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FINANCIAL MANAGEMENT
CHECK POINT 41: THE FINANCIAL MANAGEMENT PROCESS (OVERVIEW)

Please Select Any Topic In Check Point 41 Below And Click.

1. what is financial management?
2. steps in the financial management process
3. accounting information
4. bookkeeping
5. financial statements
6. financial performance evaluation
7. Master Budget
8. Operating Budget
9. Capital Expenditure Budget
10. Cash Budget
11. tax strategies
12. sources of capital
13. internal control and cash management
14. control of purchases and disbursements
15. credit control
16. inventory management
17. capital assets management
18. payroll accounting
19. cost accounting
20. pricing methods
21. management accounting
22. Integrated Financial Management
23. Who Is Working In The Financial Department?
24. The Chief Financial Officer
25. the treasurer
26. The Bookkeeper
27. additional human resources in the financial department
28. for serious business owners only
29. the latest information online
 

DO I NEED TO KNOW THIS CHECK POINT?

 

WELCOME TO CHECK POINT 41

TUTORIAL 1 General Management TUTORIAL 2 Human
Resources Management
TUTORIAL 3 Financial Management TUTORIAL 4 Operations Management TUTORIAL 5 Marketing
And Sales Management
1 6 11 16 21 26 31 36 41 46 51 56 61 66 71 76 81 86 91 96
2 7 12 17 22 27 32 37 42 47 52 57 62 67 72 77 82 87 92 97
3 8 13 18 23 28 33 38 43 48 53 58 63 68 73 78 83 88 93 98
4 9 14 19 24 29 34 39 44 49 54 59 64 69 74 79 84 89 94 99
5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100
 

HOW CAN YOU BENEFIT FROM CHECK POINT 41?

 
The main purpose of this check point is to provide you and your management team with a brief overview of the entire Tutorial 3 - Financial Management which contains twenty check points.
 
In this check point you will be introduced to:
 
• The basic steps in the financial management process.
• Accounting information and bookkeeping.
• Financial statements and financial performance evaluation.
• A master budget, an operating budget, a capital expenditure budget, and a cash budget.
• Tax strategies and sources of capital.
• Internal control, cash management, and credit control.
• Control of purchases and disbursements.
• Inventory management and capital expenditure management.
• Payroll accounting, cost accounting, and pricing methods.
• Management accounting, integrated financial management. and much more.
 

LEAN MANAGEMENT GUIDELINES FOR CHECK POINT 41

 
You and your management team should become familiar with the basic Lean Management principles, guidelines, and tools provided in this program and apply them appropriately to the content of this check point.
 
You and your team should adhere to basic lean management guidelines on a continuous basis:
 
Treat your customers as the most important part of your business.
Provide your customers with the best possible value of products and services.
Meet your customers' requirements with a positive energy on a timely basis.
Provide your customers with consistent and reliable after-sales service.
Treat your customers, employees, suppliers, and business associates with genuine respect.
Identify your company's operational weaknesses, non-value-added activities, and waste.
Implement the process of continuous improvements on organization-wide basis.
Eliminate or minimize your company's non-value-added activities and waste.
Streamline your company's operational processes and maximize overall flow efficiency.
Reduce your company's operational costs in all areas of business activities.
Maximize the quality at the source of all operational processes and activities.
Ensure regular evaluation of your employees' performance and required level of knowledge.
Implement fair compensation of your employees based on their overall performance.
Motivate your partners and employees to adhere to high ethical standards of behavior.
Maximize safety for your customers, employees, suppliers, and business associates.
Provide opportunities for a continuous professional growth of partners and employees.
Pay attention to "how" positive results are achieved and constantly try to improve them.
Cultivate long-term relationships with your customers, suppliers, employees, and business associates.

1. WHAT IS FINANCIAL MANAGEMENT?

FINANCIAL MANAGEMENT

Business owners and financial managers must have solid knowledge in various areas of financial management, which represents one of the most critical functions in every organization.

In simple terms, Financial Management entails development, implementation, and control of systems aimed at securing the most efficient use of an organization's material and financial resources.

DON'T GET CONFUSED ABOUT FINANCIAL MANAGEMENT

Many business practitioners confuse financial management with Accounting, Bookkeeping, Budgeting, Tax Preparation, Cost Accounting, Pricing, and Management Accounting.

Although all these functions are interrelated, it is necessary to understand how each function fits into the total responsibility of the financial executive.

IMPORTANCE OF THE FINANCIAL MANAGEMENT PROCESS

The most important task of the financial executive is to initiate a Financial Management Process and to develop a Financial Department within the organization. It is essential, therefore, that you and your management team pay serious attention to this function, and develop, implement, and maintain the financial management process.

Planning and control of the financial management process entails a number of steps outlined below.

 

ADDITIONAL INFORMATION ONLINE

Financial Management Overview By Krassimir Petrov.
Small Business Accounting Basics By Jeff Dessau, Carla Langhorst.
Small Business Financial Management By Jessica Lorah, RFBRC81601.
Business Financial Management By Tracey Loubser, Confident Cash Flows.
Finance: What Managers Need To Know By J. Knight, Harvard Business Publishing.

2. STEPS IN THE FINANCIAL MANAGEMENT PROCESS

A typical Financial Management Process entails a number of steps illustrated below.

THE FINANCIAL MANAGEMENT PROCESS

Step 1: Implement And Maintain A Suitable Accounting Software Package.
       
Step 2: Prepare Most Recent Financial Statements.
   
Balance
 Sheet
  Income 
Statement
  Statement
Of Cash Flows
   
Step 3: Conduct Financial Performance Evaluation.
   
Current
Financial Analysis
  Comparative
Financial Analysis
  Financial Ratio
Analysis
   

Step 4: Develop, Implement, And Maintain A Financial Planning Or Budgeting System.

   
Operating
Budget
  Capital Expenditure
Budget
  Cash
Budget
   

Step 5: Formulate Tax Strategies.

Step 6: Identify And Arrange Sources Of Capital.

Step 7: Develop, Implement, And Maintain Internal Control Systems.

       
Cash
Management
And
Control
  Control
Of Purchases
And
Disbursements
  Credit
Control
  Inventory
Management
  Capital
Assets
Management
         

Step 8: Develop, Implement, And Maintain A Payroll Accounting System.

Step 9: Develop, Implement, And Maintain A Cost Accounting System.

Step 10: Develop, Implement, And Maintain A Management Accounting System.

Step 11: Collaborate With Computer Experts In Developing, Implementing, And Maintaining An Integrated Financial Management System.

 

3. ACCOUNTING INFORMATION

ACCOUNTING INFORMATION

The business owner and the financial manager must constantly make important decisions and undertake specific steps during the financial management process. In order to implement correct decisions and carry out various steps in an effective manner, the business owner and the financial manager need accurate and reliable Accounting Information.

There are two major types of Accounting Reports available to the business owner and to the financial manager as described below.

TWO TYPES OF ACCOUNTING REPORTS

 
External Reports
Or
Financial Accounting Reports
  Internal Reports
Or
Management Accounting Reports

External reports are prepared for various people outside the organization, such as potential new shareholders or partners, financial institutions and other creditors, tax authorities, courts and legal authorities.

 

Internal reports, on the other hand are prepared for various people inside the organization, such as management and partners.

Each report must be prepared on a regular basis and together they will provide the business owner and the financial manager with essential tools designed to effectively carry out the financial management function.

Accounting Information is discussed in detail in Tutorial 3.

4. BOOKKEEPING

COMPUTERIZED BOOKKEEPING SYSTEM

The financial management process begins with the installation of a suitable Accounting Software Package which includes a comprehensive Computerized Bookkeeping System. The prime purpose of an accounting software package is to enable the company's Bookkeeper to record all financial transactions continuously in a controlled and systematic manner.

A computerized bookkeeping system is driven by an accounting software program and offers a time-efficient way of accomplishing operational tasks in the Financial Department. There are several excellent accounting software packages available to small business owners. Some of the most popular accounting software packages are presented below:

Sage One
QuickBooks Intuit
FreshBooks
Harvest Software Systems
NetSuite

MAIN FUNCTIONS OF A TYPICAL ACCOUNTING SOFTWARE PACKAGE
Main Functions of a typical accounting software package may include:
Setting up accounts for assets, liabilities, income, expenses and shareholders' equity.
Recording and posting each transaction in an appropriate account.
Recording and tracking all cash and credit sales to customers.
Recording and tracking all cash and credit purchases from suppliers.
Recording and tracking all payments received from customers for cash and credit sales.
Recording and tracking all payments issued to suppliers for cash and credit purchases.
Preparing and printing delivery notes, invoices, and monthly statements to customers.
Determining sales tax for relevant business transactions.
Preparing financial statements, including balance sheets, income statements
Preparing cash flow projections and cash flow statements.
Preparing operating and capital expenditure budgets.
Preparing management accounting reports.
Preparing cost accounting reports.
Managing payroll and payroll taxes.
Printing checks and paying bills.

Bookkeeping is discussed in detail in Tutorial 3.

 

5. FINANCIAL STATEMENTS

FINANCIAL STATEMENTS

An orderly recording of all business transactions pertinent to the company's operations facilitates timely compilation of Financial Statements.

Financial statements are prepared by company Auditors or Accountants from the trial balance at least once a year and include three types, as illustrated below. Each statement contains important information about the company's financial condition, past performance, and flow of funds.

THREE TYPES OF FINANCIAL STATEMENTS

   
Balance 
Sheet
  Income 
Statement
  Statement 
Of Cash Flows
A balance sheet provides information about a company's solvency, i.e. the excess of its assets over its liabilities on any specific date.   An income statement provides information about a company's profitability, i.e. the excess of its revenues over its expenses during a specific period.   A statement of cash flows provides information about a company's liquidity, i.e. the excess of its available and incoming funds over its outgoing funds during a specific period.

Financial Statements are discussed in detail in Tutorial 3.

6. FINANCIAL PERFORMANCE EVALUATION

FINANCIAL PERFORMANCE EVALUATION

Financial statements are used extensively by top management for evaluating financial performance and for submitting information to existing and potential shareholders, the Internal Revenue Service (IRS), and existing and potential creditors. Financial Performance Evaluation represents, therefore, an important managerial responsibility. This evaluation includes three elements, as illustrated below.

Unfortunately, many business owners often do not receive the financial information from their accountants in a timely manner and, subsequently, they are not able to conduct a meaningful financial performance evaluation. Moreover, many business owners simply don’t know how to conduct a proper financial evaluation of their company’s performance.

THREE ELEMENTS OF THE FINANCIAL PERFORMANCE EVALUATION

   
Current Financial
 Analysis
  Comparative Financial
 Analysis
  Financial Ratio 
Analysis
Current financial analysis covers the most recent financial period, usually the last year of operations.   Comparative financial analysis covers the three preceding financial periods, usually the last three years of operations.    Financial ratio analysis evaluates relationships between various items in financial statements.

Financial Performance Evaluation is discussed in detail in Tutorial 3.

7. MASTER BUDGET

MASTER BUDGET

Once a financial manager completes the evaluation of the company's present condition and most recent financial results, performance trends, and financial ratios, it is necessary to initiate the Financial Planning or Budgeting Process

Financial planning represents one of the most important responsibilities of the financial manager. The ultimate result of this process is the development of a Master Budget, which is usually prepared for one financial year, also known as fiscal year*

A master budget comprises three basic financial plans, as illustrated below. Each budget serves an important purpose and is of a particular significance to the organization.

THREE MAIN ELEMENTS OF A MASTER BUDGET

   
Operating
Budget
  Capital Expenditure
Budget
  Cash
Budget

* Note:

Some companies start a Financial Year Period on January 1 and complete this period on December 31 of the same year. S-Corporations, for example, have to comply with this requirement. Other companies may have their financial year start at any time and last for a 12 month period.

A Master Budget is discussed in detail in Tutorial 3.

8. OPERATING BUDGET

OPERATING BUDGET

An Operating Budget represents the first important element of the company’s Master Budget. In fact, the entire budgeting process begins with the development of the company’s operating budget.

The prime purpose of the operating budget is to provide management with a detailed financial plan regarding the company’s operating activities for the forthcoming financial period (usually 12 months). The operating budget provides detailed financial projections of the company’s future operating sales, expenses and profitability. This budget includes several sub-budgets described below.

ELEMENTS OF THE OPERATING BUDGET

1.

Sales Budget.

2.

Production Budget (for manufacturing companies) also known as a Cost Of Sales Budget.

3.

Operations Budget (for non-manufacturing companies).

4.

Operating Expenses Budget.

5.

Budgeted Income Statement.


THE OPERATING BUDGETING PROCESS

The Operating Budgeting Process starts with the development of the sales budget, which will include the sales projections for the forthcoming financial period. Once the sales budget values are finalized, the financial manager must proceed with the development of the production budget (for manufacturing companies), or the operations budget (for merchandising, service, project management companies, and contractors). Subsequently the financial manager must complete the operating expenses budget and the budgeted income statement.

An Operating Budget is discussed in detail in Tutorial 3.

9. CAPITAL EXPENDITURE BUDGET

CAPITAL EXPENDITURE BUDGET

A Capital Expenditure Budget represents the second important element of the company’s Master Budget. 

The prime purpose of the capital expenditure budget is to provide management with a detailed financial plan regarding the company’s capital expenditure activities for the forthcoming financial period (usually 12 months). This budget summarizes the company’s projected expenditures for all existing capital equipment, such as plant and machinery, vehicles and any other transportation, and projected costs for all current property remodeling and capital improvement projects.

The capital expenditure budget also includes the costs of all planned purchases of additional new or used capital equipment and vehicles, planned acquisition of additional property, and involvement in any planned new capital projects.

THE CAPITAL EXPENDITURE DECISION-MAKING PROCESS

The Capital Expenditure Decision-Making Process entails preparation of estimates regarding additional costs and evaluation of benefits related to proposed purchases of capital assets, or proposed investment in specific long-term projects. This process starts with the identification of capital investment opportunities and it requires a thorough Financial Cost-Benefit Analysis.

The capital expenditure budget is an important financial document, which will help business owners to make prudent management decisions regarding the financial viability of existing capital assets, acquisition of new capital assets, and participation in long-term projects.

A Capital Expenditure Budget is discussed in detail in Tutorial 3.

10. CASH BUDGET

CASH BUDGET

A  Cash Budget represents the third important element of the company’s Master Budget

The prime purpose of a cash budget, or a Cash Flow Projection, is to provide management with a detailed financial plan regarding the company’s cash flow position, or liquidity, for the forthcoming financial period. Cash budgets are prepared in advance for monthly, quarterly, semi-annual and annual periods.

The cash budget will outline and summarize the projected monthly inflow and outflow of cash as a result of the following three types of activities outlined below.

A CASH BUDGET MUST COVER THREE TYPES OF ACTIVITIES

   

Operating
Activities

 

Investing
Activities

 

Financing
Activities

 

THE CASH BUDGETING PROCESS

The Cash Budgeting Process entails examination of the sales budget, the production budget (for manufacturing companies), or the operations budget (for non-manufacturing companies), and operating expense budget. Moreover, this process entails evaluation of Creditors Age Analysis Reports and Debtors Age Analysis Reports for the most recent financial period. Finally, the cash budgeting process must take into account the projected leasing costs and other expenses, associated with the capital expenditure budget.

Management frequently uses cash budgets when dealing with banks and other financial institutions during a process of raising additional capital, or when applying for an additional credit line. Small Business Administration (SBA), for example, will require that the company provide a detailed cash budget when applying for a small business loan. This is important because every lender would like to know how the company will use the borrowed money and how it will be able to pay back the loan.

A Cash Budget is discussed in detail in Tutorial 3.

11. TAX STRATEGIES

TAX STRATEGIES

Another important aspect of financial planning entails formulation of the company’s most effective Tax Strategies. This process requires a strong collaboration between the company’s financial manager and the company’s accountant.

Since every for-profit business organization is expected to produce positive results, these results could generate taxable profits at the end of the financial period. It is reasonable to assume, therefore, that the organization will be liable to pay a certain portion of that profit in the form of Taxes to federal, state, and local tax authorities. 

Internal Revenue Service (IRS) prescribes different Tax Codes and Tax Guidelines for various types of business entities presented below.

FIVE FORMS OF BUSINESS ORGANIZATIONS

Sole
Proprietorship

Partnership

Regular
C-Corporation

Sub-Chapter
S Corporation

Limited Liability
Company

Hence, one of the prime responsibilities of the financial manager is to plan the company's activities in such a manner where the tax liability will be minimized at the end of the fiscal period. The Tax Minimization Process could produce positive results for the company’s overall bottom line and improve the return on shareholders’ investment (ROI). However, this process should not to be confused with Tax Avoidance, which is certainly illegal.

Tax Strategies are discussed in detail in Tutorial 3.

12. SOURCES OF CAPITAL

SOURCES OF CAPITAL

Once the development of financial plans is accomplished, it is necessary to implement such plans by integrating financial objectives with the overall operating activities within the organization. This process, however, cannot be accomplished without identifying and developing appropriate Sources Of Capital.

Hence, it is necessary to determine how much capital will be required to fund the company's operations, over what period, and how it will be used. In addition, it is necessary to establish when and how borrowed funds will be repaid.

There are two main Methods Of Financing commonly used by financial managers as described below.

TWO MAIN METHODS OF FINANCING

 
Debt
Financing
  Equity
Financing

Each method has its own advantages and disadvantages, which is described in details in this Tutorial.

Additional sources of financing may include accounts receivable financing, revolving line of credit, inventory financing, capital leasing, SBA loans, SBIC loans, CDC loans, venture capital, angel capital, and minority funding sources.

Sources Of Capital are discussed in detail in Tutorial 3.

13. INTERNAL CONTROL AND CASH MANAGEMENT

INTERNAL CONTROL AND CASH MANAGEMENT

The next stage of the financial management process entails the design, implementation, and maintenance of effective Internal Control And Cash Management systems. Some elements of internal control and cash management are included in various accounting software packages and discussed in this Tutorial.

There are two types of Internal Control as described below.

TWO TYPES OF INTERNAL CONTROL

 
Internal Accounting
Control
  Internal Administrative
Control

Main elements of the internal control and cash management systems are illustrated below. Each type of control plays an important role in the overall operational performance of the company and is essential to ensure its long-term success.

MAIN ELEMENTS OF THE INTERNAL CONTROL SYSTEMS

Cash
 Management
And
Control

Control Of
 Purchases
 And Disbursements

Credit
Control

Inventory
 Management

Capital 
Assets Management

Internal Control And Cash Management are discussed in detail in Tutorial 3.

14. CONTROL OF PURCHASES AND DISBURSEMENTS

CONTROL OF PURCHASES AND DISBURSEMENTS

Control Of Purchases And Disbursements represents one of the main elements of the Internal Control Systems within any organization. This type of control is designed to ensure that all purchases of products and services, made by the company’s personnel, are carried out in a systematic and controlled environment. Some elements of purchases and disbursements control are included in various accounting software packages and discussed in this Tutorial.

Control of purchases and disbursements is also designed to ensure that all future payments, which the company must make to various suppliers of goods and services, are carried out in a planned and controlled manner. This process entails a number of steps outlined below.

STEPS IN THE CONTROL OF PURCHASES AND DISBURSEMENTS PROCESS

1.

Complete a purchase requisition.

2.

Authorize the purchase requisition.

3.

Place a purchase order.

4.

Accept the delivery of goods or services.

5.

Issue goods.

6.

Prepare documentation.

Control of purchases and disbursements also entails preparation and regular evaluation of the Creditors Age Analysis Report. Moreover, this process entails development of strict check-writing procedures to avoid any possible embezzlement.

An effective control of purchases and disbursements system will enable the company to meet its obligations to suppliers in a timely manner and contribute to the company’s overall financial stability.

Control Of Purchases And Disbursements is discussed in detail in Tutorial 3.

15. CREDIT CONTROL

CREDIT CONTROL

Credit Control represents another very important element of the Internal Control Systems within any organization. This type of control is designed to minimize the company’s exposure to potential losses due to non-payment of accounts by customers.

A large portion of all business transactions between various business organizations is carried out on a credit basis. All Credit Transactions have three important elements outlined below.

THREE IMPORTANT ELEMENTS OF CREDIT TRANSACTIONS

1.

Element of future payment.

2.

Element of confidence.

3.

Element of risk.


IMPLEMENTATION OF CREDIT CONTROL

Subsequently, the financial manager must ensure a tight control of credit, which may be extended to various customers. This is particularly important during the economically challenging times when many companies may experience their own cash flow difficulties, or simply be forced to go out of business.

Prudent credit control guidelines require that the financial manager takes a number of specific steps to evaluate and minimize risk when dealing with customers. There are a number of tools which are frequently used by financial managers in this regard, including Credit Information Agencies, such as Dunn & Bradstreet, credit application forms, and trade reference inquiries. Credit control also entails preparation and regular evaluation of the Debtors Age Analysis Report.

Credit Control is discussed in detail in Tutorial 3.

16. INVENTORY MANAGEMENT

INVENTORY MANAGEMENT

Inventory Management represents another important element of the Internal Control Systems within any organization. This type of control is designed to ensure that all raw materials, parts, and consumables, purchased by the company, are used in a systematic and controlled environment.

The financial management process entails development and installation of a comprehensive Inventory Management System. This system is concerned with determining, recording, and controlling the flow of materials into the company, within the company, and out of the company.

Inventory management is very important in many organizations and, particularly, in manufacturing companies, which often carry substantial volumes of raw materials, work-in-process, and finished goods.

Inventory may be classified into several types described below.

TYPES OF INVENTORIES

• Direct Materials Inventory.

Direct materials inventory represents all raw materials, components, and spare parts purchased and used by a manufacturing or a service company.

Work-In-Process Inventory.

Work-in-process inventory represents all work-in-process in a manufacturing facility, including all semi-finished parts, components, and sub-assemblies.

• Finished Goods Inventory.

Finished goods inventory represents all products which have been completed at the end of the manufacturing process and are ready for delivery to customers.

• Merchandise Inventory.

Merchandise inventory represents all goods purchased for resale by a merchandising company - a wholesaler or a retailer.

• Consumables Inventory.

Consumables inventory represents all materials, which are used by any type of company during its operational process, e.g. machine oil for plant maintenance, cleaning materials.

Inventory Management is discussed in detail in Tutorial 3.

17. CAPITAL ASSETS MANAGEMENT

CAPITAL ASSETS MANAGEMENT

Capital Assets Management represents another main element of the Internal Control Systems within any organization. This type of control is particularly important in manufacturing companies, which have to acquire and use expensive plant, machinery and equipment.

Capital Assets, also known as Fixed Assets, or Long-Term Assets, are generally classified into two categories described below.

CLASSIFICATION OF CAPITAL ASSETS

 
Tangible Capital Assets   Intangible Capital Assets

These assets include land, buildings, production plant, machinery and equipment, office furniture and equipment, vehicles, airplanes, and boats, i.e. any physical substance.

 

These assets include patents, trademarks, copyrights, leaseholds, leasehold improvements, franchises, licenses, formulas, processes, and goodwill.


DEPRECIATION AND APPRECIATION OF CAPITAL ASSETS

Capital assets generally require large financial investments by any company and it is essential to ensure that such investments are financially viable. Moreover, the value of capital assets usually decreases from one year to the next as a result of operational usage. This reduction in value is called Depreciation and it has to be accounted for to ensure the accuracy of the company’s financial statements. Sometimes, however, the value of capital assets may increase with a passage of time (e.g. a Ferrari sports car, or a Coca Cola trademark) and this is called Appreciation.

Capital Assets Management is discussed in detail in Tutorial 3.

18. PAYROLL ACCOUNTING

PAYROLL ACCOUNTING SYSTEM

The financial management process also entails development and installation of a comprehensive Payroll Accounting System. Some elements of a payroll accounting system are included in various accounting software packages and discussed in this Tutorial.

The payroll accounting system is associated with three general types of liabilities described below.

THREE TYPES OF LIABILITIES IN A PAYROLL ACCOUNTING SYSTEM

   
Liabilities For Employee Compensation  

Liabilities For Employee Payroll Withholdings

 

Liabilities For Employer Payroll Taxes

This may include wages, salaries, and commissions.

 

This may include FICA tax deductions, federal and state income tax, retirement contributions, medical and life insurance premiums, union dues, and charitable contributions.

 

This may include FICA tax contributions, federal unemployment insurance tax (FUTA) and state unemployment insurance tax.


IMPLEMENTATION OF A PAYROLL ACCOUNTING SYSTEM

An effective payroll accounting system enables the company to meet its obligations toward employees and to comply with relevant regulations imposed by tax authorities in a timely manner.

Financial managers often use a specific type of a software-based payroll accounting system to ensure the accuracy of the payroll information. However, due to the complex nature of payroll accounting and constantly changing federal and state regulations, many small business owners prefer to use outside Payroll Service Agencies.

Payroll Accounting is discussed in detail in Tutorial 3.

19. COST ACCOUNTING

COST ACCOUNTING SYSTEM

Design, implementation, and maintenance of a suitable Cost Accounting System represent another important responsibility of the financial manager. Some elements of a payroll accounting system are included in various accounting software packages and discussed in this Tutorial.

Cost Accounting deals with four essential tasks within a company outlined below.

COST ACCOUNTING TASKS

1.

Classification of costs.

2.

Development of a cost accounting system.

3.

Determination of cost recovery rates.

4.

Implementation of the cost accounting system.

The prime purpose of the cost accounting system is to ensure that the company recovers all its costs and makes reasonable profits while manufacturing and supplying products or rendering services to customers.

There are two basic Cost Accounting Methods, which can be used by the financial manager as described below.

TWO BASIC COST ACCOUNTING METHODS

 
Job Order
Costing
  Process
Costing

An effective cost accounting system also facilitates the development of sound pricing methods, which are subsequently used throughout the cost estimating and pricing procedures.

Cost Accounting is discussed in detail in Tutorial 3.

20. PRICING METHODS

PRICING METHODS

Development and implementation of accurate and practical Pricing Methods represents another important function of the financial manager. By implementing these methods the financial manager will be able to accomplish the following tasks outlined below.

FOUR IMPORTANT PRICING TASKS

1.

All products and services are offered to customers at competitive prices.

2.

All manufacturing or operational costs are fully recovered.

3.

The company produces income in accordance with the budget requirements.

4.

The company produces an acceptable level of return on shareholders’ investments.

There are several pricing methods, which can be used by financial managers for determining the selling price of products and services. One of the most popular methods is Profit Margin Pricing. This method is widely used in the following Price-Setting Procedures outlined below.

PRICE-SETTING PROCEDURES

1.

Price-setting procedures in a service company.

2.

Price-setting procedures in a merchandising company (wholesaler or retailer).

3.

Price-setting procedures in a manufacturing company.

4.

Price-setting procedures in a project or contract management company.

Another important element of the pricing methods is the development of a Price Discount Structure designed to ensure that prices can be discounted to a certain level to accommodate specific conditions in the marketplace. This structure may include trade discounts, quantity discounts, cash discounts and promotional discounts.

Pricing Methods are discussed in detail in Tutorial 3.

21. MANAGEMENT ACCOUNTING

MANAGEMENT ACCOUNTING SYSTEM

In order to ensure effective control within the financial department and to monitor the company's operational performance, it is necessary to design, implement, and maintain a comprehensive Management Accounting System. Some elements of a management accounting system are included in various accounting software packages and discussed in this Tutorial. 

The prime purpose of a management system is to facilitate the collation of financial data pertinent to the company's actual performance and to compare such data with corresponding budget projections. The comparison between actual and projected results enables the financial manager to determine variances and to identify whether the company meets its planned objectives.

There are several types of Management Accounting Reports, based upon the nature of the company’s operations as outlined below.

TYPES OF MANAGEMENT ACCOUNTING REPORTS

1.

Management accounting reports for service companies.

2.

Management accounting reports for merchandising companies.

3.

Management accounting reports for manufacturing companies.

4.

Management accounting reports for project and contract management companies.

Management accounting reports play a critical role in assisting the company’s management to monitor the company’s actual performance on a regular basis. Unfortunately, many business owners do not receive these reports in a timely manner and often use primitive methods of calculating profit and loss. Subsequently, business owners do not get the real picture regarding their company’s performance and this often causes unnecessary inefficiency in the company’s overall performance.

Management Accounting is discussed in detail in Tutorial 3.

22. INTEGRATED FINANCIAL MANAGEMENT

INTEGRATED FINANCIAL MANAGEMENT SYSTEM

One of the most critical aspects of financial management relates to integration of financial management planning and control systems with the overall operational planning and control efforts by the company's management team. An Integrated Financial Management System represents, therefore, an essential part of a cost-effective and productive business organization.

There are several excellent accounting software programs available to small business owners at present. Some of the most popular accounting software packages are presented below:

Sage One
QuickBooks Intuit
FreshBooks
Harvest Software Systems
NetSuite

These programs enable business owners and financial managers to complete various operational tasks and obtain information related to:

General Accounting And Bookkeeping.
Budgeting.
Internal Control And Cash Management.
Control Of Purchases And Disbursements.
Credit Control.
Inventory Management.
Assets Management.
Cost Accounting.
Pricing Of Products And Services.
Payroll Accounting.
Management Accounting.
Financial Statements.
Tax Planning And Preparation.
 

UNDERSTANDING BUYING BEHAVIOR

Moreover, software programs, such as MRP II and ERP, cover various operational activities within the organization, and enable business owners and managers to obtain comprehensive management information in a timely manner and to improve the company's operational efficiency.

Various software programs are designed to perform specific operational functions and tasks which may or may not be compatible with one another. For this reason the management team must evaluate the advantages and disadvantages of each program in light of the company's current and long-term operational requirements. This, in turn, will enable the management team to select and integrate the most appropriate and compatible software programs to meet its company's present and future business needs.

Integrated Financial Management is discussed in detail in Tutorial 3.

23. WHO IS WORKING IN THE FINANCIAL DEPARTMENT?

FINANCIAL DEPARTMENT MANAGEMENT

Once all elements of the financial management process are identified, it is necessary to develop a properly functioning Financial Department. The number of people working in the financial department will depend upon a company’s size, business volume, and available budget.

The person in charge of the financial department in a small or medium-sized company holds the title of Chief Financial Officer (CFO), or Vice President Finance (VP Finance), or Financial Manager, or Controller. This person is responsible for the development, implementation, and maintenance of various financial management systems described above.

The execution of prime functions within the financial department of larger organizations may be allocated to two managers, namely: Chief Financial Officer and Treasurer. (1)

Depending on the workload in the financial department, a company may also employ a Bookkeeper, who will be responsible for all bookkeeping tasks and accountable to the chief financial officer.

Main functions of a chief financial officer, a treasurer, and a bookkeeper are described next.

TWO MAIN FUNCTIONS IN THE FINANCIAL DEPARTMENT

 
The Controller   The Treasurer

24. THE CHIEF FINANCIAL OFFICER

THE CHIEF FINANCIAL OFFICER

 

Chief Financial Officer (CFO), or Vice President Finance (VP Finance), or Financial Manager, or Controller, is in charge of accounting services and is responsible for a number of important functions in the financial department outlined below.

FUNCTIONS OF THE CHIEF FINANCIAL OFFICER

1.

Implementation and maintenance of a suitable computerized accounting system.

2.

Collaboration with auditors in preparing financial statements for external users.

3.

Evaluation of the company's financial performance.

4.

Design, implementation, and maintenance of a financial planning or budgeting system.

5.

Design, implementation, and maintenance of an internal control system.

6.

Development, implementation, and maintenance of procedures for complying with federal, state, and local tax authorities.

7.

Design, implementation, and maintenance of a cost accounting system (Sometimes this function is carried out by a cost accountant).

8.

Design, implementation, and maintenance of a management accounting system.

9.

Provision of special information requested by management.

9.

Provision of special information requested by management.

10.

Integration of all elements of computerized financial management.

25. THE TREASURER

THE TREASURER

 

The Treasurer is another staff position within the financial department and is usually responsible for a number of functions outlined below.

FUNCTIONS OF THE TREASURER

1.

Development of plans for obtaining short-, medium, and long-term financing.

2.

Formulation of cash management policies and implementation of cash management and control procedures.

3.

Formulation of credit control policies and implementation of credit control procedures.

4.

Development of plans for investing the company's funds.

5.

Liaison with insurance companies to provide adequate insurance coverage.

 

26. THE BOOKKEEPER

THE BOOKKEEPER

 

The Bookkeeper is another staff position within the financial department and is responsible for a number of functions outlined below, including some optional functions.

FUNCTIONS OF THE BOOKKEEPER

1.

Maintaining the computerized bookkeeping system in updated condition at all times.

2.

Recording all cash and credit sales transactions in the bookkeeping system.

3.

Recording all cash and credit purchases in the bookkeeping system.

4.

Recording all payroll expenses in the bookkeeping system.

5.

Recording all miscellaneous revenues and expenses in the bookkeeping system.

6.

Preparing and issuing checks for payment to creditors.

7.

Accepting and recoding checks received from customers.

8.

Depositing checks in the company’s bank account.

9.

Reconciling bank statements with the cash book on a regular basis.

10.

Preparing sales invoices and monthly statements to customers.

11.

Preparing payroll and issuing payments to the company’s employees.

12.

Preparing monthly creditors’ and debtors’ age analysis reports.

13.

Preparing management account6ing reports upon request by management.

14.

Preparing job cost reports upon request by management.

15.

Collecting outstanding debts from customers.

16.

Liaison with the company’s accountant, controller, treasurer and management personnel.

17.

Liaison with tax and other government agencies upon request by management.

 

27. ADDITIONAL HUMAN RESOURCES IN THE FINANCIAL DEPARTMENT

ADDITIONAL HUMAN RESOURCES IN THE FINANCIAL DEPARTMENT

The company may require additional employees within the financial department, depending upon its size, volume of business, and specific operational needs. These employees may include:

Accounting Manager responsible for maintaining financial management functions.
• Credit Control Manager responsible for maintaining a credit control system.
Account Payable Manager responsible for maintaining an accounts payable control
   system.
• Accounting Clerk responsible for maintaining a broad range of routine functions.

 
The final decision pertaining to the allocation of responsibilities within the financial department rests with the company's financial executive and the business owner.
 

28. FOR SERIOUS BUSINESS OWNERS ONLY

ARE YOU SERIOUS ABOUT YOUR BUSINESS TODAY?

Reprinted with permission.

 

29. THE LATEST INFORMATION ONLINE

WOULD YOU LIKE TO LEARN MORE?

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1.

Learn about the Membership Benefits, join Lean Business Club, and never feel lonely at the top again.

2.

Complete the Membership Form, or the Student Membership Form, and receive your free first-year membership.

3.

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LESSON FOR TODAY:
Manage Your Finances Today - It Will Pay Off Tomorrow!