensing costs below a certain amount (e.g. all computer equipment costs below $5,000 are expensed).Implications Operational expenditure has an immediate impact on the profit. It reduces an organisation’s profit in the period in which the expenditure is incurred.Examples of operational expenditure:Staff salaries, Medical consumables, Travel costsidea deluge 16
    17. 17. DepreciationCapital expenditure is recorded as an expense a portion at a time over the lifeof the asset, rather than a one-off when it is purchased. Example: New x-ray machine purchased Value: $100,000 Useful life: 5 years Annual Depreciation Expense ($100,000/5 = $20,000) Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 $20,000 $20,000 $20,000 $20,000 $20,000 Device Purchasedidea deluge 17
    18. 18. Depreciation and matchingWhy is the cost spread across 5 years? The device’s useful life is the time it is expected to be able to be used to provide patient care. Allocating the cost over the useful life is a way of matching the cost of the asset to the benefit it provides (i.e. it’s ability to provide patient care).After this 5 year period, the device could be: Obsolete (replaced by improved technology) and/or Not working anymore (cannot be used to treat patients).Implication At the end of five years the device’s value in the Balance Sheet will be zero (fully depreciated), reflecting one/both of the above Scenarios.Useful life is generally determined by industry standards, professional judgmentor the useful life stated by the device’s manufacturer.idea deluge 18
    19. 19. Financial managementidea deluge 19
    20. 20. Importance of financial managementBenefits of effective financial management Sufficient funds to provide high quality health care Effective resource allocation Front-line staff can focus more on patients Ability to invest in modern equipmentConsequences of not effectively managing financials Consistently incurring cost overruns Inability to provide quality patient care on a daily basis Inability to invest in new equipment Reflects poorly on the department/division’s reputationidea deluge 20
    21. 21. Who is responsible?Primary responsibilityCFO has ultimate responsibility for financial managementwithin an organisation. The CFO will delegate responsibilityand maintain the control environment.Delegated responsibilityBusiness Unit Financial managers, Cost Centre Managers,Planning Managers, Reporting Managers, Accounts PayableManagers, Accounts Receivable Managers.Inidvidual responsibilityAll employees.idea deluge 21
    22. 22. How are you responsible?Completing tasks and deliverables for the finance teamAdhering to policies and proceduresComplying with internal controlsidea deluge 22
    23. 23. Examples of decisions with financialimplicationsAllocation of staff – if the hospital is understaffed and employees are required towork overtime, expenses will increase and cash will decrease which could lead tocosts going over budget.• Investigate why costs were higher during the month than budgeted – if there is a large supplies cost perhaps a number of unscheduled surgeries took place that month.• Consider whether the department/ division will need to upgrade its equipment to meet future patient requirements.• Determine the correct amount of housekeeping supplies / medications / stationery / consumables. This is working capital management and impacts on cash management.• Determine to follow internal controls to reduce risk (and when in certain circumstances to breach those controls).idea deluge 23
    24. 24. Working capital Working Current Current Capital Assets Liabilities Working capital = current assets – current liabilities Current assets - cash, accounts receivable, inventory. Current liabilities - accounts payable, short term loans and debt. Changes in working capital have a direct effect on cashflow .idea deluge 24
    25. 25. Working capital managementTo manage working capital properly it is important that orders are promptlyprocessed, charts are processed accurately and invoices are sent to the financedepartment in a timely fashion.This is very important when it comes to managing cash flow. Cash Inventory Accounts Accounts Working receivable payable capitalStarting 5 5 0 1 9positionPurchase 4 6 0 1 9inventorySell 4 5 2 1 10inventoryCollect debt 6 5 0 1 10idea deluge 25
    26. 26. Ordering too much inventoryIt is clear that a lot of our cash is tied up in inventory. We nearly ran out of cashin this example.It is important to manage working capital due to the direct impact on cash. Cash Inventory Accounts Accounts Working receivable payable capitalStarting 5 5 0 1 9positionPurchase 1 9 0 1 9inventorySell 1 8 2 1 10inventoryCollect debt 3 8 0 1 10idea deluge 26
    27. 27. Financial reports and KPI’sidea deluge 27
    28. 28. Types of financial reports The three main financial reports are : • Profit and loss : Revenue and costs for a particular period. • Balance sheet: Assets and liability position at a point in time. • Cash flow statement: Cash inflows and outflows for a particular period. Profit & loss and Cash flow statement Balance sheet Information for the whole period Point in time1 July 30 June Together, these three reports give the overall picture of the financial health of a company. A single report can give a quick look at the performance, but one section might be performing well whilst another is failing. idea deluge 28
    29. 29. Profit and lossThe main report we will focus on is the profit and lossstatement as this gives a breakdown of revenues andexpenses – something you may have some control over.In your role you probably have more control over costs asopposed to revenue. Some cost reports you may receiveare:• Staff costs (e.g. salaries, casual staff wages).• Medical staff costs (e.g. bandages and scrubs).• Costs for using medical equipment (e.g. specialised equipment used for operations) .idea deluge 29
    30. 30. Interpreting cost reports 2010 2009 Actual Budget Variance Actual Budget VarianceEmployee expenses 213,250 206,000 7,250 209,000 201,000 8,000Medical supplies 161,240 158,000 3,240 157,000 160,000 -3,000Travel costs 74,560 80,000 -5,440 81,000 80,000 1,000TOTAL 449,050 444,000 5,050 447,000 441,000 6,000What are the key findings from this cost report?• Employee expenses exceed budget. Why?• Medical supplies exceed budget. Why?• Travel costs have decreased. Why?idea deluge 30
    31. 31. Key performance indicators (KPIs)KPI’s help define and measure progress toward organisational goals.They are quantifiable measurements, agreed to beforehand, and reflect thecritical success factors of an organisation.They will differ depending on the organisation. For example:• An IT company may have the percentage of its income that comes from return customers.• A school may focus KPI’s on graduation rates of its students.• A Customer Service Department may have percentage of customer calls answered in the first minute as one of its KPI’s.KPI’s give departments and employees an area to focus on as it is known thatperforming well within these indicators is what the company values.idea deluge 31
    32. 32. Understanding performancemanagement Key performance indicators (KPI) are a useful tool for managing performance. Example of potential health care KPI’s: KPI What it is measuring Patient Numbers per Measures whether a hospital is treating the Month number of patient’s it aims to care for. Average Emergency Measures how long it takes for hospital staff to Response Time per Week provide emergency treatments for patients. Re-Investment ($) per Measures the amount of capital expenditure on Year new equipment.idea deluge 32
    33. 33. KPI’s should be SMART • Specific S • It must be clear whether the KPI was achieved • Measurable M • KPI needs to be able to quantifiable • Agreed Upon A • KPI needs the support of the staff member being measured • Realistic R • KPI needs to be achievable • Time-bound T • KPI needs to be measured within a specific time periodidea deluge 33
    34. 34. Budgetsidea deluge 34
    35. 35. Understanding BudgetsA budget is a report that outlines the future resource allocationin an organisation. Future events Making decisions today on how to resource future events Resource allocation Determining how to allocate staff, assets, liabilities, revenues and expenses to meet organisational objectives.Budgets can be used to: Identify if there are sufficient staff to attend to future patient numbers. Determine if existing funds are sufficient to cover future expenditure. Identify if there will be excess capacity that can filled by accepting patients from overcrowded hospitals.idea deluge 35
    36. 36. Benefits of budgeting Prepare an Identify advanced Plan for Shortfalls or response for sustainable, Excess shortfalls or high quality Resources excess health care resourcesBudgeting can help in identifying the following issues: Shortfalls in funding (i.e. private patient fee no longer covers an operation’s costs). Shortfalls in staff numbers/hours (i.e. not enough staff to attend to patients). Shortfalls in physical capacity (i.e. overcrowded hospital rooms). Excess staff and/or excess physical capacity (i.e. too many staff/rooms).idea deluge 36
    37. 37. Cost of budgetingWhat is the cost of budgeting? Be careful to ensure that the costs involved in preparing budgets do not exceed the potential benefits.Try to avoid: Spending significant time discussing the budget Not using the budget to make decisions Making the budget source information 100% accurate Spending significant funds employing support staff to compile and report budgetary informationidea deluge 37
    38. 38. Types of BudgetsOrganisations use multiple types of budgets to assist in decisionmaking. Cost budget Lists the forecast costs for the upcoming period Revenue budget Outline the forecasted income for the upcoming period. Staff budget Highlights the forecasted allocation of FTE staff for the upcoming period. Investment budget Explains the forecasted re-investment of funds for the upcoming period.idea deluge 38
    39. 39. Cost behaviourWhen it comes to a budget, itis incredibly important tounderstand the differencebetween fixed and variablecosts.idea deluge 39
    40. 40. Cost behaviourFixed costs: Costs you would incur even if hospital has nopatients.Example : If there weren’t any patients in the hospital therewould still be some electricity costs, salary expenses andinsurance expenses.idea deluge 40
    41. 41. Cost behaviourVariable costs: Costs that increase or decrease in relationto a cost driver (such as patients in the hospital).Example : If a hospital is at capacity, more staff arerequired to care for patients. Wages increase, linencleaning increases and meal expenses increase.idea deluge 41
    42. 42. Cost behaviourCost drivers: Cost drivers are factors or events that havea direct or indirect impact on the cost of a specific activity.Example : The cost of running an MRI machine dependson: number of hours it runs, number of employees neededto run the machine and number of patients tested. Theunit cost refers to the cost of each additional scan.idea deluge 42
    43. 43. Fixed vs variableAllocate the following costs to either a fixed or variable cost:• Full time staff wages• Casual staff wages• Overtime• Depreciation• Travel costs• Medical waste disposal• Insurance• Electricity• Laundry costs• Cleaning costsidea deluge 43
    44. 44. Example : Budget review Quarterly Cost Budget January – March 2011 January February March Staff Costs 13,037,215 11,547,588 12,456,888 Medical Consumables 4,044,808 1,065,152 1,090,433 Medical Waste Disposal 3,036,853 1,517,938 2,887,122 Laundry and Cleaning Costs 169,240 693,559 244,677 Monthly Total 20,288,116 14,824,237 16,679,120 Funds Available 20,300,000 13,200,000 16,700,000 Variance 11,884 -1,624,237 20,880What risks does this budget present?What potentially invalid assumption is being made in this budget?What additional questions would you ask?idea deluge 44
    45. 45. How to draw up a budget1. Involve employees who will be responsible for the budget or who have information which will help you prepare them.2. Collect historical information and forecasts.3. Use historical information, and any changes in operations or prices, to budget for overheads and other fixed costs.4. Consider the cost drivers to budget for variable costs.5. Identify any non-operational cashflows (taxes and financing)6. Consider the timing of all income and expenditure items.7. Ensure your budgets contain enough information to let you monitor the key performance indicators you use to manage the business.8. Agree the budget with the individuals who will be responsible and be prepared to amend it if your assumptions are unrealistic.9. Regularly update budgets as actual figures become available and circumstances change.idea deluge 45
    46. 46. Questions?Contact me at chrismelck@gmail.comidea deluge 46

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