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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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