Best Practices in Financial Management - Essay Example

Best practices in financial management Insert Name Course, Class, Semester Institution Instructor Date Introduction Financial managements as a discipline seek to ensure that finances are managed in the right way serving all the needs of stakeholders. There are different parties who have financial reports to enhance their decision making capabilities. It is the role of the financial management to provide clear guidelines that will necessitate upholding of ethics and morals. Accounting is a broad doctrine that permeates various endeavors in the human life. It is essential that the business fraternity formulate regulations that will contain the various needs of each and every stakeholder involved in the transaction making process. The main reason behind the formulation of the accounting policies is to restore sanity and trust in the body (Management Advisory Board, 1997). Essentially, the accounting policies seek to instill professional ethics and morals among the practicing accountants. There are various regulations in place that streamline the accounting profession and ensure that competence and transparency among other moral obligations is enhanced. There are certain accounting principles for instance the accrual concepts that guide how accounting information should be presented. The essence of the accounting principles is to ensure that consistency prevails in the doctrine of accounting hence facilitating adequate performance comparison between companies. The intention of this discussion is to illustrate the difference between full accrual, modified accrual and the cash budget as well as highlighting the issues emanating from transparency in the financial arena. Accrual accounting, budgeting, financial management and financial reporting Accrual accounting is an accounting concept that fails to recognize when cash is realized in a financial transaction. This is to imply that, accrual method measures the position of a company but only recognizes the economic effects even cash is yet to be realized (Levacic, 1989). The norm is to recognize the economic event by matching the expenses to the revenues at the time payment is made for the relevant transaction. This method facilitates a clear picture of the company in the foreseeable future as current cash flows combine with the future expected cash flows. Many corporations around the globe use accrual accounting concept in their financial reporting endeavors. However, the concept is complex and expensive to implement thus is not suitable to small companies with limited transactions. The accrual accounting concept emanated from the fact that, business transaction has an increased complexity and stakeholders continually desire more detailed and accurate information. For instance; a company dealing in a long term project will have uncertain revenue streams that will affect the position of the company. It, therefore, implies that the company should indicate the financial transaction at the time of occurrence to reflect the correct information on the financial statement. This implies that, in the instance a company reports its financial statements using the accrual method, cash, and credit related transactions will be recorded differently. However, the accrual method opines that the financial reporting using the cash system is not accurate. This is because; financial reporting using the cash basis is not accurate implying that just because a company has made a sale does not necessarily mean that the company will receive payment (Department of Finance, 1992). On the other hand, the accrual concept realizes a sale one ownership and possession belongs to the buyer. This implies that even though the sale has been made and the payment is yet to be received, an account receivable is created increasing the seller’s expected revenue. It is evident that according to the accrual method, a financial transaction’s revenue is only realized once the actual transaction is complete as opposed to cash concept. In the same way, expenses are recorded not when they are paid but when they are incurred. The main advantage emanating from correct adoption of the accrual accounting concept is the fact that expenses and revenues should be matched to facilitating the relaying of accurate information. Additionally, the accrual accounting concept enhances accountability of the corporation’s assets as well as resources hence safeguarding the shareholders interests. For instance; the account receivable of a company using the accrual concept updates in the inception of a debt. This method hence incorporates all cash flows including the future expected cash flows thus illustrates the expected income in totality (Clare, 1994). Transparency is facilitated through the accrual basis. This is because; the accrual method provides stakeholders with full appreciation of all the obligation of a company both current and future or expected in the foreseeable future. The accrual method hence allows the management of a company in regulating the available cash flow. The management of a company can predict the future income and expenditure hence facilitating the decision making process. On the other hand, there is modified accrual accounting policy. This policy is mostly used by government related agencies which seek to combine the cash basis accounting with the accrual basis accounting policy (Nicholls, 1991). It is notable that the modified accrual accounting policy only recognizes revenues when the funds are available, or it is prudent that payment is about to happen soon. In addition, the modified accrual accounting policy only recognizes expenses when it is feasible that the liabilities will be incurred. Finally, this policy seeks to disintegrate a company’s funds such that, the departments spend their fair share of funds in the organization. The Generally Accepted Accounting Policies (GAAP) state that the local governments should use the modified accrual policies to record the government related transactions. This is because; the government accounts vary from business accounts hence they should have different recording antics. This idea is generally accepted considering that the government uses its records for different purposes since it, not a profit oriented venture. The main reason behind the modified accounting policy is avoiding indicating surpluses in the financial records. Difference between full accrual method and the modified accrual accounting policy The full accrual method is commonly used by the business fraternity while the modified accrual policy serves the government agencies. In addition, according to the modified accrual method, financial reports only record revenue when it is measurable and available. On the other hand, the financial reports indicate the expenditure once the liability is already incurred (Carlin, 2005). Cash budget A cash budget is a forecast of the cash inflows as well as outflows for an individual or a business for a specified period. A cash budget seeks to enquire whether an institution has the required funds to sustain the regular operations in the foreseeable future. It is tremendously vital for business to prepare a cash budget as it enlightens the management on various crucial factors. For instance, through a cash budget, the management can decide how much credit the company will extend to the customers negating any liquidity problems (Wanna, O'Faircheallough, & Weller, 1999). On an individual basis, it beneficial to have a cash budget as it will enhance regulated spending. This implies that an individual having a cash budget will avoid impulse purchases as well as unplanned spending. This awareness is beneficial as avoiding unwarranted expenditures will maximize the money available for savings. It is apparent that a cash budget aids a company as well as an individual develop a summary of all anticipated expenses alongside the anticipated income. Through this cash budget, the management of an organization can be aware of the additional fund requirement if any or the surplus cash available for development projects. The benefits allied to having a cash budget include the following; a company or an individual can minimize the eventuality of shortage in finances resulting from numerous expenditures. This is because; in the event that one has a cash shortage, the only feasible solution is to source additional funds to amend the situation. These solutions are at times costly, or time consuming and yet not guaranteed thus the cash budget is immensely valuable. It is worth noting that cash budgets vary with time periods. Some budgets cover a longer duration compared to others hence it is essential to have the period clear in the cash budget (Rabin, 1992). Both the cash budget and the accrual accounting policies revolve around financial management antics. However, there are a number of differences between the two practices. For instance, the cash budget is futuristic in that it is prepared prior to the eventuality of either cash inflow or outflow. On the other hand, the accrual accounting policy seeks to record past events hence it is eminent that the two policies share some disparities. In addition, the cash budget seeks to ensure that the funds are put into appropriate use while the accrual accounting policies emphasize on the recommended mode of recording future inflows, as well as outflows (Corbett, 1992). Explain the issue of transparency There are a number of professional ethics guiding the accounting doctrine. Among them is transparency. Given the delicate nature of money, it is vital to ensure that the transactions involve openness, adequate communication to the stakeholders, as well as accountability (Solomon, 2007). Transparency entails operating in a manner where other parties involved can clearly view the actions and events happening not missing any vital detail. The aspect of transparency permeates the whole organization from the management trickling down the hierarchy of power to the subordinates. In addition, transparency does not only apply to the accounting profession but to the entire endeavors of the organization. This is because; with adequate transparency and accountability, it is easy to improve the company’s public image as the majority of stakeholder’s desire openness. The stakeholders involved include; the government due to tax related reasons, creditors due to their withstanding monies owed, employees due to their general well being, competitors, as well as the company’s management (United States, 2010). The accounting profession inculcates various policies to ensure that the financials reflect a true and fair view with regards to the organization's position. It is clear that there are various parties who rely on the company’s financial reports enable their decision making antics. For instance, a potential shareholder needs prior information relating to the company’s earnings per share, market price of the share and previous dividend payments before investing in the company’s stock (Lynch, & Martin, 1993). On the other hand, the bank needs reliable information about the company’s credit rating before extending loans or overdrafts to any company. This implies that the information should be transparent beyond any doubt whatsoever. Human beings have certain vice in their system that undermines the virtue of transparency. This includes; corruption, lying and malice. To qualm the effect of this vice on the company’s financials, the accounting framework requires the company to hire an auditor. An auditor is a person who seeks to clarify whether the accounts prepared relay the true information about the company. The services of the auditor only come in once the financial account prepares the financial reports. This is to safeguard any stakeholder or member of the public who makes a conclusive decision basing on the financial reports (Greuning & Koen, 2001). It is the duty of the auditor to certify that the accounts are correct and reliable. However, in the event that any stakeholder relies on the audited information and bears a financial loss due to misleading information therein, the auditor is arraigned in court of law. Transparency, therefore, seeks to protect the interests of other stakeholders who might not be privy to the information mismanagement at the company’s management level. Transparency and accountability are both enforceable in a court of law. If any of the management team is guilty of either of the transgressions, persecution in the form of jail terms or life imprisonment is enforceable in the courts. It is essential for companies as well as the entire business fraternity to know the importance of transparency in their dealings with members of the public and their affiliated stakeholders (Norton, Diamond, & Pagach, 2006). In the accounting doctrine, there are various irregularities perpetrated by professions. This is ideally because; the accountants are in a position to coin the accounting concepts, inflate figures and toy with the minds of the stakeholders. It is, however, noteworthy that some distortions or irregularities happen unknowingly and hence not out of malice. These distortions and irregularities should be unveiled by the auditors of the company before realizing the financials to the public. For instance, a company using the full accrual accounting policy may record an expense in the wrong format hence distorting the entire financial report. Given the stipulations provided by the accounting policy, any deviations from the framework will amount to distortion of accounts. Distorted accounts relay misguided as well as wrong information to members of the public hence it should be avoided at all costs. Conclusion It is evident that best practices in financial management are indispensable. Financial reports provide information that influences the decision making antics of the company’s key stakeholders. It is noteworthy that financial report relay useful information not only to the members of the public but also to the individual stakeholders as well as the government. Accounting policies enhance consistency and hence each company needs to adopt respective accounting policies to regulate their financial reports. In addition, the accounting policies safeguard the interests of stakeholders who rely on the company’s financial reports. The full accrual accounting policy and the modified accrual accounting policy are examples of accounting policies in place formulated by the GAAP. These concepts seek to guide practitioners in the accounting discipline on how to record and relay information. On the other hand, transparency is an essential aspect in the accounting field. This is because; transparency seeks to ensure that the accountants provide reliable information and can be held accountable for any related misdoings. There are a number of examples of distortion of financial results arising due to inappropriate use of the accounting concepts. It is eminent that financial management is a vital aspect of our day to day societal living hence accounting policies needs to be adhered to by the professionals (Commonwealth Department of Finance, 1994). References Carlin, T.M. (2005). Debating the impact of accrual accounting and reporting in the public sector. Financial Accountability & Management, 21(3). Clare, R. (1994). Accrual Accounting: fad or necessity? Directions in Government, 8(4), 30-32. Commonwealth Department of Finance. (1994). The new financial reports of agencies. Canberra: AGPS. Corbett, D. (1992). Australian public sector management (Chapter 5). Allen and Unwin. Department of Finance (1992). Supplementary financial statements 1991-92. Canberra. Greuning, H. ., & Koen, M. (2001). International accounting standards: A practical guide. Washington, DC: World Bank. Levacic, R. (Ed.). (1989). Financial Management in Education, Open University Press, Milton. Lynch, T.D., & Martin, L.L. (1993). Handbook of comparative public budgeting and financial management. New York: Marcel Dekker. Management Advisory Board (1997). Beyond bean counting: Effective financial management in the APS - 1998 and Beyond. Canberra: AGPS. Nicholls, D. (1991). Managing State finance: The NSW experience.Sydney: NSW Treasury. Rabin, J. (Ed.). (1992). Handbook of public budgeting.New York: Marcel Dekker. Norton, C. L., Diamond, M. A., & Pagach, D. P. (2006). Intermediate accounting: Financial reporting and analysis. Boston: Houghton Mifflin Co. Solomon, J. (2007). Corporate governance and accountability. Chichester [u.a.: Wiley. United States. (2010). Transparency in accounting: Proposed changes to accounting for off-balance-sheet entities : hearing before the Subcommittee on Securities, Insurance, and Investment of the Committee on Banking, Housing, and Urban Affairs, United States Senate, One Hundred Tenth Congress, second session ... Thursday, September 18, 2008. Washington: U.S. G.P.O. Wanna, J., O'Faircheallough, C., & Weller, P. (1999). Reform of budgeting and financial management (Chapter 8, pp. 126-144). Public Sector Management in Australia (2nd ed.). South Yarra: Macmillan. Read More