Elements of Financial Management System - Case Study Example

Executive Summary The hotel which is facing a difficult time due to acute financial shortage and misuse of funds in different directions has to look towards developing their internal control system along with better facilities so that financial management process improves. This requires that the internal control process is developed which will help to manage the cash requirements properly. This would mean that the hotel has to look towards ensuring proper monitoring mechanism where the inflow and outflow of cash is monitored. This will help to gain effectiveness and ensure that th finance flows in the correct direction. Also, taking the help of different budgets like cash budget, operational budget and capital budget will help to understand the flow of cash and help to prepare strategy to deal with the situation better. This confronts for the following recommendations Ensure proper mechanism for monitoring the internal controls by having increased role of people to ensure that the finance is not misused and the business is able to take care of its financial resources in the most effective manner. Increase use of budgets so that the expected inflows and outflows can be measured which will help to prepare well in advance and reduce the chances of shortage of funds and direct the funds to be used in the correct direction Table of Contents Introduction 3 Elements of Financial Management System 3 Budgeting Process 5 Cash Flow Forecasting 6 Cash Control Process 7 Cash Control Principles 8 Budgets 9 Operational Budgeting 10 Cash Flow Budgeting 10 Capital Budgeting 11 Conclusion 11 Recommendations 11 References 13 Introduction Managing the financials of the business is very important as financials are the blood for any business and being able to manage it properly ensures long term growth and productivity for the business. The findings from the restaurant business in this situations highlights lack of cash control measures and no policies to determine the budget which is affecting the future potential of the business. This has affected the cash balances and dilution and separation of roles and responsibilities has made it difficult to perform the daily operations. This report looks to present the different areas like cash control procedure, budgeting and cash handling process so that the business is able to manage the finances effectively and ensure smooth operations. This report is aimed at the upper level managers and the chairman with the objective of highlighting before them the importance of having proper internal controls and developing proper budgetary requirements so that the business is better controlled. This will help to reduce the financial crunch and help to look into different aspect of finance. The scope of the report is to investigate the manner in which proper cash control method and budgetary requirements will benefit the hotel and help to transform their business. Along, with it the different issues relating to internal control will bring before the management the manner in which operational efficiency can be achieved and the organization can perform better in the future. Elements of Financial Management System The financial management system presently used in the hotel is in appropriate as there is no separation of duties and the manner in which the financials are being used are not accounted. This has created differences in the manner of working and requires that the process is developed for better performance. This makes it important that before the management looks towards developing the internal controls and budgetary process the different elements of financial management system is looked at. They are as (Dropkin and LaTouche, 2008) Clearly stated Goals: The management on the forefront need to clearly state the purpose for which the financials will be used. Along with it accountability should be set on the department heads to ensure that the financials are used in the correct direction and for the purpose for which they have been provided. This will help to control the leakages that exist in their use of financials and will exercise better control Budgeting: The management has to look towards developing different budgets which looks at the future estimated earnings and expenses. This will help them to allocate the required funds to the different departments and will ensure that the hotel doesn’t face a liquidity crunch. This will also help to develop the planning, monitoring and decision making tools which will ensure financial control over the business Financial Control: The management need to excercise some degree of internal control by clearly stating the purpose for which the financials are used. Ensure proper cash management strategies and process so that the overall delicacy of the process improves and the business is able to manage its financial resources better Financial Reporting & Review: This aspect was completely ignored by the organization as they didn’t look towards reporting the expenses and verifying those to gauge its authenticity. This has resulted in the misuse of funds and is an area which the management needs to consider by developing better internal controls Auditing: The management also needs to ensure that the financials are audited so that the manner in which the funds were used can be identified. This will help to use the funds in the correct direction and will stop the misappropriation of funds which has been witnessed presently. Thus, the different aspect of the financial management is a key which the management has to look in the beginning so that strong rules and regulations which prevent the misuse of funds can be developed. Budgeting Process The management needs to understand the manner in which budgeting process will help them to improve the process in which the financials are used. This will help the hotel to highlight the manner which the objective can be achieved through proper controls and ensure that each person becomes liable for his act and will thereby reduce the manner in which the business was facing an acute shortage of finance. This is shown in the chart below (Dropkin and LaTouche, 2008) The budgeting process will thereby look into a number of questions and will help to bring some important answers based on which the hotel will be able to improve their financials. This will look towards providing different impetus based on which the budgets can be prepared which will ensure the development of proper cash control process so that the overall development of the business is monitored. Cash Flow Forecasting Cash flow forecasting is a method of developing an internal control which will have the hotel in ensuring that they are able to control their financials in a proper manner. This is a method of budgeting which looks at determining the income and expenditure made by the business through the development of budgets which helps to monitor the availability of cash within the organization. This will help to determine that the business has sufficient cash flows for the future and will be able to meet their daily cash requirements. This will help the hotel to deal with shortage of cash which they are presently witnessing and will help to improve the effectiveness of the entire process (Dropkin and LaTouche, 2008). The cash flow forecasting will be beneficial for the hotel because instead of looking at the cash flow for the entire year it will help the hotel to break down their inflow and outflow month wise. This will help them to determine the period when they will have sufficient cash and in period which will result in cash crunch. This will thereby help to improve the effectiveness of the entire process and will help the hotel in managing their finances in a far improved manner then they are managing at the present situation. This will help the hotel to deal with the shortage of cash through the following ways (Dropkin and LaTouche, 2008) Providing the grants and money required in the operations early so that the business can be carried out without any hiccups This will also ensure that the hotel to manage their cash position can delay the payment of certain bills The hotel can delay some activities which require additional cash until the time they have sufficient cash available at their disposal The hotel can also look towards making arrangement for the required cash by identifying the potential sources which will provide them with the required money Cash Control Process The hotel need an immediate step in this direction and needs to develop a cash control process. This is due to the fact that the funds have been misused for purposes on which it shouldn’t have been which has resulted in a shortage and diverting the funds elsewhere. Proper cash control process through the following will help to ensure that the process is controlled (Dropkin and LaTouche, 2008) Provide Reliable Data: This is the most important aspect as it is important that correct data and information should be provided regarding the expenses and income and in a timely manner so that cash is properly controlled and monitored Safeguarding important data: It is imperative that important data is safeguarded and steps are taken to gauge the authenticity of the expenses. This will help to provide better cash control management strategy and will provide the hotel with a strategy to control their spending. Ensure Compliance: This is fundamental which the hotel should aim at as they should look towards ensuring that they comply with the legal requirements and provides all details pertaining to the expenses. This will help the hotel to get the required leverage and abide with the requirements of the law which will allow them to perform smoothly Cash Control Principles Cash is one of the most important assets for the business and especially in the hotel industry. This requires that the management looks towards developing certain cash control principles which are applicable over the entire organization and helps to manage cash in a better manner (Dropkin and LaTouche, 2008) The hotel management has to ensure that the minimum cash balance which will ensure that the operations are carried out effectively is maintained The management has to instruct the cashier or the person in charge to record all the transaction which involves either inflow or outflow of cash Pass on the responsibility of monitoring the manner in which the cash is being used to a person who is reliable. This will help to check the expenses that the business is making and will help to deal with the issues of excessive spending in a better manner Steps should be taken that a person other than the cashier or the person in charge of maintaining the cash is provided with the authority to give approvals to expenses which are over a stipulated limit Overall check and monitoring with minimum interference from other unauthorized person should be ensured so that the financials are managed in the most effective manner and the organization is able to control their daily proceedings Budgets The management of the hotel has to understand that budgets are an integral part of their business development and by developing a proper budget they will be able to work on the different areas through which they will be able to gain efficiency in managing their financial resources. The management needs to understand the fact that the budget is an ongoing process and looking towards developing their business based on the budget will ensure that they don’t have to deal with a financial crunch. This will also act as a tool in monitoring the performance of the hotel and by using different type of budgets the hotel will be in a position to monitor their financial requirements in an effective way (Sharon and Cheryl, 2007). Operational Budgeting This is one of the most important budgets that the hotel needs to look at. Since, this budget records the revenues and expenses so it will have the management to get a fair idea about the manner in which the finances will be managed. This will help them to provide important information pertaining to the manner in which the business will be able to deal with the financial requirements out of its current operations. This will thereby help to develop the framework which will ensure better coordination and ensure development of strategies that looks towards financial enhancement and better policies to manage it (Sharon and Cheryl, 2007). Cash Flow Budgeting This budget has its own importance as it will help the management to understand the monthly cash inflows and outflows. This will help to act as a guide and provide the management directives on the manner the business looks towards using the finances. Further, this strategy will also ensure that the cash flow pattern is recorded and in months when the cash flow is low arrangements can be made before hand so that there is sufficient liquidity and the hotel is able to conduct its operations in a smooth manner (Sharon and Cheryl, 2007). Capital Budgeting This aspect will look towards the long term planning and will help to provide important inputs regarding the manner in which different assets will be purchased or disposed. This will help the management to take timely steps and look towards arranging the capital requirements well in advance. This will also reduce the pressure on the daily operations of the business and will ensure that the hotel doesn’t use its operational revenue for long term assets which will affect their daily business (Sharon and Cheryl, 2007). Conclusion The hotel has to understand the importance and ensue that they improve the internal controls. Along with it special emphasis need to be laid on developing budgets and strategies that ensures maximum productivity and helps the business to be able to manage their finances in the best possible manner. This will help to reduce the chances of financial crunch and will help the hotel in ensuring that they are able to gain operational efficiency in managing their finances and grow their business. Recommendations The hotel needs to ensure that an internal control is developed which will look towards monitoring the performance of the fiance section. This will help to develop the cash control process and ensure that the misappropriation of funds reduces. Along with it the responsibilities have to be differentiated so that responsible person acts in a fair manner. In addition to it different budgets like operational, cash and capital needs to be prepared so that the management knows about the inflows and outflows of cash. This will help to manage the cash position effectively and will reduce the chance of a liquidity crunch. This will also transform into a situation where the hotel is able to take care of its finance requirements in a better way and ensure that their efforts provide them the desired result by gaining financial efficiency. References Dropkin, M and LaTouche, B. 2008. The Budget-Building Book for Non-profi ts: A Step-by-Step Guide for Managers and Boards, San Francisco, Calif.: Jossey-Bass Publishing Sharon, G. and Cheryl, D. 2007. Thinking Broadly: Financing Strategies for Youth Programs, Washington, D.C.: The Finance Project. Retrieved on August 30, 2012 from http://fi nanceproject.org/publications/Thinkingbroadly_PM.pdf Read More