Monitoring & Controlling

The process of monitoring and controlling is essential in all aspects of business functions, especially in the processes of financial management. This is because inconsistent methods of review and systems of control will have an immediate impact on the viability of the business and requires management to monitor the internal and external factors that will impact financially on business operations. This may include changes to the economic outlook, internal production methods and changes to workplace laws.

A cash flow statement is one of the key financial reports that are part of effective financial planning. It provides the link between the income statement and balance sheet, as it gives important information regarding a firm’s ability to pay its debts on time

The cash flow statement indicates the movement of cash receipts and cash payments resulting from transactions over a period of time. It can also identify trends and can be a useful predictor of change. 

Cash flows can be a better predictor of a business’s status than profitability. 

A statement of cash flows can show whether a firm can:

• generate a favourable cash flow (inflows exceed outflows)

• pay its financial commitments as they fall due — for example, interest on borrowings, repayment of borrowings, accounts payable

• have sufficient funds for future expansion or change

• obtain finance from external sources when needed

• pay drawings to owners or dividends to shareholders

Operating activities are the cash inflows and outflows relating to the main activity of the business  that is, the provision of goods and services. 

Inflows consist of payments to:

• • • Income from sales (cash and credit) make up the main operating inflows 

    • Dividends and interest received. 

Outflows consist of payments to:

• • • suppliers

    • employees

    • other operating expenses (insurance, rent, advertising, etc.)

Financing activities are the cash inflows and outflows relating to the borrowing activities of the business. 

Inflows consist of payments to:

• • •  Equity (issue of shares or capital contribution from owner) or debt (loans from financial institutions). 

Outflows consist of payments to:

• • • The repayments of debt and cash drawings of the owner or payments of dividends to shareholders.

Investing activities are the cash inflows and outflows relating to the purchase and sale of non-current assets and investments. These assets and investments are used to generate income for the business.

Inflows consist of payments to:

• • •  Selling of an old motor vehicle (due to $ flowing into the business)

Outflows consist of payments to:

• • • purchasing new plant and equipment or purchasing property.

Activity

1. Write the formula down for the cash flow statement from the text above

2. What could you deduce about the business from the cash flow statement?

3. Explain how you could control the examples above using some cash flow management strategies. You can use your booklets. 

The income statement is a summary of the income earned and the expenses incurred over a period of trading. It helps users of information see exactly how much money has come into the business as revenue, how much has gone out as expenditure and how much has been derived as profit

The income statement shows:

• operating income earned from the main function of the business, such as sales of inventories, services and non-operating revenue earned from other operations, such as interest, rent and commission

• operating expenses such as purchase of inventories, payment for services and other expenses incurred in the main operation of the business, such as advertising, rent, telephone and insurance.

1. Sales revenue = Price($) x quantity    

 The cost of goods sold (COGS) is the value of stock that a business has sold to its customers. 

2. COGS= Opening stock (the value of goods available for sale in the beginning of an accounting period)  + Purchases − Closing stock (the value of goods unsold at the end of the accounting period.)

Gross profit is that part of a business’s profit that represents operating income minus cost of goods sold.

3. GP = Sales Revenue (SR) - COGS

Net profit/retained profit is the difference between the gross profit and expenses.

     4. NP = GP - Expenses

Expenses are simply costs. 

Specifically, expenses are the costs incurred in the process of acquiring or manufacturing a good or service to sell and the costs (direct and indirect) associated with managing all aspects of the sales of that good or service.

Ratios relevant to the Income Statement

• • Gross Profit ratio = gross profit/sales (IS)

  • Net profit ratio = net profit/sales (IS)

  • Expense ratio = total expenses/sales (IS)

A balance sheet represents a business’s assets and liabilities at a particular point in time, expressed in money terms, and represents the net worth of the business

The balance sheet shows the level of current and non-current assets, and current and non-current liabilities, including investments and owners’ equity.

Assets - Are items of value owned by the business.

• •  Current assets can be turned into cash within 12 months

Examples - Cash, Accounts receivable, prepaid expenses, Inventory/stock

• •  Non-current assets are not expected to be turned into cash within 12 months.

Examples - Plant and equipment, land, vehicles, intellectual property and Goodwill (The value of a company’s brand name, solid customer base, good customer relations, good employee relations, and any patents or proprietary technology represent some examples of goodwill. )

Liabilities - Are what is owed by the business

• • Current Liabilities . These are liabilities must be repaid within 12 months

Examples -  Accounts payable. eSales taxes payable, Payroll taxes payable, income taxes payable, Interest payable, Bank account overdrafts, Accrued expenses

• • Non-current liabilities - Debts that must be paid after the next 12 months.

Examples - 

Owners’ equity is the funds contributed by the owner(s) and represents the net worth of the business. 

Examples - Capital, reserves and retained profits, drawings

The balance sheet shows the financial stability of the business. Analysis of the balance sheet can indicate whether:

• the business has enough assets to cover its debts

• the interest and money borrowed can be paid

• the assets of the business are being used to maximise profits

• the owners of the business are making a good return on their investment.

The accounting equation, which forms the basis of the accounting process, shows the relationship between assets, liabilities and owners’ equity.

Ratios relevant to each statement

• • Current ratio/working capital = current assets/current liabilities (BS)

  • Debt to equity ratio = total liabilities/total equity  (BS)

  • Gross Profit ratio = gross profit/sales (IS)

  • Net profit ratio = net profit/sales (IS)

  • Return on equity = net profit/total equity (BS & IS)

  • Expense ratio = total expenses/sales (IS)

  • Accounts receivable turnover = (sales/accounts receivable)/365 to work out average length of time it takes to convert the balance into cash.  (IS)

2011

19 What does a cash flow statement show? 

(A) Assets 

(B) Liquidity 

(C) Profitability 

(D) Receivables 

2014

10   Which of the following would be found on an income statement? 

(A)  Accounts payable 

(B)  Gross profit 

(C)  Intangibles 

(D)  Net assets 

2018