Paper on Financial Monitoring and Control - Essay Example

?Financial monitoring and control Financial monitoring and control is an activity that must be carried out to protect monies and assets of project oforganizations. This is done by developing effective financial monitoring and control system. Financial monitoring and control system is developed and adopted to safeguard organization’s funds. According to Nikolai et al (2009), efficient monitoring and control of cash ensure that there is adequate cash to undertake important activities in organizations. Cash control systems need internal control measures that are adequate and effective, which must comply with laws and regulations of any given jurisdiction where the business or project is carried out. Kutz (2003) asserts that error and lack of control over organizations assets and cash lead to business or project failure. Components of financial monitoring and control system First, roles and responsibilities form part of the components of financial monitoring and control system. Every financial or accounting officer has a role to play regarding cash receipts and disbursement as well as towards financial records. Access to cash of the organization should be limited to few authorized personnel and duties performed by different accounting and finance officers should be separated. Cash should be controlled from the time it is received from customers (at the point of sale) to the point it is deposited in the bank. Point of sales terminals or cash registers need to be used. This is because point of sales terminals and cash registers allow for monitoring cash inflow. Second, financial records are components of monitoring and controlling finances. All expenses and revenue (income) transactions are recorded in general ledger. General ledgers form the foundation for generating reports and financial statements of each project. Revenue, cost and managerial accounting are used for internal purposes for planning, monitoring and controlling organization’s monies. Financial records are evidences that financial transactions took place. Financial records assist project managers to determine how much they have spent, how much they have and how much they need to spent in future (Garman and Forgue, 2007). Gross et al (2005) asserts that well kept financial records enables managers and interested parties to review result of financial transactions. Cash shortages and excess will be easily identified and remedial measures taken to correct the situation when proper records are kept. List of all checks received must be recorded and forwarded to the appropriate department. Cashiers must prepare daily bank deposits. Records of all billings, payables, accruals, receivables, invoices, contracts and suppliers must be kept appropriately. Third, disbursements thresholds also form part of financial monitoring and control system. Procedures that allow payments of actual expenditures must be complied with accordingly. The organization must create ceilings above which payments shall only be made through checks. For example, an organization ensures that payments above $200 must be made using checks. Furthermore, large amounts of cash to be disbursed must be authorized and approved by people who are in higher positions. For example, any expenditure above $5,000 must only be approved and authorized by the project director or managing director. The organization should properly utilize petty cash systems and payments should only be made upon verification of all supporting documents. Fourth, a budget forms a component of financial monitoring and control system. Budgets reflect financial goals and objectives of a project covering a specific period of time. During budgeting, technological trends, resource pricing, employee relations, raw materials cycles, inventory levels, financial needs and seasonality should be taken into considerations (Shim and Siegel 2008). Donovan (2005) explained that before a person or organization spend what they have earned, it is important to prepare budgets to be able to focus on priorities. Therefore, every organization undertaking a project must prepare and set budgets. This is prepared by budget holders, managers and finance staff. The staff is then managed, monitored and controlled through cost control. The prepared budget should be used to control expenditures by ensuring that only expenditures identified by the budget are paid for. In case expenditures away from the budget are needed, then it must be authorized by project sponsors in conjunction with project managers. Fifth component of financial monitoring and control system is bank reconciliation. The organization through its accounting or financial officers must perform periodic bank reconciliations. Bank reconciliation is a common cash control procedure that compares amount of cash on monthly bank statement with amount of cash reported in the general ledger. Bank reconciliation should be performed by a person who was not involved in receiving and disbursing monies. Bank reconciliation is done to identify irregularities, adjustments and errors in cash available at the bank. It deters fraud because it requires potential fraudsters to collude, which may not be an easy task. Sixth component of financial monitoring and control system is fraud control and detection. Financial fraud is an unethical and illegal activity that causes misappropriation of financial resources in an organization. It is a deliberate action and decision of individuals who handle money and assets of the company or organization to mishandle them. Mishandling of finances and assets of the company causes substantial losses. The fraud is usually hidden in financial records and continues until they are discovered. When somebody submits an expense report, which contains items for legitimate expenses that never took place, it becomes a fraud. Stealing inventory or manipulating payroll to pay ghost workers is also fraud. A good financial monitoring and control system should be able to detect and prevent fraud. It should also provide avenues for whistle blowing as well as the consequences of fraud. This ensures that money is not lost to illegal activities perpetuated by officers of the company or organization. The seventh component of financial monitoring and control system is cash audits. Verification of all disbursements is important to ensure that only legitimate items with supporting documents are paid for. The auditors verify whether the number of employees is legitimate and correct. This means that there should be no ghost employees in the organization. All invoices must also be correct and legitimate to warrant payments. Auditors should also ensure that only authorized people approved and authorized payments according to established thresholds. Auditors need verify petty cash to ensure that no money has been paid out without appropriate reasons and supporting documentation. Eighth, the other component of financial monitoring and control system is the work breakdown structure. Kendrick (2010) asserts that earning value management begins with development of a work breakdown structure. Work breakdown structure indicates all the tasks that will be undertaken in the project and associated with the costs. Earned Value Management Earned value management refers to project management techniques, which measures progress and performance of a project in a projective manner. It combines schedule, cost and scope into an integrated system. It provides accurate forecast of problems during project executions and predicts project success. According to Cleland and Ireland (2006) is important in assessing differences between schedules and budgets. Earned value management (EVM) is necessary for controlling cash flow during the execution of a project. Earned value (EV) refers to the budgeted cost of work performed (BCWP). Earned Value equals to percent completed ? budget at completion. This indicates the amount that is spent when a given task is accomplished. Earned value is then compared with the planned value and actual cost of the project. Cash outlay is controlled by paying only for the work that has been completed and not actually spent on the project. Earned Value Management essential features First, EVM is a project plan that identifies work to be completed. Second, EVM is a valuation of work that has been planned. Third, EVM defines earning rules that quantify accomplished work Tracking projects using EVM First, define the work. This is done using work breakdown structure. Work breakdown structure provides details of activities or tasks to be undertaken. Table1: Schedule performance index of a project that will cost $480,000 Task Duration in months Number of tasks to be completed Planned Budget Number of completed tasks Earned Value A 1 1 60 1 60 B 1 2 120 2 120 C 1 3 180 2 120 D 1 4 240 3 180 E 1 5 300 4 240 F 1 6 360 4 240 G 1 7 420 5 300 H 1 8 480 6 360 Secondly, assign values (planned values) to every activity. This involves allocation of budgets where values are allocated in monetary terms, hours worked or both to all tasks. Each activity must contain budget at completion (BAC). Each activity in table1 cost $60,000. Third, each task is allocated specific duration. For example, in table1, tasks A to H took one month each to complete. Fourth, define earning rules. For example, no credit is earned if work is not finished. Fifth, execute the project according to plan and measure progress. When tasks are started and completed, Earned Values are accumulated based on earning rule developed. Progress is measured by establishing the difference between planned and earned values. The project manager shall only pay monies equivalent to earned values and not planned or actual values incurred. This is indicated in the graph below. Figure 1: Graph indicating planned and earned values of a given project. The above graph indicates that in the first two months, the amount that needs to have been paid is $120,000 for the project. The planned values are equal to earned values. However, the earned values in subsequent months is lower that the planned values. This means that the project is behind schedule. Earned Value Rationale When earned value minus average cost is greater than zero (EV-AC>0), the project is under budget. When earned value minus average cost is less than zero (EV-AC Read More