Financial Reporting System - Research Paper Example

? Budgeting Operational Plans MEMORANDUM Managing director Board of Directors 20th May Re: Financial Reporting System Financial reporting systems form a very important component of a company’s decision making strategy. It will help managers of a company access past and present financial records and also use the information available to predict future financial events. The Meaning and Components of a Financial Reporting System Companies need to record all their financial transactions and keep track of all their expenditures and revenues as well as track their assets and liabilities. This enables the managers of a company to report to the shareholders how their investments have been maximized over a period of some time. Different companies use different approaches to recording and reporting their financial details (McConnell, 2001). Both manual methods and computer assisted technologies are being used to facilitate proper recording of financial details of companies. With the rapid developments in technology, software applications have been developed to assist companies manage their financial record effectively. As a result, more companies are using computer aided financial reporting so as to give more authentic and reliable financial reports. Financial statements have to be prepared in accordance with set standards and reported timely to users. Financial reporting systems help companies achieve their financial objectives through accurate recording and timely reporting of financial reports (Siegel & Shim, 2006). A financial reporting system refers to all the procedures and processes that a company employs in order to ensure financial accountability. These include the polices and measures put in place to ensure proper recording, verification of financial transactions as well as timely reporting. Having a good financial reporting system helps companies properly manage and control their assets, liabilities, revenues and expenditure. A financial reporting system can also be defined as a collection of computer resources (software and hardware) that help companies record, verify and report financial data that reflect the outcome of their financial transactions over s specified period of time. A well established financial system comprises various things, among them a financial reporting database, a budgeting database as well as general ledgers. The financial reporting database helps the company prepare its financial statements such as the balance sheet, income statements, and cash flow statements periodically. This can be done either on a monthly basis, quarterly or annually. The budgeting database enables a company to access past financial information and helps the managers calculate financial estimates for the next accounting period. The budgeting database is well structured with expense thresh holds and cost limits that managers wish to set for the company (McConnell, 2001). A general ledger contains different accounts where information relating to financial transactions is recorded by the accountants or bookkeepers. Activity Based Budget The activity-based budgeting is a new and emerging trend in budgeting that seeks to give companies a new approach to manage their budgets. Activity-based budgeting allows company executives to present their budget based on the actual costs of the company’s products as opposed to the traditional budgeting methods, which require the budget to include various factors, which affect costs such as training and compensation (Mancino, 2007). In Activity Based Budgeting (ABB), only those business activities that incur costs are taken into consideration when preparing budgets. These activities are then aligned to specific objectives and goals, and thereafter, the costs that will be required to meet these business activities are used to draft the budget. The traditional method of budgeting only allowed company executives to adjust the budgets for previous financial periods so that they meet the new objectives for the next financial period. Activity-based budgeting goes a step further in enabling managers to set objectives for each activity that will incur costs in the next financial period for which the budget is being prepared. This also enables the company to streamline its costs and generally improve its business practices in line with the objectives of the budget (Mancino, 2007). The management board of I can Business Incorporated (ICBI) can also use the activity based budgeting method to plan for their future finances. They can do this by examining and analyzing the cost structure of the company through the business activities that are actually being carried out. They should also take a look at the company’s potential to make profits from their business processes in the sale of their goods or services. The managers can find cost efficiencies by comparing processes carried out in different sections of the company and consolidating them or doing away with some of those business activities. In this manner, the managers will be able to relate every business activity to a specific desired result, hence proper planning and budgeting that will take in to consideration all aspects of the company. Similarities and Differences between Activity-Based Budgets and Operating Budgets These two methods of budgeting have very many similarities as well as differences. The two methods are similar in that they both help the managers predict and plan for the future finances of their organizations, only that they differ in their approaches (Mancino, 2007). Based on their approaches to budgeting the two methods differ significantly. Activity-based budgeting takes a more holistic approach in budgeting, which requires managers to look at all the processes involved in generation of profits of the company and critically analyze them and align them to the objectives of the company (Siegel & Shim, 2006). Activity-based budgeting also requires that managers consider only those activities that are likely to incur costs within the next financial period. The operating budget methodology takes a very different approach to budgeting. Here, a general financial objective for the company will be set by the top managers and each department given a threshold by which they need to deliver so as to enable the company achieve its main objective. Activity-based budgeting takes into consideration the needs of the customer and applies it in the budgeting process. By analyzing the various business activities, the top executives are more likely to mainly focus on those that meet the customers’ needs. This helps to ensure improved service delivery and efficiency of operations. Operating budgets, on the other hand, are mainly built on past financial records and do not therefore consider the end product to the customer (Mancino, 2007). Basic Guidelines That ICBC Should Follow In Order To Have a Successful Plan In order for ICBC to succeed in its financial transactions, the company needs to put in place a very sound Financial Reporting System. This will ensure all financial details are well recorded, verified and controlled by the company’s management. This will also ensure timely reporting of financial statements and reports (Edward & Collins, 2005). ICBC should also strengthen its internal Control Systems (ICS) to ensure all the business activities are clearly monitored, and to ensure that the possibility of errors occurring is greatly minimized. This will ensure that illegal activities such as forgery are kept off the business. The company also needs to incorporate activity-based budgeting which will ensure a holistic approach to planning for the company’s future. This will help the company improve its business activities to meet the desired objectives and meet customer demands. Finally, the company also needs to ensure the objectives are communicated effectively to all the employees so that each person understands what is expected of them. This will enable the company to move ahead as a team and meet its desired objectives (Edward & Collins, 2005). Basic Guidelines for Budgeting In order to come up with a great budget, the company has to examine and analyze its financial position, as well as examine past budgets, determining if their objectives were met and if not, what led to that (Edward & Collins, 2005). With that in mind, a budget can be created based on the following basic guidelines: Develop an outline for the budget. This includes determining which budgeting methodology to use and how such a methodology will impact on the whole company. Set goals and objectives. This includes coming up with goals and objectives that the company ought to meet at the end of the coming financial period. Identify key people involved in the processes. This involves indentifying competent individuals who can oversee the whole budgeting process from the start to the end. They ought to be highly qualified people who understand their roles. Set timelines. The next guideline is to set timelines for each of the goals and objectives set out; find out how success will be measured and when this will be done. Communicate the plan. After drafting the budget, let every employee know about where the company is going so that they can align their activities with the set out objectives. References Edward, J. Collins, M. (2005). Budget Making, Theory and Practice. Cambridge, MA: Cantabrigia, Inc. Mancino, J. (2007). "The Auditor and Fraud." Journal of Accountancy April: 32-36. McConnell, Donald K., Jr., and Banks, George Y. (2001). The New Fraud Auditing Standard. CPA Journal June: 22-30. Siegel, J. G & Shim, J. K. ((2006). Accounting Handbook. New York: Barron's Educational Series. Read More