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Financial controls provide the basis for sound management and allow managers
               to  establish  guidelines  and  policies  that  enable  the  business  to  succeed  and
               grow. Budgeting,  for  instance,  generally  refers  to  a  simple  listing  of  all  planned
               expenses and revenues. On the basis of this listing, and a starting balance sheet, you

               can  project  a  future  one.  The  overall  budget  you  create  is  a  monthly  or  quarterly
               projection of what the balance sheet and income statement will look like but again
               based on your list of planned expenses and revenues.
                      While you do not need to be an accountant to understand this section, good
               managers have a good grasp of accounting fundamentals. You might want to open a
               window to AccountingCoach.com or a similar site as you work through this section
               to begin to build your accounting knowledge tool kit.
                                                                            [1]
                      The Nature of Financial Controls
                      Imagine  that  you  are  on  the  board  of  Success-R-Us,  an  organization  whose
               financial  controls  are  managed  in  an  excellent  manner.  Each  year,  after  the
               organization  has  outlined  strategies  to  reach  its  goals  and  objectives,  funds  are
               budgeted for the necessary resources and labor. As money is spent, statements are
               updated  to  reflect  how  much  was  spent,  how  it  was  spent,  and  what  it  obtained.
               Managers, who report to the board, use these financial statements, such as an income
               statement or balance sheet, to monitor the progress of programs and plans. Financial
               statements provide management with information to monitor financial resources and
               activities. The income statement shows the results of the organization’s operations,
               such  as  revenues,  expenses,  and  profit  or  loss.  The  balance  sheet  shows  what  the
               organization is worth (assets) at a single point in time, and the extent to which those
               assets were financed through debt (liabilities) or owner’s investment (equity).
                      Success-R-Us conducts financial audits, or formal investigations, to ensure that
               financial management practices follow generally accepted procedures, policies, laws,
               and  ethical  guidelines.  In  Success-R-Us,  audits  are  conducted  both  internally—by
               members  of  the  company’s  accounting  department—and  externally  by  Green
               Eyeshade Inc., an accounting firm hired for this purpose.
                      Financial ratio analysis examines the relationship between specific figures on
               the  financial  statements  and  helps  explain  the  significance  of  those  figures:  By
               analyzing financial reports, the managers at Success-R-Us are able to determine how
               well the business is doing and what may need to be done to improve its financial
               viability.
                      While  actual  financial  performance  is  always  historical,  Success-R-Us’s
               proactive managers plan ahead for the problems the business is likely to encounter
               and the opportunities that may arise. To do this, they use pro forma financials, which
               are  projections;  usually  these  are  projected  for  three  fiscal  years.  Being  proactive
               requires reading and analyzing the financial statements on a regular basis. Monthly,
               and sometimes daily or weekly, financial analysis is preferred. (In the business world
               as a whole, quarterly is more common, and some organizations do this only once a
               year, which is not often enough.) The proactive manager has financial data available
               based  on  actual  results  and  compares  them  to  the  budget.  This  process  points  out
               weaknesses  in  the  business  before  they  reach  crisis  proportion  and  allows  the




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