Assess relationship between a financial system or function and other systems or functions in an organization
Finance plays a key role in the functioning of any organisation because a steady flow of funds is required to make planned expenditure for delivering products and services and the sale of these products and services generates the necessary funds to make a profit.
Any activity undertaken by any of the other departments without proper financial consideration can have a detrimental effect. For instance, if the sales team decides to offer extended credit or discounts to increase sales, this will affect cash flow and finance will not be able to collect cash for the business when ...view middle of the document...
Hence, more funds were made available for increased sales and marketing of higher margin products although fewer numbers were actually sold. Hence, the marketing strategy had to be revamped to meet this new situation. Also the launch of a new product, G100, was brought forward since there was a possibility of obtaining a higher margin on it. The NPI
(New Products Introduction) section thus had to modify their deadlines and prioritise their current activities accordingly. The financial situation of the company thus impacts the functioning of all its departments.
Describe the systems of accounts and financial statements used to control a financial system
The three most important systems of accounts and statements used to control a financial system are:
1. Profit and Loss Account
A company may produces an annual profit and loss account which indicates the total profit or loss made during that period. Some companies also produce a monthly profit and loss statement. The various entries in the statement and their brief description is given below.
a) Total Sales or Revenue or Turnover: This is the total value of sales achieved over the period.
b) Direct Costs or Variable Costs: These are costs directly related to and vary with the sales achieved in the period such as cost of raw materials, transportation cost, cost of production and wages of production staff.
c) Gross Profit: This is equal to Total Sales (a) – Direct Costs (b). It is also expressed as a percentage of total sales and is called Gross Profit Margin.
d) Indirect costs or Fixed costs: These are costs that do not vary with sales such as administration expenses and other overheads such as rent, travel, training, depreciation etc.
e) Operating Profit: This is equal to Gross Profit (c) – Indirect Costs (d) and is a measure of profits earned by the company through its trading activities.
f) Pre-Tax Profit: This is obtained by either adding interest received on cash deposits in bank or deducting interest payable on loans from the operating profit.
g) Post-Tax Profit: This is calculated after payment of taxes on any interest made.
h) Retained Profit: For a limited company, some amount of the post-tax profit can be distributed among the shareholders as dividend. What is left is called retained profit. If the board of directors themselves are shareholders, they can reduce their wages (increase operating profits but pay more corporation tax) and take more dividends instead. This retained profit is then added to previous years profit and recorded in the balance sheet.
2. Balance Sheet
A balance sheet summarises the Assets (what is owned) and Liabilities (what is owed) of the business. Both these can be split into long term and short term. Long term assets or fixed assets include plant, machinery, land etc and short term assets include cash in bank, debtors and current stock. Long term liabilities include owners’ funds such as retained profit or shareholders...