UBO - Lecture 09 - Monitoring Organisational Performance

Lecture 9 Monitoring Organisational Performance
Finance & Budgetary Control

Understanding Business Organisations
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UnderstandingBusiness
NCC Education Limited V1.0
Understanding Business
Organisations
Lecture 9:
Monitoring Organisational Performance
Monitoring Organisational Performance Finance &Budgetary Control Lecture 9 - 9.2
Scope and Coverage
This topic will cover:
The various types of accounting activities found within an
organisation
The role of cash flow, profit and loss accounts and
balance sheets in monitoringorganisational performance
balance sheets in monitoring organisational performance
The difference between profit and cash
The use of financial information for effective internal
control
The range of budgets typically used within an
organisation
Learning Outcomes
By the end of this topic, students will be able to:
Describe the role of the finance function within an
organisation
Understandthe basic types of financial reports
Understand the basic types of financial reports
Understand the importance of financial results to
evaluate performance
Explain the role of budgeting in ensuring internal
activities are controlled
Large public companies raise money by
issuing shares to people and institutions
In smaller companies, the owners/directors
maycontribute their own money
The Pressure on Organisational
Performance
may contribute their own money
The pressure is on to provide a return on
investments
Management of financial resources should be
entrusted to a professionally qualified
accountant
Financial accounting producing financial reports
Management accounting assisting with the
management of the organisation
Auditing checking the financial statements and
Types of Accounting
g g
accounting systems of an organisation
Consultancy and specialist accounting
Cash-flow statement
Profit and loss statement
Balance sheet
Detailed Financial Information
Balance sheet
Shows where cash has come from and how it has
been spent
Cash received should be greater than cash spent,
leading to a cash surplus
Cash-Flow Statement
However, in certain businesses there may be heavy
cash outflows required before cash starts to come in
Difficult to draw sensible conclusions about financial
performance of a business on the basis of cash-flow
alone
$
Cash generated from operating activities XXX
Returns on investments and servicing of finance XXX
Taxation paid XXX
General Form of Cash-Flow
Statement
Cash generated from investing activities XXX
Net cash inflow/outflow before financing XXX
Payment to the sources of the finance XXX
Net cash-flow for the year XXX
P&L is a trading account for a period, usually a
year, but can be monthly or cumulative
It shows profit performance and demonstrates how
the business has performed on its trading activities
Profit and Loss Statement
Typical components are:
Sales revenues
Cost of sales/cost of goods sold
Gross profit margin (sometimes called the contribution)
Fixed overheads and/or operating expenses
Profit before interest and tax
Trading profit and loss account for the year to dd/mm/yy
Sales
Income fromsold goods
Cost of goods sold
Opening finished goods in stock
Add: Cost of finished goods manufactured
Simplified P&L Account
Less: Closing finished goods in stock
Gross profit
Less:
Expenses
Distribution costs
Selling costs
Administration costs
Other income and expenditure
Net profit before interest and tax
Depreciation based on the original cost of the
investment, including set-up and training, less the
expected scrap value at the end of its life
Credit most products are sold on the basis of
Factors Affecting Profit and Loss
credit rather than cash, so bad debts need to be
taken into account
Warranty claims if a product under warranty has
to be repaired or replaced, this is a cost to the
manufacturer
A statement that lists the assets, liabilities and
equity of a business at any specified time
Provides a snapshot of the financial health of the
business
The Balance Sheet
Typically prepared every 6 to 12 months
Uses a double entry approach every entry for an
item of incoming finance must have a
corresponding entry for usage
$million
Property, plant and equipment (tangible fixed assets) 68.4
Investments 4.8
Goodwill (intangible assets) 31.5
Stocks of goods for resale 44.7
Money owing fromcustomers
Example of a Balance Sheet
(debtors) 51.9
Cash and bank account (current assets) 19.2 115.8
220.5
These resources were financed by shareholders
(including retained profit) 121.4
Money owing to suppliers, banks and tax 99.1 220.5
Depreciation the figure used should be the
original cost minus the proportion so far
depreciated
Factors Affecting the Balance
Sheet
Changes in price levels asset is recorded at
original cost less depreciation, so price fluctuations
may cause complications
Managers need systems and procedures to
ensure the financial consequences of decisions
are understood
Cannot wait until year-end for financial
Internal Control
information
Income and expenditure must be monitored
throughout the year
Budgets play a vital role
Begins at the top level with directors setting targets
and goals
Profit target derived for the whole organisation
Individual units/divisions will have to prepare their
b d ib i ll b d
The Budgeting Process
own budgets, contributing to overall budget
Once agreed, the budget becomes an operating
plan
Important to keep budgets up-to-date and reflecting
operating and marketing conditions
Sales budget
Materials budget
Labour budget
O h db d t
Components of a Corporate
Budget
Overhead budget
Capital budget
Research and development budget
Cash budget
Budget balance sheet
Budgets frequently used to judge performance
Employees often blamed for failing to achieve budget
(e.g. sales people not reaching sales targets)
Blame may lie with the budget rather than the person
Budgets and Performance
Measurement
y g p
Consistent failure to achieve budget should lead to a
review of the budget to ensure targets are fair
As conditions change, the budget should be revised so
that it continues to be credible
Important that employees feel a sense of ownership
Managers need to make ad-hoc decisions
Financial information may need to be processed to
assist
Accountants play a vital role in extracting and
Decision Making
p y g
supplying the financial data required
Data must be accurate and understandable
Managers need a regular flow of internal financial
data to manage effectively
Information must be related to the needs of
managers
Routine Information for Managers
Information must be flexible so managers can look
at what if scenarios
Internal information may expand into the supply
chain if sufficient trust exists
All businesses are under pressure to achieve profits and
deliver a return for their investors
The financial function plays a critical role in monitoring
organisational performance
The interpretation of financial reports is vital in evaluating
Summary
The interpretation of financial reports is vital in evaluating
performance
A corporate budget is made up of a variety of divisional and
departmental budgets, each with their own budget holder
Financial information must be up-to-date and accurate in
order to assist managers in their decision making
References
Boddy, D. (2005), Management: An Introduction,
3rd edition, Prentice Hall, Chapter 18
Boddy, D. (2007), Management: An Introduction,
4th edition, Prentice Hall, Chapter 19
Campbell and Craig (2005), Organisations and the
Business Environment, 2nd edition. Butterworth-
Heinemann, Chapter 29, pp 648-660
Lecture 9 Monitoring Organisational
Performance Finance & Budgetary Control
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Finance & Budgetary Control

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