This document provides an overview of the Advanced Diploma in Management Practice course taught by Steve Pollard. The course aims to enable students to critically evaluate organizational performance using accounting information for planning, decision-making, and control. Key topics covered include financial management, financial reporting, understanding costs, budgeting, and financial controls.

2. Finance Advanced Diploma in Management Practice Steve Pollard

3. Advanced Diploma in Management Practice Contact: Steve Pollard [email_address]

4. Course Secretary: Lee Hutchinson Room No: 2 D 15 Telephone: 028 9036 8077 Email: [email_address] Advanced Diploma in Management Practice

5. Setting the Scene

6. The Teaching Plan Handouts and materials on Web CT Finance for the Non-Financial Manager Not An Accountancy Course Finance as a Management Tool: Governance Planning Decision-Making Control

7. People Knowledge Resources Results Finance Monitor and Evaluate Business Processes Leadership Strategy ______ _____

8. Finance The science that describes the management of money, banking, credit, investments, and assets. Basically, finance looks at anything that has to do with money and the market

9. AIMS The aim of this module is to enable you to critically evaluate and appraise the performance of the organisation as a whole, and subsets within that organisation and to use accounting-based information for planning, decision-making and control.

10. Setting The Scene

11. STRATEGIC VISION & MISSION Senior management’s view of firm’s long-term direction Helps managers avoid visionless or rudderless decision-making Conveys organisational purpose motivating employees to do their very best Helps keep direction-related actions of lower-level managers on common path A well-chosen mission prepares a business for the future!

12. Objectives Represent managerial commitment to achieve SPECIFIC & MEASURABLE PERFORMANCE TARGETS by a certain time Spell-out HOW MUCH of WHAT KIND of performance BY WHEN Direct attention & energy to WHAT NEEDS TO BE ACCOMPLISHED Establishing objectives converts the business’ mission into concrete performance outcomes!

13. WHAT KIND OF OBJECTIVES TO SET FINANCIAL OBJECTIVES Relate to firm’s financial performance Acceptable financial performance is critical to businesss survival STRATEGIC OBJECTIVES Relate to firm’s competitiveness & market position Tend to be competitor focused Acceptable strategic performance is essential for long-term competitive success Required for Every Key Result Area

14. MANAGERIAL VALUE OF OBJECTIVES Objectives serve two purposes: Substitute strategic decision-making for aimlessness over what to accomplish Provide benchmarks for judging organisational performance

15. MANAGERIAL VALUE OF OBJECTIVES Principle: Companies whose managers set objectives for each KEY RESULT AREA and then pursue actions calculated to achieve their performance targets typically outperform companies whose managers have good intentions, try hard, and hope for success

16. WHAT KIND OF OBJECTIVES TO SET SHORT-TERM OBJECTIVES Focus on short-term performance LONG-TERM OBJECTIVES Focus on long-term performance Required for Both Short & Long Term

17. STRATEGIC MANAGEMENT PRINCIPLE Every company needs both strategic and financial objectives!

18. EXAMPLE: CORPORATE OBJECTIVES To achieve 100 percent total customer satisfaction. . .everyday. . .in every restaurant. . .for every customer. McDONALD’s

19. EXAMPLE: CORPORATE OBJECTIVES To increase annual sales from $1 billion to $2 billion in 5 years. To enter a new market every 18 to 24 months. To have 30% of sales each year come from products not in the company’s product line five years earlier. To be the lowest cost, highest quality producer in the household products industry. To achieve a 15% average annual growth in sales, profit, and earnings per share. Rubbermaid

20. Financial objectives Goals related to returns that a business will strive to accomplish during the period covered by its financial plan. Financial plan: A blueprint relating to the financial future of a Business

21. EXAMPLE: FINANCIAL OBJECTIVES Achieve sales growth of 10% per year Increase earnings by 15% annually Increase dividends per share by 5% per year Increase net profit margins 2% to 4% Boost annual returns on invested capital from 15% to 20% Stronger credit ratings A more diversified revenue base Stable earnings during recessionary periods

22. “ Our primary objective is to grow the value of the business for our shareowners. This objective is quantified in terms of three financial targets: To increase our earnings per share by at least 10% every year To generate £150m of free cash flow every year To double the value of our shareowners’ investment within four years.” Cadbury Schweppes Plc

23. The name of your organisation, brief description, key products and/or services Your organisation’s key financial objectives attitude to surpluses & profitability Your organisation’s annual turnover (revenue/income/funding) no of employees net worth (if you know it!) Your role Financial reports that you contribute towards the preparation of are required to present interpret to help with decision making.

24. CONTENT Resources and Financial Management Financial Reporting Understanding Costs Budgeting Financial Controls Investment Appraisal Techniques Information Management Legal Frameworks

25. Resources and Financial Management: Explain the term financial management Establish Financial Objectives Identify key tasks involved Classification of resources Appreciate the role of the manager in financial management Apply this to you and your organisation

26. What is Financial Management ? Handout: What is Financial Management

27. “ Financial management is all about getting the most appropriate manpower, materials or equipment at the best price (economy), making sure that the resources are used in the most productive way (efficiency) to meet the organisation’s objectives (effectiveness).” Chartered Institute of Management Accountants

28. Collier (2003: 18) believes that: financial management is concerned with, Funds from stakeholders or financiers to provide the capital the business needs to sell and produce goods and services.

29. Financial Accounting: The measuring and reporting of accounting information for external users (those users other than Managers of the business) Atrill McLaney 2005

30. Management Accounting: The measuring and reporting of accounting information for the Managers of a Business Atrill McLaney 2005

31. Financial Management can be defined as: The management of the finances of a business / organisation in order to achieve financial objectives Financial Planning Financial Control Financial Decision making

32. Planning - To ensure that: Enough funding is available at the right time to meet the needs of the business. Working Capital Why does a business need Working Capital?

33. Working Capital: In the short term, funding may be needed to invest in equipment and stocks, pay employees and fund sales made on credit. In the medium and long term, funding may be required for significant additions to the productive capacity of the business or to make acquisitions.

34. The working capital cycle can be defined as: The period of time which elapses between the point at which cash begins to be expended on the production of a product and the collection of cash from a customer Working Capital

35. The diagram below illustrates the working capital cycle for a manufacturing firm Working Capital

36. Financing Working Capital

37. Financial control ensures that the business is meeting its objectives by addressing questions such as: Are assets being used efficiently? Are the businesses assets secure? Do management act in the best interest of shareholders and in accordance with business rules?

38. The key aspects of financial decision-making relate to investment , financing and dividends : • Investments must be financed in some way – however there are always financing alternatives that can be considered. For example it is possible to raise finance from selling new shares, borrowing from banks or taking credit from suppliers • A key financing decision is whether profits earned by the business should be retained rather than distributed to shareholders via dividends. If dividends are too high, the business may be starved of funding to reinvest in growing revenues and profits further.

39. Key Resources

40. Assets and Resources of the Firm Financial capital Physical capital Social capital Human capital Intellectual capital Customer capital

41. financial capital – the money available for investment and growth intellectual capital – specialised or protected knowledge or property physical capital – physical resources, including IT human capital – staff resources and capabilities social capital – ‘good name’, goodwill, similar cultural characteristics customer capital – the size, value and loyalty of customers information capital – systems, databases, networks organisational capital – culture, leadership, alignment Benchmark against other organisations in our sector. To what extent are our assets better, the same or worse than competition? Are they stable, strengthening, or becoming weaker? Assets and Resources Source: Grant, Kaplan and Norton

42. Fixed Assets Current Assets Long-Term Liabilities Current Liabilities Balance Sheet

43. Understanding Costs

44. Cost “ The amount of resources, usually measured in monetary terms, sacrificed to achieve a particular Objective.” Atrill & McLaney

45. Financial Framework Types of cost incurred by the organisation: Variable costs (COGS) or (COS) Fixed costs and Overheads Capital Expenditure (Capex) Depreciation

46. Direct or Variable Costs: “ Costs that can be identified with specific cost units, to the extent that the effect of the cost can be measured to each unit of output” Atrill & McLaney

47. Overheads (Indirect Costs or Fixed) Costs that do not vary with changing sales or production volumes e.g. rent, rates, administration, depreciation, telephones, heat, light & power, insurance, professional fees, stationery etc.

48. Fixed Costs Costs which in the short term remain unchanged regardless of the level of activity.

49. Financial Framework Sales Volume (Cumulative ) Costs & Business activity and the P & L Account Value € /£ 0 5 10 15 20 25 A B C Fixed Costs Sales Variable Costs

50. Contribution and Margins Which company would you invest in? Why?

51. Direct and Indirect Costs in Practice: Survey in 1999 of 176 fairly large UK businesses revealed that on average, total costs are in the following proportions: Direct costs 70% Indirect Costs 30% Applied across all sectors except financial services (52/48) Drury and Tayles

52. Financial Reporting - The Traditional Accounting Control Model Handout: Introduction to Financial Accounts

53. Financial accounts are concerned with classifying, measuring and recording the transactions of a business. How financial and physical asset resources are reported At the end of a period (typically a year),

54. Financial Framework Financial Reporting: Balance Sheet Profit & Loss Account (P&L) Cash Flow Statement Annual Report and Account (All the above)

55. Financial Framework Profit and Loss Account Describing the trading performance of the business over the accounting period Balance Sheet Statement of assets and liabilities at the end of the accounting period (a "snapshot") of the business Cash Flow Statement Describing the cash inflows and outflows during the accounting period Notes to the Accounts Additional details that have to be disclosed to comply with Accounting Standards and the Companies Act Directors' Report Description by the Directors of the performance of the business during the accounting period + various additional disclosures, particularly in relation to directors' shareholdings, remuneration etc

56. The Balance Sheet

57. Financial Framework Capital Structure: Owners share capital (equity) Reserves (P or L) – part of owners equity Short-term finance – debt Long-term finance – debt Debt : Equity = Gearing ( high is >1 ) Sometimes expressed as a % of total funding

58. A statement of the assets and liabilities of a business at a particular date – It has two parts: A statement of Fixed Assets, Current Assets & Current liabilities – Total Assets A statement of how net assets have been financed

59. Glossary of Terms Fixed Assets – Held by the enterprise rather than for sale or conversion to cash e.g. Buildings, machinery, equipment, fixtures & fittings. Current Assets – Cash and anything that is expected to be converted into cash within one year e.g. stock, debtors, cash, bank balance .

60. Glossary of Terms Current Liabilities – Liabilities to be paid within a year e.g overdraft, trade creditors, short-term loans, accrued expenses, tax. Long-term Liabilities – More than a year Total (Net) Assets – Fixed + Current less current liabilities and long-term liabilities

61. Balance Sheet (amounts shown in £' millions) 24 February 200x 26 February 200x FIXED ASSETS 10,038 8,527 Current Assets 1,694 1,342 Short-term creditors (4,389) (3,487) NET CURRENT LIABILITIES (2,695 (2,145) Total Assets less Current Liabilities 7,343 6,382 Long-term creditors (1,927) (1,565) Provisions (24) (19) TOTAL NET ASSETS 5,392 4,798 Equity shareholders' funds 5,356 4,769 Minority interests 36 29 Total Capital Employed 5,392 4,798

62. Draw Up A Personal Balance Sheet

63. Profit & Loss Account P&L Describing the trading performance of the business over the accounting period

64. £'000 £'000 Revenue 12,500 10,000 Cost of Sales 7,500 6,000 Gross Profit 5,000 (40%) 4,000 (40%) Operating Costs Sales and distribution 1,260 1,010 Finance and administration 570 555 Other overheads 970 895 Depreciation 235 210 Total Operating Costs 3,035 2,670 Operating Profit (gross profit less operating costs) 1,965 1,330 Operating profit margin (operating profit / revenue) 15.7% 13.3% Interest (450) (475) Profit before Tax 1,515 855 Taxation (455) (255) Profit after Tax 1,060 600 Dividends 650 400 Retained Profits 410 200

65. The Trading Account. This records the money in (revenue) and out (costs) of the business as a result of the business’ ‘trading’ (Gross Profit) The Profit and Loss Account proper This starts with the Gross Profit and adds to it any further costs and revenues, including overheads. The Appropriation Account. Retained for future investment and growth, Returned to owners eg a ‘dividend’ or Paid as tax. 3 Parts to P&L

66. Cost of Goods Sold – The directly attributable costs of products or services sold e.g. materials, direct labour, production costs. Gross Profit – Where sales revenue (turnover) exceeds the cost of goods sold Glossary of Terms

67. Overheads (Indirect Costs or Fixed) Costs that do not vary with changing sales or production volumes e.g. rent, rates, administration, depreciation, telephones, heat, light & power, insurance, professional fees, stationery etc.

68. Net Profit Where sales revenue plus other income (such as rent received) exceeds the sum of cost of goods sold plus overheads

69. Interpretation of the Statements Key Questions: Financial information is always prepared to satisfy in some way the needs of various interested parties (the "users of accounts"). Stakeholders in the business (whether they are internal or external) seek information to find out three fundamental questions: How is the business doing? How is the business placed at present? What are the future prospects of the business?

70. How Is This Business Doing? £'000 £'000 Revenue 12,500 10,000 Cost of Sales 7,500 6,000 Gross Profit 5,000 (40%) 4,000 (40%) Operating Costs Sales and distribution 1,260 1,010 Finance and administration 570 555 Other overheads 970 895 Depreciation 235 210 Total Operating Costs 3,035 2,670 Operating Profit (gross profit less operating costs) 1,965 1,330 Operating profit margin (operating profit / revenue) 15.7% 13.3% Interest (450) (475) Profit before Tax 1,515 855 Taxation (455) (255) Profit after Tax 1,060 600 Dividends 650 400 Retained Profits 410 200

71. Interpretation of the Statements Performance Area Key Issues Profitability Is the business making a profit? Is it enough? Efficiency Is the business making best use of its resources? Is it generating adequate sales from its investment in equipment and people? Is it managing its working capital properly? Liquidity Is the business able to meet its short-term obligations as they fall due from cash resources immediately available to it? Stability What about the long-term prospects of the business? Is the business generating sufficient resources to repay long-term liabilities and re-invest in required new technology? What is the overall structure of the businesses' finance - does it place a burden on the business? Investment Return What return can investors or lender expect to get out of the business? How does this compare with similar, alternative investments in other businesses?

72. The Main Tools of Review Area for Review Comments Review of the Business; Chairman's and CEO's Review The accounts of all quoted companies (and many private companies) include some commentary from senior management on the strategy and performance of the business. This is often the most useful place to start. The statements (usually one each from the Chairman, CEO and Finance Director) will reveal many "qualitative" things about the business. These include a description of the business activities, objectives, developments and competitive environment. Political, environmental and macro-economic issues may also be raised. Cash flow statement The cash flow statement will reveal where the company's resources have come from and how they have been applied during the year. Calculation of significant ratios between figures in the accounts Ratio analysis is an important tool for understanding and comparing business performance. However, ratios and other financial calculations are rarely useful when looked at in isolation. it is important to carry out calculations of ratios and other significant financial figures with previous years (many companies publish five or ten year summaries as part of their annual reports) in order to identify positive or adverse trends). Comparison with other, relevant competitors and industry "norms" is also important.

73. : Key Profitability Ratios Ratio Calculation Comments Gross Profit Margin [Gross Profit / Revenue] x 100 (expressed as a percentage This ratio tells us something about the business's ability consistently to control its production costs or to manage the margins its makes on products its buys and sells. Whilst sales value and volumes may move up and down significantly, the gross profit margin is usually quite stable (in percentage terms). However, a small increase (or decrease) in profit margin, however caused can produce a substanial change in overall profits. Operating Profit Margin [Operating Profit / Revenue] x 100 (expressed as a percentage) Assuming a constant gross profit margin, the operating profit margin tells us something about a company's ability to control its other operating costs or overheads. Return on capital employed ("ROCE") Net profit before tax, interest and dividends ("EBIT") / total assets (or total assets less current liabilities ROCE is sometimes referred to as the "primary ratio"; it tells us what returns management has made on the resources made available to them before making any distribution of those returns.

74. Key Efficiency Ratios Ratio Calculation Comments Sales /Capital Employed Sales / Capital employed A measure of total asset utilisation. Helps to answer the question - what sales are being generated by each pound's worth of assets invested in the business. Note, link with the primary ratio - ROCE. Sales or Profit / Fixed Assets Sales or profit / Fixed Assets This ratio is about fixed asset capacity. A reducing sales or profit being generated from each pound invested in fixed assets may indicate overcapacity or poorer-performing equipment. Stock Turnover Cost of Sales / Average Stock Value Stock turnover helps answer questions such as "have we got too much money tied up in stock"?. An increasing stock turnover figure or one which is much larger than the "average" for an industry, may indicate poor stock management.

75. Key Efficiency Ratios Credit Given / "Debtor Days" (Trade debtors (average, if possible) / (Sales)) x 365 The "debtor days" ratio indicates whether debtors are being allowed excessive credit. A high figure (more than the industry average) may suggest general problems with debt collection or the financial position of major customers. Credit taken / "Creditor Days" (Trade creditors + accruals) / (cost of sales + other purchases)) x 365 A similar calculation to that for debtors, giving an insight into whether a business i taking full advantage of trade credit available to it.

76. Liquidity Ratios Ratio Calculation Comments Current Ratio Current Assets / Current Liabilities A simple measure that estimates whether the business can pay debts due within one year from assets that it expects to turn into cash within that year. A ratio of less than one is often a cause for concern, particularly if it persists for any length of time. Quick Ratio (or "Acid Test" Cash and near cash (short-term investments + trade debtors) Not all assets can be turned into cash quickly or easily. Some - notably raw materials and other stocks - must first be turned into final product, then sold and the cash collected from debtors. The Quick Ratio therefore adjusts the Current Ratio to eliminate all assets that are not already in cash (or "near-cash") form. Once again, a ratio of less than one would start to send out danger signals.

77. Stability (Long-Term Health) Ratios Ratio Calculation Comments Gearing Borrowing (all long-term debts + normal overdraft) / Net Assets (or Shareholders' Funds) Gearing (otherwise known as "leverage") measures the proportion of assets invested in a business that are financed by borrowing. In theory, the higher the level of borrowing (gearing) the higher are the risks to a business, since the payment of interest and repayment of debts are not "optional" in the same way as dividends. However, gearing can be a financially sound part of a business's capital structure particularly if the business has strong, predictable cash flows. Interest cover Operating profit before interest / Interest This measures the ability of the business to "service" its debt. Are profits sufficient to be able to pay interest and other finance costs?

78. Key Investor Ratios Ratio Calculation Comments Earnings per share ("EPS") Earnings (profits) attributable to ordinary shareholders / Weighted average ordinary shares in issue during the year A requirement of the Stock Exchange - an important ratio. EPS measures the overall profit generated for each share in existence over a particular period. Price-Earnings Ratio ("P/E Ratio") Market price of share / Earnings per Share At any time, the P/E ratio is an indication of how highly the market "rates" or "values" a business. A P/E ratio is best viewed in the context of a sector or market average to get a feel for relative value and stock market pricing. Dividend Yield (Latest dividend per ordinary share / current market price of share) x 100 This is known as the "payout ratio". It provides a guide as to the ability of a business to maintain a dividend payment. It also measures the proportion of earnings that are being retained by the business rather than distributed as dividends.

79. Over To You Port of Belfast Annual Accounts 2005

80. Understanding Costs

81. The significance of cost information to managers Basic elements of cost fixed/variable direct/indirect cost allocation methods and implications Key costing techniques standard costing absorption costing and activity based costing marginal cost and the contribution approach to short-term decision making Long-term decision-making and capital expenditure evaluation Business plans Understanding Costs

82. Exercise Costs in Year One for a New Start Community Day Care Centre 15 – 20 minutes

83. Break-Even When Sales Revenues = Costs Point at which enterprise is making neither a profit or loss

84. Break-Even Indicates the point at which all costs are covered by sales revenue Prompt you to reassess the price if break-even appears unachievable Helps calculate the level of sales required to cover any additional fixed costs such as new premises, equipment or staff

85. Calculating Break-Even One Product or Service Overheads__________________ Price of unit – direct costs of unit = No. Units

86. Community Day Care Centre Example £111,767 = 1,242 weeks per year £100 - £10 Open 50 weeks p.a. then 1,242 / 50 = 25 Children

87. Break Even Analysis 20,000 40,000 60,000 20 40 Units £’000 C F E D B A

88. Costing Techniques Marginal Costing Absorption Costing Activity Based Costing Standard Costing

89. Marginal Costing A useful way of emphasising the marginal costs of production and services. This information is of great assistance when making pricing decisions .

90. Marginal Costing If the selling price < variable cost, the loss will increase as more units are sold This will be acceptable only in limited circumstances Example? Supermarket loss leaders.

91. Marginal Costing If selling price > variable cost, then the margin will absorb part of the fixed costs After a certain point, profits will be made MC explains why some goods are sold off very cheaply Example? Airline tickets.

92. Absorption Costing Takes into account all costs Allocates them to individual products or cost centres Some are directly attributable to a distinct activity Examples: materials, dedicated employees wages.

93. Absorption Costing Others are not directly attributable Allocation required as costs must be absorbed by each product No single correct method of overhead allocation Aim is to achieve fairness in each individual situation Examples: finance, personnel, IT.

94. Activity Based Costing Takes total cost allocation one step further More accurate cost management methodology than traditional cost accounting Focuses on indirect costs (overheads) Traces rather than allocates each expense category to the cost driver Effectively makes “indirect” expenses “direct.”

95. Standard Costing A system for identifying predetermined or target unit costs that should be achieved under efficient operations .

96. Uses of Cost Accounting Cost Control Promoting Responsibility Aid Business Decision Making Aid Pricing Decisions Understanding the nature of your costs, and what drives them, is vital for effective management decision making .

97. Making Capital Investment Decisions Appraisal Techniques

98. Investment Decision Techniques Payback Return on Investment (RoI) or Accounting Rate of Return (ARR) Discounted Cash Flow Net Present Value (NPV) Internal Rate of Return (IRR).

99. Payback Simple measure of the period of time taken for the savings made to equal proposed capital expenditure.

100. Payback: Example A new machine will cost £100,000. It will save £40,000 running expenses in the first year and £30,000 per year thereafter Can you calculate the payback period?

101. Payback: Solution A new machine will cost £100,000. It will save £40,000 running expenses in the first year and £30,000 per year thereafter Payback period is 3 years.

102. Return on Investment (Accounting Rate of Return ) Takes the average of the money saved over the life of the asset and expresses it as percentage of the original sum invested

103. Which company would you invest in? Why?

104. Return on Capital Invested Now which would you invest in?

105. A new machine will cost £100,000. It will save £40,000 running expenses in the first year and £30,000 per year in each of the remaining 7 years Can you calculate the return on investment or accounting rate of return? Return on Investment (Accounting Rate of Return)

106. Return on Investment (ARR): Example A new machine will cost £100,000. It will save £40,000 running expenses in the first year and £30,000 per year in each of the remaining 7 years The RoI is 250,000x100 = 31.25% p.a. 100000 x 8

107. Discounted Cash Flow (Net Present Value) Does take account of the time value of money Therefore considered best method More difficult to understand! Discount factor = 1 (1+r)t r is the discount rate/interest rate t is the time period of the cash flow.

108. Discounted Cash Flow (Net Present Value) Question The purchase of 2 competing piece of machinery are under consideration Machine A costs £100k and will save £60k in year 1 and £55k in year 2 Machine B costs £90k and will save £55k in both years 1 and 2 Savings occur at the end of each year with bank interest at 10% Can you calculate the NPV of the two projects?

109. Discounted Cash Flow (NPV): Solution Machine A Machine B Expenditure Now £ 100,000 £90,000 Less Year 1 Savings (discounted) £ 54,540 £49,995 £ 45,460 £40,005 Less Year 2 Savings (discounted) £ 45,430 £45,430 Savings at Net Present Value ( £ 30) £ 5,425 Conclusion: Machinery B the better option

110. Financial Planning and Monitoring

111. Planning and Monitoring Market Research Objectives Description Costings Targets Commercial Community Benefit What product or service? What market gap? Confirm business Objective(s) What will the business do? By whom? With what? Materials, labour, overheads; Turnover, margins, price Agree targets:sales, turnover, profit What community needs ? Define social and environmental objective(s ) What will be done? By whom? How? When ? Time, use of facilities, materials Confirm realistic social performance targets

112. Planning and Monitoring Management & Financial Information Monitor Adjustments Annual Audit Commercial Community Benefit Set up systems: cash flow, P&L, balance sheet, time management, job sheets etc. Monthly management accounts Adjust in light of reality Assets/liabilities, liquidity, performance, net worth Set up social book keeping and accounting systems Monthly/quarterly report on social performance and cost Adjust in light of reality Performance verified showing cost to company and contribution to society PROFIT/LOSS Pearce, J. “Social Enterprise in Anytown” 2005 Calouste Gulbenkian Foundation

113. Monitoring Performance Required by law to exercise control Need effective systems for monitoring financial performance in place Need to gather and understand financial information needed to make decisions

114. How?

115. How Book-Keeping records Budgets Cashflow P&L Statements Balance Sheet

116. Budgets Estimate of Income / Expenditure for a set period Most likely to be used for: Preparation of Cashflow Forecasts Preparation of P&L Forecasts

117. “ A budget is a quantitative statement, for a defined period of time, which may include planned revenues, expenses, assets, liabilities and cash flows. A budget provides a focus for the organisation and aids the co-ordination of activities and facilitates control”. (CIMA)

118. Budgets Many types but 4 Main Ones are: Sales Budget Materials / Direct Costs Budget Overheads Budget Capital Expenditure Budget

119. Budgets are prepared in advance of a defined period of time. They are based on the objectives of the business and are intended to show how policies are to be pursued in order to achieve objectives.

120. What is a budget? A budget – is a financial plan. – sets out a businesses financial targets. – is a plan expressed in money. – an agreed plan of action over a given period. – an agreed plan establishing, in numerical or financial terms, the policy to be pursued and the anticipated outcomes of that policy.

121. Six Key Purposes of Budgets A method of planning the use of resources A vehicle for forecasting A means of controlling the activities of various groups within the firm A means of motivating individuals to achieve performance levels agreed and set. A means of communicating the wishes and aspirations of senior management A means of resolving conflicts of interest between groups with the organisation

122. Can Get too Much? Review Drucker Checklist Consider and Discuss Budgeting and Budgetary Control in your own organisation

123. Beyond Budgeting Origin of the Beyond Budgeting method. History The BBRT (Beyond Budgeting Round Table) was established in 1998 in response to growing dissatisfaction, indeed frustration, with traditional budgeting. The BBRT community successfully addressed three major questions: Is there an alternative to budgeting? - Yes. Is there a better management model? - Yes. How should it be implemented? - This is the main focus now.

124. BBRT

125. Organisations of any size and industry can use BB. Some examples include: Toyota, the Japanese automotive manufacturer, Svenska Handelsbanken, the Swedish bank, Aldi, the German retailer, and Southwest Airlines, the American airline. Other less well known exemplars are Ahlsell, the Swedish building materials wholesaler, and ISS, the international Danish facilities service group. World Bank Small Non-profit: Sightsavers International, a UK charity.

126. BB is not a process. It is a management model based on two sets of principles. The six principles of managing with adaptive management processes are: Goals are based on maximizing performance potential. Base evaluation and rewards on relative improvement contracts with hindsight. Make action planning a continuous and inclusive process. Make resources available as required. Coordinate cross-company actions according to prevailing customer demand. Base controls on effective governance and on a range of relative performance indicators. Principles

127. Beyond Budgeting The six devolution-based principles: Provide a governance framework based on clear principles and boundaries. Create a high-performance climate based on relative success. Give people freedom to make local decisions that are consistent with governance principles and the organisation's goals. Place the responsibility for value creation decisions at front line teams. Make people accountable for customer outcomes. Support open and ethical information systems that provide &quot;one truth&quot; throughout the organisation.

129. Beyond Budgeting? Exercise: Review Handouts What is Budgeting? How Should Budgeting Happen in Practice What is Beyond Budgeting? Who Is Right? Which Is Right For Me?

130. Exercising Control

131. Organisational Controls Exercise Please list as many organisational controls that you can think of which are used within your organisation .

132. Basic Internal Controls Financial reporting Budgetary planning Other planning Financial policy and procedures in Place Employee behaviour Segregation of duties Qualification of staff and advisers Controls over Incoming Funds Banking procedures No cash Key Organisational Controls Controls over Expenditure Authorisation limits Double signatures Tendering process Budgets Cost centres Audit Security Asset management Payroll check Double entry.

133. Where Are We At?

134. Information Management Exercise

135. Corporate Governance Legal Frameworks Ethical Frameworks Corporate Responsibility & Corporate Governance Stakeholder Theory Triple Bottom Line Accounting

136. Component 1: Ownership structure and influence Transparency of ownership. Concentration and influence of ownership. Component 2: Financial stakeholder rights Voting and shareholder meeting procedures. Ownership and financial rights. Takeover defences. Component 3: Financial transparency and information disclosure Quality and content of public disclosure. Timing of and access to public disclosure. Independence and integrity of audit process. Component 4: Board structure and process Board structure and composition. Role and effectiveness of board. Role and independence of outside directors. Director and executive compensation, evaluation and succession policies. Source: Standard & Poor's Governance Services (2002) Components of S&P corporate governance score

137. It is thought that such indices could help determine if well-governed companies outperform their rivals. Though it is worth noting that studies relating corporate governance to company performance have not shown a consistent relationship. Recently, researchers at the Wharton School examined data from four agencies specialising in rating corporate governance, including Governance Metrics International, Investor Responsibility Research Center, Institutional Shareholder Services and The Corporate Library. They analysed the association between the ratings and subsequent company operating performance and stock returns. They found no conclusive evidence that the summary ratings were related to stock returns, but they did find evidence that corporate governance ratings are associated with the level of future operating performance (Larcker et al., 2005). “ According to Business in the Community, the performances of companies have moved upwards, creating a bunching at the top and diminishing the differences between the companies. Peer pressure creates this race to the top and impacts positively on corporate governance performance.” (Baker, 2006).

138. In the theory of accounting and finance, it is assumed that the objective of the business is to maximise the value of a company. Put simply, this means that the managers of a business should create as much wealth as possible for the shareholders. Given this objective, any financing or investment decision that is expected to improve the value of the shareholder's stake in the business is acceptable. In short, the objective for managers running a business should be profit maximisation. both in the short and long-term. Shareholder Concept Maximising Shareholder Wealth

139. Shareholder Concept The shareholder conception of the firm, views the corporation as its shareholders, and management as their agent. This notion is well entrenched in law, and in the theory of the firm such as that espoused by Ronald Coase in the 1930s and by Jensen and Meckling (1976). It is also implicit in Milton Friedman’s view of the social responsibility of business (1979).

140. Stakeholder Concept - A Wider Range of Objectives In recent years, a wider variety of goals have been suggested for a business. These include the traditional objective of profit maximisation (in other words - the shareholder concept has not been abandoned). However, they also include goals relating to earnings per share, total sales, numbers employed, measures of employee welfare, manager satisfaction, environmental protection and many others. New streams of thought have emphasised the need for a more holistic approach to the study of companies, and their role in society. This is the essence of the stakeholder approach. “ Freeman defines stakeholders in numerous ways, but the most commonly quoted definition is: any group or individual who can affect or is affected by the achievement of the organizations objectives” (Cooper 2004).

143. Have we met our objectives? Resources and Financial Management Financial Reporting Understanding Costs Budgeting Financial Controls Investment Appraisal Techniques Information Management Legal Frameworks