Section 3: Monitor and control finances

Implement processes to monitor actual expenditure and to control costs across the work team

3.2

Monitor expenditure and costs on an agreed cyclical basis to identify cost variations and expenditure overruns

Implement, monitor and modify contingency plans as required to maintain financial objectives

3.4

Report on budget and expenditure in accordance with organisational protocols

3.1 Implement processes to monitor actual expenditure and to control costs

across the work team

3.2 Monitor expenditure and costs on an agreed cyclical asis to identify cost
!ariations and expenditure o!erruns

3.3 Implement" monitor and modify contingency plans as re#uired to maintain

financial o $ecti!es

3.4 Report on udget and expenditure in accordance with organisational protocols

Monitoring and controlling finances %ontrols Up-to-date and complete record keeping provides a mechanism to maintain and introduce effective internal controls Monitoring and e!aluation !he organisation"s financial records are used to determine to what extent business operations are meeting expectations #perational and marketing strategies, and performance standards should be constantly monitored to determine how well they are impacting on the organisation"s financial objectives $here necessary the financial plan should be adjusted to make allowance for changes in the internal or external environment &hat udgets" records and reports contri ute to the monitoring and e!aluation function' %ash flow udgets %ash flow budgets and reports are vital for all businesses $hen planning business activities the budget is one of the primary tools used !here are various types of budgets &owever, the first step in planning, in most instances, is to construct a sales forecast !his indicates the organisation's projected income over the budgeting period (rom the projected sales figures you can construct a cash flow budget ) a comparison of the inflows and outflows in the organisation -to determine how much cash the organisation will have at specific periods of time during the year, and how much of your incoming monies can be allocated to other budgets * + month cash flow budget minimises uncertainty and predicts future events early enough to tae corrective action if needed !hen again, if you"re applying for a loan, you may need to create a cash flow budget that extends for several years into the future, as part of the application process !he primary use of a cash flow budget is to predict the businesses ability to take in more cash than it pays out indicating the businesses ability to create the resources necessary for expansion It can also predict cash flow gaps , periods when cash outflows exceed cash inflows when combined with cash reserves ) so that steps can be taken to ensure that the gaps are closed, or at least narrowed !hese steps might includelowering inventory investments lowering investments in accounts receivable looking for outside sources of cash, such as a short-term loan, to fill the cash flow gaps

(ow cash flow works %ash flow is the movement of money in and out of a business ) the process through which the business uses cash to generate services or goods for sale to customers, collects the cash from the sales, and then completes this cycle all over again .nalyse the businesses previous year's sales amounts -income (actor in answers to the following questions- &ow much did you sell last year, at what periods during the year/ &ow much will you sell in the upcoming year/ $hat seasonal fluctuations or trends or other variables are likely to affect your sales/ $hat are your expectations for the upcoming year/ !he following figures, for a retail sports business, represent the first + months' figures for last year !hey can be used to predict the next years' sales for that period 0ast 1ear 2anuary (ebruary March *pril May 2une 345,666 345,766 384,766 385,566 399,966 39:,+66

1ou might expect, for instance, sales to be 4 percent higher in the off season and 4 7 percent higher during the peak period; which begins in *pril <rojections 2anuary (ebruary March *pril May 2une 345,456 345,+57 384,:47 396,455 399,+99 39:,5:+

!o project cash inflows you will need to factor in forecast changes ) to the internal workforce =higher staffing capacity, new machinery, training or other factors that might increase productivity>, plus any

costs of goods sold operating expenses debt payments major purchases putting together the projected cash In its basic form, the completed cash flow budget combines the following information on a month-bymonth basisBeginning Cash Balance ? <rojected %ash Inflows -<rojected %ash #utflows = Your Cash Flow Bottom Line (the ending cash balance) #bviously a cash flow budget will include more detail than is listed above &owever, the basic form of the cash flow budget will always remain the same

* positive cash flow bottom line indicates your business has a cash surplus at the end of the month * negative cash flow bottom line indicates that your line indicates that your business has run into a cash flow gap , a period where cash outflow exceeds cash inflow when combined with your beginning cash balance %ash outflows and inflows rarely, if ever, occur at the same time More often than not, cash inflows lag behind cash outflows, leaving the business short of money on occasion !his cash flow gap represents an excessive outflow of cash that might not be covered by an inflow for weeks, months, or even years *ny business, small or large, may experience a cash flow gap from time to time , it does not necessarily mean the business is in financial trouble @egative cash flow gaps are often filled by external financing sources Aevolving lines of credit, bank loans, and trade credit are just a few of the external financing options available * cash surplus is the cash that exceeds the cash required for day-to-day operations &andling cash surplus effectively is just as important as the management of money into and out of the cash flow cycle Identification of excess funds allows management to assess new profit-making opportunities or to invest in additional resources with the aim of expansion *lternately cash surplus can be used to pay down debts )e tors <reparing cash flow statements regularly, as well as creditor and debtor reports, will assist with improving cash flow !he business needs to know when debts fall due and should follow up overdue payments <oor management of debtors will have a greater impact on some businesses under the BC! as the business might be funding BC! payments to the tax office before the tax has been collected *ccounting records can also be used to calculate gross margins on product lines to determine which products contribute the most to the bottom line and which are under performing Bross margin is calculated by taking cost of goods sold from sales %omparing a product line"s gross margin to budgeted and previous figures will inform the business how the product is performing Dudgeted balance sheets display comparative estimates for a budgeted period !he current balance sheet, at the end of a selected period, compared with that of another similar period =usually 48 months> !his report also includes non-cash items, such as estimated provision and depreciation for income tax #nce the actual results are known, a report is evaluated and prepared to identify if significant differences have occurred Management evaluate the budgeted balance sheet to make sure it reflects a sufficiently strong financial position * capital expenditure budget addresses an organisation"s long-term capital requirements, or the purchase strategy for facilities and equipment required for it to meet its long-term objectives Most organisations prepare long-term capital expenditure budgets for periods of 7 or more years !he general ledger displays account balances at the beginning of a period, the total debits and credits, and the balance at the end of the period !he product activity report displays every transaction assigned to a specific product line or product within a specified period * sales analysis reportEbudget report displays cost of sales, sales revenue, gross profit, units sold, average cost and percentage margin within a selected period It compares this year"s sales with the figures for the same period last year !his could also be produced in a spreadsheet format !he sales budget is prepared =as we have already seen> from the sales forecast !he sales budget provides the information required to prepare the cash receipts part of the cash budget Fariance analysis reports compare the current actual profitE cost statement or cash flow with the budgeted profitE cost figures Unless this is done, serious shortfalls or problems may not be identified in sufficient time to take appropriate action (or example, tightening of cash flow, clearing up debtors etc

!here are other expenditure and cost reporting procedures that can be useful to an organisation (or instance, it might be useful to report on the cost of items or products made in your organisation, or in your division of the organisation ) particularly if you work in a manufacturing business If your organisation offers only one product or service, you can easily calculate the cost per unit by dividing all =direct and indirect> costs associated with operating the business by the total output Most businesses, however, offer more than one product or service !he unit cost of each is assessed by allocating particular costs or proportions of costs against each product or service (or instance, a company producing photograph albums could allocate unit costs as illustrated*nit costs

!he percentage cost of total indirect cost is calculated based on the total labour cost to produce each album &ow the organisation chooses to allocate the costs depends on the service or product and the nature of the business (rom the unit cost a breakeven analysis can be conducted !he expenditure and revenue reportE budget forecasts sales and expenses over a defined period, such as 48 months Most of the other budgets produced within an organisation will draw on this budget, as it determines the number of people employed, level of raw materials stock, rent, leases, and so on +reparation of a re!enue udget: should examine past sales trends carefully should take account of what is happening in the particular market, is it growing, stable or declining should take account of what is happening in the economy especially if sales are sensitive to economic conditions as they are in industries like building, tourism, housing and entertainment must involve those directly responsible such as sales representatives and sales management Dreakeven analysis works out how many units must be sold to cover indirect and direct cost combined It aids in setting goals or targets, while providing a record of costs and indicator of the point when revenue =unit cost multiplied by the number of units sold> generated from sales equals total costs =indirect costs plus direct costs> to produce the productE service

!o accurately determine the breakeven point and present it as a report, you will need to find the following informationthe direct costs involved with productionE provision of the product the cost to produce each unit =unit cost> the indirect costs incurred to operate the organisation =or proportion disbursed to a particular cost centre> !he breakeven point is the point where the organisation is not losing money and not making money either It is good to know where this point is and how much of every dollar above that amount is profit !hree terms must be defined and calculated 4 (ixed %osts which are the costs that do not change whether sales go up or not -they do not vary in the medium to short term If the level of production varies, fixed costs must be paid, regardless of production levels !hese are, therefore, costs that would still need to be paid even if production was shut down (or example, building rental is a fixed cost =as well as being an indirect cost>, as buildings are rented for a fixed period and the rental must be paid regardless of whether the building is occupied or not Come other examples are; basic utilities, salariesE labour, car payments, memberships, equipment and lease payments, etc 8 Fariable %osts which are the costs that rise and fall depending on your sales Come examples are; the cost of the product sold, packaging, transportation, manufacturing costs, marketing, labour, etc Girect and indirect costs can be either variable or fixed $hen you are looking at direct and indirect costs, you need to consider which of these =or which components of these> are fixed and which are variable, so that you can accurately record them in your financial reports, particularly the %ost of Boods Cold report 9 !he Fariable %ost <ercent per Unit of Cales *dd up all the variable costs involved for each sale Givide the variable cost per sale by the average sales price !he result is the Fariable %ost <ercent per Unit

!he formula is as follows(ixed %ost divided by =4-Fariable %ost <ercent <er Unit> !he result is the number of units you must sell to breakeven !o determine the dollar amount, multiply by the average amount of each sale (or example- (ixed costs are 3:66 per month Fariable costs are 37 per sale !he average sale is 346 !herefore, the Fariable %ost percentage per unit is 37H346 I 76J !he breakeven point is 3:66H=4-76J> I 3:66E76J I 34,K66 1ou will need to have 34,K66 in sales to break even It also tells you that for every dollar in sales over 34,K66, you will make 76J of it in profit +rofit and loss reports <rofit and loss reports show the gross and net profitsE losses for a reporting period in accordance with organisational policy and procedures and accounting requirements (inal general ledger accounts reflect the future viability of any commercial company and must be compiled with the utmost care and attention (or example, if a business buys a part for 3+6 66 then sells it for 3876 66 a profit of 3456 66 has been achieved !his is a correct assumption if a gross profit figure =with no costs calculated> is required &owever, for any business transaction there will be both direct and indirect costs associated Indirect costs will includewages stationery electricity rent vehicle costs telephone etc !he compilation of a <rofit and 0oss report can include these costs but even then might not show a true representation of the profitEloss for the required period, because not all of the expenses apply directly to the accounting period in which they have been accounted (or example, gas rates could be paid and accounted for in the month of 2une, but the actual gas used was for the previous 9 months.

Many organisations identify their operational costs by using electronic spreadsheets or computer accounting systems which are fast, accurate and efficient If the organisation operates a computer accountingE costing system, it can readily access cost figures from the appropriate personEdepartment Defore you can cost products or services effectively, analysis of the following costs is requiredlabour =including all salaries and on-costs> equipmentEproject materialEstock overheads =such as payroll, leasesE vehicles, rent, telephone, etc> Girect costs are those that are directly incurred to deliver a product or service Girect cost, readily identified as belonging to the end product, include most labour, plant and equipment, materials or stock, and travel or freight costs Girect labour costs are all the costs of employing every person directly involved in producing the product or service within your organisation, and includegross salary workers compensation insurance Cuperannuation Buarantee charge leave loading long service leave *dministrative support staff who are not directly involved in the production process or service delivery are identified as indirect costs !he following costs can also come under the heading of overheadsCuperannuation leaveE holidays =annual and public> workers compensation leave loading sick pay Lxpenses, the cost of doing business, include both the costs directly attributed to productE service production and general operating expenses (or accounting purposes, gross sales are the total dollar amount of sales &owever, in the course of normal business, items may be returnedErefunded andEor cash discounts may be offered to customers who pay early etc !hus a net sales figure is returned once all cash discounts, refunds and other allowances are deducted from the gross sales Most businesses calculate a cost =as a percentage> that they can use to calculate the real profits 1our enterprise will have a percentage figure for this calculation; such as 46J !he example that gave our profit of 3446 66 is, therefore decreased by 46JI355 66 !he overhead percentage of 46J is not intended to be a realistic indication of the overhead percentage in any business !he overhead percentage is a variable that must be calculated for each individual concern * <rofit and 0oss report will give a better representation of the business when taken over as long a period as possible @ote- It is not possible to make a profit or a loss on BC!, therefore BC! figures should not be shown on a <rofit and 0oss report

@ot all <rofit and 0oss sheets will have the same format; they might, for instance, show percentages rather than dollar figures 1our enterprise will have guidelines for formatting and printing profit and loss reports Aatio analysis is the analysis of performance through comparisons or ratios, and is important in business decision making Aatio analysis provides a means of comparing performance and examining trends to other firms in the industry %ommonly used ratios include liquidity ratio =cash assetsE cash liabilities>, average debtors =trade debtorsE average daily credit sales> and inventory turnover =cost of goods soldE average inventory> Aatios are not just a device used by accountants, but a useful tool that identifies strengths and weaknesses of a business and leads to questions about performance that should result in action Aatios can also be used to set performance targets (or example, a business seeking to improve its cash flow position may do so by setting targets to reduce average debtors andEor inventory turnover Understanding the relationship between their impact on cash flow and these items, gives greater control over the business and the ability to clearly communicate performance objectives