Monitor and Control Finances

Once an organisation has set and begun to implement a budget or financial plan, it is important to monitor it. To begin this process, managers need to implement ways to monitor and control actual expenditure and costs across their work team. Reading E provides several examples of how to control various areas to get you thinking!

Regular monitoring of actual expenditure is critical – not only to verify actual expenditure against a budget but also to identify issues that may need corrective action. Processes to monitor actual expenditure and to control costs include the reporting of:

• Assets
• Consumables
• Equipment
• Expenditure
• Income
• Stock
• Wastage

The Harvard Financial Administration (2011) explains that one way of monitoring expenditure is by reconciling accounts. Regular monitoring of accounts reports will help to:

• Ascertain that revenues have been received.
• Discover any errors in your budget 
• Avoid overspending
• Verify that cost transfers and corrections have been made or are made in a timely manner.

Implementing a process of regularly reviewing accounts reports can be very useful when trying to monitor and control expenditure. For example, if the review of the accounts report showed that one of your departmental areas was close to overspending for the month, you would be able to take the corrective action necessary to ensure that the budgetary requirements were not exceeded.

Another common way in which managers can monitor and control actual expenditure is through conducting stock takes on a regular basis. Stocktaking is a process organisations use to count stock on hand. Marley and Pederson (2009) explain that a stocktake is necessary for two main reasons:

Stocktaking processes and reports can also help monitor and control expenditure as the counts can determine:

• Reordering of stock: Ensures expenses are not wasted on over ordering and sales are not lost from stock that is not available
• Stock losses and gains: Discrepancies can be identified relative to what should be on hand
• Fast and slow moving lines: Can identify stock that needs to be rotated or if the stock mix needs to be adjusted

^{(Simmons and Hardy 2011)}

If organisations do not control and monitor stock correctly, excess stock can create unnecessary wastage. Excessive inventory can cause problems for cost controls relative to where the stock is stored, reduced sale prices to move the product, and reduced production capacity. Thomas, Mason and Ford (2003) suggest that in order to control costs, the development of a budgetary action plan is very important. The figure on the following page shows how expenditure can be controlled through various monitoring controls.

An important step demonstrated in Thomas, Mason and Ford’s (2003) process (see figure on the following page) is the need to engage in rigorous performance reviews. Once the work team understand the budget specific to their area and have been set goals to achieve budgets, performance management processes should be in place to monitor actual expenditure and control costs. Through effective performance management processes, the ability to achieve set budgets can be heightened. Effective performance management:

• Instils a clear understanding of goals
• Nurtures skills and behaviours
• Uses feedback to grow, develop and encourage rather than blame

^{(Ashdown 2014)}

The way in which employees are performance managed will depend on existing processes within your organisation. In a lot of organisations, performance management occurs informally on a regular basis and formal reviews tend to be held quarterly, bi-annually or annually. If your team has regular weekly meetings, it would be a great opportunity to informally discuss performance as a whole and also individually. Whilst a lot of managers tend to focus more of their time on employees who are underperforming, it is important to remember to celebrate and acknowledge team members who are performing above expectations. The process below shows a six step method that managers can use to implement performance management processes:

From step four onward collecting data to assess performance becomes an important part of the process. The best way to measure performance with data is to identify cost variations and any expenditure overruns.

Work team performance can be quantified by actual costs and expenditures versus budgeted costs and expenditures. If your team was given a monthly budget, there would be no point in reviewing actual data versus budgeted data in the last week of the month! Depending on your budget, an agreed review process should be in place with realistic time frames. For example, with a quarterly budget, monthly reviews would be realistic. If during a review, causes of underperformance were identified, Phillips (2012) explains that there are two types of actions that a manager could take: corrective and preventative.

Minor variance from budgeted expenditures are to be expected and do not require immediate action. Significant variances on the other hand should be investigated and actioned immediately. So what kind of variances occur and why do they occur? Wu (2013) explains that there are two main components which attribute to budget variance:

1. Internal working efficiencies of the business
2. Change of external elements

In simpler terms, the first component means that the performance of individuals or work teams within a business are responsible. Variances caused by the first component should be addressed immediately. With regards to the second component, the change of external elements such as trends or changes in operational strategy should be addressed in the next phase of budget formulation (Wu, 2013). The diagram below shows various budget variations that can occur:

There are many ways variances and overruns can occur. This is why it is so important to monitor expenditure and costs on a cyclical basis to ensure that budgets are met.

Calculating the Variance

Variances can be either positive/favourable (better than expected) or negative/unfavourable (worse than expected). A favourable variance might mean that costs were lower than expected in the budget or revenue/profits were higher than expected (Riley 2012). In contrast, negative variance might mean that costs were higher than expected or revenue/profits were lower than expected (Riley 2012). In order to action variances, the variances need to be calculated. The formula used for calculating variances is:

(Budgeted Cost – Actual Cost = Variance)

It is good practice to show variances in both dollar values and as percentages. Calculating percentages gives a truer representation of any variances. This is because the largest dollar variance might not always indicate the most significant variance. By scanning the variance percent, it should be easy to identify significant areas of interest. The formula for variance percent is:

(Variance ÷ Budget Cost) × 100 = Variance %

The example below shows a budget report for the small soft drink manufacturer that has been discussed throughout this Study Guide using the budgeted amounts from section one.

By examining the labour expenses we can see that $14,375 was budgeted for labour but $16,000 was actually spent. This means that labour expenses were over budget by $1,625, equaling 11.3% of the total labour budget.

As you will remember from section one of this module, contingency planning involves anticipating and being prepared for unexpected events or emergencies which may cause an organisation to exceed its original budget. It is important to understand that contingency plans are not static; once they have been developed they will need to be implemented, monitored and modified where necessary in order to meet financial objectives. Implementing and monitoring contingency plans involves identifying contingency events, monitoring for those events and implementing or modifying the contingency plan if necessary (Griffin and Van Fleet 2014).

In order to implement contingency plans, you first need to identify and define contingency events. A contingency event is an occurrence or incident in the internal or external environment which would necessitate the implementation of a contingency plan. In addition to identifying contingency events you should also try to identify signs, indicators or clues that a contingency event is about to occur (Griffin and Van Fleet 2014).

Once contingency events and indicators have been identified, managers must continuously monitor the internal and external environment. If a contingency event occurs, the appropriate contingency plan should be implemented. As you should be aware, it is impossible to accurately predict every event that may impact an organisation; for this reason it will sometimes be necessary to modify existing contingency plans (Griffin and Van Fleet 2014).

While accurate record keeping may seem burdensome, it has a number of benefits for any organisation. According to the Australian Taxation Office (2012), well maintained business records can assist small business owners with:

In addition to the benefits it can have for your business, record keeping is also a legal requirement. By law, all Australian businesses must keep records for at least five years. Poor record keeping can lead to heavy penalties in addition to being one of the leading causes of small business failure (Australian Taxation Office 2012). The following extract from the Australian Taxation Office (2012) explains what kind of records business need to keep.

As previously mentioned, one of the chief reasons for keeping accurate business records is to assist in satisfying your business’ taxation obligations. The GST, a 10% tax on all goods and services (with some exceptions), was introduced to Australia on July 1, 2000 and replaced or reduced a number of other state and federal taxes. The GST is an indirect, broad-based, consumption tax meaning that the tax is applied to transactions rather than income and to consumers not producers or suppliers. Since its introduction the GST has had a significant impact on all kinds of businesses. Many businesses have had to make significant changes to pricing, cash flow and record keeping (Australian Taxation Office 2014).

How GST works
Generally, businesses registered for GST will include GST in the price of sales to their customers, and claim credits for the GST included in the price of their business purchases.

Registering for GST
You only register once for GST, even if you operate more than one business. When you are registered for GST, you include GST in the price of the products you sell and claim credits for GST in the price of products you buy for your business. You will need to register if your current or projected GST turnover will reach the registration threshold.

When to charge GST (and when not to)
If you are registered for GST - or required to be - the goods and services you sell in Australia are generally taxable unless they are 'GST-free' or 'input taxed'.

Issuing tax invoices
When you make a taxable sale of more than $82.50 (including GST), your GST-registered customers need a tax invoice from you to be able to claim a credit. Tax invoices must include certain information. There are additional rules for sales of more than $1,000, and for invoices issued by agents or created by the recipient

Accounting for GST in your business
As a GST-registered business, you need to issue tax invoices to your customers, collect GST and send it to the ATO.

Lodging Your BAS or Annual GST Return
You report and pay GST amounts, and claim GST credits, by lodging an activity statement or an annual GST return. An example of a BAS statement is included below.

G1 Total sales

• Your GST-free sales
• Your GST taxable sales

G2 Export sales

• The value of exported goods that meet the GST-free export rules
• Payments for the repairs of goods from overseas that are to be exported
• Payments for goods used in the repair of goods from overseas that are to be exported

G3 Other GST-free sales

• Most basic foods
• Health and education services
• Certain childcare services.

G10 Capital purchases

• Land and buildings
• Machinery
• Cash registers
• Computers
• Cars

G11 Non-capital purchases

• Stationery and repairs
• Equipment rentals
• Leases

^{(Adapted from Australian Taxation Office 2014, 1)}

In addition to the requirements of the Australian Taxation Office, under the Corporations Act 2001 the Australian Securities and Investment Commission (ASIC) also requires businesses to keep certain records. Section 10.2 of the Corporations Act gives the following guidelines regarding financial record keeping:

Furthermore, certain businesses are also required to lodge financial reports with ASIC. The following extract from ASIC provides some guidelines regarding who is required to lodge financial reports and what information is included in those financial reports.

While these types of financial considerations will generally be handled by the finance or accounts department, managers need to be aware of their organisation’s taxation and reporting requirements because they will be instrumental in managing the data for record keeping and eventual reporting. One method of ensuring you meet all your business and legal requirements in regard to record keeping and reporting is to implement detailed policies and procedures. Policies are designed to specify an organisation’s response, attitude or approach to a common situation while procedures provide employees with specific steps to follow in that situation. Most organisations will already have financial management policies and procedures in place which you will need to be aware of (Hightower 2013). Financial management policies and procedures may relate to:

• Accountability
• Auditing
• Budgeting
• Legislative requirements
• Record keeping
• Reporting

Insufficient or poorly developed policies and procedures or the deliberate breach of policies and procedures can lead to incomplete, misleading or incorrect reporting. Incomplete, misleading or incorrect reporting can lead to heavy penalties, business failure or damage to reputation. The following extract gives one example of a disaster arising from misleading reporting.

You should now have an understanding of implementation processes that help monitor expenditure and control costs. You have also learned how to identify variances in budgets and how to handle these variances with contingency plans. Finally you learned about the need for regular reporting, not only for internal purposes but also for statutory requirements.