Planning and Implementing Financial Management Approaches - Vital Essence - Essay Example

?Assessment A Planning and Implementing Financial Management Approaches Task Organization: Vital Essence (proxy , a small-medium enterprise (SME) The business organization upon which the discussion will focus is referred to here as Vital Essence; its actual name is being withheld upon the owner’s request, as well as the actual figures. It is a small business operation which deals in the retail of natural health products, herbal medications, and aromatic salves and oils. The business has its own line of herbal supplements, but majority of its sales – about 80 per cent – is generated from the sale of products supplied by other small businesses. The company is a family business, and has enjoyed brisk sales for the past three years. Team: Store management. Briefly described, the team is in charge of the conduct of day-to-day operations of the store. Team members ensure the shelves are well-stocked, put out the order for deliveries when inventory runs low, adjust prices according to promotional campaigns, and attend to the general maintenance of store equipment and facilities. Type of team budgets: Monthly cash budgets One of the financial plans the team is guided by is the monthly cash budget, a short-term planning and monitoring tool which aids in the planning of cash flows, predicting short-term shortfalls, and monitoring the collection of accounts receivables. Forecasted cash shortfalls enable store management to make the decision as to whether it could draw down on its credit facility with the bank, to cover short-term cash needs when cash at hand is unable to meet the cash needed to cover the month’s obligations. Task 2: A sample of the monthly cash budget used by the store management team at Vital Essence is shown at the end of this report. The purpose of the cash budget is to guide the store manager’s decision as to enhancing store cash sales as well as credit sales, collecting accounts receivables, and disbursing cash in payment of expenses; it is the aim of management to ensure that sufficient cash is available to settle the month’s obligations, thereby avoiding penalties and surcharges associated with past-due accounts. The prompt settlement of fees is also important to maintain the company’s good credit standing among its suppliers and financiers. Achievability – The cash budget shown is considered achievable, because while shortfalls are expected at the beginning of the year, this is seen to be diminishing within the first quarter, and the store is able to attain positive cashflow in the fourth month of the year. Short-term cash inadequacy can be supplemented by a short-term bank loan which may be resolved by the second quarter of the year. Accuracy – The cash budget plan is not entirely accurate, since it is essentially a forecast and much of the bases for arriving at the amounts are speculative. There are also events during the year which may affect the sales, cash flow, and disbursements in ways which cannot be foreseen at the time the budget was being prepared. It is reasonably accurate, however, for the purpose of observing how any variations in cash flow may affect the activities of the store, and may inform concerning contingency measures that may be taken; therefore, it is also a risk-management tool. Comprehensiveness – The cash budget is not very comprehensive, because there are items which it may have failed to take into consideration because the likelihood of their occurrence in indeterminate. What are usually included in a forward-looking budget are those which are recurrent and have occurred regularly in the past, or at least with predictability if not regularity, so that the planner has sufficient bases upon which to value the possible cash receipt or disbursement. Task 3 Contingency plan Consequences if the situation or event occurred If only a minor deviation in the plan occurred, then there are no serious consequences foreseen, only an equally minor adjustment may be involved. However, a number of serious consequences are likely if a substantial deviation occurred in the plan. A possibility is the likelihood that the expected collections on accounts receivables are not realized. This would threaten a shortfall in cash for which a short-term bank loan may be needed. In lieu of borrowing, the store might consider cutting down on the less urgent expenses, with different consequences. Cutting down on inventory expense may result in unstocked shelves, reducing sales and discouraging continued customer patronage. Reduction in payroll would likely foster employee discontent and demotivation; if it happens often enough, strikes and walkouts are possible. Reduction in selling expenses may compromise future sales, while cutting back on store equipment may introduce inefficiencies in store operations as well as inconveniences to the customers within the store. The budget plan adjustment that would be made Given that hypothetical event, the least urgent expense/s shall be determined and cutbacks made on those activities, in the manner least intrusive to the business. In the case of other events, such as for instance the sudden rise in the price of inventory, decisions would have to be made if the demand could withstand an increase in store prices to defray the added cost, or if such may diminish the volume of sales to the point where it would be unprofitable. Where demand is strong and competition on these products is weak, then a possible price increase may be warranted. Manner of aligning adjustments to achieve the original plan There should always be a balance of inflow and outflows, to ensure that the least impairment to net inflows will be made. With this in mind, a study of the faster moving product lines or items will be made, or those with the strongest demand, and the store should consider the possibility of either hiking their prices on these products or shifting a greater volume of inventory to them, and away from the slower or least profitable product lines. Expenses, as earlier explained, should be rationalized to eliminate or postpone the least urgent ones. Expected outcome if contingency plan was implemented If the contingency plan were implemented, balance will be restored between incoming and outgoing cashflows, and the store would be able to stave off additional risks or costs (i.e., interest on bank loans, lost opportunity cost, penalties and surcharges on late payments for past due accounts). Task 4 The store is a small one, and internal communications are as simple as the morning pre-opening briefing. Prior to this, however, management should meet with section supervisors to provide them a copy of the plan and sound them off on possible problems that may arise. Participation in decision-making at each succeeding level is encouraged. Team responsibilities to be allocated before implementation The section supervisors should be clarified on their accountabilities and targets, and the course of action their sections are expected to take. Feedback process to be used by team members It is likewise the responsibility of the section supervisors to immediately inform management if targets are not likely to be met because of the failure to realize expected outcomes – for instance, the strong negative response of customers to the increase in the price of some items, which may result in severely reduced sales of that product. Support methods and resources The methods and resources designed to support the front line (i.e., staff who come into direct contact with customers) would include online information to track the progress of operations, prompt inventory ordering and delivery to prevent embarrassing stock-out, and timely, friendly, and most specially proactive customer support in entertaining complaints, answering queries, maintaining cleanliness and pleasant store ambience, and a separate, “priority” lane to expedite high volume purchases to keep queuing lines and waiting times short. These services would justify a likely increase in the prices of products, and speed up the volume of sales even when prices remain the same. Assessment B Monitoring, Controlling, Reviewing, and Evaluating Financial Processes There are a number of processes which may be adopted to monitor and control an SME’s finances. The advantage of an SME over a large corporation is that monitoring and decision making can be directly carried out by the owner-proprietor and need not go through bureaucratic processes that may delay and even compromise a timely sale. In the case of Vital Essence, one of the more important budget control devices is the variance report issued at the end of every month. This corresponds to the monthly budget shown at the end of this report, together with the accounts receivable aging report. The monthly frequency is ideal for management purposes because daily movement of goods is fast and would be too expensive, and transient, to formally report on a daily basis. Furthermore, many cash expenses occur in monthly cycles, thus a monthly cash budget supports a more complete reporting process. This report juxtaposes the budgeted and actual figures of the store’s operations for any single month, providing the store manager a basis by which to assess the actual performance of the store against the expected level of activity. The table following is a sample of one such variance study. The actual figures and details have been altered at the request of the store owner who would wish the particulars of his store activities to be kept confidential. The purpose of a variance report is to provide specific comparison between the budgeted and the actual figures for each of the budget accounts. The deviation is shown as a variance, which is a percentage arrived at by dividing the actual over the budgeted amount. Where the account is a cash inflow, a variance over 100 per cent is favorable because it indicates the availability of more cash to defray the month’s cash obligations, indicating a lower default-risk probability. On the other hand, a variance below 100 per cent is unfavorable because the forecasted cash inflow was not met, leading to a higher probability of default risk. On the other hand, under cash expenses which represent cash outflows, a higher than 100 per cent variance is an undesirable development, because this means that more cash would be leaving the store’s coffers than was expected, putting a strain on available cash resources. It would only be favorable if the higher cash expense had generated a proportionally higher cash inflow, which would justify the added expense. On the other hand, a lower than 100 per cent variance on the cash expense is desirable, because this means that there would be less pressure on the need for cash to defray the expense. It would however be undesirable if the lower cash outflow had resulted in lower cash inflow – for instance, lower inventory expense may have directly resulted in more than proportionally lower sales, thereby reducing cash inflow for the store during the month in the case of cash sales, or even for the succeeding months in the case of credit sales the payments of which are aged over the next two months after the sale (see table for aged accounts receivables at the end of the report). Month-end variance study for actual against budget figures Small scale retail store cash budget for January %   Budgeted Actual Variance Beginning Cash Balance 20,000 20,000 0 Expected Cash Receipts: Cash sales 20,000 24000 120.0% Collection of accounts receivable 34,000 32000 94.1% Other income 0 1400 Total Cash 74,000 77,400 104.6% Expected Cash Payments: Inventory 50,000 52000 104.0% Payroll 10,400 9800 94.2% Other direct expenses 2,000 1800 90.0% Advertising 12,000 11835 98.6% Selling expenses 6,000 5800 96.7% Administrative expenses 5,000 5260 105.2% Store and equipment expenditures 10,000 9471 94.7% Other payments 600 684 114.0% Total Cash Expenses 96,000 96,650 100.7% Ending Cash Balance -22,000 -19,250 87.5% In the variance study for the budget for January shown in the preceding page, actual cash sales were shown to be 120 per cent of the budget, while actual collection of accounts receivable was able to achieve only a fraction (about 94 per cent) of the forecasted amount. It is fortunate that the drop in collections was compensated by the increase in cash sales, so that the overall variance for the total cash receipts was slightly higher than budgeted. While it is a positive development, the increase was not so high over the expected, that an increase in expenses might supplant this slight positive margin created by the higher cash inflow. For most intents and purposes, cash receipts are deemed to have achieved the target. Concerning expected cash payments, variance analysis shows that three accounts exceeded their forecasted amounts – inventory, administrative expenses, and other payments. The fact that inventory expense increased (by 104 per cent), when viewed in tandem with the increase in cash sales (by 120 per cent), appears justified and even advantageous to the business because the sales amount realized rose higher by proportion than that of the inventory expense that supported it. The reverse would have been an indication of inefficiency. Administrative expenses exceeded the budgeted amount by 5 per cent; this may be unfavorable because administrative expense does not directly support sales, and must therefore be justified. Administrative expense is comprised of several components, usually overhead expenses; the additional expenses over budget might actually be unnecessary expenses, or expenses which might have been avoided without impairing sales. The same may be said of “other payments” which is an aggregate account and non-specific as to its function; a good financial manager will examine which among the components of this account exceeded budget, and why. There are various financial management processes for monitoring effectiveness and reliability. In the store scenario, one important process is the periodic cash count whenever the cashier changes shift. Each cashier takes with him or her the roll of print tape and the cash that is in the register at the time he or she changes shift. Then the incoming cashier brings his/her own cash change in various denominations. For accountability purposes, the cashier has to reconcile his/her taped transactions with the beginning and ending cash count of his/her own run. In this manner, the accountability of each cashier is ascertained concerning any shortfalls (or excesses, for that matter) on the amount of cash he/she has handled. Another process has to do with the inventory, which should be handled as much as possible by only one stock clerk. A periodic inventory count should be made, not necessarily daily but definitely weekly, with an occasional surprise check by the manager or the supervisor. The stock count must coincide with the computer balance as recorded by the point-of-sale terminals in the store; there must also be a real-time readout of the inventory balances to alert management when stock balances are getting low, for orders to be made within the right lead time. In order to ensure compliance of store personnel with the measures for control, their cooperation must be engendered through a storewide meeting outside of store hours. Employees must be informed of and given due notice about the actions they are required to take, the reasons for taking those actions, the standards against their compliance shall be measured, and any rewards or penalties as a result of their performance. The employees should also be allowed to express their opinions, misgivings and doubts as well as suggestions for improvement. Subsequently, management should adopt those suggestions that prove meritorious, and explain to the personnel the reasons why other suggestions were not adopted. Read More