Financial Analysis of Organizational Management

Finance Systems

Relationship between a Financial System/ Function and Other Systems / Functions

The finance function represents the heart of every business. It is the ignition key for every business to thrive and prosper. In this case, it integrates all the other systems in the organization such, as the marketing function, information technology, and the management function as the major areas of business. An organization cannot run or achieve its objectives and the shareholder’s expectations without the finance department.

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The financial function is a process where all the activities of any particular organization are explained in monetary terms. This in turn assists the organization generate reports that are useful to the shareholders, investors, and other interested parties. Financing assists in many things such as the purchase of equipment, leasing, paying out salaries and wages, sales, and marketing, among others (Nair & Rodrigues. 2013).

Relationship between the finance function and the production function

The production department produces goods. It requires raw material, labor, and fixed overheads in the production process. To pay for all these costs, the production department needs money, which has to come from the finance function. The finance function scrutinizes the budget of the production department and disburses the funds needed to fulfill the roles of the production function.

The correlation also applies in sales, as the producers supply the products. Both the finance and the production function should cooperate so that the business can ultimately grow.

The relationship between the financial function and the marketing function

It is the marketing department that must sell the maximum goods that satisfy the customers’ wants and needs. The marketing function does product development, promotion, and distribution activities. They, therefore, need some money to fund all these activities. The marketing managers thus create a budget; the finance managers have to approve before availing funds. The money will come from the finance department.

The relationship between the finance function and the personnel function

The employees of any particular organization are managed by the personnel function. Both departments depend on each other to meet the goals of the company. It is a requirement in any particular organization that employees be paid. The objective of any organization is to reduce the misuse of funds by paying just the right amount of salaries to the exact people. The departments should, therefore, work together to eliminate any instances of ghost workers. The employees are usually the human resource capital of any company. They, therefore, need to be trained, given incentive schemes and retirement benefits’ so to increase their morale.

The human resource function, the marketing function, the IT function and the finance function all depend on each other to achieve the objectives of any organization. The IT function in this modern era plays a very important role in financial modeling.

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The finance function has a main duty which is to seek cheaper funds for any future investments. The investments should be able to generate a positive net present value, as a result, the organization will remain to be inexistent for the foreseeable future, and it will be able to meet all its debts and liabilities’.

Systems of Accounts and Financial Statements Used to Control a Financial System

Financial statements are also known as financial reports. They are formal records that show the financial activities and the financial position of an organization. They are normally structured in a manner that is very presentable and easy to read and interpret. They include:

The statement of financial position

It is also referred to as the balance sheet. It normally reports the assets, the liabilities, and the owners’ equity in a given financial year.

The statement of comprehensive income

The statement of comprehensive income is also referred to as the income statement, statement of revenue and expenses, or the profit and loss account. It reports the income, the expenses, and the profits of a particular organization in a given financial year.

Statement of changes in equity

It is also referred to as the equity statement or the statement of retained earnings. It normally reports all the changes in equity in a given financial year.

Statement of cash flows

It normally reports the cash flows of an organization, in particular, the operating, investing, and financing activities.

In larger organizations, in a given financial year, the financial statements’ may be very complex and may include the notes to the accounts and the discussion of the management and the financial analysis to compare the trends in the growth of the organization.

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The Information Contained in a Set of Accounts or the Financial Statements

I will use the financial statements from Al-Rajhi Bank of Saudi Arabia for the years ended 2014, 2015, and 2016 for exemplification. The bank was established in 1957 and has over 600 branches word wide. The Al-Rajhi Bank is known to be the leader of the Sharia Islamic law system and abides by it to the letter. It is because of this reason that the majority of the residents in Saudi prefer it. It was founded by four brothers, and about 75% of the shares are privately owned. In Quarter 3 of 2015, it recorded a 27.8% increase in profits. This is because the bank benefitted from lower operating expenses than they had projected.

Profitability ratios

The profitability ratios measure the performance of an organization. They normally focus on the company’s return on assets and equity

Return on Asset Ratio
NAME OF THE BANK 2016 2015 2014
Al-Rajhi Bank 2.48% 2.29% 2.33%

Al Rajhi Bank has had its ROA increasing steadily for the years 2014, 2015, and 2016 by 2.33%, 2.29%, and 2.8% respectively. This is an indication that the bank is continuing to earn an increasing profit on each SAR of investment. Al Rajhi bank could be well managed, and that is why there is an increased ROA.

Return on equity ratio
NAME OF THE BANK 2016 2015 2014
Al-Rajhi Bank 16.49% 16.11% 17.03%

Al Rajhi Bank had its highest return on equity in 2014 at 17.03%. This could have been a result of financing themselves with equity and debt capital, increasing their profit margins, increasing their asset turnover distributing their idle cash, and lowering their tax rates. By 2015, the return on equity decreased to 16.11%; this could have been a result of decreased tax rates, decreased asset turnover, decreased profit margins, and financing themselves with more equity as compared to debt capital. In 2016 however, its return on equity steadily increased to 16.49%.

Liquidity ratios

Liquidity ratio is a company’s ability to pay its short-term and current debts within less than one year.

Financial Leverage (Average)
NAME OF THE BANK 2016 2015 2014
Al-Rajhi Bank 6.54 6.77 7.34

Al Rajhi Bank recorded its highest financial leverage in 2014 at an average of 7.34. Its financial leverage dropped in 2015 to an average of 6.77. In 2016, the financial leverage dropped again to an average of 6.54. Al Rajhi Bank is keeping in mind the optimal capital structure and, makes sure that that they increase the value of the company.

Activity ratios

The Activity ratios are used to measure a company’s ability to convert different accounts of its balance sheet in to cash or sales.

Asset Turnover (Average)
NAME OF THE BANK 2016 2015 2014
Al-Rajhi Bank 0.04 0.04 0.04

Al Rajhi Bank has also had a constant asset turnover of 0.04 for the last three years of 2014, 2015, and 2016. This high asset turnover could be as a result that the bank is continually using assets and limiting the purchases of inventory.

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A Budget for an Area of Management Responsibility

A budget needs to be very realistic. As a manager, I need to understand my role in the budgetary system. Budgeting is both financial planning and a control tool. As part of the performance appraisal strategy, the organization should appraise the managers based on their ability to operate within the organization’s budget. Budgets are normally of two types, the capital expenditure budget, and the operating budget.

The capital expenditure budget is prepared for the costs that are associated with plant and equipment that lasts for more than one year such as a scanning machine.

The operating budget is prepared to assist in the normal day to day running of the business. The operating budget consists of the sales budget and the expense budget.

The Operating Expense budget for Quarter 1 of 2016 in the Human Resource Department

PAYROLL Payroll expenses 120,000
Employee Bonus 1,000
Employee overtime 1,500
FRINGE Fringe benefits 300
Refreshments 50
Employee appreciation 100
TRAVEL Meals 100
Hotel 250
Auto rental 150
Airplane Tickets 500
PROFESSIONAL SERVICES Recruiting fees 750
Professional Fees 200
Legal fees 75
GENERAL EXPENSES Employee training 400
Miscellaneous expenses 200
Project materials 200
Equipment rental 50
Postage and delivery 50
Software license fees 800
Outside services 100
Telephone 200
Cellphone 200
Utilities 300
Supplies 100
Total Operating expenses 127,475

Budgetary Control Systems Comparing the Actuals with the Planned expenditure

EXPENDITURE BUDGETED ACTUAL VARIANCE
PAYROLL Payroll Expenses 120,000 115,000 5,000
Employee Bonus 1,000 1,000 0
Employee overtime 1,500 5,000 (3,500)
FRINGE Fringe benefits 300 350 (50)
Refreshments 50 70 (20)
Employee appreciation 100 250 (150)
TRAVEL Meals 100 70 30
Hotel 250 200 50
Auto rental 150 125 25
Airplane Tickets 500 750 (250)
PROFESSIONAL SERVICES Recruiting fees 750 800 (50)
Professional Fees 200 100 100
Legal fees 75 0 75
GENERAL EXPENSES Employee training 400 500 (100)
Miscellaneous expenses 200 150 50
Project materials 200 250 (150)
Equipment rental 50 0 50
Postage and delivery 50 45 5
Software license fees 800 800 0
Outside services 100 50 50
Telephone 200 200 0
Cellphone 200 200 0
Utilities 300 300 0
Supplies 100 150 (50)
Total Operating expenses 127,475 126,360 1,115

Corrective Measures to be Taken in Response to Budgetary Variations

  • The overtime has gone above the stipulated budget by 3,500. This shows that you should start hiring and investigate what issue required that much overtime in the first quarter.
  • All the fringe benefits went above the budget. The fringe benefits went up by 50, the refreshments went up by 20, and the employee appreciation went up by 150. Investigations need to be carried out to determine why the employees are being appreciated with a lot of money and whether the organization attains its objectives as a result.
  • The airplane tickets had a variance of 250. Investigations should be made to determine whether the airline company hiked its prices and what caused the hike in prices and also, you need to determine if these trips are necessary and if the company can do without them.
  • The recruiting fees are over the budget by 50. You do not need as many legal fees as budgeted and so, you may need to adjust your budget for the next quarter.
  • The employee training costs are up by 100; the supplies are also up 50 by and the project materials 150. You will have to adjust the software licenses. Training of employees is necessary for an organization, and thus, training costs may have to be adjusted in the next quarter.

Conflicts That Can Occur with Management Control Systems and How These Could Be Resolved or Minimized

  • Conflicts between the different functions in an organization;

An organization normally has different functions working towards a common goal. A particular function may argue that their budget is better than the other functions and thus need a lot of funding to cater for the major variances, this may result in a conflict among the line managers. The line managers should, however, be advised that every functional unit in an organization is as important as the others and they must work together towards the common goal of the company.

  • The conflict between the budgeted outcomes and the actual outcomes;

Some line managers prepare unrealistic budgets that do not provide room for any changes in the economy. Changes usually occur every day, and the line managers must understand that and prepare budgets that are very flexible to accommodate any changes. The changes are really important in every budget to keep up with the competitors and the constant changes in the tastes and preferences of the customers.

  • The conflict between interdepartmental targets;

Many line managers may have budgets and targets that contradict each other, for instance, the sales department may want to increase their sales at a given margin by the end of the first quarter whereas, the production function may have a machine that has failed that cannot produce what the sales function expect. This results in a conflict. The line managers should understand that all the departments need to work together to achieve the common goals of the organization.

Sources of Finance

Define the Current and Potential Sources of Finance That Support Organizational Activities

Banks and financial institutions

Banks provide both long term and short term sources of finance. Banks lend organizations money in the form of loans or overdrafts. Loans may take repayment of up to three years while paying the bank a fixed sum of money plus any interest. However, before the banks and the financial institutions lend out a loan, they usually require security for the loan. Banks, on the other hand, provide short term finances in the forms of bank overdrafts, then bank overdrafts, however, may also have a limit and they are usually repaid as soon as possible.

The business’ retained profits

Every business usually keeps some money in their account that is recorded in the statement of changes in equity. The retained profits that an organization keeps are usually kept just in case an organization runs into debt. Dividends are also paid out from this retained profits. The retained profits may be plowed back into the company to serve as a source of finance.

The venture capitalists

These are external investors that usually want a higher return on their investments. They deal with companies that have a high growth ratio and that have a high rate of return on their investments. They aim to make very high profits.

The sale of the organizational assets

Organizations may sell some of the fixed assets such as land, machinery, or property to finance themselves.

Evaluate the Distribution of Finance in Support of Organizational Activities

The Human Resource Department

This department is responsible for hiring personnel and training them for their development. The employees, however, need to be paid and the finance function must do so,

The production department

This department produces goods that need to be sold by the marketing department. They, therefore, need to purchase the raw materials necessary to produce the output expected. The finance function must fund the procurement of these materials.

The marketing department

The marketing department needs to do a lot of advertising, research, and branding for the goods to be sold. All these require funds from the finance function. The funds received from the sales in the marketing function are recorded in the finance function.

The information technology department

In modern times, the IT department is the backbone of any organization. They are responsible for coming up with software for the other departments to use. It is the work of the finance department to fund all the outsourced IT services and software.

Evaluate the Monitoring and Control of Finance Employed in Support of Organizational Activities

Control techniques normally provide managers with the information that they need to measure performance. The information from the controls must be specifically for a specific management unit. Many corporations use financial reports to ensure that the information is consistent and accurate.

Budget controls

A budget is used for both planning and control. Budget development methods are Top-down budgeting; this is where the top managers prepare the budgets and hand it over to the bottom managers. Bottom-up budgeting, this is where the lower levels of management come up with the budget and send it to the top managers for approval. Zero-based budgeting, the line managers are responsible for coming up with a budget against the contribution of that particular department within the organization. Flexible budgeting, the budget is set in a way that can be altered to meet the needs of the changing economy.

Marketing controls

These include doing market research and gathering data regarding consumers changing needs and wants and their preferences. They include Test marketing- this is doing a test on a small group of people to assess the needs of a larger group of people. Marketing statistics involve data collection and analysis to gauge performance levels.

Human resource controls

They enable the management to enhance the performance of the workforce. The employees’ performance should meet the set standards. The controls here include performance appraisals, disciplinary measures, training, among others.

Computers and information controls

The control involves the use of electronic devices to gauge performance.

Reference

Nair, G. K., & Lewlyn, L. R. (2013). Dynamics of financial system: a system dynamics approach. International Journal of Economics and Financial Issues 3(1), 14-26.

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