FINANCIAL MANAGEMENT BY Navitha Sewpersadh CA (SA) UKZN INSPIRING - - PowerPoint PPT Presentation

UKZN INSPIRING GREATNESS UKZN INSPIRING GREATNESS

MANAGEMENT DEVELOPMENT PROGRAMME: FINANCIAL MANAGEMENT BY Navitha Sewpersadh CA (SA)

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COST ACCOUNTING

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Introduction

The Constitution says: National, provincial and municipal budgets and budgetary processes must promote transparency, accountability and the effective financial management of the economy, debt and the public sector. (Section 215)

• In South Africa the great recession has led to the need to

tighten the management of the fiscus, including financial resources in the Public Service.

• The rating downgrades that SA experienced will increase the

cost of capital to government.

• Government has a responsibility towards its citizens to expend

public finances in an effective, efficient and economic manner. In order to do so, sound financial management practices are required in terms of legislation, thus placing a high burden of accountability on all civil servants.

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ESSENTIAL CONCEPTS

DEFINITION OF FINANCIAL MANAGEMENT: The planning, directing, monitoring, organizing, and controlling of the monetary resources of an

• rganization.

Financial management refers to the efficient and effective management of money (funds) in such a manner as to accomplish the objectives of the

• rganization. It is the specialized function directly

associated with the top management.

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Principles of financial management

• Consistency: your financial policies and systems must remain

consistent over time.

• Accountability: you must be able to explain and demonstrate to all

stakeholders how you have used your resources and what you have achieved.

• Transparency: your organisation must be open about its work and

its finances, making information available to all stakeholders.

• Integrity: individuals in your organisation must operate with honesty

and propriety.

• Financial stewardship: your organisation must take good care of

the financial resources it has been given and ensure that they are used for the purpose intended.

• Accounting standards: your organisation's system for keeping

financial records and documentation must observe accepted external accounting standards.

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Principles of PFM reforms in SA

• Comprehensiveness and integration
• Political oversight and a focus on policy

priorities

• Using information strategically
• Changing behaviour by changing

incentives

• Ensuring budget stability and predictability

while facilitating change at the margin

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Aims of the PFMA

• To regulate financial management…
• To ensure all revenue, expenditure, assets, and

liabilities … are managed efficiently and effectively;

• To provide for the responsibilities of persons entrusted

with financial management;

• Applicable to all public entities , however the following

are excluded from schedule 3 the Reserve Bank, Auditor General, higher education institutions, and a constitutional institution (reference to S47(4), they have their own acts)

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Cost Containment Measures

– Good financial management and sound accounting practices can support cost containment measure such as developing a cash and investment policy for donations and other external investment structure. – PFMA section 38 together with Chapter 11 of Treasury Regulations, requires the accounting officer to take effective and appropriate steps to collect all money due to the Department, including as necessary:

• Maintenance of proper accounts and records for all debtors,

including part payments, and

• Referral of matters to the state attorney, where economical, to

consider legal demand and possible legal proceedings in court.

• Writing off debts owed to the state.

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– Proper Debt Management could curtail losses entails, such as:

• Preparing and reviewing the debtors age analysis on a

monthly basis.

• Part of risk management (in later slides) is the review of credit

control measures and the implementing of early settlement incentives.

• Generally debts that are outstanding for more than 90 days

have a higher risk of being unrecoverable. Monitoring of the percentage of debt outstanding for more than 90 days is recommended.

• Refer matters to state attorney if economical (cost benefit

ratio) or consider writing off if deemed uneconomical.

Cost Containment Measures

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Costing in Business

Costing can be useful to management in:

• Planning
• Assessing alternatives and decision-

making

• Monitoring outcomes

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Factors influencing productivity

by Prof. Mudit Katyani

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Financial Management Process

IMPACT OUTCOMES

OUTPUTS ACTIVITIES INPUTS

Manage towards achieving desired results Plan, budget implement and monitor What outcomes were achieved and how, forms inputs into our next financial year Financial, social and environmental impacts End products, or service deliverables Business/ operational processes to convert inputs into outputs Inputs – raw materials, labour, overheads, etc

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Product Costing – Summary

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TERMS & CONCEPTS

• Direct costs are physically traced to a cost object.
• Indirect costs are allocated using a cost-allocation base.

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TERMS & CONCEPTS

Overheads: Include the following:

• Indirect material – supplementary materials, eg. cleaning

products, colouring matter, glue, screws, lubricants, waste products

• Indirect labour – all wages and salaries not directly

related to manufacturing process, eg. employer contributions (pension, medical, unemployment insurance, workmen’s compensation), wages of cleaning staff, casual labour, overtime, shift expenses, leave pay, bonuses, salary of factory foremen, wages of security personnel

• Other overheads – all other manufacturing costs, eg.

depreciation, leasing of equipment, insurance, property tax, electricity, water, telephone

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ENTITIES

Service entities:

➢ earn income mainly from the rendering of services ➢ trading inventory and cost of sales accounts are not necessary

Trading entities:

➢ earn income mainly by purchasing finished goods/inventory and selling them at a profit ➢ cost of sales and inventory accounts are necessary

Manufacturing entities:

➢ purchases raw material which it uses to manufacture products and then sells these products at a profit ➢ additional costs that serve as basis for calculation of manufacturing cost of finished goods or products (cost of sales)

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MANUFACTURING ENTITIES

• As manufacturing process takes place in steps,

products will be at different stages of production at any given moment

• These different stages of completion may be

differentiated as follows :

• unprocessed inventory - raw material
• partially completed inventory - work-in-progress
• completed inventory - finished products

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Profit determination

Comparison of : Service entity Trading entity and Manufacturing entities

Income earned form services rendered Expenses incurred Profit

Sales – Cost

• f sales =

Gross profit Expenses incurred Profit

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Manufacturing Companies

Materials Inventory

Finished Goods Inventory

Sales Cost of Sales(Product cost)

INCOME STATEMENT

Operating Expenses

Inventoriable Product Costs BALANCE SHEET

= Operating Income

when sales

• ccur
• Work in

Process Inventory

Period Costs

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Product Costs vs Period Costs

Product costs are costs identified with goods produced or purchased for resale. These costs first become part of the inventory on hand, sometimes called inventorial costs. Inventorial costs become expenses in the form of cost of goods sold

• nly when the inventory is sold.

Period costs are deducted as expenses during the current period without going through an inventory stage.

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Group Exercise

Classify the following items as EITHER: Product cost, indicate whether it is direct material, direct labour or manufacturing overheads OR Period cost, indicate whether it is a marketing/selling or an administrative cost.

• 1. Raw materials used to manufacture products.
• 2. Wages of workers who handle material during the production process
• 3. Advertising costs
• 4. Depreciation of a vehicle used by the managing director
• 5. The production manager’s salary
• 6. Lease payments on manufacturing equipment
• 7. Lease payments on vehicles used by sales personnel
• 8. Depreciation on manufacturing equipment
• 9. Rent on factory building

10.Cleaning material used by production workers

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Variable and Fixed Cost Behaviour

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TERMS & CONCEPTS

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Break-Even Point

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CVP Scenario

Per Unit Percentage of Sales Selling price R1.50 100% Variable cost of each item 1.20 80 Selling price less variable costs R .30 20% Monthly fixed expenses: Rent R3,000 Wages R13,500 Other fixed expenses R1,500 Total fixed expenses per month R 18,000 Cost-volume-profit (CVP) analysis is the study of the effects of output volume on revenue (sales), expenses (costs), and net income (net profit).

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CVP Scenario

• How much contribution to the company is made if 50

000 units is sold?

• Would the contribution cover our fixed costs?
• What is our break even units??

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Cost-Volume-Profit Graph

R

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Target Net Profit

Therefore Managers can use CVP analysis to determine the total sales required in units and rands to achieve their target net profit since:

• Target sales
• Less variable expenses
• Less fixed expenses

= Target net Profit Assume management require a target net profit of R1 440.

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Target Net Profit

Therefore, if we input our numbers into the target profit calc, we will get: (18000 + R1440) / .30 = 64 800 units If we take 64 800 units x R1.50= R97200 (REVENUE)

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Contribution Margin and Gross Margin

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Contribution Margin and Gross Margin

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BUDGETING

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Benefits of Budgets

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Human Relations Problems

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Incentives to Lie and Cheat

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Basic concepts

• Variance – difference between an actual and an expected

(budgeted) amount

• Management by Exception – the practice of focusing attention
• n areas not operating as expected (budgeted)
• Static (Master) Budget – is based on the output planned at the

start of the budget period

• Static-Budget Variance (Level 0) – the difference between the

actual result and the corresponding static budget amount

• Favourable Variance (F) – has the effect of increasing
• perating income relative to the budget amount
• Unfavourable Variance (U) – has the effect of decreasing
• perating income relative to the budget amount

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BUDGET PROCESS

• PLANNING
• COORDINATING
• INTERPRETING
• PRESENTING
• APPROVING
• ADMINISTERING
• APPRAISING

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ZERO BASED BUDGETING PROCESS

• IDENTIFY GOALS
• GATHER DATA
• PLAN PROGRAM TO MEET GOALS
• IDENTIFY ALTERNATIVE WAYS TO

ACHIEVE GOALS

• DO COST ANALYSIS OF

ALTERNATIVES

• MAKE DECISION AS TO FUNDING

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Static vs Flexible budgets

Static Budget Planned level of

• utput at start of

the budget period

Based on

Flexible Budget Budgeted revenues and cost based on actual level of output

Based on

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BUDGETS VS FORECASTS- WHY??

–Measure actuals and forecasts against the budget throughout the planning process. –Analyze anticipated versus actual results. –Predict future performance and anticipate changes. –Assist in monitoring control of current performance. –Provide early warning of deviations from plans.

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Strategic planning and budgeting systems

• Strategic planning is long term planning usually

undertaken by senior managers

– Decisions about the type of businesses and markets that the

• rganisation operates in, and how those businesses and

activities will be financed – Decisions about corporate strategy

• Planning

– To quantify a plan of action

• Facilitating communication and coordination

– Provides a formal mechanism to enable communication and coordination

• Allocating resources

– Provides a forum for evaluating alternative use of resources among competing users

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Cost Benefit and Behavioural considerations

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Budgets

• Variance – the difference between planned values and actual

values – Positive/favourable variance – actual expenses less than planned or actual revenue more than planned – Negative/unfavourable variance – actual expenses more than planned or actual revenue less than planned.

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Performance Reports

Budget Actual Variance Revenue R50,000 R50,000 Less: Promotion event 22,000 24,500 R2,500 U Salaries 12,000 11,600 400 F Ad hoc workers 6,000 6,050 50 U Other fixed costs 4,500 4,500 Total expenses R44,500 R46,650 R2,150 U Profit/Loss R 5,500 R 3,350 R2,150 U U= Unfavorable – actual exceeds budget F – Favorable – actual is less than budget.

WERITE LTD JUNE 30, 2020

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What are the COVID 19 implications to budgets, revenue and expenses??? Think about fixed costs???

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Financial Accounting

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Reporting

▪

Design Implement Manage Report Audit Internal External Management Accounting Public Accounting

Internal managers Day to day decisions Long range strategic plans External users Stakeholders

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Ethics

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Unethical Behaviour Temptation

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Triple bottom line

• Created by John Elkington describes separate

financial (profit), social (people) and environmental (planet) “bottom lines” of companies.

• John Elkington stated that companies should

apply three bottom lines instead of focusing purely on its profits.

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Triple bottom line

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Financial results

FINANCIAL POSITION AT A SPECIFIC TIME Reflects the accumulated net worth (wealth) of an entity- photograph’ of the business on a particular date Statement of financial position FINANCIAL PERFORMANCE OVER A SPECIFIC PERIOD Reflects the profit made or loss incurred by the entity- performance of the business over a period Statement of profit or loss and other comprehensive income

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Statement of financial position

Assets Non-current assets Land and Buildings 950 Furniture and equipment 1 200 Current assets Inventory 3 600 Bank 4 250 Total assets 10 000 Equity and liabilities Capital 8 000 Non-current liabilities Loan 2 000 Current liabilities Total equity and liabilities 10 000

Intention of generating benefit from their use for more than a year In the form of cash, converted into cash, or used within one year Repayable over a period

• f more than one year

Repayable within one year

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Statement of profit/Loss & other comprehensive income

SALES/TURNOVER LESS COST OF SALES GROSS PROFIT ADD OTHER INCOME LESS OPERATING EXPENSES PROFIT BEFORE INTEREST Finance costs (interest expense) PROFIT FOR THE YEAR OTHER COMPREHENSIVE INCOME Surplus on revaluation on land TOTAL COMPREHENSIVE INCOME

Rent received Interest received Rent expense Electricity Wages and salaries Depreciation If 2 statements – P/L ends and OCI starts

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Cash flow statement

• Measures performance by subtracting cash inflows

from cash outflows to arrive at a net cash flow for the period

• Cash received (inflows)

– Cash from customers (sales) – Cash from the owner (capital) – Cash from lenders (liabilities)

• Cash paid (outflows)

– Buying assets i.e. inventory or vehicles – Paying for expenses – Repaying loans – Drawings/distributions

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ACCOUNTING STANDARD

• South Africa applies the International financial

Reporting Standards (IFRS)

• Developed by the IASB in the UK and applied

internationally.

• Comprises of:

– IAS and IFRS statements – Includes a “Conceptual Framework”

• Ensures that all financial statements are compiled in

a manner consistent with the qualitative principles.

• Underlying Assumption GOING CONCERN

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Qualitative characteristics

Comparability Verifiability Timeliness Faithful representation

(complete, neutral, free from error)

Understand

• ability

Relevance

Fundamental characteristics Enhancing characteristics

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Duality concept

• Determines the financial position of an entity

and is defined in terms of the fundamental accounting equation Assets = Equity + Liabilities

• It is based on the framework of accountability

for the employment of funds How are funds utilised = Who provided the funds Every transaction has a twofold effect namely for every debit we need a credit.

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Duality concept

• OE = A – L
• r

A = OE + L

• Each transaction has a dual effect on the

accounting equation

• i.e. It must always balance

→ double entry principle

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Debiting and crediting procedure

ASSETS = EQUITY + LIABILITIES

Dr Cr Dr Cr Dr Cr +

• +
• +

Increase on debit side Decrease

• n credit

side Decrease

• n debit

side Increase on credit side Decrease

• n debit

side Increase on credit side Normal balance Normal balance Normal balance PROFIT OR LOSS INCOME ACCOUNTS Decrease

• n debit

side Increase on credit side EXPENSE ACCOUNTS Increase on debit side Decrease

• n credit

side

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Ratio analysis

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Return on Investment

• Is it really worth investing all that time, money

and effort into the project?

• To help make that decision we use the return
• n investment
• The investment will be the initial development

costs of the project

ROI = average annual profit x 100 total investment OR ROI = (gain from investment – cost of investment) / cost of investment

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Return on Investment

Example:

– Average annual profit = R50,000/5 (years) – Initial investment = R100,000

• ROI = R10,000 x 100

R100,000

• ROI = 10%

Year 1 2 3 4 5 Project AAA

• 100000

10000 10000 10000 20000 100000

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Working Capital Concepts

Net Working Capital

Current Assets - Current Liabilities.

Gross Working Capital

The firm’s investment in current assets.

Working Capital Management

The administration of the firm’s current assets and the financing needed to support current assets.

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Liquidity: Current ratio

• Liquidity of entity
• Ability of entity to meet short-term obligations

By comparing Current assets & Current liabilities Current ratio = Current assets : Current liabilities

• General norm of 2:1 is a good indication that

entity can meet its short-term obligations

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EXAMPLE 1

Total current assets amount to R24 000 and total current liabilities amount to R8 000. Current ratio = Current assets : Current liabilities = R24 000 : R8 000 = 3 : 1 Current ratio is above the norm of 2:1. Entity will be able to pay its short-term debts (creditors) and outstanding debts are collected in a timely manner from its debtors. This will result in the entity having no difficulty when purchasing inventory or paying for other expenses.

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Liquidity: Quick Ratio/ Acid test ratio

• If CA consists mainly of inventory

Current ratio misrepresentation of liquidity

• Looks at assets easily convertible into cash –

Debtors, Short-term investments, Bank Acid test ratio = (Current assets – Inventory) : Current liabilities

• Must be at least 1:1, but 2:1 is preferable

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EXAMPLE 2

Total current assets amount to R24 000 and total current liabilities amount to R8 000. The inventory included in current assets amounts to R14 000. Acid test ratio = Current assets – Inventory : Current liabilities = R24 000 – R14 000 : R8 000 = R10 000 : R8 000 = 1,25 : 1 The minimum acceptable standard for the acid test ratio is 1 : 1. However, 2 : 1 is preferable. The above ratio is within the acceptable limits which means that the entity should not experience problems in paying its short-term debts.

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Profitability: Gross profit percentage

• Can compare with other similar entities and

determine if it is acceptable for type of business

• Gross profit indicates profit made by entity when

taking only sales and purchases figures into consideration

• Good indication of whether selling prices are

sufficient and whether purchase price of inventory is too high

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Sales xxx Less: Cost of sales (xxx) Opening inventory xxx Purchases xxx Carriage on purchases xx Customs duty xx Available for sale xxx Less: Closing inventory (xxx) Gross profit xxx

The gross profit percentage (%) is calculated as follows: Gross profit percentage = Gross profit (R) ÷ Sales (R) x 100

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Profitability: Net profit percentage

• Determine how entity performs and if % is

comparable with similar entities

• Net Profit/Loss: Profit or loss after all income

and expenses have been brought into account Net profit percentage = [Net Profit (R) ÷ Sales (R)] x 100

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Profitability: Return on capital employed ( ROCE)

• Profitability of an entity is one of most important

components in analysis and interpretation of

• Fin. Statements
• Return on capital profitability ratio

how profitable owner’s capital investment is

• Also indicates possible problems and

shortcomings

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Return on capital employed =

Net profit before Interest & Tax (R) ÷ Total Capital (R) x 100

• If % profit owner earns on his capital > return

at financial institution return on capital is good

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Profitability: Other Ratios

• Return on Assets (ROA)

Return on Assets = Net profit before Interest & Tax (R) ÷ Total Assets (R) x 100

• Return on Equity (ROE)

Return on Equity = Net profit after Tax & Preference Dividends (R) ÷ Ordinary Shareholders Equity (R) x 100

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Efficiency: Inventory/stock turnover rate

• Must not have obsolete or slow-moving

inventory

• Costs money in form of floor space, interest,

insurance and labour

• Ratio provides an indication of the rate of

movement of inventory, i.e. how quickly inventory is sold once it has been produced or purchased

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• Low turnover rate – slow-moving inventory
• The higher the turnover rate, the better for the entity
• 2 Formulas:
• 1. Inventory turnover rate (no. of times per year)

Cost of sales ÷ Ave. inventory = No. of times per year (Opening inventory + Closing inventory) ÷ 2

Efficiency: Inventory/stock turnover rate

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• 2. Months/Weeks/Days of inventory on hand
• Ave. inventory ÷ COS x 12 = No. of Months
• Ave. inventory ÷ COS x 52 = No. of Weeks
• Ave. inventory ÷ COS x 365 = No. of Days

Efficiency: Inventory/stock turnover rate

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Efficiency: Debtors collection period

• 1. Debtors Turnover
• Measures how many times your debtors are covered by your

credit sales. Higher the times better the coverage Debtors Turnover = Credit Sales (R) ÷ Average Debtors (R)

• 2. Debtors collection period
• Time between product is sold on credit and when payment is

received from debtor NB for cash flow

• Indication of average period that an entity must wait to receive

payment for goods sold on credit

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Efficiency: Debtors collection period

• The shorter the period, the better
• Ave. Debtors ÷ Credit sales x 12 = No. of Months
• Ave. Debtors ÷ Credit sales x 52 = No. of Weeks
• Ave. Debtors ÷ Credit sales x 365 = No. of Days
• An acceptable period depends on type of entity

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Efficiency: Creditors

• 1. Creditors Turnover

Measures how many times your creditors are paid during the year. Higher the times indicates good cashflow in order to settle your creditors.

Creditors Turnover = Credit Purchases (R) ÷ Average creditors (R)

• 2. Creditors Payment Period
• Time between product is purchased on credit and when

payment is made

• Indicates average time that entity takes to pay its creditors

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Efficiency: Creditors payment period

The longer the payment period, the more better it is for the entity’s cash flow, but only if interest is not levied on late payments of outstanding amounts

• Ave. Creditors ÷ Credit purchases/COS x 12 = No. of Months
• Ave. Creditors ÷ Credit purchases/COS 52 = No. of Weeks
• Ave. Creditors ÷ Credit purchases/COS x 365 = No. of Days

An acceptable period depends on type of entity

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Comparable ratios

• By comparing current period and previous

period, the improvement or deterioration in ratios can be determined

• Possible for management to identify problems

and correct them timeously

• Therefore you are required to calculate ratios

for both periods and compare them and give advice on the results!!

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QUESTIONS