Finance for Managers: Purpose, Techniques, and Importance of Financial Records

This document provides an overview of finance for managers, focusing on the purpose, techniques, and importance of financial records. It discusses the differences between management and financial accounting, the process of budgetary control, and different costing methods used for pricing policies. The document also includes a variance analysis for cost and revenue.

FINANCE FOR MANAGERS

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
1.1 The purpose and requirement of financial records................................................................1
1.2 Techniques for recording financial information....................................................................2
1.3 The legal and organisational requirements of financial records............................................3
1.4 The importance and usefulness of financial statements to stakeholders................................3
3.3 Differences in management and financial accounting...........................................................4
3.2. The process of budgetary control. ........................................................................................5
3.4 Different costing methods used for pricing policies.............................................................6
TASK 2............................................................................................................................................7
3.3 Determining the variances on cost and revenue....................................................................7
4.1 Demonstrate the main methods of project appraisal..............................................................8
4.2 Calculation of the projects.....................................................................................................9
4.3 Different sources of funding................................................................................................12
2.1 The components of working capital and how it is useful in working capital management.13
2.2 The components of working capital management...............................................................13
CONCLUSION..............................................................................................................................14
REFERENCES..............................................................................................................................15

INTRODUCTION
Financial accounting is a key element for financial management of any organization.
Financial control is very important to for all the financial activities in an organization. The
present report focuses on various aspects in Malta Ltd company which is important for a
financial manager. The report depicts purpose of keeping financial records and why it is
important. Different techniques of financial reporting are mentioned in report. The rules and
regulations required for financial recording is presented. Different costing methods of pricing is
described in the report. Calculation on variance is present in report which shows actual and
budgeted profit figures. The report presents the calculation on different techniques of project
appraisal for Board of Director to choose a suitable project for investment. by describing
methods of project appraisal.
TASK 1
1.1 The purpose and requirement of financial records
It is a document which records all financial transactions of an organization, individual or
business entity (Yin, Arbaiy and Din. 2017). Books of account records all the necessary
transactions which helps in financial statements such as balance sheet, trail balance, general
ledger etc.
The purpose of financial records is:
 Maintaining proper records of expenses, income would help in filing the taxes, and will
avoid any problem regarding financial accounting.
 It helps in establishing accurate and complete accounting and recording system. For preparing accurate financial statements which helps in ascertaining financial
performance at end of year.
The importance of keeping financial records are:
 Financial records help in monitoring the performance of a business. It improves in
decision-making for business,
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 Keeping good financial records are the key element in preparing financial statements for
company, like income statements, balance sheet of company (WHAT IS FINANCIAL
RECORD, 2018).
 Financial records assist in identifying the sources of different transactions. It is important
to keep different accounts for sources like income and expenditure.
 Recording of financial transactions will help to prepare the tax return files.
1.2 Techniques for recording financial information
Data of all financial activities in business are called financial information. It would help
in financial records and preparing financial statements of company.
Techniques for recording financial information are:
Reconciliation: It is a process of comparing financial information that is being recorded
in two systems or accounts (Schinckus ,2018). It is important to analyse and compare both the
entries of transactions and make correction if required to make information accurate to use.
Verification: It is a process of examining information contained in report or system to
ensure that the information is accurate and complete. Every information should be verified
before recording in financial books.
Journals: It refers to record the accounting transaction of the organization with the
particular date. It helps the company to record all the transaction systematically and with
accuracy for the further use by Ledger.
Ledger: It helps to record the economic transaction in term of money with debit and credit
side. It is used to record the book keeping entries for the further calculation of balance sheet and
profit and loss account.
Double entry system: It refers that for every transaction amount will be recorded in two
accounts to maintain the accuracy of the data. It helps to match the debit side of the transactions
to its credit side. Companies normally use the double entry system to minimize the errors and
fraudulent activities.
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1.3 The legal and organisational requirements of financial records
The laws and regulations are very important for recording of financial information.
They are the basic requirements for recording financial information, as every external or internal
user of financial statements wants it to be accurate, relevant and fairly presented (Collier, 2015).
The major authorities involved in formatting regulations are:
IASB: International Accounting Standard Board is the conceptual framework for
recording of financial reporting. The general purpose of financial recording is to help in making
financial statements. Laws are required so that financial statements would be accurate and can be
useful to the external users of financial statements.
FRS: Financial Reporting Council is regulation board which frameworks guidelines for
monitoring and execution of different financial disclosures associated with financial recording
system. It is issued by IFRS to provide a common global language for business affairs so that the
financial statements of company can be used by different companies across the world.
GAAP: General Accepted Accounting Principles established the laws and regulations
about how company should manage its books of accounting. Company should make accounting
records according to applicable company law (Page., 2014). New UK GAAP aim to make the
preparation of financial statement to be easier and cheaper.
1.4 The importance and usefulness of financial statements to stakeholders
Financial statements are prepared for the external users so that they can understand and
compare financial position of a company, which will help them to make decisions about their
investment (Flower,2016). The usefulness of financial statements to different users are as
follows:
Owners and investors: The stakeholders of company need to know financial information
of with in a specific time period. This information will help them to make decisions regarding
whether to invest in company or not. Owners of small business will access financial statements
to know success and profitability of business.
Management: Financial information is useful to management of the organization for
accessing planning, controlling and decision-making process (Chen and et.al., 2018). The
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necessary steps can be taken to improve financial performance of the company by evaluating the
information within a specific time period.
Lenders: Banks and other financial institutions will need these statements to ascertain
repayment capability of company.
Government: The government bodies and tax authorities will use company financial
statements for taxation and regulatory purpose.
Customer: The company's ability to continue its existence can be found from its
financial position in management and financial accounting. The statements will help the
customers to evaluate the solvency position of the company.
3.3 Differences in management and financial accounting
Basis of difference Management Accounting Financial Accounting
Meaning Management accounting provides
information to managers to make
decisions, policies and plan for running
business effectively.
Financial accounting focuses on
the preparation of financial
statements to provide financial
information to internal and
external users.
Objective It helps in decision-making and
planning process to the management.
It provides information to
outsiders.
Format There is no standardized format given
by regulatory bodies (Gitman, Juchau
and Flanagan, 2015).
There is a standardized format
for the accounting of every
transaction.
Information Management accounting provides both
monetary and non-monetary
information..
It provides monetary and non-
monetary information to
management
Decision making It includes past information as well as
the predictive information for making
decisions.
In decision-making process
both current and previous
financial statements are taken
into consideration.
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User It is used by internal management only It is used by both management
and external users like
stakeholders, investors etc.
3.2. The process of budgetary control.
The process of controlling and monitoring budget in given accounting period is
Budgetary-control (Schaltegger and Burritt, 2017). it controls the actual and budgeted income
and expenditure; it monitors whether a company is operating according to planned budget or
there is a need for any changes is required.
The budgetary-control process includes the following steps:
Establish a plan: At first the budget will be created which will coordinate with all
business activities. The planning for income and spending on department will be done. A set of
goals should be prepared that management wants to achieve.
Record the actual performance and comparison: After budget is created, next step is to
monitoring and analysing and interpreting actual performance of a company with budgeted goals
(Maelah and Yadzid, 2018). The management will use budget report for comparison.
Standard report: After knowing comparing value, next step is to set a standard report for
budgetary control process. This report will allow the managers to focus on favourable and
unfavourable variance (What is Budgetary Control, 2018).
Taking actions: These steps occurs at the end of accounting year; management takes
steps against the actual performance of year and budgeted goals. A proper action will be planned
by management, and it will execute in the next accounting year.
3.4 Different costing methods used for pricing policies
Cost method which are used in pricing policies are as follows:
 Absorption costing: It refers to the cost associated with the production of particular
product and services. It helps the organization in inventory valuation to present accurate
amount in balance sheet. It includes all the fixed and variable cost while calculating the
actual cost of the product.
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 Marginal cost : It refers to the cost related to one additional unit of production. In this
fixed cost of the production is considered as cost of period while variable cost considered
as product cost.
 Cost based pricing: In this method a certain percentage of desired profit margin which
will be added to final price of a product. The profit margin will be decided according to
cost of production.
 Demand based pricing: In this method price of the product is determined on demand of
the product (Hanna and Dodge, 2017). If a demand of product is more, organization will
set the high price to gain profit and vice versa.
TASK 2
3.3 Determining the variances on cost and revenue
Actual cost:
Actual labour cost:
= 24420/1075*1100
= 24987
Actual Material cost:
= 23260/ 1175*1100
= 21775
Budgeted Cost:
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Variance analysis (as per 1100 units)
Sales Variance
Sales price Variance = (budgeted selling price – actual selling price)*actual quantity sold
=(62-63.55)*1100 = -1705
Sales Volume Variance = (budgeted sales – actual sales) x budgeted selling price
= (1, 000 units – 1, 100 units) x € 62 = €6.200
Total Sales Variance = (Budgeted Sales – Actual Sales)
= 62000 – 69900 = €7, 900
Labour Variance
Labour Rate Variance = (budgeted rate – actual rate )*actual hours
=(22 – 22.72) * 1075 = €774
Labour efficiency variance = (Budgeted hours – actual hours) *budgeted rate
= ( 977 – 1075) * 22 = € 2156
Total labour variance = (budgeted rate*Budgeted hours ) - (actual rate * actual hours)
=(21494 – 24424) = € 2930
Material Variances
Material price variance = (Budgeted price – Actual price) * Actual Quantity
= (20 – 21.15) * 1100 = € 1265
Material usage variance = (Budgeted Quantity – Actual Quantity) * Budgeted price
= (1000 – 1100) * 20 = € 2000
Total material variance = (Budgeted price * Budgeted Quantity ) - ( Actual price * Actual
Quantity)
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= (20000 – 23265) = € 3265
Fixed Overhead Variance
Fixed overhead expenditure variance = (Budgeted Cost – Actual Cost)
= (6000 – 6400) = € 400
Fixed overhead capacity variance = Budgeted production hours – Actual production hours)*
FOAR
= ( 977 – 1075)* 5.82 = € 570
Total Fixed overhead variance = (1000*6)- (1100*5.82)
= (6000 – 6402) = € 402
Interpretation: By considering the outcomes on which budgeted and actual results has
variations. The estimated sales were 62000 on which actual sales had been made as 69900 that
there is 12.74% of variance differences. By doing assessment, positive variances have been
found in sales and profitability aspect. It shows that business unit has charged suitable prices for
the products or services offered. However, adverse variance has identified in material cost
variance due to higher usage. As per the standards, 1kg material needs to be used for per unit.
However, according to the actual results, 1.6 kg materials used which may occur due to the
wastage of material. Hence, business unit should lay focus on training & development session for
personnel which in turn helps in exerting control over material related expenses. In addition to
this, as per the outcome of variance analysis labour cost per hour is 22.2 which in turn higher
over standards. Thus, firm needs to focus on enhancing proficiency level of personnel through
conducting effectual training session.
Variance analysis (as per 1100 units)
Particulars
Budgeted
figures
(in €)
Actual
figures
(in €)
Variances
(in €)
Sales 68200 69900 1700 F
Direct
labour 24200 24420 220 A
Direct
materials 22000 23260 1260 A
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Fixed
overhead 6000 6400 400 A
Profit 15400 15820 420 F
4.1 Demonstrate the main methods of project appraisal
The main method of project appraisal are Net present value, internal rate of return, average
rate of return, payback period and average rate of return which help the company to interpret the
different project. The methods are:
 Payback period: It refers to the time period which are required by the organization to
recover the initial investment in the project. It can be calculated by dividing the
investment cost with the annual cash flow. It is simple to calculate and interpret the data
but the drawback is it does not include the present value and life of the project or assets.
The payback period of project 1 is 2 years and 2 months and of project 2 is 2 year and 1
month.
 Net present value: It is used in capital budgeting and investment planning to evaluate the
profitability of the project. Positive NPV indicate that project is beneficial for the
organization. It helps the organization to compare the profitability of two project. But it is
based on certain assumptions i.e. firm's cost of capital. NPV of Project 1 is 22089 and
project 2 is 20586.
 Internal rate of return: It is used by company to evaluate the profitability and
attractiveness of the project. The advantage of IRR is that it consider the timed value of
money and easy to understand and interpret the data. But it also has some disadvantages
that it ignore the future cost and size of the project. Internal Rate of return is 17% of
project 1 and 20% of project 2.
 Average rate of return: It is used to calculate the profitability of the firm by comparing
two and more investment opportunities. The percentage of ARR indicates the earning of
the project. It is easy to understand and calculate but it ignores the time value of money
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which does not provide accurate data and information. ARR is 41% of project 1 and
42.5% of project 2
4.2 Calculation of the projects
Computation of cash inflow
Year
Project 1
(CIF)
Cumulative
CF
Project 2
(CIF)
Cumulative
CF
1 120000 120000 72000 72000
2 64000 184000 40000 112000
3 80000 278000 56000 168000
Payback period:
Project 1: Payback period = Cumulative cash flow / initial investment
= 2 + (16000 / 80000)
= 2.2 Years or 2 years and 2 months
Project 2: Payback period = Cumulative Cash flow / Initial Investment
= 2 + 8000 / 56000
= 2.1 years or 2 years and 1 month
Interpretation: As per the above mentioned evaluation, in the case of project 2, business unit
will recover its initial investment 1 month earlier over others. Hence, as per the payback period
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identified firm should choose project 2. Moreover, in this, business unit will start to attain profit
after the period of 2 years and 1 month.
Net present value:
Interpretation: according to the above table it can be concluded that both the project A
and project B gives the positive NPV. However, in comparison to project b, NPV of other one is
higher. In other words, it can be stated that NPV of project A is higher over B. considering all
such aspects business unit is advised to invest money in project A which in turn offers higher
benefits after specific time frame.
Internal rate of return
Year Project 1: cash flows Project 2: net cash flows
-200000 -120000
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1 120000 72000
2 64000 40000
3 80000 56000
IRR 17% 20%
Interpretation: By applying investment appraisal tool it has found that IRR of project 1
and 2 accounts for 17% & 20% respectively. As per the selection criteria project with high IRR
should be considered by the firm. Accordingly, business unit should give preference to project 2.
Average rate of return
Year Project 1: cash flows Project 2: net cash flows
1 120000 72000
2 64000 40000
3 80000 56000
Average EAT 88000 56000
Average investment 107000 66000
82% 85%
Interpretation: The above depicted table shows that ARR of project 2 is comparatively higher
over 1. Moreover, ARR of project 1 and 2 implies for 82% and 85% significantly. Referring this,
it can be entailed that firm should choose project 2 as compared to other alternatives available.
Interpretation:
As per the above method it can be interpreted that Project B is more suitable for
investment because it gives positive NPV with low investment. In compare to the ARR, IRR and
payback period Project A is more suitable because it gives higher return but the investment is
also high and also these methods did not consider the time value of money. So on the basis of
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NPV and initial investment it can be recommended to the company that they have to select
project B rather than project A for investment.
4.3 Different sources of funding
Short term financing: the fund raises for a business for a time period less than a year is
known as short term financing (Bendell, 2017). Short term financing is to meet the day to day
expenses of a business like paying wages, increasing inventories etc. the sources for short term
financing includes, advances for customer, credit on instalment, using bank overdraft,
discounting bill etc.
Medium term financing: The finance required for investment for one to five years are
medium term financing. It is generally required for the repair and modernization of machinery,
renovation of building, carrying advertisement campaign etc. The medium-term finance can be
raised by borrowing funds from commercial banks, issuing debentures, taking loans from
specialized credit institution.
Long term financing: Finance required for a period exceeding to 5 years are long termed
financing. Long term financing can be required for purchase of a fixed asset, new machinery, or
in expansion of the business. Fund for long term can be raised by issuing equity shares in market,
by debentures, using the reserved profit of business, taking loans from industrial and financial
institution etc.
2.1 The components of working capital and how it is useful in working capital management
Working capital plays a pivotal role in financial management as it keeps the business
operations to work smoothly. Working capital includes in short term financial decisions which
measures the company's efficiency of capital. It is company's surplus of current asset over
current liability. Working capital management is a process or techniques of controlling the
current asset and liabilities of a company which helps in minimize the total cost of production.
2.2 The components of working capital management
Current Assets: The assets which can be easily convertible into cash within a period of a
year is current assets (Singh, Kumar and Colombage, 2017). Current assets resources are cash
and bank balances, short term investment advances from customers, prepaid expenses etc. which
helps to meet day to day requirement.
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Current liability: The claims from outsiders like investors, suppliers etc. which are
required to give within a period of a year is called current liability. Current liability includes
creditors for goods purchased, outstanding expenses, short term borrowings, taxes and dividend
payable etc.
Inventories: Raw materials, work in progress, and finished goods are inventories of the
organization. Having large inventories would result in blocking the capital which could be put to
productive use somewhere else. Similarly, the shortage of inventory could result in loss of sales
or customer’s goodwill.
Accounts payable management: Payable or creditors are one of the most important
components of working capital. Payable management leads to steady sully of material to a firm,
while trade creditors will cost as a result of loss of cash discount or cash purchase.
Ways to manage working capital in the organization
Working capital of the organization refers to the difference between the current assets
and current liability. Every organization require managing thie working capital to pay the
supplier on time, purchase the material etc. It can be managed by different ways such as:
 They have to manage the inventory level in the organization by budgetary-control
method. It helps them to record the inventory level and control them to reduce the
maintenance cost.
 Working capital can be managed by minimizing the delay in account receivable. They
regulate the time period of collection of debt from the debtor to increase the cash level.
 It can be managed by controlling the account payables and pay the bills on time.
CONCLUSION
By summing up the above report, its being concluded that recoding financial information
correctly and systematically is very important for preparing financial statements. The report
reflected legal and regulatory requirements for financial recording and reporting. The report
depicts the usefulness of financial statements to internal and external users. Different budgetary
control methods are mentioned in the report. Calculation of variance for accessing the budgeted
and actual profit figure is depicted in report. The report includes calculation for project appraisal
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for 2 projects in which NPV, IRR and payback method is concluded in the report. The present
report gives highlight on the working capital and components of working capital.
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REFERENCES
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Chen, C. W. and et.al., 2018. Financial statement comparability and the efficiency of acquisition
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Collier, P. M., 2015. Accounting for managers: Interpreting accounting information for decision
making. John Wiley & Sons.
Flower, J., 2016. European financial reporting: adapting to a changing world. Springer.
Gitman, L.J., Juchau, R. and Flanagan, J., 2015. Principles of managerial finance. Pearson
Higher Education AU.
Hanna, N. and Dodge, H. R., 2017. Pricing: policies and procedures. Macmillan International
Higher Education.
Lutz, F., 2017. The theory of interest. Routledge.
Maelah, R. and Yadzid, N. H. N., 2018. Budgetary control, corporate culture and performance of
small and medium enterprises (SMEs) in Malaysia. International Journal of
Globalisation and Small Business. 10(1), pp.77-99.
Page, M., 2014. Business models as a basis for regulation of financial reporting. Journal of
Management & Governance. 18(3), pp.683-695.
Schaltegger, S. and Burritt, R., 2017. Contemporary environmental accounting: issues, concepts
and practice. Routledge.
Schinckus, C., 2018. An essay on financial information in the era of computerization. Journal of
Information Technology. 33(1), pp.9-18.
Singh, H. P., Kumar, S. and Colombage, S., 2017. Working capital management and firm
profitability: a meta-analysis. Qualitative Research in Financial Markets. 9(1), pp.34-47.
Yin, Y. X., Arbaiy, N. and Din, J., 2017. Financial Records Management System for Micro
Enterprise. JOIV: International Journal on Informatics Visualization. 1(4-2), pp.209-213.
Online
WHAT IS FINANCIAL RECORD. 2018. [Online]. Available through:
<http://www.allfinanceterms.com/financial-record/>.
What is Budgetary Control?. 2018. [Online]. Available through:
<https://www.myaccountingcourse.com/accounting-dictionary/budgetary-control>.
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