4.7 Establishing financial control systems Flashcards
What are the key financial control systems that a business should implement to effectively monitor and manage its financial performance, and how do these systems differ based on the size and nature of the business?
As a business is established, its day-to-day operations will command much of the owner’s attention and effort. To continue to build momentum, the business will need to establish financial control systems that allow the business owner to monitor and manage its financial performance. Financial control systems will vary from business to business depending on its size and nature. Some of the more common financial control systems that businesses implement relate to accounting and record-keeping systems.
What are some common financial challenges that new businesses face, and how can they address issues such as poor systems, mismanagement, theft or fraud, poor debt management, lack of cash flow, damage to assets, and incorrect pricing to avoid potential financial problems?
A new business could potentially suffer financial problems because of any of the following:
-poor systems
-mismanagement
-theft or fraud
-poor debt management
-lack of cash flow
-damage to assets
-incorrect pricing.
How can financial control systems such as budgeting, cash-flow management, control of accounts receivable, inventory audits, and regular auditing help prevent financial problems and losses, and what steps should a business take if these issues persist to avoid the risk of closure?
If these problems persist, the business’s financial performance may be hampered. In the worst case, the business may be forced to close. Financial control systems can be used by the business to help to prevent these problems and losses:
-budgeting
-cash-flow management
-control of accounts receivable
- inventory audit
- auditing
What is budgeting?
estimating the business’s financial performance for a given period in the future
What are the different types of budgets that a business can prepare, such as cash flow budgets, budgeted income statements, and budgeted balance sheets, and how do these budgets help in predicting or estimating the business’s financial performance over different periods, such as monthly, quarterly, or yearly?
(hint: refers to budgeting)
Budgeting refers to predicting or estimating the business’s financial performance for a given period in the future. There are a number of different types of budgets that a business can prepare, including cashflow budgets, budgeted income statements and budgeted balance sheets. Budgets may be prepared monthly, quarterly or yearly.
How can a business use the comparison between actual and planned results to understand deviations from targets, and how does establishing budgetary standards serve as a benchmark for evaluating the business’s financial performance?
(hint: refers to budgeting)
By comparing actual with planned results, the business can ask questions about why certain targets were not reached or why results were better than anticipated. Completing budgets also helps the business to establish standards and use them as a benchmark against which to compare actual events.
what is cashflow?
the money being transferred into and going out of the business
What strategies can a profitable business implement to manage cash flow effectively and avoid financial difficulties, and how do measures like tracking outstanding debts, hiring accounts staff, offering payment discounts, withholding supplies, and arranging short-term loans or a bank overdraft contribute to maintaining healthy cash flow?
(hint: refers to cashflow)
Managing cash flow is crucial to the survival of the business. Regardless of whether the business is making a profit (what is left after business expenses have been deducted from money earned from revenue), if it does not have the cash needed to pay its day-to-day expenses it will find itself in a great deal of trouble. A profitable business can ensure such issues do not arise by implementing some of the following strategies:
+keeping track of money that is owed to the business and chasing up outstanding debts
+hiring accounts staff to ensure that customers are paying the full amount on time
+offering discounts to customers who pay cash or make payments early
+withholding future supplies to customers who are late in paying their accounts or who have outstanding amounts owing
+arranging readily available short-term loans and a bank overdraft.
Why is profit essential for the long-term success of a business, and how can small business owners ensure they maintain profitability while also managing sufficient cash flow to meet debts and expenses on time?
(hint: refers to cashflow)
Profit is also vital to the business. Failing to make a profit will lead to the long-term demise of the business. A small business owner needs to manage a profitable business and make sure that there is enough cash available to pay debts and expenses on time.
How important is cash flow?
The Australian Taxation Office (ATO) says that it is very important for a business to maintain sufficient cash flow to be able to meet obligations, such as bills and tax. It suggests that the best way to do this is to prepare a cash-flow projection or budget. This can be as simple as adding up all the cash receipts over the course of a year, such as sales and other income, then adding up all the cash payments, including payments for salaries and interest. By comparing the totals, a business can calculate its surplus or deficit of cash. A deficit means that the business will need to take corrective action to avoid problems.
what is credit terms?
the terms and conditions of sale between a customer and a business, including the amount of time provided for making final payment
How can a business balance the importance of maintaining cash flow and profitability, and what strategies can be employed to ensure that while managing cash reserves, it also works towards increasing revenue or reducing costs to restore a positive cash-flow position and sustain operations?
(hint: refers to cashflow)
A business that has a healthy cash flow but that is not making a profit will find over time that cash reserves will disappear. A business can delay paying expenses but, ultimately, creditors must be paid if the business is to continue. If there is insufficient revenue coming into the business, eventually the only way to make payments will be to use cash reserves, which is an unsustainable practice. A business can return to profit by increasing revenue and/or by reducing costs. If this process is managed successfully, a positive cash-flow position should be restored. Making a profit is very important, but so too is cash flow. A business can continue to operate for some time without making a profit but, if it is lacking cash, it will be unable to meet the immediate needs that allow it to continue operations.
what is Accounts receivable?
the outstanding payments a business is owed by its customers. the money that the business is owed by its customers. In many ways, accounts receivable represents cash waiting to come into the business.
How does the process of recording accounts receivable work when a sale has been made but payment is still pending?
(hint: accounts receivables’)
When a sale is made and the good or service has been delivered but the customer has not yet paid, the amount owed is recorded under accounts receivable. This means that although the sale has been completed and revenue has been recognized, the cash has not yet been received. The business needs to track these receivables to follow up on payments and maintain healthy cash flow.
What are some strategies a business owner can use to set effective credit terms, and how do these terms impact the payment cycle and cash flow?
(hint: refers to accountable receivables)
Effective credit terms include setting payment cycles ranging from 30 to 90 days, depending on the industry and customer relationships. Longer payment terms extend more credit to customers but may delay cash inflow, while shorter terms can result in quicker payments. Offering various payment methods can also facilitate faster payments. Clear credit terms help manage customer expectations and cash flow.
