- Review your current accounting system and suggestions for improvement
- Check whether transactions are performed only in accordance with management’s general and specific authorization
- Check whether detailed records identifying revenues, expenses, assets, liabilities and equity are properly maintained
- Train your Accounting staff on standard accounting procedures and practices
- Ensure accurate recording of transactions
- Identify the types of resources needed to achieve these objectives
- Quantify the amount of resource (labor, equipment, materials)
- Calculate the total cost of each type of resource
- Summarize the costs to create a budget
- Identify any risks and issues with the budget set
- Confirm the business vision and objectives
Budget is an estimate of costs, revenues and resources over a specific period reflecting a reading of future financial conditions and goals.
A thorough budget gives an insight of company financial commitments and is needed for any organization for optimal utilization of resources and for strategic decision making.
Budget can be mainly in 3 major parts
- Revenue Budget
- Expenses budget
- Capital Expenditure budget
In short by preparing budget, the management can foresee their future over a specific period
- Estimate revenues based on market conditions and resources available. Past data can be a useful tool
- Estimate all major overheads like manpower requirements etc
- Estimate the capital expenditure requirements of the organization
- Estimate the likely time frame of inflows and outflows
- Summarize in the form of projected financial statements
- Periodical monitoring and comparing with actuals
The Internal control objectives are
- Validity: To check whether all material transactions are recorded
- Completeness: no valid transactions have been omitted.
- Authorization: all transactions have been approved prior to being recorded.
- Accuracy: Transaction amounts have been calculated correctly.
- Classification: transactions are recorded in the right accounts.
- Accounting: all transactions are recorded in conformity with GAAP.
- Proper period: the accounting transactions are in the period in which they occur.
Lack of proper analysis and reporting system is the major hindrance for managerial decision making and in turn becomes major obstacle in the growth. A proper system for financial analysis should be in place by way of timely financial reporting.
Few such examples are
- Profitability reports
- Balance sheet
- Cash flow statement
- Sales data
- Production reports
- Stock reports
- Accounts receivables & ageing
- Accounts payables & ageing
Need for ERP shall be analyzed on the basis of
- Size of the organization
- Business requirements
- Complexity of the business process
- Adequacy of financial and operational data generated from current system
- Cost benefit analysis
- Adequacy of resources including man power
Inventories + Accounts Receivables – Accounts Payable – Bank overdraftsEach component of the working capital is a specialized area and need to managed carefully.
Inventories:The volume of inventories is a big challenge for any company. More inventories block companies funds and less inventories may affect the turnovers.
Questions often asked are
- What should be the stock turnover ratio? (How many months stocks should be kept)
- How do we have controls on inventory against pilferage and losses?
- How do we monitor ageing of inventories?
- What should be our reorder levels?
- How to keep track of slow moving and obsolete stocks?
- How often we conduct physical verification of stocks
- Do we have proper classification of inventories like ABC analysis?
Accounts Receivables:Managing Accounts Receivables is an activity of paramount importance. Poor receivables management may hinder cash flows and cause the company to incur bad debts.
Control system in this area include
- Credit evaluation of customers: proper credit checks required for new customers for the company to consider credit terms. Proper review of credit terms is essential for existing and new customers
- Timely invoicing: Timely invoicing is an essential practice to develop and expedite payments from customers
- Review the pricing policy and ensure goods are sold at authorized prices
- Ensure proper controls on discounts given
- Ensure proper controls on writing off of bad debts
- Review ageing analysis report periodically and monitor overdue receivables
- Obtain confirmation of balances from customers and reconcile with our ledger accounts
Accounts PayableFor accounts payable, an entity’s accounting and internal control system over purchases, payable and cash disbursements will affect the nature, extent and timing of tests of balances procedure.
The following controls are required in this area
- Approval of all vendors and credit terms by authorized person
- Approving vendors invoices and payments
- Ensure no duplication of payments
- Ensuring periodical confirmation of balances
- Periodical reconciliation of accounts and confirmation of balances
Top management often deprived of very valuable data which is already available in the system. Lack of skilled accounts staff is also one of the reasons. MIS reporting is very essential for management decision making and strategy planning. MIS reports vary from organization to organization and depends on industry dynamics and requirement of the management.
Some of the important MIS reports can be
- Location wise, region wise sales
- Location wise, product wise profitability
- Dynamic funds planning report
- Analysis of financial data with the help of ratios like
- Gross profit ratio and net profit ratios
- Ratio of expenses on sales
- Trend analysis
- Report showing top customers, top products in terms of revenue share and profitability
- Working capital ratios
- Debt equity ratio etc