CMI UNIT 5007V1 Organisational financial management Assessment

Question:

Task 1:

A.C. 1.1 – Assess the relationship(s) between a financial system/function and other systems/function in an organisation

A.C. 1.2 – Describe the systems of accounts and financial statements used to control a financial system

A.C. 1.3 – Analyse financial information contained in a set of accounts or financial statements

Task 2:

A.C. 2.1 – Construct a budget for an area of management responsibility
A.C. 2.2 – Develop budgetary control systems comparing actuals with planned expenditure
A.C. 2.3 – Discuss corrective actions to be taken in response to budgetary variations
A.C. 2.4 – Identify conflicts that can occur with management control systems and how these could be resolved or minimised

Task 3:

A.C. 3.1 – Define the current and potential sources of finance that support organisational activities
A.C. 3.2 – Evaluate the distribution of finance in support of organisational activities
A.C. 3.3 – Evaluate the monitoring and control of finance employed in support of organisational activities

Solution:

Re:  A.C. 1.1

The financial function is the bloodstream of any organization regardless of size, type and ownership structure. Though the importance of financial excellence is usually associated with business organizations that exist to make profit for their owners, the significance of an effective financial system cannot be undermined for not-for-profit (NFP) organizations as these organizations need to ensure the expenditures are controlled and are in line with the overall objective of the NFP.

To assess the financial performance of any organization a set of financial statements is used.

  1. Profit and loss account
  2. Balance sheet
  3. Cash flows statement
  4. Statement of changes in owner’s capital
  5. Notes to the financial statement

Another very critical purpose financial function serves is planning and control.

It is important to note that financial function is interwoven with the rest of the organizational functions such as operations/production, estimation, business development, HR & administration etc.

Financial function and operations/production:

Operations and production require financial resources e.g., materials, labor and other capital assets to generate production. Financial function is interrelated as sourcing of the resources require decisions that have financial implications such as credit terms, lease or buy, own or outsource etc.

Financial function and estimation:

Estimation function in a construction company works to bid for new tenders. These tenders are against bill of quantities (BOQ). These tenders are carefully prepared in close coordination with financial function as these have huge financial implications so far as a construction company is concerned. Financial function challenges the assumptions, incorporates inputs such as cost of performance, advance payment and letter of credit.

Financial function and business development:

Business development function exists to look for new projects. Input from financial function is pivotal to this characteristic to ensure that all new projects are in line with the overall business strategy and financial goals.

Financial function and HR & administration:

Financial function is interrelated to HR & administration that deals with movement of staff that have financial implications.

A.C. 1.2

Re: A.C. 1.2

System of accounts:

A system of accounts follows the a process flow in order to provide useful economic and financial information to the users of financial statements.

Description of financial statements:

In sub task A.C.1.1 familiarizes us with the financial statements. We will now describe briefly below each of those five elements:

  1. Profit and loss account:

Profit and loss account or income statement, as the name signifies, is a statement that shows us results of operations of any business organization. In simplistic terms a profit and loss account shows how much profit or loss a business has made over a period of time. Main elements in a typical income statement include:

  1. Sales revenue: Money earned by for example selling ice cream
    1. Cost of sales: Money spent on making ice cream that was sold
    1. Gross profit: Difference between sales and cost of sales
    1. Operating expenses: Spending on common organizational overheads
    1. Net profit: Net income after deducting all expenses from the operating profit.
  2. Balance sheet:

Balance sheet is the statement that reflects the financial health of the business. Main elements of balance sheet are:

  1. Assets: What the business owns
  2. Liabilities: What the business owes to outsiders
  3. Owner’s equity or capital: Shareholding or the owners of business
  • Cash flow statement: It has following components:
    • Operating: Main business operations
    • Investing: Cash inflow/outflow on assets to generate more revenue
    • Financing: Cash inflow/outflow from financing the business e.g., equity or debt
  • Statement of changes in equity: This statement shows how owner’s equity has changed and what has caused changes in the owner’s capital
  • Notes: These are explanatory notes usually cross-referenced with above four financial statements in order to provide further details.

Other financial control systems:

Other than the above below tools are also used to control the financial system:

  1. Budgets: Set limits and targets in line with overall organizational goals
  2. Financial plans : Provide a look ahead

Re: A.C.1.3

Following set of financial statements is used to analyze the financial information:

ABC Company Limited
Profit & loss account
For the year ended Dec 31, 2016
Pounds
Sales            613 633
Cost of sales          (368 180)
Gross profit            245 453
Operating expenses          (134 999)
Operating profit            110 454
Income tax (30%)             (33 136)
Net profit              77 318
ABC Company Limited
Balance sheet
As on Dec 31, 2016
Pounds Pounds
ASSETS LIABILITIES
Current assets Long term liabilities      662 033
Cash and bank            183 825
Accounts receivables            621 067 Current liabilities
Total current assets            804 892 Accounts payable         97 533
Total liabilities      759 566
Fixed assets            311 228
Total assets         1 116 120 OWNER’S EQUITY
Share capital      100 000
Retained earnings      256 554
Total owner’s equity      356 554
Total liabilities and equity   1 116 120

Performance measures: These measures are used to gauge the financial performance of the business.

Return on capital employed (ROCE) = 110 454
1 018 587
Return on capital employed (ROCE) = 11%
Return on equity (ROE) = 110 454
356 554
Return on equity (ROE) 31%
Gross profit margin = 245 453
613 633
Gross profit margin = 40%
Net profit margin = 77 318
613 633
Net profit margin = 13%
Operating profit margin = 110 454
613 633
Operating profit margin = 18%

Financial status measures: These ratios are used to gauge the financial position/health of the business.

Current ratio = 804 892
97 533
Current ratio (times) = 8.25
Current ratio = 183 825
97 533
Current ratio (times) = 1.88
Working capital ratio = 707 359
97 533
Working capital ratio (times) = 7.25

Analysis:

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