Premises Management
Financial management is the process of managing an organisation’s financial resources. It includes financial reporting and budgeting/forecasting.
Financial management should be central to all the decision making process of all organisations. It is a core part of successful management and ensuring the sustainability of an organisation.
Developing an asset is often a large financial undertaking. Given the potential risks involved it is vital that effective financial management systems are put in place.
It is critical when setting up a financial management system that you involve an accountant in the process. This is necessary to ensure you are equipped with the expert advice needed to make informed decisions. A system should be implemented, as early as is practical, that meets all the needs of the organisation in terms of reporting and planning. It will be more cost effective to have this finalised from the outset and less of a concern for the management.
Financial Management Systems
It is vital to have a computerised system in place to help understand and grow the organisation. For small and medium sized businesses there are financial management systems available to purchase out of a box at a relatively low cost. Examples include Sage Line 50, Quickbooks and Iris. For larger businesses a be-spoke system may be required. In order to determine which package is most appropriate for your organisation you should talk to similar organisations to find out what they use and their thoughts on the system. Internet research is also an option but potential providers should provide case studies to demonstrate their ability to deliver.
The financial management system can be set up so that management accounts can be seen at a few clicks of a button. Both profit and loss reports and balance sheets can be run and you can easily see at any one time what your current cash balance is, providing the system is kept up to date. Specific reports can also be set up to meet the reporting needs of different organisations. This allows you to be responsive to the needs of the management team.
It is important that those with the responsibility for operating the financial management systems have a good working knowledge of the program they are using to ensure that they are getting the best out of the package. All the package providers run courses. These are best on a one-to-one basis so that they can be tailored to your specific needs. You should expect to pay around £400 for a full-day session. You can find out more about courses by visiting the website of the programme providers.
The financial management system is also a good way of managing credit control. Each system can produce detailed debtors and creditor’s report that will highlight overdue invoices. This should be run off at the very least monthly so that any potential problems can be identified at an early stage.
The new version of Sage takes this one step further as it has a dashboard that lets you see the exact credit position of the organization. You are able to see where your money is, how old your customer and supplier list is as well as what is due, overdue and disputed. This then ensures you pay suppliers on time, ensuring good relations are maintained with partners.
Cash is critical to the business and Sage highlights which customers you should be spending time chasing. Regular analysis of the data means you can keep track of the financial reliability of customers and suppliers. This can be used to highlight emerging problems at an early stage. This can protect the company from potential losses and conflicts. It means the management team is aware of risks in real-time when making deals and agreeing contracts. You are also able to set up standard letters for chasing debts so that you do not need to keep re-inventing the wheel each time.
The construction stage of the development process presents the biggest financial risk to the project. Make sure you keep track of any changes to the design and their cost implications. Once construction has been completed you should reconcile invoices with the original contract. Contractors may attempt to add provisions to the contact, you need to check that these are valid to ensure overpayments are not made. You must set aside money at the end of the construction phase for subsequent payments to contractors over the next twelve months. This retention money is paid once the building has been in operation for a set period and any defects have been resolved. Do not allow this to be swallowed up by general expenditure.
Construction projects require detailed understanding of VAT liabilities. This is a complex area of taxation law and it is advisable to seek professional advice. This will incur a cost but it negates the risk of being hit by a large and unexpected tax bill.
Budgeting/Forecasting
Budgeting is essential to control the finances of the organisation, as such it is key to business growth and success.
Budgeting should be an ongoing process and Sage provide a programme called Sage forecasting that allows organizations to create accurate cash flow and profit and loss projections. If you opt for Sage Forecasting and have Sage Line 50 you can hotlink the two programmes so that at month end you can filter the actual figures from line 50 into forecasting and then create variance reports for the profit and loss, balance sheet and cash flow.
Variance reports need to be reviewed in detail and if there are large variances you should question why these have occurred. Was it a one off or should the budgets be re-looked at and updated?
Budgeting and forecasting are particularly important during the construction phase. When circumstances change run forecasts based on different scenarios. This will allow you to identify risks and make the management team aware of any cost escalation. The earliest this happens the easier any adjustments will be.
Key reasons for preparing budgets are:
- Allows an organization to plan ahead
- Enables an organization to set out targets and assess whether these have been achieved.
- Manage cash flow more effectively
- Improve decision making as it enables more calculated risks to be taken.
- Monitor performance of organization.
Financial Management Systems
When a new system is implemented some organisations continue running their old system. In many cases this will be a manual system for a number of months. This is not necessary. If organisations opt to do this it should only be done for a few weeks, otherwise it causes additional work and confusion.
The financial management system must not be allowed to become out-of-date. It should be updated on a daily/weekly basis so that reports can be issued on a timely basis to the management team.
A key point to note is that financial management is not just the responsibility of finance staff, all team members have a role to play. This should be made clear to people so that they understand their responsibilities.
Budgeting/Forecasting
A common pit fall with budgeting is that they are not always realistic as the right members of staff are not always involved in the process.
The main budget you are working on should only include sales/income if they have a more than an 80% chance of receiving it. This allows management to be aware of any cash shortfalls, lack of profitability etc at an early stage, enabling them to respond quicker to resolve any problems and focus their efforts where appropriate. Budgets can be run with different scenarios and assumptions so that the management team can see how the change in a variable affects both cash and profitability. This gives the management a more realistic outlook on the business and the risks it faces.
One thing that must always be remembered is that CASH IS KING. Without cash the organisation is in trouble. Keeping up to date forecasts is vital to minimise the risks of a cash crunch, as it allows early warnings to be made.
It is advisable to not run budgets using excel spreadsheets. They are not complex enough to translate a change in the profit and loss figures through to the balance sheet and cash flow. It can also be very time consuming to compare actuals and variances. In contrast with Sage it is possible to just click a button and produce the report.