Relationship between Financial System and other Systems in an Organization - Example

Name: Course: Instructor: Date: Relationship between Financial System and other Systems in an Organization Organizational financial system is the heart of all operation and all the departments depends of the system to effectively conduct their operations. An organization need to have a sound financial system to survive in any industry. Management is responsible for the development of a sound financial system that is accurate, reliable and relevant. Department that relate with the finance system in organization such as Granite Reit include marketing department, research and development department, human resource department and Information communication department. Systems of Accounts and Financial Statements for Controlling Financial System Granite Reit uses balance sheet, statement of income and statement of cashflows to control its financial system. The balance sheet comprises of the non-current assets, current assets, current liabilities equity and non-current liabilities. The balance sheet is used to report the current financial position of a company. The statement of income comprises of revenue and income tax expense. Statement of income outlines the relevant income and expenses incurred in during operations in a company. Granite’s Reit statement of cashfows comprises of the operating activities, investing activities and financing activities. The company’s operating activities entails tenant allowance paid, income tax, interest expense and tax expense. The operating activities provided the Granite Reit with a cash of $159,991 during the financial year ended December 2016. Granite’s investing activities comprises of the development costs, improvement or maintenance costs and cost of purchasing more assets. The company was able to generate a cash of $11,779 from its investing activities for the financial year ended December 2016. The financing activities comprises of the proceeds from debentures, repayment of unsecured debentures, proceeds from secured long-term debts, repayment of long-term debts, proceeds f Om bank indebtedness, repayment of bank indebtedness, proceeds from issued units, cost of acquisition of non-controlling interest and cost of distribution of non-controlling interests. Table 1 below shows an example of a balance sheet Granite Reit Balance Sheet As at December 2016 Item Amount ASSETS Non-current Assets Investment Properties Deferred taxes assets Other Assets Current Assets Accounts receivables Income taxes receivables Prepaid expenses Restricted cash Cash and cash equivalents Total Assets LIABILITIES AND EQUITY Non-current Liabilities Unsecured debentures Secured long term debt Deferred tax liabilities Cross currency interest rate swaps Current Liabilities Deferred revenue Bank indebtedness Accounts payable and accrued liabilities Income taxes payables Distributions payable Total Liabilities Equity Non-controlling interests Stapled unitholders’ equity Total equity Total liabilities and Equity Table 1 Table 2 below shows an example of statement of income Granite Reit Statement of Income For the year ended December 2016 Rental revenue and tenant recoveries Property operating costs General and administrative expenses Depreciation and Amortization Interest expenses and other financing costs Others Income before income taxes Income tax expense Net Income Table 2 Analysis of Granite Financial Statements for the Year ended December 2016 The analysis of financial ratios helps Granite to determine the relationship between various items of the balance sheet and financial statements. Ratios such as liquidity ratios helps in measuring Granites ability to generate cash, profitability ratios enables granite to measure its ability to generate profit from its activities, debt ratios measures its ability to meet debt obligations and activity ratios help in measuring efficiency to use assets and operations. Financial audits and financial ratio analysis helps in monitoring and controlling funds by directing an organization on where to invest more funds and where to reduce funding. The table 3 below shows analysis of various ratios for Granite Reit. 2016 Current Ratio =  Debt Ratio = R.O.I = Debt Equity Ratio = Net Working Capital Ratio = Table 3 The analysis in table 3 above has taken into consideration the current ratio, debt ratio, return on investment, net working capital ratio and debt equity ratio. The current ratio of the company is at 4.28:1 an indication that it has a high liquidity hence able to meet its cash obligations. The debt ratio of Granite Reit for the financial year ended December 2016 is at 33%, an indication that the company’s financial risk is not so high. Debt ratio of 33% represents the percentage of assets supplied into the company by non-owners. The debt equity ratio of Granite Reit for the financial year ended December 2016 is at 49.34% a percentage that represents total amount of funds supplied by non-owners of the company. The networking capital ratio for the year ended December was at 0.067:1, a lower value an indication that debtors may fail to pay their debts on time. Granite Reit also has a return on investment ratio of 9.64% a return percentage that the company has generated from the use of its assets during the financial year ended December 2016. Budget A budget is a plan expressed in monetary terms and shows expenditure income and capital to be employed. In preparation of a budget, an organization must first identify a factor that will limit the activities it plans to undertake. The table 4 below shows a marketing budget for three months Item Jan-2017 Feb-2017 March-2017 Target marketing 100 120 120 Social media 90 100 100 Open houses 85 100 100 Photography 85 100 100 Videography 85 100 100 Billboards and bus benches 100 130 130 Print marketing 105 120 130 Park benches 60 80 80 Blogging and content creation 80 100 100 Others 50 60 80 Total $840 $1010 $1040 Table 4 Budgetary Control System Control in an organization is the process of guiding an organization towards a desirable direction. An organization requires a budgetary control system to ensure it meets its obligation using the available funds. Budgetary control system is important since it helps an organization to ensure unpredictable disturbances do not enter into the system thus preventing deviation from the expected goals or results. A budgetary control system helps in comparison of the actual results with the budgets. The table 5 below shows a marketing budget for an organization like Granite Reit that shows the actual and planned expenditure. Item Jan-2017 Feb-2017 March-2017 Budget ($) Actual ($) Budget ($) Actual ($) Budget ($) Actual ($) Budget Actual Amount left Target Marketing 100 125 120 130 120 140 340 395 (50) Social media 90 105 100 110 100 120 290 335 (45) Open houses 85 100 100 110 100 130 285 340 (55) Photography 85 100 100 120 100 140 285 360 (75) Videography 85 100 100 105 100 130 285 360 (75) Billboards and bus benches 100 130 130 120 130 140 360 390 (30) Print marketing 105 120 120 130 130 150 355 400 (45) Blogging and content creation 60 80 80 100 80 120 220 300 (80) Park benches 80 100 100 120 100 150 280 370 (90) Others 50 70 60 80 80 100 190 250 (60) Total $840 $1030 $1010 $1125 $1040 $13200 $2895 $3500 $605 Table 5 A review at the budgetary control system above shows that the company’s budget for marketing for the three months was $2895 while the actual expenditure was $3500. This is an indication that the actual expenditure was more than the budget by 20.89%. Corrective actions taken in response to budgetary Variations Revision of standards or targets An organization may set inappropriate standards or target that might not be met during the stipulated time and with the available resources. The performance is likely to deviate from what the organization expects. Therefore, in such case an organization should revise its goals or standards to ensure they are achievable during the next stage of operation. To ensure an organization does not experience deviation from the budget, proper planning should be done. Proper training In some cases, employees may fail to implement plan in a particular way it was intended. If management notices a deviation from the plan, employees should be subjected to proper training since lack of proper training may result into underachievement and failure to implement particular projects as was planned Review of Decision Models Variance in the budget can occur when chosen decision models fails to capture most important aspects of the decision. The relationship between different variables in a model can cause the variation in the budget. Decision makers therefore need to review such models to ensure the relationship between variables is appropriate in order to avoid variance that may arise. Monitoring the Implementation Breakdown Variations in the budget may occur due to failure of the employees to implement operations within the amount of money provided in the budget. Management should ensure it closely monitors the operations in the organization to ensure implementation is within the laid down budget. This will ensure provision of quality products to customers and acquisition of appropriate raw materials. Conflicts that occur with Management Control Systems and their Minimization Management control systems help an organization in achieving its goals and working with the available budget, however these systems may result into conflicts such as multiple role conflicts, motivation versus evaluation conflict, planning versus motivation conflict, motivation versus evaluation conflict, planning versus evaluation conflict and planning versus motivation conflict. Planning versus evaluation conflict may arise when the need to eliminate or isolate the effects of unforeseeable or uncontrollable environmental variables conflict with the planning’s requirement to provide a realistic assessment of future prospects. Motivation versus evaluation conflict may arise in situation where a manager views the objectives set in the control system as the standard against which performance is measured and no other ways of measuring performance. Planning versus motivation conflict arises when objectives and standards of a control system are not achievable with the available resources making it impossible achieve planning and motivation roles. Multiple roles conflict arises when an organization prepares a control system such as a budget with various roles that makes it difficult to implement. In addition, multiple role conflicts may be due to failure to roll over or revise previous objectives making the period of the control system such as a budget to be longer. Management can resolve or minimize these conflicts by ensuring they recognize these conflicts, restructuring the control system for instance the budgeting system, rolling over objectives of a control system, reliance on other elements of the management control systems and taking into consideration that importance of different roles in the control system may vary depending on the level of the organization. Sources of Finance that support activities of Granite Reit Granite Reit has various sources of funds that help in financing its activities, they include long-term debt, debentures, retained earnings, equity shares and leasing. Granite Reit uses its retained earnings to finance its activities, for instance for the financial year ended December 2016 the company had a retained earnings of $29.5 million that it plans to utilize during the financial year to end December 2017. The company uses retaining earnings pay for the allowances, income tax expenses, interest expenses and commissions. Granite for instance in 2016 entered, renewed and extended around 28 leases to help increase its income producing portfolio. The company also issued debentures worth $400 million due 2023. The company will therefore be able to receive $400 million in future that is November 2023. Distribution of finance in Granite Reit Analysis of Granite Reit shows that the company distributes funds to support different activities in the organization, such as funds for operational activities, financing activities and investment activities. Investment activities in the company include funds for maintenance or improvement of property, development of property and acquisition of development land. Some of the operational activities in Granite include leasing commission paid, income tax and interest expense. Financing activities in Granite Reit involved repayment of unsecured debentures, repayment of bank indebtedness and acquisition of non-controlling interests. Financing Activities Investment Activities Operational Activities Proceeds from debentures Purchase of asset, for example land Payment of income taxes Repayment of debentures Purchase of investment property Generation of income Payment of distributions Payment of contingent consideration Payment of interest expense Repayment of long-term debts Payment of leasing commission Payment of long-term debts Tenant allowances Monitoring and Control of Funds in Granite Rite An organization needs to monitor and control its funds to increase chances of continual operation. Granite Reit monitors and controls its funds in response to the economic conditions, investment opportunities and capital availability using the following, Maintaining investment grade credit rating Financial audits Financial ratio analysis for instance liquidity ratios, profitability ratios, debt ratios and activity ratios Compliance with existing debt covenants Compliance with debt restrictions and investment pursuant to the trust declaration Building long-term unitholder value and maintaining property development, ongoing operations and acquisitions Using the budget prepared during the planning stage. Granite Rite conducts internal and external financial audits to ensure financial management practices are within the accepted policies, procedures, ethical guidelines and laws. Financial audits helps to control and monitor its fund since it enables the company to uncover any loopholes through which the organization might be losing its funds. The analysis of financial ratios helps Granite to determine the relationship between various items of the balance sheet and financial statements. Ratios such as liquidity ratios helps in measuring Granites ability to generate cash, profitability ratios enables granite to measure its ability to generate profit from its activities, debt ratios measures its ability to meet debt obligations and activity ratios help in measuring efficiency to use assets and operations. Financial audits and financial ratio analysis helps in monitoring and controlling funds by directing an organization on where to invest more funds and where to reduce funding. The current ratio Granite of granite for the year ended December 2016 is at 4.28:1 an indication that it has a high liquidity hence able to meet its cash obligations. The debt ratio of Granite Reit for the financial year ended December 2016 is at 33%, an indication that the company’s financial risk is not so high. Debt ratio of 33% represents the percentage of assets supplied into the company by non-owners. The debt equity ratio of Granite Reit for the financial year ended December 2016 is at 49.34% a percentage that represents total amount of funds supplied by non-owners of the company. The networking capital ratio for the year ended December was at 0.067:1, a lower value an indication that debtors may fail to pay their debts on time. Granite Reit also has a return on investment ratio of 9.64% a return percentage that the company has generated from the use of its assets during the financial year ended December 2016. Budget also helps Granite to monitor and control its funds since it helps to check on the expenditures in various departments. An organization is able to plan their funds and keep track on its spending by using a budget. Reference Bowyer, Jonathan & Silvio M. Organisational Management T-KIT. Strasbourg Council of Europe, 2004. Print Boer D., Rien B., & Wim K. The Basics of Financial Management . An Introductory Course in Finance, Management Accounting and Financial Accounting. Groningen: Noordhoff, 2011. Print Adam N., & Patricia K. Financial Management. Stuttgart: UTB, 2015. Print Granite Reit Annual Report, available at www.granitereit.com, retrieved on April 9, 2017 Fridson, M. S., & Alvarez, F. (2011). Financial statement analysis workbook step-by-step exercises and tests to help you master financial statement analysis. Hoboken N.J., Wiley. http://www.books24x7.com/marc.asp?bookid=43202. Read More