37 Management of Financial Resources

N. Chellam

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1.   Introduction

 

Financial management is the critical area of business that deals with the effective management of money and money worth dealings of an establishment. In olden days financial management has been understood as simply recording all the expenses and income of an organization in a systemic way. But the concept of managing financial resources is totally changed now into analysing the statements of financial records and taking prudent decisions for the growth and welfare of the organization. Hence financial management dealt in two distinguished methods called financial accounting and management accounting.

 

2.   Objectives

 

After learning this chapter you should be able to

  •  Understand the key aspects of accounting
  • Identify the principles of accounting
  • Get introduced with the basic financial statements
  • Importance of budgeting

3. Who are the users of financial statements?

 

There are seven broad group of users were identified in food service establishments They are owners, board of directors, managers, creditors, employees, government agencies, and financial analysts.

 

3.1. Owners:  Keep  monitoring the  investment  status  of  the  business  as  they are  the investors.

 

3.2. Board of Directors: They are elected people to supervise the business transactions and to look after the decision making.

 

3.3.Managers: They evaluate the financial operations then and there and take prudent decisions.

 

3.4. Creditors: They are much bothered about the payment obligations, lending and crediting monitory benefits.

 

3.5 Employees: Always very curious about knowing the financial position of the company whether it could help them to meet wages and bonus,

 

3.6. Government agencies: They are concerned with the financial positions of the establishment for the taxation purposes.

 

3.7. Financial Analysts: They are outsiders but they keenly watch the financial position of the establishment in order to full fill his clients wish.

 

In a non –profit making establishment usually public is viewed as owners in the interest of they are the part of organization. A clientele can be categorized as an additional user and he also ensure the monitory status of the organization,

 

4.   Components of Financial Resources:

 

The following are the essential components of a food service system. They are

  • Money the input
  • Financial accounts the output
  • Financial data the memory function
  • Budget the controlling criteria
  • Financial statements the interpretations

All these works hand in hand and gets interlinked each other and working as a system of management.

 

5.   Key Aspects of accounting

 

There are four basic components formulate the financial management principles, they are auditing, cost accounting, financial accounting and management accounting

 

5.1.Auditing: It is an area of accounting that deals with the review of accounting statements and records. It is an examination done by the governmental sector to judge the fairness and reliability of reports.

 

5.2.Cost Accounting: It is nothing but the process of determining the cost and control of cost. In a food service establishment cost accounting principle takes up a special concern because it deals with the cost of food production and distribution.

 

5.3.Financial Accounting: It is the statement of financial position of an establishment that pass on the relevant information to the outsiders such as banking sectors, tax departments and insurance companies. It includes all financial statements such as balance sheet and income statement.

 

5.4.Managerial accounting: It is the history of financial status and data that helps the management of daily operations and planning for future. It helps to analyse the alternative courses of actions. Budgeting control is one of a major operational feature of managerial accounting.

 

6.   Scope of Financial Management

Financial management generally helps in taking decisions about policies and resources. Financial decision making can be done under three major areas they are,

 

6.1.   Investment Decisions:

 

Decisions on capital investment could be done through optimum utilization of financial resources. Assets and liabilities could be well managed by financial management. Any change in taxation policy of the government can make the investor to revise the investment pattern. A caterer can take investment decision on the liquid cash accumulated by investing them on modernized equipments or expanding the facilities available, so that he can develop a portion of the business in a best possible ways. In this situation a caterer must see the financial statements of the organization and can take a prudent decision.

 

6.2. Financing Decision:

 

Decisions pertaining where to invest and how to generate funds are called financing decision. There are two ways by which the finance could be generated for the establishment one is taking loans or borrowing money and the other is shareholders fund. It’s easy to generate funds by borrowing money but it involves a lot of financial risk of insolvency in terms of non payment. Hence it is necessary to think twice before swiping any investment of shareholders. And here is the financial statements help to choose the right option of fund generation.

 

6.3.Operational Decisions:

 

Utilising the existing resources is called operational decisions. Decisions regarding sale, overhead charges, employee expenses, meal charges including both direct and indirect are to be considered in terms of financial statement analysis before making change in structure of these. Decisions pertaining to the selling price of food items are called disposition decision. Percentage of profit to fixed, mode of payment by the customer, option for credit sale, all these will look after the operational features and decisions regarding these would be disposition decision.

 

7.   Accounting Principles:

 

Basic understanding of principles of accountancy would help the users of financial resources understand the interpretations properly. The commonly adopted principles of accountancy by food service establishments are discussed below.

 

7.1.Business entity concept: Business is a separate entity that does not involve individuals wish and requirements.

 

7.2.The Fundamental Equation: The relationship between the assets, liabilities and owners equity are called fundamental equation. There must be a direct proportion of all these aspects for healthy financial management.

 

7.3.Going-Concern Concept: the Company’s assets to be treated as a long term investment. Then only there will be sustained financial actions initiated.

 

7.4 Money as a unit of measure: To obtain a perfect financial data carefully. Because every financial transactions must be documented. Money is treated in financial term as unit of measuring the transactions.

 

7.5.Cost Principle: It involves recording transactions in local values. Cost is the value of money spent on goods and services as Rupees or Dollars.

 

7.6.   Balancing revenues and expenses:

 

The concept matching revenues with all applicable expenses during the financial year is very important to avoid financial confusions during the tenure for example a restaurant manager can purchase food in one financial year that can be expended in the next financial year. But the sales documents would be balanced at the end of second financial year with a previous years account. Unless it is prepared it is impossible to get the balance sheet done for the final financial statement. This matching concept is the basis for accuracy in accounting.

7.7. Depreciation

 

It is also another aspect of accurate accounting in a systemic manner by which the cost of expenses are allotted over the year in a useful way. A number of methods are used to calculate depreciation one of which is straight line method. This method calculates the depreciation over the life of an asset. A simple formula is use the calculate depreciation using straight line method is cost of asset – salvage value / years of useful life.

 

7.8.Consistency Principle

 

It is a method of choosing an accounting system by an organization for the recommended period of time to make a financial data comparable.

 

7.9.   Materiality Principle

 

It is the principle of accounting the events and information in to an account.

 

8. Basic financial Statements

 

The primary financial statements used by an organization are balance sheet and income statement. Both the statements provide adequate information required by the account analysis.

 

8.1.Balance sheet

 

It is the statement of financial position of an organization that publishes the list of assets, liabilities and owners equity at a specific date in the financial year. This is designed by adopting the basic principle of account after regarding the entry in journal and ledger.

 

8.1.1. Asset

 

The first part of the balance sheet is filled by the list of assets that are copied from the current account. Generally assets are classified in to three as current asset, fixed asset and general asset. Current assets include the cash in hand, accounts receivable, inventory, prepaid expenses and entrance fee receivables. Fixed assets like buildings, land, furniture’s, equipments and utensils are categorize under fixed asset in a balance sheet. General asset include the other supplementary investments of an establishment.

 

8.1.2. Liabilities

 

These are the debts of a company. They are classified in to two as current liability and long term liability. Current liability is a debt that has to be paid within a period of one year where as long term liability will not be paid within a stipulated period. Example for current liabilities is payment of purchases annual mortgage and accrued expenses and long term liabilities are mortgage for building or land.

 

8.1.3. Owners Equity

 

It is the capital section of a balance sheet represents the money value of stock, earnings and addition in the capital. In profit oriented organization the ownership may be of three kinds: proprietorship – single owner; partnership – multiple owners; corporation – ownership by stockholders. In a non profit organization the members may be the owners.

 

8.2.Income Statement

 

Income statement is a statement of profit and loss earned by the organization in the financial year. It is prepared once in a year in order to estimate the financial soundness of the organization .In the statement sales or revenues of food and beverage of the financial year are incorporated. Expenses such as administration, marketing, operational cost and energy cost are stated under this statement. Certain fixed expenses like taxes, insurance, interest and depreciation would also be informed in this column. With the help of income statement the financial soundness of an organization is clearly assessed for a particular period.

 

9.  Tools for comparison and analysis

 

The financial manager must use variety of tools to analysis the efficiency if financial data. Commonly utilized tools are ratio analysis, trend analysis, common-size statements and break-even analysis. The results of analysis indicate the manager the financial compatibility of the organization.

 

9.1.Ratio Analysis

 

This is a common method of analyzing the financial data in terms of relationship, facilities and understanding. It is expressed in several ways such as common ratio – ratio between x and y; percentage – percentage of sale; turnover – number of times the inventory is turned in a month; per unit – sales per session. These analyses help to categorize the liquidity, solvency, activity, profitability and operating features of an organization.

 

9.2. Trend Analysis

 

It is the comparison of results of an establishment over a long period of time. Here changes and turns ups may be incorporated in to it as percentage or amount. It is used to forecast the future revenues amd the level of activities. It is usually represented in the form of graph and will help the manager to understand the financial crises and boosts over a period of time.

 

9.3. Break-Even Analysis

 

It is one of an important tool to analyse the financial stability of an establishment. Break-Even means no profit no loss that is total expenses are equal to income. It helps to analyse the cost in three distinct ways such as fixed cost, semi fixed cost and variable cost. Fixed cost is the cost that does not get changed over the change in production. Examples of fixed cost are rent, rates, taxes, insurance etc. Variable cost is always changed by nature of work input. Example food cost or material cost. Some cost like labour, maintenance and utilities are changed only during a heavy variation in production. So break-even is analysed by dividing the fixed cost by variable cost at sale. It is one of an important tool that helps to project the balance between the income and expenses under several assumed condition.

 

10. Budgeting

 

10.1.What is a Budget?

 

Budget is a plan of future expenses in financial terms in order to control expense and profit as per sale. This is also an important tool of financial management by which all the resources are controlled effectively. It is a tremendous process that involves planning, preparation, control, reporting and utilization.

 

10.2.  Benefits of Budget

  • Budget can forecast the future plan of the organization
  • It can control the operational resources
  •  It can co-ordinate the objectives of management
  • It is a tool for periodic examination

10.3.  Types of Budget

 

Budget can be classified as several types based on the its behaviour, duration and

 

nature.

 

10.3.1. Capital Budget

 

This is a type of budget that focused on the assets of the organization such as equipments, shares, plant and infrastructure.

 

10.3.2. Operating Budget

 

The operating features of an establishment such as sales, purchase, administration, maintenance are focused in this budget.

 

10.3.3. Master Budget

 

This is the budget that shows the assets and liabilities of the organization prepared based on the previous records.

 

10.3.4. Departmental Budget

 

A budget that is prepared by an individual department of the establishment based on their needs and requirement .Maintenance and services of the department is focused here.

 

10.3.5. Fixed Budget

 

It is a budget that remains unchanged over a period of time and which is not related to the level of sales. Example rent, rate, administration and advertisement.

 

10.3.6. Flexible Budget

 

This is a budget that focus is the volume of sale and cost of sale. The budget of college and school canteen, hotels is all this type.

 

11. Steps in Budget Planning

Budget planning is done systematically by adopting a sequence. Following are the steps involved in building a budget for commercial organization.

 

11.1.     Step one – Development of sales budget:

 

Sales budget is constructed as the first step and it is the plan or estimate of revenues expected by the organization. For which the past experience should be examined well. Changes in prices and rates are also considered here. National and local indicators such as new companies, share market, changing trend are all to be evaluated well for the construction of this budget. Seasonal variations and purchasing policy are to the given importance.

 

11.2  Step two – Development of expenditure budget.

 

Expenditures related to the estimated level of revenues to be incorporated in this step. Food, labour and operational expenses are to be clearly mentioned here. Labour budget is constructed with increments in salary and wages of the year. Anticipated changes in food cost must also be informed here. Menu changes, operational change that may influence the labour needs are also to be included.

 

11.3. Step Three-Development of cash budget:

 

It is a detailed estimate of anticipated cash receipts and disbursement during the financial tenure. This will help the management in informing cash inflow and outflow, and cash resources. Mode of heavy payments, tax and insurance clearance are also being planned ahead in this step.

 

11.4. Step four-Development of capital expenditure budget:

 

The needed developments in the establishment such as expansions, improvements, replacements, purchases of land are to be included. Extra care is needed in this step to avoid unnecessary commitments in long terms and after reviewing the need for change this has to be done.

 

11.5 Step Five-Preparation of pro forma statement:

 

It is a combination of sale and expenditure along with the estimate of profit. It consolidates the annual requirements of finance for overall works.

 

After careful planning of all steps the budget has to be reviewed by an expert committee from the management and technical advisors it has to be documented for execution.

  1. Summary

Effective management of financial resources is the dare necessity for the success of an establishment. Hence it is the duty of the mangers to have a thorough knowledge and exposure on planning, constructing, executing, analysing and controlling the essential procedures of financial management.

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Bibliography:

  1. Gregoire M.B and Spears M.C., (2006), Food Service Organizations: A Managerial and Systems Approach (6th Edition), Pearson Prentice Hall Publications.
  2. Sethi,M and Malhan,S,M,( 2006),Catering Management an Integrated approach, IInd edition, Wiley Eastern Limited, Mumbai.
  3. Maian C Spears,(2004)Food Service Organizations Amanagerial and Systems Approach,III edition,Merrill an Imprint of Prentice Hall,New Jercy, Columbus

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