4 – Using financial information

Understanding financial information in organisations is essential for anyone who wants to effectively manage or oversee a business’s financial operations. Financial information is used to track and monitor the organisation’s financial performance, make decisions about allocating resources and plan for the future. This module will discuss some of the critical ways financial information is used in organisations and the importance of accurately and effectively managing financial information.

Budget planning

Budget planning is crucial to managing a business, as it involves setting financial goals and allocating resources to achieve those goals. By creating a budget, a company can establish a roadmap for its financial operations and use it to track its progress and make adjustments. In this article, we will discuss some of the critical steps involved in budget planning and the importance of having a well-developed budget in place for the success of a business.

Types of budget

There are several different types of budgets that businesses use to plan and manage their financial operations, including:

  • Financial plan: A financial plan is a high-level budget that outlines the organisation’s overall financial goals and objectives and provides a roadmap for achieving those goals. This budget typically includes information about the organisation’s income, expenses, assets, liabilities, and cash flow.
  • Capital budget: A capital budget is a type of budget that is used to plan for the acquisition of new assets or equipment, such as buildings, machinery, or vehicles. This type of budget typically includes information about the costs of acquiring the assets and any financing or leasing arrangements that may be necessary.
  • Sales budget: A sales budget is a type of budget used to forecast the organisation’s sales revenue and to plan for allocating resources to support those sales. This type of budget typically includes information about the organisation’s sales targets, the products or services that will be sold, and the expected costs of sales.
  • Production budget: A budget is a budget used to plan for producing goods or services. This budget typically includes information about the organisation’s production targets, the raw materials and other inputs that will be needed, and the expected production costs.
  • Cash flow budget: A cash flow budget is used to plan for the organisation’s cash inflows and outflows. This budget typically includes information about the organisation’s expected cash receipts, cash disbursements, and net cash flow.
  • Marketing budget: A marketing budget is used to plan for the organisation’s marketing and¬†advertising activities. This budget typically includes information about the organisation’s marketing goals, the target audience, the marketing channels used, and the expected marketing costs.

Using budgets

Budgets are used as devices for planning, coordinating, motivation, and control in organisations for several reasons. First, budgets are used as planning devices because they help organisations to establish their financial goals and objectives and to create a roadmap for achieving those goals. This can help organisations to identify the resources that will be needed and to allocate those resources in the most effective way possible.

Second, budgets are used as coordinating devices because they help to align the activities and functions of different departments and teams within the organisation. By providing a common framework for financial planning and decision-making, budgets can help to ensure that all of the organisation’s activities are working towards the same goals and objectives.

Third, budgets are used as motivation devices because they can help to motivate employees to achieve the organisation’s financial goals. For example, budgets can be used to set specific, measurable, attainable, relevant, and time-bound (SMART) goals for employees and to provide incentives for achieving those goals. This can help to improve employee motivation and engagement.

Finally, budgets are used as control devices because they monitor and evaluate the organisation’s financial performance. Managers can identify variances and take corrective action as needed by comparing actual results to the budgeted amounts. This can help ensure that the organisation is operating within its financial means and making adjustments necessary to improve its performance.

Business planning

Finance is essential to business planning because it establishes the organisation’s financial goals and objectives and develops strategies and plans for achieving those goals. The purpose of using finance in business planning is to ensure that the organisation has the financial resources and capabilities it needs to achieve its goals and support its operations.

There are several key benefits of using finance in the business planning process, including:

  • Identifying the organisation’s financial goals and objectives: By using finance in the business planning process, the organisation can identify its financial goals and objectives and develop a plan for achieving them. This can help to ensure that the organisation is working towards its desired financial outcomes and to provide a clear direction for its operations.
  • Developing strategies and plans to achieve the organisation’s financial goals: Once the organisation’s financial goals and objectives have been established, finance can be used to develop the strategies and plans needed to achieve those goals. This can involve setting financial targets, allocating resources, and identifying potential risks and opportunities.
  • Providing the necessary financial resources and capabilities: The organisation must have the required financial resources and capabilities to achieve its financial goals. By using finance in the business planning process, the organisation can ensure that it has the funding, personnel, and other resources it needs to support its operations and achieve its goals.
  • Monitoring and evaluating the organisation’s financial performance: Finally, finance is used in the business planning process to monitor and evaluate the organisation’s financial performance over time. This can involve tracking financial metrics, such as revenue, expenses, and profitability, and comparing them to the budgeted amounts. This can help the organisation to identify any variances and to make adjustments as needed to improve its performance.

Budget Cycles

The budget-setting cycle is the process by which organisations develop and implement their budgets. The budget-setting cycle typically involves several key steps, including:

  • Identifying limiting or critical factors: The first step in the budget-setting cycle is to identify any limiting or critical factors affecting the organisation’s financial performance. This includes market conditions, economic trends, and regulatory requirements.
  • Developing functional budgets: Once the critical factors have been identified, the organisation can develop operating budgets for its significant departments or functions. These budgets typically include information about the organisation’s income, expenses, assets, liabilities, and cash flow for each functional area.
  • Developing cash budgets: The organisation can then use its operating budgets to create a cash budget, which is a detailed plan for the organisation’s cash inflows and outflows. This budget typically includes information about the organisation’s expected cash receipts, cash disbursements, and net cash flow.
  • Preparing sales budgets: The organisation can then use its cash budget to prepare a sales budget, which is a forecast of its sales revenue. This budget typically includes information about the organisation’s sales targets, the products or services that will be sold, and the expected costs of sales.
  • Developing debtors’ budgets: The organisation can then use its sales budget to establish a budget, which is a forecast of the organisation’s accounts receivable. This budget typically includes information about the organisation’s expected accounts receivable, timing, and collection amounts.
  • Developing creditors’ budgets: The organisation can then use its sales budget to establish a creditors’ budget, which is a forecast of the organisation’s accounts payable. This budget typically includes information about the organisation’s expected accounts payable and the expected timing of payments.
  • Developing capital expenditure budgets: The organisation can then use its sales budget to establish an investment (or capital expenditure) budget, which is a forecast of the funds invested in fixed assets such as plant and equipment. This budget typically includes information about the amount, timing and purpose of each planned investment.
  • Preparing operating budgets: The organisation can then use its investment (or capital expenditure) budget to prepare an operating (or profit and loss) budget, which is a detailed forecast of how much profit or loss it expects to generate each month. This budget typically includes information about expected revenues, expenses, and profits for each functional area.
  • Developing a cash flow forecast: The organisation can then use its operating budget to create a cash flow forecast, which is a detailed projection of how changes in the company’s accounts payable, accounts receivable and other financial items will affect its overall cash balance. This forecast typically includes the amount and timing of expected inflows and outflows over the coming year.
  • Approving the budget: Finally, once these budgets have been prepared, they must be reviewed and approved by senior management or the board of directors. Once this approval has been obtained, the organisation can begin implementing its annual budget for the new fiscal year.

Managing budgets and budgetary management controls

Managing budgets and budgetary management controls are critical for the success of any organisation. By developing and implementing effective budgeting and control processes, organisations can ensure that their financial resources are used efficiently and effectively to achieve their goals and objectives.

There are several critical steps involved in managing a budget, including:

  1. Identifying priorities and timescales: The first step in managing a budget is identifying the organisation’s priorities and timescales. This can involve setting financial targets, allocating resources, and identifying potential risks and opportunities.
  2. Negotiating and agreeing on financial resources: Once the organisation’s priorities and timescales have been established, the next step is to negotiate and decide on the necessary financial resources to support those priorities. This can involve securing funding, hiring personnel, and acquiring equipment and other assets.
  3. Accurate recording of income and expenditure: It is essential to accurately record the organisation’s income and expenditure to monitor its financial performance and identify any variances. This can be done through financial accounting software, which can help ensure that all transactions are recorded accurately and in a timely manner.
  4. Monitoring income and expenditure against planned activity: The next step in managing a budget is to monitor the organisation’s income and expenditure against its planned activity. This can involve comparing actual results to the budgeted amounts and identifying variances that may require corrective action.
  5. Taking corrective actions if budgets are not met: If the organisation’s budgets are not being met, it may be necessary to take corrective action to bring the organisation back on track. This can involve adjusting the organisation’s plans, revising its budgets, or changing its operations.
  6. Investigating unaccounted variances: If there are any unaccounted variances between the organisation’s actual results and its budgeted amounts, it is essential to investigate the reasons for those variances to identify any underlying problems or issues.
  7. Updating budgets: As the organisation’s plans and circumstances change, it may be necessary to update its budgets to reflect those changes. This can involve revising the organisation’s financial targets, allocating additional resources, or changing its plans and operations.
  8. Dealing with unforeseen internal and external situations and changes: In addition to planned changes, organisations may also need to deal with unexpected internal and external situations and changes. This can include changes in market conditions, economic trends, or regulatory requirements. In these cases, adjusting the organisation’s budgets and plans may be necessary to respond to those changes.
  9. Negotiating revisions to the budget: If the organisation’s plans or circumstances change, it may be necessary to negotiate modifications to its budget with critical stakeholders, such as funders and investors. This can involve discussing fundamental changes or adjustments and agreeing on any essential budget revisions or additional resources.
  10. Reporting and communicating changes: Once the organisation’s budget has been revised to consider changes in its plans and circumstances, it is essential to promptly communicate those changes to critical stakeholders. This can include updating reports and financial statements, as well as any other communications that may be relevant.

Factors impacting budgetary planning

Many factors can prevent an organisation from maximising its performance and reaching its goals. Some typical operational constraints include limited financial resources, inadequate technology or equipment, and constraints on time and other resources. Staffing can also be a significant constraint, especially if an organisation cannot hire enough qualified employees or is forced to reduce its staff due to financial or other reasons.

In specific examples, a hospital may be unable to provide the best possible care to its patients if it is understaffed or lacks the necessary equipment and technology. Similarly, a manufacturing company may be unable to produce enough goods to meet customer demand if it is unable to hire additional workers or if it is unable to invest in new equipment.

An organisation’s specific constraints will ultimately depend on its particular goals, industry, and operational environment. It is essential for organisations to regularly assess and evaluate these constraints to identify potential solutions and take steps to overcome them.

Financial forecasting methods and tools

Financial forecasting is the process of predicting a company’s future financial performance. There are a variety of methods and tools that can be used to make financial forecasts, including financial ratio analysis, trend analysis, and regression analysis. These methods and tools help organisations to make informed decisions about their future operations, investments, and other financial activities. Financial forecasting is essential to effective financial management and can help organisations maximise their performance and achieve their long-term goals.

Quantitative methods

Quantitative methods are mathematical and statistical techniques that are used in financial forecasting. These methods are based on the analysis of numerical data and can help organisations to make more accurate and reliable predictions about their future financial performance.

Some common examples of quantitative methods used in financial forecasting include:

  • Causal forecasting uses statistical models to identify the relationship between different variables and forecast future outcomes based on that relationship.
  • Decomposition breaks down complex data into simpler components to make it easier to analyse and forecast.
  • Rule of thumb, which uses simple, standardised formulas or ratios to make estimates about future performance.
  • Smoothing uses historical data to identify trends and patterns and smooth out random fluctuations to make more accurate forecasts.
  • Time series analysis uses past data to identify trends and patterns over time and forecast future performance based on those trends and patterns.
  • Budgets are detailed plans for future financial performance based on careful analysis and projections of future revenues and expenses.
  • Cash flow forecasts predict future cash inflows and outflows to ensure that an organisation has enough liquidity to meet its obligations and achieve its goals.

Financial reporting standards

Financial reporting standards are a set of principles, rules, and guidelines organisations must follow when preparing and presenting their financial statements. In the United Kingdom, financial reporting standards are set by the Financial Reporting Council (FRC), the independent regulator responsible for promoting high-quality financial reporting.

The FRC sets several different financial reporting standards, including the UK Generally Accepted Accounting Principles (UK GAAP), which outline the specific rules and guidelines organisations must follow when preparing their financial statements. UK GAAP is based on international financial reporting standards (IFRS), which organisations worldwide use.

In addition to setting financial reporting standards, the FRC monitors compliance with these standards and can investigate and enforce any breaches. This helps to ensure that organisations are transparent and accountable in their financial reporting and that investors and other stakeholders have access to accurate and reliable information about a company’s financial performance.

In the United States, financial reporting standards are set by the Financial Accounting Standards Board (FASB), an independent organisation responsible for establishing and maintaining generally accepted accounting principles (GAAP). GAAP is a set of rules and guidelines organisations must follow when preparing and presenting their financial statements.

The FASB is responsible for developing and issuing new accounting standards and interpreting and enforcing existing standards. This ensures that financial statements are prepared consistently and transparently and provide helpful information to investors, creditors, and other stakeholders.

In addition to the FASB, the Securities and Exchange Commission (SEC) also plays a role in setting financial reporting standards in the United States. The SEC is the federal agency responsible for regulating the securities industry and has the authority to establish and enforce rules and regulations related to financial reporting.

Overall, the financial reporting standards in the United States are designed to promote transparency and accountability in financial reporting and to provide investors and other stakeholders with accurate and reliable information about a company’s financial performance.

Cost accounting

Cost accounting is a branch of accounting that focuses on measuring, analysing, and reporting costs associated with an organisation’s operations. It is a valuable tool for organisations to understand and control their costs, make informed decisions, and improve their financial performance.

Some of the critical components of cost accounting include:

  • Costing involves identifying, classifying, and assigning costs to different products, services, or activities. This allows organisations to understand the cost structure of their operations and identify opportunities for cost savings.
  • Budgeting involves the creation of detailed plans for future financial performance, including the allocation of resources and the setting of targets and goals. This helps organisations to monitor and control their costs and to ensure that they remain on track to achieve their financial objectives.
  • Pricing involves the determination of the selling price for a product or service. Cost accounting can help organisations to determine the cost of a product or service and to set prices that will cover their costs and generate a profit.
  • Control involves monitoring and evaluating actual costs and performance against the budgets and targets set by the organisation. This allows organisations to identify variances and take corrective action if necessary.
  • Decision-making involves using cost accounting information to support the decision-making process. Cost-benefit analysis, for example, is a tool that can help organisations to evaluate the costs and benefits of different courses of action and make informed decisions.

Qualitative tools

In addition to quantitative methods, financial forecasting can also be based on various qualitative tools. These tools rely on expert judgment and opinion rather than numerical data to predict future financial performance.

Some common examples of qualitative tools used in financial forecasting include:

  • External and internal expert opinion involves seeking experts’ advice and input in a particular field or industry. This can help organisations to gain insight into potential future developments and trends and to make more informed forecasts.
  • The Delphi method involves surveying a panel of experts and using their responses to make predictions about future events. This can help reduce individual opinions’ subjectivity and generate more reliable forecasts.
  • Market research involves gathering and analysing information about customer preferences, market conditions, and other factors that may affect future financial performance. This can help organisations to understand the demand for their products or services and to make more accurate forecasts.
  • Industry norms are benchmarks or averages commonly used within a particular industry to compare the performance of different companies. This can give organisations a reference point to help them make more realistic forecasts.
  • Government data and reports on sectors and trends provide information about economic conditions, industry trends, and other factors that may affect future financial performance. This can help organisations to understand the broader context in which they operate and to make more informed forecasts.

Factors influencing financial forecasting and management

Financial forecasting and management are essential for organisations to achieve their financial goals and maximise performance. However, several factors can influence the accuracy and effectiveness of financial forecasting and control. These factors can include internal factors, such as the organisation’s financial resources, staffing, and operational capacity, as well as external factors, such as economic conditions, market trends, and changes in government regulations.

Aims of financial forecasting

The main aim of financial forecasting and management is to help organisations to achieve their financial goals and maximise their performance. This can involve several different objectives, such as:

  • Generating revenue and profits: Financial forecasting and management can help organisations identify growth and profitability opportunities and develop strategies for achieving these goals.
  • Ensuring financial stability and sustainability: Financial forecasting and management can help organisations to manage their financial resources effectively and to ensure that they have the necessary liquidity and financial flexibility to weather any potential challenges or setbacks.
  • Protecting and enhancing the organisation’s assets: Financial forecasting and management can help organisations to identify and manage risks and to take steps to protect their assets and investments.
  • Providing a return on investment for stakeholders: Financial forecasting and management can help organisations to meet the expectations of their stakeholders, such as shareholders, investors, and creditors, and to provide a return on their investment.

Contribution of teams

Teams can play a valuable role in contributing to an organisation’s governance and compliance efforts. Governance refers to the processes and structures in place to ensure that an organisation is managed and directed in a way consistent with its values, goals, and legal and ethical obligations. Conversely, compliance involves ensuring that an organisation follows the relevant laws, regulations, and policies that apply to its operations.

Teams can contribute to an organisation’s governance and compliance efforts in several ways, such as:

  • They provide input and feedback on the organisation’s governance, compliance policies, and procedures.
  • Identifying potential risks and issues related to governance and compliance and suggesting ways to address these risks and issues.
  • Participating in training and education programs to ensure that team members know the organisation’s governance and compliance obligations.
  • Assisting with implementing governance and compliance policies and procedures and ensuring they are followed consistently.
  • Reporting any concerns or violations of governance and compliance policies to the appropriate authorities or individuals within the organisation.

Operations manager’s key roles

Operations managers ensure that the organisation’s operations are efficient, effective, and aligned with its strategic goals and legal obligations.

Some of the critical roles and responsibilities of an operations manager can include:

Assisting with planning policy: An operations manager may be involved in helping to develop and implement planning policies that align with the organisation’s strategic goals and legal obligations. This can include setting targets, defining roles and responsibilities, and identifying resources needed to achieve the organisation’s objectives.

Coordinating and overseeing the organisation’s day-to-day operations: An operations manager is typically responsible for overseeing the various departments and teams that make up the organisation and ensuring that they are working together effectively. This can involve coordinating schedules, delegating tasks, and monitoring progress to ensure that the organisation’s operations are running smoothly.

Developing and implementing processes and procedures: An operations manager may be responsible for developing and implementing processes and procedures designed to improve the efficiency and effectiveness of the organisation’s operations. This can include standardising workflows, implementing new technologies, and streamlining processes to eliminate waste and inefficiency.

Monitoring and analysing performance: An operations manager is typically responsible for monitoring and analysing the performance of the organisation’s operations and for identifying areas where improvements can be made. This can involve collecting and analysing data, setting performance targets, and providing feedback and guidance to teams and individuals.

Assisting with budgeting and financial management: An operations manager may be involved in helping to develop and manage the organisation’s budget and ensure that its financial resources are being used effectively and efficiently. This can include setting financial targets, monitoring expenses, and identifying opportunities for cost savings.

Conducting internal/external audits: This ensures that systems work as planned, variance is managed within resources, and compliance measurement and reporting are periodically undertaken.

Recognising legal and regulatory considerations: data protection, health and safety, revenue and customs responsibilities and implementation, company law, employment law

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