WHAT IS IT?

Financial management is planning, organizing, staffing, leading and directing and controlling an organization’s financial functions and resources to accomplish the organisation’s financial and other goals; and

Accountability is the obligation of an individual or an organization to account for its activities, accept responsibility for them and to disclose the results in a transparent manner.  It particularly includes responsibility for money or other entrusted property.

VALUE PROPOSITION

The principal features that drive the value added by professional financial management and accountability services are the ASSURANCE, INSIGHT AND OBJECTIVITY provided to the governing body which has the duty and responsibility to manage the organisation’s finances and prepare its published financial information.

These services are essential to you because it is not feasible for the governing body itself to meet all of the compliance requirements associated with financial reporting or to perform the detailed analysis and interpretation required to manage the organisation’s finances successfully on a daily basis.  This is work for a highly qualified specialist with a relevant university degree and strong experience and knowledge in the field.  The need for such skills may not be full-time in smaller organisations or it may be temporary during a vacancy in any organisation.

Irrespective of whether or not the role is full-time, part-time, performed by employees or outsourced, the value added is substantial – in at least three areas:

• Assurance (for the governing board and senior management) is derived from governance, risk management and control processes organised and operated by the Finance function.

THE FINANCIAL MANAGEMENT PROCESS

In my view, it is essential that the financial management and accountabilty function of every organisation is overseen by a qualified financial accountant who is a CA or CPA.  That person, whether full-time or part-time, should also be appointed as the organisation’s CFO.  In addition to his internal responsibilities, the CFO has specific statutory duties to give written assurances about the basis and contents of the financial report and the solvency of the organisation at the date of his attestation.

The CFO is typically responsible for the following fundamental systems and internal controls, transaction processing, reporting, analysis, compliance and other functions:

• Revenue, accounts receivable and receipts;
• Purchases, accounts payable and payments;
• Banking, including online functions, cash management, collateral security and signatories and authorities;
• Investment activities;
• Fixed asset registers, asset lives and depreciation;
• Annual budgets for operating and other revenue and operating and capital expenditure;
• Monthly financial reporting to the governing board or its Finance Commitee;
• Annual financial reporting and co-ordinating the external audit process;
• Borrowing and debt servicing;
• Superannuation payments and related financial issues for terminations, retirements, etc.
• Taxation compliance and payment;
• Long run financial forecasting and modelling;
• Activity-based costing for production management and inventory valuation purposes;
• Operating statistics for key activities affecting revenue and expenses;

In smaller organisations, the CFO and his staff are often also responsible for:

• Support for the governing board’s finance and audit committees;
• Administering the governing board’s delegations of its authority;
• Purchasing;
• Inventory management and recording;
• Asset acquisition, maintenance, disposal and replacement;
• Fleet vehicle acquisition, utilisation, maintenance and replacement; and
• Insurance.

ISSUES IN FINANCIAL MANAGEMENT AND ACCOUNTABILITY

Accountability and Related Issues

• Adequate resourcing of the finance function based on current position descriptions and individuals’ goals and performance plans;
• Financial reporting in accordance with the law, accounting standards and other pronouncements, the organisation’s accounting policies and accounting records;
• Co-ordination with the external and internal auditors;
• A comprehensive set of accounting policies and procedures that are up-to-date;
• A complete set of delegations of authority from the governing board for financial transactions and related matters;
• Existence and custody, ownership, valuation and disclosure of the organisation’s assets;
• Any impairment of asset values (including intangibles) not already recognised – especially from obsolescence, adverse market trends, damage or inability to cover forecast cash operating costs;
• Consideration of the condition, location and saleability of inventories, including the existence and valuation of any excess, obsolete, damaged or slow-moving inventory items;
• Collectability of accounts and loans receivable, writing off bad debts and recognising any bad debts recovered;
• Disputed accounts receivable or payable;
• Identification of stock held on consignment and its segregation and exclusion from inventories;
• Intellectual property rights and obligations, their protection and, if applicable, valuation and amortisation;
• Capacity, replacement and maintenance of property, plant and equipment;
• Financial and non-financial liabilities – their recognition, existence, completeness, valuation and disclosure;
• Objective evidence to support assumptions underpinning the disclosures in the financial report;
• Application of period-end cut-off procedures;
• Financial viability in the light of future operating strategies and likely trends;
• Solvency and avoiding trading while insolvent;
• Acting to avoid any reservation or qualification in the auditor’s report;

Financial Operations

• Financial risk identification, assessment and treatment;
• Improving financial outcomes by increasing revenue or reducing costs;
• Strategic financial management of initiatives such as outsourcing, diversification, growing market share, etc. as reflected in a medium-term financial model;
• Costing of various aspects of goods and services produced and delivered;
• Annual budget and financial forecasts are based on the proposed staffing profile and work arrangements, including any opportunities for savings;
• Variances between budgeted and actual operating costs are explained and are also used to identify any additional revenue opportunities or cost savings;
• Supporting negotiations for funding and loans with government agencies, philanthropic trusts, or lending institutions;
• A comprehensive chart of accounts that is geared to meet the monthly and other reporting requirements;
• Prompt, accurate and complete processing of transactions;
• Timely reconciliations of account balances and resolution of reconciling items;
• Industrial relations issues and risks with financial implications – the stability of relationships, including powers to transfer employees and redundancy terms and conditions where applicable, etc.
• Reporting of pertinent key financial performance indicators (‘KFIs’) and comparisons with industry benchmarks;
• Capacity, functionality and currency of information systems and controls over computer access and back-ups, all linked into the Information Technology Strategic Plan;
• The operating environment, including future prospects for market share, price increases, new entrants, competitive advantage, cross-subsidies, etc.
• The effectiveness of relationships with key external (financial) stakeholders, especially funding agencies and largest customers;
• Transactions and balances denominated in an overseas currency(s) and the treatment of gains and losses arising over time;
• Cash and investment management strategies to maximise interest revenue within the governing body’s investment management policy and risk appetite;
• Security and continuity of tenancy arrangements and any penalties for early termination;
• Contributions to a range of other internal consultations and discussions on matters addressed in other parts of the organisation but requiring financial advice or support;

Contracts and Agreements

•  Key contracts with employees, customers, suppliers and service providers all have financial implications requiring understanding, recording and monitoring and may include onerous provisions and clauses governing and/or restricting transfers of assets or changes in operations or locations;

Claims and Litigation

• Claims for employees who are receiving WorkCover payments and the adequacy of return-to-work plans and actions;
• Compliance with supply agreements, product licences, royalties, warranties and other sales-related obligations;
• Recognising and disclosing details of any claims received or unsettled litigation and costs and recoveries relating thereto;

Other Compliance Matters

• Key contracts with employees, customers, suppliers and service providers all have financial implications requiring understanding, recording and monitoring and may include onerous provisions and clauses governing and/or restricting transfers of assets or changes in operations or locations;
• Monthly financial reporting to the governing board and its finance committee (if applicable);
• Taxation compliance with respect to income tax, Pay-As-You-Go and other withholding requirements, Capital Gains Tax, Goods and Services Tax, Fringe Benefits Tax, Payroll Tax (if applicable) and Superannuation Guarantee levies;
• Requirements of the Victorian WorkCover Authority and its legislation;
• Supporting compliance with environmental licences and pollution protection requirements;

Quality Assurance – Accreditation and Support Mechanisms

• Processes you use to provide a high level of assurance that the financial management and accountability outputs and outcomes will be at or above the required standards;
• The Plan-Do-Check-Act Cycle;

Contingencies and Commitments

• Contingent liabilities requiring to b reported in the financial report and any that exist but are not yet disclosed; and
• The impact of capital expenditure committed to contracts but not yet spent on liquidity and future viability.

RESOURCES AND TOOLS

• Legislation applicable;
• Accounting standards, policies and procedures and other guidance;
• Other organisations’ annual reports;
• Planning documents, including forecasts and assumptions;
• Financial models and scenario analysis;
• Financial analysis tools including Microsoft® EXCEL and specific purpose proprietary software;
• Analytical tools attached to mainframe systems such as ORACLE and various payroll and other general ledger applications;
• Business case templates and analysis and evaluation of options;
• Cost-benefit analysis templates;
• Pricing models and user pays rationale;
• Analysis of cost drivers and cost behaviour – fixed and variable costs, total costs, unit costs, average costs and marginal costs;
• Direct and indirect costs;
• Allocation of overhead costs;
• Adjusting for seasonal elements and non-recurring factors;
• Breakeven analysis and contribution margins;
• Discounted cash flows and net present value calculations;
• Investment management analytics, including internal rates of return, payback periods and returns on investment;
• Models for valuing community service obligations, including (economic, social and environmental aspects);
• Lease v. buy analytical models;
• Linear regression analysis;
• Time series in perpetuity (more than thirty years);
• Compound interest and debt repayment calculators;
• Valuation of service lines and programs as an input for evaluating outsourcing proposals;
• Discussion groups sponsored by professional bodies, especially the leading accounting bodies;
• Industry-based professional bodies and trade associations’ publications and training courses; and
• Internet searching.

FREQUENTLY ASKED QUESTIONS

 1.     How can I improve my organisation’s financial performance?

The answer to your question is, initially, very simple – either increase revenue or reduce costs – or both.  Too easy!!  Although the answer is 100% true and it’s a foolproof solution, it glosses over a range of practical issues that often make the financial performance improvement process much more complex in practice.  Those factors include:

• Competitive pressures that often prevent, for example, outright price rises;
• Employees’ remuneration levels can usually not be reduced without dire consequences – at least without considerable negotiation to obtain commitments to associated improvedments, often through productivity.  So then it’s the employees producing more in exchange for higher remuneration.  But then the issue becomes marginal at the bottom line because of that trade-off; also the trade-off may mean that the productivity gain is not as large as the additional remuneration – or vice versa; and
• Industry regulations may prevent some cost reduction initiatives being implemented if they may contravene occupational health and safety or environmental regulations.

And there are a host of other factors too – but they don’t mean that it can’t be done; they simply mean that improving financial performance successfully calls for a range of management skills and information in addition to the fundamental revenue and cost variables.

2.     What is the connection between revenue and expenses on the one hand and assets and liabilities on the other when evaluating financial performancee?

Reducing costs or increasing revenue will boost financial performance but there are performance aspects which are driven by stocks of assets and liabilities.  The key variables include:

• Turnover of accounts receivable;
• Cash and investment performance – interest and dividend earnings and capital growth;
• Foreign currency risk and hedging of borrowings;
• Inventory turnover;
• Utilisation of property, plant and equipment, including vehicles – where costs are largely fixed but productive usage may help to defray those costs over more revenue – or at least production outputs;
• Optimisation of property, plant and equipment in terms of acquisition and disposal, maintenance, replacement (if required) and life-cycle costs;
• Lease v. buy decisions as part of the capital rationing process;
• Turnover of accounts payable;
• Interest rates on borrowings – and their interface with collateral security available;
• Overdue employees’ leave which grows by inflation if not taken within a year or so of the related service being worked;
• Sick and personal leave management; and
• Management of employees’ penalty payments for overtime, public holidays, shift allowances, etc.

3.     Is materiality only an auditing concept or does it apply to accounting and accountability as well?

At first sight, I think materiality should only be for auditors’ use because the accountants should aim to produce correct accounting records – not ‘near enough’!  But that answer is not very practical because time and resources are necessarily limited and so, even as an accountant, it is not practicable to investigate every tiny question which has a negligible effect on the financial reports.  It should be remembered also that materiality has two aspects – value ($) and the nature of the item, event or transaction; in the latter case an event, transaction or balance may be very small in monetary value but be of much greater significance if its nature meant that it may have a key influence on the company’s share price or on a public sector organisation’s Minister’s accountability – for example a fraud or an illegal act such as a secret commission.

In summary, I think materiality plays an important role in both accounting and auditing.

4.     Where can I get expert help on financial management and accountability issues?

Simply .  .  .

Call me on:  +61 417 373 589

Email:  peter@strategicassurance.com.au

Visit (by appointment only):  Level 7, 470 Collins Street MELBOURNE VIC 3000 | ABN 62 064 547 275