Importance of finance in a business organisation

1.0 Abstract
Importance of finance in a business organisation is a report paper for the board of directors in an organisation. This paper delivers the importance of accounting and financial control in the business firm. As well as explaining management and financial accounting, different costing methods used for pricing purposes, budget preparation and efficient working capital management.

2.0 Introduction
Finance is a science that describes the management, creation and stud of mone , banking, credit, investments, assets and liabilities. Finance consists of financial s stems, which include the private, public and spaces, and the stud of finance and financial instruments, which can relate to countless assets and liabilities. !ome prefer to devise finance into three distinct categories" public finance, corporate finance and personal finance. All three of which could contain man sub categories. #www.investopedia.com$. The definition its self provides the importance and significant of finance in the organisation. %one of the business firmsrun without the financial aspects, because finance is needed for all t pes of business in the form of capital, assets, liabilities, investments etc. Finance is categorised under different headings,consider to persons authorit to access financial records. In a business organisation all of the activities are linked with financial concept, therefore keeping accurate accounting s stem is ver essential for the success of business. This will avoid lot of financial wastages in the organisation, as the result compan can earn more profit from their business operations. &ere the financial consultant gives advices to a rapid growing '( ltd. compan s board of directors for reali)ing importance of accounting and financial control in the business.

3.0 Task 1
3.1 Necessities for keeping financial records: Finance is one of the main important factors in each and ever organisation, which reali)e an organisation in to all the aspects. For example b financial records organisation can understands* where the are in profit making, what is their working capital level, how much is there budget per each pro+ect etc. !uch t pes of accurate information will help management to take appropriate decisions in the business.

, keeping financial records a compan can reduce their unwanted expenses, because the report will definitel shows the compan s unhealth capital management. Therefore financial records help an organisation for making effective capital management in their operations. As well as financial report will shows each products profit making level, consider to those data management team can make efficient further plan for their activities. &owever each and ever aspects financial record takes an essential role in an organisation, which helps board of directors in the business for controlling all activities in the firm. 3.2 Recording techniques and financial reporting require ents: -ifferent t pes of financial statements provide financial information in to the organisation, in the form of income statement, statement of retained earnings and balance sheet. In earlier da s these all financial records are keeping with the help of manual effort. ,ut now a da the impact of technolog makes the work efficientl with in no time. Therefore b using technolog compan can produce accurate financial reports in the organisation. An efficient accountant will helps an organisation for this purpose. The financial report is e.uall needed for both legal and organisational aspects. All t pes of organisations are restricted b a predetermined profit making level. If an of the breach that level, the will transfer in to respective t pe of business on the basis of their turnover* which means if a private limited compan makes huge amount of profit without considering their maximum profit making level, then the government should convert that private limited compan in to public limited compan . Therefore government want each compan s financial reports not onl for one purpose but also for man other decisions making purposes, including taxation rate, emplo ee salar decisions, calculating economic growth etc. 3.3 !sefulness of financial state ents to stakeholders: /ach stakeholder can use ever organisations financial statements effectivel with respect to their needs and wants. 0wners, emplo ees, government, customers, suppliers etc. are some of the ma+or stakeholders in each business. 0wner can use the financial statements for efficient decision making in the business unit, for instance in the case of profitabilit and debt management decisions. As well as each level of emplo ees can anal se the financial statements and can adopt new efficient wa s for performing well in the organisation. , the wa weak department can avoid their mistakes and the can also tr to make more output in the business. The government also use compan s financial statements for legal purpose. 1oreover the customers can choose product or services considering to the compan s financial statements. As well as suppliers use different companies financial statements for identif ing high rate of return. And also shareholders depends compan s financial statements for taking shares. , the wa each stakeholders use compan s financial statements differentl .

3." #anage ent and financial accounting: 1anagement and financial accountings are two different branches of accounting. 2onsider to management, financial accounting is a wide concept. In this case the '( limited compan can produce both management and financial accounting in their organisation. 2onsider to financial accounting, keeping management accounting is an optional thing. ,ut financial accounting is compulsor for all growing compan in the form of profit and loss account and balance sheet. ,ecause financial accounts provide each companies financial position to all their stakeholders, therefore such accounts can use both internal and external users. ,ut management account is onl for internal users, which have no uni.ue format for keeping records. The main concept for preparing management accounting is to decision making purpose. !uch accounts focuses on each part of the business, therefore superior gets appropriate data from each departments, thus will helps management to make efficient strategic plan in the organisation. , the wa the can control and coordinate all their activities in the business successfull . 3.$ %udgetar& control process: The main purpose of budget in a business firm is the look forward to the future activities of the organisation with respect to their long term goal including operating and financial aspects. If an organisation have appropriate budget for their future activities, then each of the department can work effectivel for attaining organisational goal. The reason is that, the /mplo ees have clear cut idea about each and ever activit . As well as the can evaluate, coordinate and manage their performance successfull . The first and foremost advantage for making budget is an organisation can perform well with in minimum expenses b maximum use of resources. Therefore making budget helps an organisation for controlling their operations effectivel .

Figure3" 2ontrol process

Planning

Reviewing

Reporting

Executing

/ach of the budgetar control stages accessing management to different duties"4 5lanning At the planning stage management planning each and ever activit in the business. &ere the management takes decisions consider to business long term and short term goals. 1anagement assign particular duties to each emplo ee in the firm. 1anagement efficientl distributes resources in the business. The fix performance me6asures for measuring emplo ees performance in their duties.

/xecuting &ere management executes their plan in to action The communicate all level of emplo ees in the organisation especiall middle level and lower level emplo ees. 7ith the help of performance measurement s stem, management measure each and ever emplo ees performance.

8eporting

In the budgetar control process, management takes report from all the control process levels. &ere the management tr to takes efficient feedback from their all activities incorporated in the business.

8eviewing After taking feedback management reviewing each activit consider to their pre4determined plan or budget. If the find an negative variations in their operations, the will take immediate decisions for that.

9ike this budget controls all activities in the business, including operating and financial activities. 3.' (osting ethods used for pricing purposes:

2ost can be classified under different headings on the basis of time period, nature, elements, relationships, normalit etc. 6.:.3 0n the basis of time period &istorical cost 2urrent cost 5redetermined cost

6.:.; 0n the basis of nature <ariable cost Fixed cost !emi variable cost

6.:.6 0n the basis of elements 1aterial costs 9abour cost /xpenses cost

6.:.= 0n the basis of relationships -irect cost Indirect cost

6.:.> 0n the basis of normalit %ormal cost Abnormal cost

9ike these costs can be classified under different headings for pricing purpose. ,ut the vital and essential concept for classification of cost is on the basis of relationship, which means direct cost and indirect cost. -irect cost contains both direct material

cost and direct labour cost. &owever indirect cost contains all other indirect overheads. Therefore an organisation can easil determine their products price. ,ecause the products price determination is"4

Figure ;" -etermining product price

Product Product price price

Direct Direct Material Material cost cost

Direct Direct Labour Labour cost cost

Overhead Overhead ss

!electing costing method is ver critical for business success. If the product cost is doesnt meet the all expenses of the business, then the businesses will goes down in the market. The cant make profit from their operations. Therefore before fixing product price business should give focuses on all their product expenses.

".0 Task 2
2alculating and recogni)ing variations of business operations b anal sing budgeted and actual profit figures. Table3" 8econcile the actual and budgeted profit figures )l.no *articulars 1. 2. 3. ". $. -irect 9abour -irect 1aterials Fixed 0verheads !tandard 5rofit !ales 8evenue +i,ed budget ;;??? ;???? :??? 3=??? :;??? +le,ible budget ;=;?? ;;??? ::?? 3>=?? :@;?? Actual figure ;==;? ;6;:? :=?? 3>@;? :AA?? -ariance ;;? 3;:? ;?? =;? 3B??

3. -irect labour increases from ;=;?? to ;==??. Therefore there is adverse variance of ;;?. ,ecause there where expenses increases then flexible budget.

;. -irect material increases from ;;??? to ;6;:?. Therefore there is adverse variance of 3;:?. ,ecause in actuals direct material increases than flexible budget so there is a situation of excess expense in the business. 6. Fixed overheads decreases from ::?? to :=??. Therefore there is favourable variance of ;??. ,ecause consider to flexible budget the compan s expense reduce. =. !tandard profit of the business increases from 3>=?? to 3>@;?. There for there is favourable variances of =;?. ,ecause the compan s income increases rather than flexible budget. >. !ales revenue increases from :@;?? to :AA??. Therefore there is favourable variance of 3B??. ,ecause the compan s revenue increases rather than flexible budget. , anal sing these all variables we can conclude that, some of the changes are adverse and others are favourable to the compan . 7e can classif the adverse and favourable variances of the compan on the basis of expense, income and revenue. If"4 /xpense increases /xpense decreases adverse to the compan favourable to the compan

Income increases Income decreases

favourable to the compan adverse to the compan

8evenue increases 8evenue decreases

favourable to the compan adverse to the compan

9ike this each variations affects compan s operations negativel and positivel .

$.0 Task 3
Taking accurate investment plan is vital for ever organisation. ,ecause investment plans take huge role in the future business activities of the organisation. ,ad investment decisions should lead a compan in to poor financial performance, as well as that limits the future growth of the business. In short efficient investments plans should protects a compan from sudden financial threats. %ow a da s organisations are using investment appraisal methods for selecting appropriate investment plans for their operations. Therefore b using investment

appraisal methods this compan business.

can select an

of the suitable plans for their

Figure ;" Investment appraisal methods

Investment appraisal methods

Accountin g rate of return

Internal rate of return

Pa bac! period

"et present value

Accounting rate of return CA88D Accounting rate of return is a method for calculating average return of mone over the pro+ect time period. Therefore in the A88, anal sing average annual operating profit and average investment to earn that profit b consider the particular pro+ect plan. &ighest accounting rate of return pro+ect plan is acceptable for an organisations success. 0rganisation can use this e.uation for calculating accounting rate of return. Accounting rate of return E average annual operating profit F average investment to earn that profitG3?? Table 3" Accounting rate of return 5roposal 3 5roposal ;

Average annual operating profit E Average investment to earn that profit E A88 E

Average annual operating profit E Average investment to earn that profit E A88 E

5a back period C5,5D 5,5 is the one of the method for capital budgeting, it is eas to use and understand. This method is usuall prefer for small business, larger business ma use this method at their beginning stage, after that the choose complicated method with respect to their business operations. For the best performance of the business, organi)ation should adopt the plan shorted to be selected. The number of ears to recover initial cost is the main principle of 5a ,ack 5eriod, because the shorted plan is the great for the business. 0rgani)ation can use thise.uation for calculating pa back period. 5a back period E aH #b4c$Fd &ere"4 a E ear recovering the initial investment b E amount at which next after the ear IaJ c E corresponding amount at ear IaJ d E amount at which before the ear IaJ Table 6" 5a back period 5roposal 3 aE bE cE dE 5roposal ; aE bE cE dE

%et present value C%5<D %et present value method gives more importance to the present value of investment. Therefore this method considered both cash flow and timing for the mone . If a business organi)ation takes %et 5resent <alue 1ethod for evaluating capital budget, then the organi)ation can choose the proposal which gives more positive value in future. 0rganisation can use this e.uation for calculating net present value. %et present value E cf3F #3Hk$ 3 H cf;F #3Hk$ ; H KK. H cfnF #3Hk$ n L Ico

&ere"4 2f3 E cash flow of ear 3 ( E discount rate Ico E initial cash flow

Table =" %et present value 5roposal 3 5roposal ;

Internal rate of return CI88D Internal rate of return is the discount rate that set net present value at )ero. It calculated b discounting the net cash flows using different discount rates still it gives net present value as )ero. The pattern of cash flow pla s an important role in pro+ect evaluation b using internal rate of return method method. The main criterion b using internal rate of return method is if the internal rate of return is greater than the cost of capital, accept the pro+ect* on the other hand if the internal rate of return is less than the cost of capital, then re+ect the pro+ect. 0rganisation can use this e.uation for calculating internal rate of return of the pro+ect. I20 E cf3F #3HI88$ 3 H cf;F #3HI88$ ; H KK. H cfnF #3HI88$ n &ere"4 I20 E initial cash flow I88 E internal rate of return 2f3 E cash flow ear 3 Table >" Internal rate of return

5roposal 3

5roposal ;

'.0 (onclusion ..0 %ibliograph&

http"FFwww.investopedia.comFtermsFfFfinance.asp 2osting, Terr 9uke , seventh edition, ;??A.