accounting and financial management day 1
TRANSCRIPT
Information
• Management accounts explain and communicate complex processes and procedures
• Figures are used to communicate information• Secret is to keep it simple and understandable• Complexity and/or jargon leads to bad
decisions and a loss of control• Complexity creates fear of numbers
Financial information
• Financial information is a language that is universally used and accepted
• Formats may vary• Terminology may vary e.g. Profits v
surplus, stock v inventory
Management tool
• Financial information should be a valuable management tool
• The tool assists with:– Planning and control– Creating and supporting strategy– Improving efficiency and effectiveness– Comparing, monitoring & reporting– Measuring performance (project/
organisation, internal & external)
Communication tool
Very important aspect Structure this so it is Understandable Two way process Constructive Partners not assassins!
Format
• No prescribed format• There will be many different types of information• Depends on audience• What they need to know
Relevant & Timely
Information must be relevant What does the reader need? What is relevant to that position?
Information must be presented within an appropriate time frame Too early – accuracy? Too late - relevancy/ action?
Preparation
•Who?•Do they understand what is required?•Do they understand operations?•Can they make recommendations?•Will they be listened to?
Ownership
•Does someone take responsibility for preparing them?•Does someone take responsibility of acting on the information?•Who are they reporting to?
Action
•Is something done with the information?
Fixed Assets
•Confusion over certain items as to what they are•Definition depends on 3 factors
•Purpose of purchase•Expected life of item•The cost
Fixed Assets - 2
•If purchased for resale then it is stock•If used to passively generate an income then an investment•If to be used in furtherance of normal activities, it could be a fixed asset
Fixed Assets - 3
•Expected life important •Fixed asset if expected life is longer than a year•If less than 1 year – “expense” it•If more than 1 year – “Capitalise” it
Fixed Assets - 4
•Materiality•If high cost than capitalise•If low cost expense it•Use Common Sense
Depreciation
•Represents a transfer of value from the capital value to the profit and loss account•Trying to represent the true value of using the asset for that year•Can be very complex – e.g. land – this tends to increase in value
Depreciation - 2
•Estimate life expectancy of asset•Charge annual account on estimated life expectancy
•Wear and tear•Obsolescence•Uneconomical/ unreliable•Inadequacy – change in type/size of goods dealt with•Depletion•Expiry
Closing value
•There may be a residual value•Estimate life expectancy of asset•Difficult to estimate•Can use “Reducing Balance” method, rather than•“Straight Line” method
Depreciation meaning
•A decrease in value over a period of time•Replacement shortfall – difference between residual value of old item and amount needed to replace it •Allocation of cost – charge to P&L for the “cost” of use in that period
Disposal
•A profit or loss brought about on disposal has to be reflected in the accounts•e.g. car w/off over 4 years to zero values –now sell it at £1,000 – caused a profit to be generated•e.g. A laptop written down to half price over two years, on sale only realise a quarter of purchase price – loss caused
Strategic Process
Strategic Objectives Outcomes Outputs Resources
Required
Delivery/ execution trajectory
Strategy/ Planning trajectory
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Planning
•The resources required to deliver the strategy need to be costed•Need to be sure you really understand your project and/or your organisation•Working out the “money” requirement leads to an adjustment of the amount and timing of the resource input (more grounded in reality)•Now have a better handle on the funding requirement to deliver strategy•This is known as Financial Forecasting
Tool
•The financial underpinning assists with:
•Allocating/ maximising resources •Implementing plan•Identifying financial/ resource problems•Indicator for employee performance•Actions required to fulfil goals
Types
•Revenue•Cash•Project•Capital
Types - 2
•Zero based – start as if with a clean sheet
•Incremental – take history and change, either your own or someone else's
Assumptions
•With experience (historical evidence or personal experience) the accuracy of assumptions increases•The closer to the present the more accurate the assumption•Need to be reasonable and need to be robust when questioned
Revenue
•Hard to predict•Incremental if history•Look at what others are doing•Research and back up what you believe
Income expectation
Absolutely need Require
Have in hand Need to get
Nice to have
Funder What for
Have capability/ resources
AHow much
BLikelihood %
C = A x BExpectation
A
B
C
Total Value
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Costs
•Easier to predict•Lot of information available•Predictions dependent on:
•Market conditions•Understanding of resource requirements•Allocation and categorisation
Other considerations
•What is controllable•What is uncontrollable•Phasing of costs e.g. utilities•Spikes in resources•Understanding how to cut back if predictions slow, late or wrong
Types of Cost
•Variable costs•These are costs that change with activity, so that each time something is done there is a cost associated with it
•Fixed costs•These are costs that are incurred even where there is no activity
Types of Cost
•Project costs•Can these be regarded as being variable? They are activity related but also include an element of fixed costs
•Core costs•These could be seen to be fixed, yet also include some variable element
Types of Cost
•Understanding costs ensures that you can:• Control the business• Get the pricing right• Measure your performance•Explain why you charge more or less if challenged to do so
Financial planning
FundingCash in
ExpenditureCash out
How?When?
DependenciesWho By?
Resources RequiredInitial plan
Hypothetical
Reality check
Resources RequiredWorking plan
Plan “B”
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Budgets
•Budgets are tactical tools•What have you planned to deliver in the next 12 months•What resources do you have, what more do you need to get in•How are you going to deliver the plan•How are you going to monitor progress•What actions will come about as a result of the monitoring & reporting
Budgetary processStrategic Plan
Set GoalsOutcomes/ Outputs Identify
Portfolio of
Initiatives
Design Delivery
ProgrammeBusiness Plan
Quantify Resource
Requirement(Budget)
Monitor Progress
Reports
Compare actual to budget
Decide on action
Change strategy?
© Red Ochre 2016
Variance
•The difference between budgets and historical information for the same period is called a variance•Variances are useful management tools as they highlight areas where assumptions are incorrect and areas where there is potential for improvement
Reasons for inaccuracies
•Inadequate information•Circumstances beyond your control
•Staff departures•Grant cut backs•Funder default•Natural disasters