ILM Level 5 Certificate in Management
Understanding Financial Management
Understanding
Financial Management
Contents
Unit Objectives
A general introduction to finance
Accounting at its most simple
Accounting and financial reporting standards
Accounting policies
Depreciation
Financial Objectives
The Business Cycle
Sources of funds
The key financial statements:
The profit and loss account
The balance sheet
The cash flow statement
The Cash Flow Forecast
Monitoring and controlling the cash flow
The Finance Function
Financial evaluation using ratio analysis
Financial and management accounting
The budgetary process and budgetary control
Flexed budgets
RASCAL
The Budget Setting Cycle at Loughborough
The balanced scorecard
Financial Governance in Loughborough University
Summary
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1
Unit Objectives
This unit will help you develop your knowledge and understanding of finance at
Loughborough, the value of management accounting and the process of budget setting
and control.
The aim of this unit is to provide you with an understanding of the basic finance
terminology used in accounting and also at Loughborough University. The unit is run in
conjunction with the finance team and is specifically designed to help you to understand
more about Finance at Loughborough. This unit is also followed up by Making a Financial
Case, which will help you to understand how a financial case is put together here at
Loughborough.
By the end of this unit, you will be able to:



Understand finance within the context of Loughborough University
Understand the role and value of management accounting
Understand budgets for the management of your area of operation
The unit will covers areas such as:
 accounting documentation, such as balance sheets, profit and loss accounts,
income and expenditure accounts and cash flow statements
 financial performance measures at Loughborough
 cash, profit and cash flow forecasting
 sources of finance and funding within the Higher Education Sector and at
Loughborough, and their characteristics
 Loughborough’s stakeholders and financial expectations
 financial performance indicators and their role in achieving objectives
and on budgets:
 the role of the management accountant
 the nature and purpose of financial and non-financial budgets
 methods of preparing budgets
 budgetary techniques for controlling operations
 how variances are calculated and used to analyse extent, source and cause of
budgetary deviation
 techniques for monitoring and controlling costs
2
A General Introduction to Finance
Accounts, finance and financial information are all central to business decisions. But what
is the basis upon which this information is compiled? Managers who are not specialist
accountants need to know something of the basics of the management information
contained within a set of accounts/financial reporting statements. This will enable you to
communicate with the financial experts within the organisation and those outside, who may
otherwise take advantage of your naivete in this discipline.
This unit is designed for managers who are not financial specialists but who need to be
able to interpret financial information for decision-making purposes. You need to be able
to:


Identify financial trends
Interpret and analyse financial information and evaluate its significance to dayto-day operational decisions
Accounting at its most simple
Take a local club. They will prepare their accounts on the basis of cash received and paid
out. They make up a cash book or may produce their accounts straight from bank records.
They are unlikely to produce a balance sheet but will prepare an income and expenditure
statement in a list format.
As soon as an organisation starts to use any form of accounting ledger they will start using
a double entry book keeping system. This is where the accounts start to add to zero.
Basically, every action will have two balanced effects. If I purchase a chair for £100 two
things result. I have a chair and I don’t have a £100. The two parts of the transaction are
recorded on a trial balance. These form the debit and credit entries relating to this
transaction.
Debits – assets, expenditure, surpluses / profits
Credits – liabilities, income, deficits / losses
A positive balance in your bank account is a good thing. This shows as a debit.
Consequently, all accounting systems everywhere show income as a negative number!
As an organisation gets bigger and more complex, more rules have to be followed when
preparing a set of accounts.
3
Accounting and Financial Reporting Standards
The aim of a set of Financial Statements is not to be absolutely correct. It is to give a true
and fair view of an organisations financial position.
There are many users of a set of accounts. In a free market economy such as the UK,
common sense dictates the need to have uniform financial reporting standards. A common
vocabulary, uniform accounting methods, and full disclosure in financial reports are the
goal of the accounting profession. The most important financial statement and financial
reporting standards and rules are called ‘generally accepted accounting principles’
(GAAPs). UK GAAP, is the overall body of regulation establishing how company accounts
must be prepared in the United Kingdom. These provide a framework to measure profit,
and to value assets and liabilities, as well as what information should be disclosed in those
financial statements published for use outside the business. Without these principles it
would be chaos and literally impossible to compare the financial reports of companies. We
will discuss these further.
The regulatory framework in the UK includes the Companies Act 2006, Financial Reporting
Standards (FRS) and Statements of Recommended Accounting Practise (SORP) . There
is a specific SORP for HE ‘Accounting for Further and Higher Education’ which deals with
grants given for specific purposes. Around the University, you may hear reference to FRS
17 Retirement benefits, which governs how we account for our liabilities in relation to the
Leicestershire Local Government Pension Scheme. Public limited companies (PLCs) are
required by law to have their accounts independently audited, thereby protecting the
interests of external investors.
The University is also a charity and is regulated by the Charities Commission through
HEFCE.
All of these are currently under review. For financial periods starting after 1st January 2015
(i.e. for the financial year 2015/16 for the University), these will be changed. Four new
FSR’s are being introduced. FSR 100 is an enabling statement; FRS101 allows for
reduced disclosure but cannot be used by charities. FRS102 governs how we will prepare
our accounts and FRS 103 is only applicable to insurance accounting. These will have a
fundamental impact. They will change how we treat certain income streams and how we
need to account for the USS Pension Scheme. They will also require that we collect data
on unused annual leave at 31st July each year.
4
Accounting Policies
Fundamental to the preparation of financial statements of a business are certain
accounting principles. These concepts are recognised internationally and are designed to
make accounting information more meaningful.
The going concern concept: means that the financial statements are prepared on the
basis that the business will continue to exist for the foreseeable future.
The prudence concept: means that the financial statements contain income and profits
only when realised rather than when anticipated. However, they contain all possible and
potential costs or losses. If in doubt ‘overstate losses and understate profits’.
The accruals concept: requires that expenses and income be accounted for when they
are incurred or invoiced and not when the money changes hands. This concept specifically
means that the profit and loss account does not show the cash flow of the business.
The consistency concept: requires the same treatment for similar items to allow proper
comparison of accounts for different years
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Financial Statements are prepared using the concept of a true and fair view – they may not
be 100% accurate but the give the right impression!
5
Depreciation
One of the issues arising from the application of these principles is depreciation. Most
fixed assets reduce in value over their lifespan. Think of your own personal assets, eg. car,
television, stereo system and so on. These will almost certainly not be worth now what you
paid for them originally. For most assets, it is a downward trend.
The organisation’s accountant will calculate a reduction in the value of each of your fixed
assets over the accounting period. S/he will then:


deduct depreciation from the value of the fixed assets in the balance sheet for the
period (normally 12 months)
charge it as an expense in the Profit and Loss Account
Depreciation is normally calculated in one of two ways:
1.
2.
the straight line method
the reducing balance method
1. The Straight Line Method: takes the original cost of the asset and deducts the same
fixed amount each year, eg.



A machine costs £10,000
There is no expected residual value at the end of its forecast 5 year lifespan.
(Residual Value means how much the asset will be worth and for how much it is
expected to be sold at the end of its useful life within the business.)
Depreciation will be £2,000 per year leaving a residual value of £0.
Year
Cost
£
1
2
3
4
5
10,000
10,000
10,000
10,000
10,000
Accumulated
Depreciation
£
2,000
4,000
6,000
8,000
10,000
Book Value
£
8,000
6,000
4,000
2,000
0
If you plotted the book value in a graph then it would look something like the following:
Value
Time
6
2.
The Reducing Balance Method: takes the original cost of the asset and reduces it
by a fixed % each year
This method is used where the asset is expected to depreciate more heavily in the earlier
years of its use.
Activity:

A new vehicle costs £12,000

It is decided that it will depreciate at a rate of 25% per year
Year
Cost
£
1
2
3
4
5
12,000
12,000
12,000
12,000
12,000
Accumulated
Depreciation
£
3,000
5,250
Book Value
£
9,000
6,750
2,847
If you plotted the book value in a graph then it would look something like the following:
Value
Summary
Time
Depreciation matches the economic benefit of an asset to the period in which it is in use.
The method and rate adopted for charging depreciation should reflect the nature and use
of the asset.
7
Financial Objectives
Why are we in business? – a relatively easy question for a business, a much harder
question for the University.
For a business, “To make money” is the easy answer to the question. This is true in that
those who participate in a business enterprise do so in the hope of increasing their wealth
– the common measure of which is money. But it is inadequate, because no business has
an automatic right to increases in wealth. Any increases are as a result of customers
wanting the product or service that the business is providing. Every business must
therefore have both marketing and financial objectives and these are inextricably linked.
Considerable controversy exists as to what the financial objectives of a business are or
should be. Some of the options include:







maximisation of profit
maximisation of return on capital employed
survival
security
long-term stability
growth
maximisation of shareholders’ wealth
Clearly it is too simplistic to say that the only objective of a business is to maximise profits.
Another goal could be security; the removal of uncertainty regarding the future may
override the pure profit motive.
The mission of the University is to



To increase knowledge and understanding through research which is internationally
recognised.
To provide a high quality international educational experience with wide
opportunities for students from diverse backgrounds which prepares our graduates
for the global workplace.
To influence the economic and social development of individuals, business,
professions and communities
But we work within a set of financial constraints both self-imposed and externally imposed
by HEFCE and our lenders.
8
The Business Cycle
How is a business financed?
When you start a business, there are only two places (legally!) that you can obtain the
money from … put in your own money (Share Capital) or borrow it (Loan Capital).
Share Capital is a permanent form of funds i.e. the shareholder is not entitled to their
money back, but is, hopefully rewarded with both on-going dividends and capital growth
should he sell his shares.
Loan Capital is a temporary form of funding ie the lender will eventually want the return of
his investment and meanwhile will expect to be paid interest on his capital.
The relationship between Share Capital and Loan Capital is known as ‘Gearing’. The
higher the gearing %, the greater are the risks to shareholders, but the potential to earn
greater returns on their investment has to be also be considered. We will do more about
gearing when we look at ratio analysis.
SHARE
CAPITAL
FIXED
ASSETS
RESERVES
(RETAINED
PROFITS)
INVESTMENTS
CASH
STOCK
DEBT
DEBTORS
STAFF
CREDITORS
SALES
OVERHEADS
Eventually, when the business is operating, there will be another source of funding … the
profits that the business retains ie the retained profits. These profits belong to the
shareholders and will increase the ‘equity’ within the business. In a business the
difference between income and expenditure is termed a profit. In a not for profit entity it is
termed a surplus. A profit is available for distribution to the shareholders or for reinvestment and in a not for profit organisation the surplus is used for re-investment.
The University has no share capital. It is not a company. It is an exempt charity
established by Royal Charter. It does have retained surpluses and it does raise money
through loans.
9
Just as there are, eventually, three sources of funds (Share Capital, Loan Capital and
Retained Profits), there are three areas that we can utilise the funds that have been
generated:



Fixed Assets (eg Land, Buildings, Machinery etc)
Working Capital (Stocks, Debtors, Creditors)
Investments in other companies
10
Source of Funds
In considering the appropriate form of funding, the following factors will need to be
considered:




Cost of servicing ie interest rate and repayment of capital
Admin and legal costs of raising finance
The tax position in terms of ability to recover interest payments
The dilution and control of existing shareholders
From the lenders perspective, the following factors will be important:





The return for investing
The level of risk attached to the lending
The ‘exit route’ in terms of liquidating the debt (if required)
The personal tax position of the lenders
The degree of control the lender has in terms of the affairs of the business
In terms of risk and return, the more risk attached to the funds, the higher the expected
return.
Ordinary Shares (Equity Financing)
This is the most important form of financing. The ordinary (or equity) shareholders are the
owners of the business and through their voting rights, exercise control. As owners they
also bear the greatest risk. If the business performs badly they will receive low or no
dividends and probably a reduction in the market value of their shares. There is no
obligation to pay them a dividend. If the business goes into liquidation, they will rank last in
terms of repayment (assuming that any funds are left!)
On the other hand, if the business is successful then the rewards, both in terms of income
and capital growth, are not limited.
There are essentially 3 ways of raising new equity finance:



Retained profits
Rights Issue
Public Issue
Retained profits are the most important. They represent the dividends forgone by the
ordinary shareholders and are the cheapest way of raising finance. Their retention is key
to the future growth of the business.
Rights Issues are offers to existing ordinary shareholders to take up additional shares for
cash, at a price usually significantly below the market value quoted. The number of shares
that an individual shareholder has the ‘right’ to take up depends on the number of shares
already owned. If the shareholder does not want to take up the offer, the rights can be sold
in the capital market by a non-shareholder. The other option is to let the rights offer lapse,
but in this case the shareholder will be worse off financially by this decision.
11
Preference Shares
These shareholders bear less risk than ordinary shareholders. They usually have the right
to the first slice of any dividend paid. The type of preference share eg 5% Preference
Share determines their dividend. They are normally ‘cumulative’ which means that if their
dividend is not met in the year, the obligation to backdate payment must be met (as well as
current year obligations) before ordinary shareholders are considered. Preference
shareholders do not normally have voting rights.
Debentures (Loan Stocks)
Many businesses borrow by issuing securities with a fixed interest rate and a pre-stated
redemption date. They are typically issued for periods from 10 to 25 years. Some
debentures do not have redemption dates and are known as ‘perpetual loan stocks’. They
are usually secured against specified assets of the business eg property. A market
quotation often exists for debentures so that they can be traded.
Debt
This is not tied in any way to the success or otherwise of the business and has no element
of ownership.
12
The Key Financial Statements
Loughborough University produces Financial Statements for the year to 31st July. The
Financial Statements for 2011/12 are 64 pages long.
They comprise
Operating and Financial review – p6 – 33
Statement of Corporate Governance – p35 – 35
Statement of the Responsibilities of Council – p36
Independent Auditors Report – p37
Statement of Principal Accounting Policies – p38 – p39
Consolidated Income and Expenditure Account – p40
Balance Sheet – p41
Statement of Total recognised Gains and Losses – p42
Consolidated Cash Flow Statement – p43
Notes to the Accounts – p44 – 63
Consolidated Five Year Results – p64
However the main summary documents for any business are



Profit and Loss Account / Income and Expenditure Account
Balance Sheet
Cash flow forecast/statement including STRGL
And we will now examine these in detail
13
The Profit and Loss Account / Income and Expenditure Account
The Profit and Loss (P&L) Account of a business tells you how successful (or
unsuccessful) the business has been at generating profits during the period (usually a
year). Simply, the profits of a business arise from selling goods or services at a price that
is greater than all the costs of the business.
It is important to realise that the P&L does not provide information about the cash
movements in the business. Profits do not mean cash. In fact, a business can go into
liquidation despite making profits because, quite literally, it runs out of cash!
Profits do not equal cash because of the ‘accruals accounting concept’. The concept
requires that income and expenses be accounted for in the period to which they relate
rather than the period in which they were physically received or paid.
The P&L summarises the trading results of the business for a period of one year and is the
link between this year’s and last year’s Balance Sheet.

Fixed assets purchased are not shown in the P & L Account because they
represent an asset to the organisation not an expense. (Fixed assets are acquired
to enable the business to perform its activities. They are not for bought for re-sale
at a profit, in the short-term.)

Stocks are valued at the cost price or net realisable price (whichever is the lowest)
not the sale price

It is upon the net profit that the taxation is calculated.
For organisations which are not necessarily driven by profit-making, profits are often
referred to as a ‘surplus’, and any loss would be referred to as a ‘deficit’. Indeed, rather
than being called a P & L account, the alternative, appropriate term is an Income and
Expenditure Statement (or account).
14
Different Kinds of Profit Figures
Larger, more complex businesses tend to have more detailed financial statements. In this
case, there may well be a number of different profit figures as presented below.
Gross Profit
(Sales less Cost of Sales)
(less overhead expenses)
Operating Profit
(less interest payable on loans)
Net Profit Before Tax
(less taxation)
Net Profit After Tax
(less dividends)
Retained Profit
(The retained profit [reserves] from the previous profit and loss
account should be brought forward and added to the retained profit for
the current period to provide a cumulative retained profit figure)
A typical P & L account is presented below
15
Profit and Loss Account for the year ended 20—
Sales Revenue
Cost of Sales
Gross Profit
£000
10,925
(7,718)
3,207
Net Operating Expenses
(2,555)
Operating Profit
Interest received and other income
652
10
662
(8)
Interest payable
Profit on ordinary activities before
taxation
Tax on profit on ordinary activities
654
(252)
Profit on ordinary activities after
taxation
Dividends
Retained profit for the financial year
402
(50)
352
Non-Trading Businesses
A Cost of Sales section is often incorporated into the P & L account by organisations who
want to separate out the direct costs of the business from the Operating Costs (indirect
costs). This is not mandatory and, indeed, where it is chosen not to differentiate the direct
and indirect costs, the structure of the P & L account would appear as below.



Sales
Less Expenses
Net Profit/Loss
£
Sales
(Less) Expenses:
Net Profit
£
552,000
Rent/Rates
Insurance
Heat/light/water
Advertising
Telephone
Salaries
36,000
2,500
4,800
4,800
3,600
150,000
201,700
350,300
16
Look at the example P & L account below and read the accompanying notes.
The following information is used to produce the profit and loss account, balance sheet and cash
flow
Income:
 Capital of £300,000 injected in January
 Expected sales of £80,000 per month on 60 days’ credit (sales in January will be
received in March)
Expenditure:
 Cost of sales:
o Subcontracted activity: £15,000 per month on 30 day’s payment terms (ie.
January’s invoice will be paid in February)
o Direct salaries: £10,000 per month from January to June inclusive
o Fixtures and fittings (fixed assets) of £25,000 to be paid in February
Equipment (fixed assets) of £6,000 to be paid in January and £5,000 to be
paid in February
 Insurance of £2,000 per year to be paid in January
 Monthly payments:
£








Business rates
Services
Telephone
Travel
Administration materials
Indirect salaries
Advertising (January)
Advertising (Feb. to June)
4,000
500
500
500
300
20,000
2,000
1,000
Notes to the monthly Cashflow Statement: (this is important information for the
forthcoming Profit and Loss Statement and Balance sheet)

Depreciation at 30 June is estimated to be £6,000. As it is a non-cash expense,
it is not deducted from the Cashflow Statement. However, it will be deducted as an
expense in the Profit and Loss Statement and from the value of the fixed assets in
the Balance Sheet. Assume it is calculated on the straight line method.
17
Activity:
Complete the P & L Statement for Enterprise Ltd below. Please note this is for a six month period. In order to complete it, first
fill out the two monthly spread sheets below. One is the monthly income and expenditure account, the second is the monthly
cash book.
Profit and Loss Statement for Enterprise Ltd for the period
1 January 20 -- to 30 June 20 -£
Sales:
Sales
(Less): Cost of Sales:
Subcontracted
activity
Direct salaries
£
Gross Profit
(Less) Expenses:
Indirect salaries
Business rates
Insurance
Services
Administration mats.
Travel
Telephone
Advertising
Depreciation
Net (Operating) Profit
18
Income and Exp
Month
Income:
Enterprise Ltd Profit and Loss : Period 1 January 20— to 30 June 20—
Jan.
Feb.
Mar.
Apr.
May
Jun.
Totals
Sales
Total Receipts (B)
Payments:
Subcontracted activity
Direct salaries
Indirect salaries
Business rates
Insurance
Services
Administration mats.
Travel
Telephone
Fixtures and Fittings
Equipment
Interest Charges
Professional Fees
Advertising
Taxation
Depreciation
Total Expenses
10,000
20,000
4,000
10,000
20,000
4,000
10,000
20,000
4,000
10,000
20,000
4,000
10,000
20,000
4,000
10,000
20,000
4,000
60,000
120,000
24,000
500
300
500
500
500
300
500
500
500
300
500
500
500
300
500
500
500
300
500
500
6,000
500
300
500
500
25,000
5,000
2,000
1,000
1,000
1,000
1,000
1,000
3,000
1,800
3,000
3,000
25,000
11,000
0
0
7,000
45,800
81,800
51,800
51,800
51,800
51,800
334,800
19
Cash book
Month
Income:
Capital
Sales
Enterprise Ltd Profit and Loss : Period 1 January 20— to 30 June 20—
Jan.
Feb.
Mar.
Apr.
May
Jun.
Totals
30000
Total Receipts (B)
Payments:
Subcontracted activity
Direct salaries
Indirect salaries
Business rates
Insurance
Services
Administration mats.
Travel
Telephone
Fixtures and Fittings
Equipment
Interest Charges
Professional Fees
Advertising
Taxation
Depreciation
Total Expenses
10,000
20,000
4,000
10,000
20,000
4,000
10,000
20,000
4,000
10,000
20,000
4,000
10,000
20,000
4,000
10,000
20,000
4,000
60,000
120,000
24,000
500
300
500
500
500
300
500
500
500
300
500
500
500
300
500
500
500
300
500
500
6,000
500
300
500
500
25,000
5,000
2,000
1,000
1,000
1,000
1,000
1,000
3,000
1,800
3,000
3,000
25,000
11,000
0
0
7,000
45,800
81,800
51,800
51,800
51,800
51,800
334,800
20
The Balance Sheet
The balance sheet is the second key financial statement to be studied in this module.
It is a very important tool for assessing the financial position of the business at a
particular point in time – just like a taking ‘snapshot’ of the business. It is the one
statement which will show whether the business is growing or contracting. The
discussion of the balance sheet will introduce a range of new financial
categories/terms of which you would benefit from being aware.
The Balance Sheet provides a summary of all the amounts ‘owned’ by the business,
which equals all the amounts ‘owed’ by the business; in other words, the value of all
the assets and the sources of funds with which the assets have been acquired. The
Balance Sheet balances because it shows two sides of the same story … the
business’s assets always equal the business’s liabilities. The answer is always zero.
The sources of the money, which enables the business to own its assets, are divided
into 2 parts:
1. The financial claims of the lenders and others who supply goods and
services to the organisation and who are owed money – liabilities
2. The capital and reserves
The value of the assets, therefore, always balances the financial claims on the
business = the balance sheet eg.
Assets:
Liabilities:
£10
£4
plus Capital and Reserves
___
£10
£6
___
£10
This can be expressed as:

Assets = Liabilities + Capital and Reserves or:

Assets – Liabilities = Capital and Reserves
If you are buying your house through a mortgage, it is very simple concept to apply
using the above format. You could do it yourself. Here’s an example. Your house is an
asset which has a present day value which, hopefully, is worth more than what you
originally paid for it. If not, you’re in negative equity. Let’s say that the house is worth
21
£250,000 (asset) and you still owe £80,000 (liability); the difference between these
two figures includes the capital that you initially injected plus the growth in capital
that you have achieved through the increase in the market value of your house. In
this case it would be £170,000. This is graphically represented below.
Assets:
Liabilities:
£250,000
£80,000
plus Capital and Reserves
___
£250,000
£170,000
___
£250,000
Activity: At the start of business, an organisation has:
Assets of £10
Liabilities of £4
Capital and Reserves of £6
Assume that after one week’s business, there were:
Assets of £12
1.
Liabilities of £5
After one week’s business, what is the Capital and Reserves figure?
a. £5 b. £6 c. £7 d. £8
2.
By how much did the wealth of the organisation increase by the end
of the week’s business?
a. £1 b. £2 c. £3 d. £4
An increase in the Capital and Reserves, therefore, shows an increase in the wealth of
the organisation.
22
Assets of the Business
An organisation may possess 3 types of asset: fixed assets, current assets and
investments.
1.
Fixed Assets:






2.
these are possessions which the organisation uses
to carry out its activities:
land
buildings
machinery
equipment
fixtures and fittings
vehicles
Current Assets:
these are the assets which are held in the organisation in
the normal course of business and which will, at some stage, become cash (if
not already). They include:




3.
stocks
debtors
bank balance
cash held at the business
Investments: these relate to money invested outside the organisation with a
view to earning interest, dividends or other benefits. They may include:


shares in other companies
loans to other companies
How the Assets are Funded
There are 2 sources which fund the assets of the business: the liabilities of the
business and the capital and reserves.
1.
Liabilities of the Business:
There are 2 types of liability: current liabilities and long-term liabilities.
Current Liabilities:
These are monies owed and payable by the organisation within the normal
business cycle – 12 months. They include:



Bank overdrafts
Creditors
Taxation due
23
Long-Term Liabilities:
These are monies owed and payable by the organisation over a period longer
than 12 months, eg. a bank loan.
2.
Capital and Reserves:
These are the other sources of finance for the organisation, eg. capital,
together with any accumulated reserves/profits
Example:
before you attempt the Balance Sheet for ‘Enterprise’, let’s look at one
based on the example we have been working on.
24
Example Balance Sheet for
………. at 30 June 20 –
£
£
Fixed Assets:
Fixtures and fittings
30,000
Equipment
15,000
(Less) Depreciation
0
45,000 (1)
Current Assets:
Debtors
Bank balance
8,000 (2)
272,300 (3)
280,300
(Less) Current Liabilities:
Creditors (Subcontractors)
Net current assets
25,000 (4)
255,300 (5)
Net assets
300,300 (6)
Financed by Capital and
Reserves:
Capital
50,000 (7)
Net Profit
180,300 (8)
Reserves
70,000 (9)
300,300 (10)
Remember: Assets – Liabilities = Capital and Reserves
(See the notes to the balance sheet below)
25
Notes to the Balance Sheet:
1. This is the total value of the fixed assets. Normally depreciation would be
deducted annually from the value of the fixed assets but for the example
balance sheet, no depreciation has been deducted.
2. Unpaid Credit Sales (debtors) are a current asset to the organisation because
at 30 June, there is still £8,000 owing to the business
3. The closing bank balance for June in the Cashflow.
4. Creditors are businesses to which we still owe money. At 30 June, £25,000 is
still owed for June from the work provided by the subcontractors.
5. Net Current Assets
£255,300
=
=
Current Assets
£280,300
less
less
Liabilities
£25,000
6. Net Assets
£300,300
=
=
Fixed Assets
£45,000
plus
plus
NetCurrent Assets
£255,300
7. The capital injected into the business in the period.
8. The Net Profit from the P & L Account
9. The reserves (retained profits) brought forward from previous trading periods
10. The total of capital and reserves. This figure must balance with the net assets
figure (6)
26
Activity:
Now complete the Balance Sheet for Enterprise Ltd. You will need to refer to
appropriate figures in the Information above.
Balance Sheet for Enterprise Ltd at 30 June 20 –
£
£
Fixed Assets:
Fixtures and fittings
Equipment
(Less ) Depreciation
Current Assets:
Debtors
Bank balance
(Less) Current Liabilities:
Creditors
Net Current Assets
Net Assets
Financed by Capital and
Reserves:
Capital
Net Profit
Reserves
0
Remember:

Assets – Liabilities = Capital and Reserves

Net current assets = current assets – current liabilities

Net assets = fixed assets + net current assets
27
The Cash Flow Statement
Cashflow is the lifeblood of the organisation. The effective forecasting, monitoring
and control of the cashflow is, therefore, hugely important if the organisation is going
to have sufficient funds to finance its day-to-day operation.
The relative importance of cash, in comparison to its ‘cousins’: sales and profit, is
neatly summed up as follows:
‘Sales is vanity, profit is sanity, but cash is reality’
The business can have achieved fantastic sales, admirable profit margins, but until the
cash is received for those sales, the business has, in reality, achieved nothing.
It is a misconception that if a business is making profits it must be doing well. For a
business to survive it is essential that it has cash; profits are not essential for survival.
If a business has a cash flow problem, this will not necessarily be evident from either
the Profit and Loss Statement or The Balance Sheet. Hence the requirement for a
cash flow statement to be included within the statutory financial statements. This is a
statutory requirement for companies with a turnover of £5.6m plus.
Cash Flow Statement
For the year ended 31st December 20--
Cash at beginning of the year
£000
X
Plus cash received during year:
Sales from trading
Sale of property
Sales of shares
Sales of debentures
X
(Less) cash payments:
Purchase of direct materials, labour and overheads
Dividend payments
Interest payments
Taxation
Purchase of fixed assets
Closing Balance
(
(
(
(
(
( X
)
)
)
)
)
)
X
28
Cash Flow Forecasting
The Cash flow Forecast is a tool for planning cash inflows and cash outflows. It
highlights the likely cash situation of the business on a month-by-month basis:
It shows the forecast timing of cash outflows for goods/services you have bought
from other businesses on a credit basis – these businesses are your trade creditors.
Another type of creditor could be the bank through the provision of loans or an
overdraft facility.
It also shows the forecast timing of cash inflows for the goods/services you have
supplied either through cash sales or, more commonly, through credit sales – the
latter group of customers become your debtors.
Activity:
Let’s look at the monthly Cash flow Statement for Enterprise Ltd. It’s all pretty
straightforward with the exception of how we deal with credit sales and credit
purchases
29
30
Monitoring and Controlling the Cash flow
So far in this section, we have looked at forecasting the cash flow. Once the operating
period is under way, you will need to assess what the variances are to the forecasts
for each figure. Invariably, there will be differences. To do this, the cash flow Forecast
can be designed so that each month has three columns as in the example below. It is
important for you to investigate both positive and negative variances. These are
expressed as either favourable (FAV) or adverse (ADV).
Activity: How would you apply them to variances for the receipts and payments
below for March.
Month
March
Actual
Forecast
Opening Bank
Balance (A)
Income:
Credit Sales
Total Receipts
(B)
Expenditure:
Sub-contracted
activity
Direct salaries
Indirect salaries
Business rates
Insurance
Services
Admin. Mats.
Travel
Telephone
Fixtures
and
Fittings
Equipment
Interest Charges
Professional
Fees
Advertising
Total Payments
(C)
Variance
0
0
80,000
80,000
70,000
70,000
15,000
15,000
10,000
20,000
4,000
2,000
500
300
500
500
0
11,000
19,000
4,000
2,500
400
300
600
600
0
0
0
0
0
0
0
1,000
53,800
1,500
54,900
0
31
As you can see, there are both positive and negative variances. We need to be clear
about how to interpret each variance:
So, what do you do about the situation? Having investigated each variance you will
be more informed for future planning. However, in the short-term, we may well need to
re-budget in order to stay within our targets. This could mean cutting back on
expenditure on some items in subsequent months and looking to increase sales/get
cash back into the business quickly where possible. This introduces another notion,
that of rolling forecasts; whilst you forecast ahead over an appropriate period, each
month you need to modify the forecast for the following month(s) based on actual
performance.
32
The Finance Function
The Finance Functions objectives should be geared towards achieving the corporate
goals. That means planning, raising and utilising funds in the most efficient manner to
achieve the corporate financial objectives.
Financial Management is also concerned with investment and financing decisions by
addressing the following type of questions



How much should be invested?
In which project should the investment be made?
How should the investment be funded?
33
Financial Evaluation using Ratio Analysis
As manger’s you may well be asked to assess the financial performance of other
businesses with who you interact. This assessment will need to take into account
both their income and expenditure. In order to cover both scenarios our aim here is to
help you to understand how to evaluate financial performance based upon the
information presented in the profit and loss account of a business. Financial ratios can
be used to help assess the profitability and efficiency of the operation. These are in
common use and may be referred to by our stakeholders. Financial ratios are useful
because they enable you to compare:



the current performance of the operation with past performance
the performance of one operation with that of another operational area within
the business
the organisation’s financial performance against that of a competitor, eg. the
University of Leicester
The size of the operation doesn’t matter too much because ratios cancel out size
differences.
Ratio Analysis provides a means of presenting in % terms information from which
comparisons can be made between figures, e.g.



Profit trends
Growth/contraction of the operational area
Strength/weakness of the financial position of the operation
Accounting ratios can be divided into four categories, each of which serves a
specific purpose for analysis:




Liquidity ratios
Profitability ratios
Efficiency ratios
Investment ratios
For the purpose of this unit we will be focusing on the first three ratios above.
34
Liquidity Ratios:
Liquidity (indicates
how well equipped
the business is to
pay its short-term
debts)
Current Ratio
Current Assets
Current Liabilities


Ratios:


Current
ratio


Liquidity
ratio
Liquidity
Ratio
eg. 2 :1
Means that, for every £1 of current
liabilities, there are £2 of current assets
Provides a measure of how well working
capital is being financed
Norm is 2:1 in favour of assets, but will
depend on the industry
Result of less than 1:1 could indicate
liquidity problems and overtrading
Current Assets (excluding stock) eg. 1:1
Current Liabilities



Also known as the ‘acid test or quick’
ratio
Deducts stocks from assets because they
are not usually able to be liquidated
quickly if creditors demand payment
Should not be lower than 1:1
35
Profitability
(shows the
degree of
success with
which the
business is
trading)
Gross Profit
to Sales
x 100
eg. 10%
This means that gross profit is 10% of the total
value of sales. For example, if the ratio is 10%
and sales were £100,000, gross profit would be
£10,000. By using this ratio, we can ascertain
the ratio of gross profit to sales. We may be
achieving huge sales but have only a very small
gross profit margin. That would tell us that the
‘Cost of Sales’ is far too high. These figures can
be found at the top part of the P & L account.
Ratios:

Gross
profit/sales

Net
profit/sales Net Profit
to Sales
ROCE

Gross Profit
Sales Revenue
Net Profit
Sales Revenue
x 100
eg. 6%
This means that net profit is 6% of the total value
of sales. For example, if the ratio is 6% and
sales were £100,000, net profit would be £6,000.
By using this ratio, we can ascertain the ratio of
net profit to sales. We may be achieving huge
sales but have only a very small net profit
margin. That would tell us that the ‘Operating
Costs’ are far too high. These figures can be
found in the P & L account.
Return on
Capital
Employed
(ROCE)
Net Profit
x 100 eg. 20%
Total Assets less Current Liabilities


Compares inputs (capital invested) with
outputs (profits)
Shows the return on funds employed
within the business and the effectiveness
with which they have been employed
36
Efficiency (shows
how effectively the
assets are being
utilised)
Sales to
Fixed Assets
Sales/fixed
assets

Stock
turnover


Debtor
Payment
Time
eg. 3 times
This means that the use of the fixed assets of
the business (eg. land, buildings, machinery,
equipment, vehicles etc) is generating 3 times
its £ value in sales. Therefore, if the value of
fixed assets was £10,000, these assets would
be generating 3 times their value in sales,
£30,000
Ratios:

Sales
Fixed Assets
Stock
Turnover
Cost of Goods Sold
Average Stock


Creditor
Payment
Time
Debtor
Payment
Time
Indicates the average number of days
stock is held
Good stock management suggests this
should be as low as possible without
affecting production
Debtors
x 365
eg. 30 days
Average Credit Sales per day


Creditor
Payment
Time
eg. 4 times a year
Measures how long, on average, trade
debtors take to settle
Goal here is to reduce as much as
possible
Creditors
Credit Purchases


x 365
eg. 60 days
How long, on average, the business
takes to meet its obligation for goods or
services purchased
Goal is to maximise whilst retaining
supplier goodwill
37
Activity: using the P & L Account and Balance Sheet provided below, perform a ratio
analysis, comparing financial performance between 2010 and 2011. A table has been
provided for your calculations on the page following the accounts.
Enterprise Ltd
Balance Sheet at 31st March 2011
Year to 31
March 2011
Fixed Assets:
Tangible assets
Current Assets:
Debtors
Cash at bank and in hand
Current Liabilities:
Creditors: amounts falling due within one year
Net Current Assets
Total Assets Less Current Liabilities
Creditors: amounts falling due after more than
one year
Net Assets excluding pension liability
Prension scheme liability
Net Assets
Financed by Capital and Reserves:
Reserves
Year to 31
March 2010
1,411,591
1,467,766
6,531,591
5,229,755
11,761,346
5,616,773
3,021,492
8,638,265
5,565,126
6,196,220
7,607,811
991,552
4,159,766
4,478,499
5,946,265
136,713
6,616,259
(416,000)
6,200,259
5,809,552
(788,000)
5,021,552
6,200,259
5,021,552
Enterprise Ltd
Profit and Loss Account Year Ended March 2011
Sales Turnover
Cost of Sales
Gross Profit
Operating Expenses
Operating Profit
Interest receivable
Interest payable
Profit Before Taxation
Taxation
Retained Profit
Year to 31
Year to 31
March 2011
March 2010
33,347,493
23,497,600
24,457,899
14,908,682
8,889,594
8,588,918
8,289,654
4,771,931
599,940
3,816,987
231,351
158,325
(17,000)
(16,000)
814,291
3,959,312
48,584
31,760
765,707
3,927,552
38
Ratio Comparison Table
Ratio
Calculation
2011
2010
Liquidity:
Liquid Ratio
(there is no
stock)
Profitability:
Current Assets
(excluding stock) /
Current Liabilities =
x :1
Gross Profit to
Sales
Gross Profit / Sales
Revenue x 100 = x%
Net Profit to
Sales
Net Profit / Sales
Revenue x 100
= x%
Net Profit / Total
Assets less Current
Liabilities x 100 eg.
x%
ROCE
Efficiency:
Sales to Fixed
Assets
Sales / Fixed Assets =
x times
Debtor
Debtors / Credit Sales
Payment Time x 365 days
= x days
On the following page, a table has been provided for you to note down your thoughts
regarding the financial performance of Enterprise Ltd over the two periods.
39
Activity:
Having used the ratios to analyse actual performance against budgeted
performance for Enterprise Ltd, provide a brief evaluation of your conclusions
regarding the performance of the business. Remember, the time period over
which we are analysing financial performance is 6 months.
Liquidity
Profitability
Use of Assets
40
Financial and Management Accounting
Accounting is normally divided into two areas: ‘financial accounting’ and ‘management
accounting’. The distinction is based mainly on the groups of people who use the accounting
information:
Financial Accounting classifies and records a company’s transactions in accordance with
established concepts, principles, accounting standards and legal requirements. It then aims
to present a ‘true and fair’ view of the overall result of those transactions. For a company, the
end result of financial accounting is the generation of an end of period: profit and loss
account, cash flow statement, and balance sheet. The company’s auditors report on these
financial statements.
Management Accounting aims to help managers to run their organisations. Of course,
accounting alone is not nearly enough: managers also need other data to make decisions
about running the business (production data, customer data, competitor performance, labour
performance, resource utilisation etc).
The differences between Financial and Management Accounting can be summarised in the
following table:
Issue
Governed by
Users
Time
Coverage
Financial
Company law, SSAPs
External
Past and present
Whole company/group
Emphasis
Criteria
Accuracy
Objective, verifiable,
consistent
Money
Data
Management
Managers’ needs
Internal
Present and future
Divisions and
departments
Decision-making
Relevant, useful,
understandable
Money or units of
performance
41
The Budgeting Process and Budgetary Control
Budgeting is used in organisations of all types to assist in the development and co-ordination
of plans, to communicate these plans to those who are responsible for carrying them out, to
secure co-operation of managers at all levels, and as a standard against which results can be
compared.
The Budgeting Process
Budgeting is part of the short-term planning process. It can be a highly painstaking process,
involving the co-operation and flexibility of all the budget holders who may well have to
modify their budgets in the light of both external and internal factors. Many drafts may have to
be prepared before the final set of budgets is established. The outcome of the budgeting
process is a master budget comprising:



Projected balance sheet
Projected profit and loss account
Projected cashflow
These will be supported by a series of operating budgets for each cost area, for example, in a
Sports Centre: the sports hall, the swimming pool, the gym, the café/restaurant. It is vital to
apportion responsibility for each budget, in the form of a cost centre, which is responsible for
the monitoring and control of costs.
it is also important to analyse the limiting factors, ie. those factors which may put barriers in
the way of the organisation achieving its objectives. These are the:

External limiting factors (over which the organisation has no direct control)

Internal limiting factors (over which the business has considerable control)
Activity: consider possible examples of limiting factors within a sports
centre list them below.
External Limiting Factors:
Internal Limiting Factors:
42
From the above activity, one of the key issues that should be highlighted is that ‘demand’ is
at the centre of the whole process. Is there insufficient demand in the marketplace to employ
all the company’s resources effectively? Alternatively, is there more demand than we can
cater for without suffering from escalating complaints from customers, unhappy with our
ability to provide the level of service expected from a modern day sports centre?
43
Budgetary Control
This is concerned with:



Monitoring budgeted against actual figures
Analysing and investigating variances both positive and negative
Re-budgeting where necessary
You can profile a budget across a financial period so that you can better analyse where the
actual result has varied from the expected. For example, we do most of our repairs outside
of term time.
Flexed Budgets
These are used where forecast demand and actual demand are different. By ‘flexing’ the
budget, it is possible to get a much more realistic analysis of budgetary performance. The
purpose of a flexed budget, therefore, is to account for changes in the budget variables and,
consequently, to assess real budgetary performance.
For example, the operational training budget below, for January, was forecast for 5,000
delegates. In reality, there were only 4,000 delegates, therefore, the budget will be flexed in
order to get a real picture of budgetary performance.
If we analysed the budgetary performance as it stands now, with one exception, we have
achieved a favourable ‘underspend’. F stands for ‘favourable’ and A stands for ‘adverse’. For
example, for ‘support staff’ we had a forecast budget of £10,000. Actual expenditure was only
£8,300 and, therefore, the favourable underspend is £1,700.
If we flex the budget, however, it shows a very different picture: the original forecast budget
should have been £8,000 but actual expenditure was £8,300 resulting in a £300 adverse
overspend. We need to complete the full budget evaluation.
Complete the flexed budget below by using the formula below the table. The flexed budget
for ‘support staff’ has been done for you.
44
January Training Budget
Forecast
5,000
delegates
Actual:
4,000
delegates
£
Support
Staff
Training
Workbooks
Training
Staff
Delegate
Workbooks
Venues
£
Variance
Flexed
Budget:
4,000
delegates
£
£
10,000
8,300
1,700 F
1,000
840
160 F
15,000
13,200
1,800 F
2,000
1,900
100 F
4,400
3,500
900 F
Catering
1,600
1,600
0
Hotel
Expenses
Other
Materials
Services
2,400
2,400
0
1,800
1,400
400 F
700
720
20 A
38,900
33,860
5,040 F
Variation
from
Flexed
Budget
£
8,000

Step 1: Find the flexed % = 4,000/5,000 x 100 = 80%

Step 2: Calculate the flexed figures: (example – ‘Support Staff’):
300 A
10,000/100 x 80 = 8,000

Step 3: Compare the actual figures with the flexed figures to find the variation from the
flexed budget: (example – ‘Support Staff’)
8,300 – 8,000 = 300 A = £300 overspend (use the shaded columns for this
comparison)
Once you have filled in the final two columns, you will be in a position to compare the ‘actual’
performance against the ‘flexed’ budget column. These are the two shaded column and the
variance will be filled into the far right column.
45
RASCAL
RASCAL stands for the Resource Allocation System and Cost Apportionment at
Loughborough. It is the model by which we fund and measure the financial position of the
Schools.
•
•
•
•
•
The majority of the University’s income comes from the core activities of teaching and
research, including short courses and consultancy. These are carried out in the 10 (11
when LUiL recruits students) Schools of the University at departmental level. At a
University level there is also income from the Residential and Catering operations. The
surpluses from these operations add to the funding available to the University.
Support Services such as Facilities Management, IT Services, Student Services,
Human Resources, etc are all essential costs of the University which enable it to
function but are not self-financing. These departments are given an allocated budget
from the University with which to deliver the required level of service to the University.
The difference between the total income for the University and the total expenditure of
the University is the surplus (or deficit). As the required surplus is set at c3% of
turnover it can be regarded as another “cost” to the University.
RASCAL attempts to allocate income to the departments generating the income and
charges them with the directly attributable costs of the department plus a fair share of
the total costs of the University, including the required 3% surplus.
The net result of income minus directly attributable costs minus apportioned costs is
the surplus or deficit of the department/School. The way RASCAL is constructed
means that as long as each department/School meets its budget, whether surplus or
deficit, the University will balance its budget and deliver the required surplus
Principles of RASCAL
RASCAL is:
• An income streamed model. Income is distributed to Schools in the same way as it is
earned
• All University income is distributed in the model
• All expenditure is charged
• The budgeted surplus is also charged to Schools
• Where possible income should be distributed gross
• A cross subsidy should be imposed to reflect the cost of teaching in different subject
areas but this should be transparent
•
Three models considered for cross subsidy were:
1. TRAC T national (average teaching costs across the sector)
2. HEFCE income stream (1.7,1.3.1.0)
3. TRAC T group A (Russell Group)
The model for cross subsidy chosen was model 1 as this model will keep pace with the
competitive environment and it is also data that HEFCE uses.
Indirect Charges
•
Cost of support service sections have in the past been apportioned on five principal
drivers . Now they are based only on two drivers, space and people (people being
student load including PGR’s and all staff FTE’s).
46
•
•
The term COMA charge has been replaced by “Indirect Charges” and includes the
Community Charge.
It is still a basic premise that the charge is based on perceived usage of University
resources NOT a reflection of income in the School.
Surplus / Deficit
If a School is in Surplus, the income it is earning exceeds the direct costs, the schools use of
Professional Services, a contribution to miscellaneous items and a share of the required
surplus of the institution. If it is in deficit, it isn’t earning enough to cover these costs. Over
time, the purpose of the model is that all Schools should move towards a break even
position.
Most of a Schools expenditure is staff cost. It is not easy to change this figure in the short
term. Therefore, for the coming year, as School agrees a target surplus or deficit position as
part of the budget setting process and should work towards delivering that result.
47
The Budget Setting Cycle at Loughborough
The budget setting cycle at Loughborough University begins and ends with the Financial
Forecast. This does include a forecast income and expenditure account, a balance sheet and
a cash flow statement. It predicts forward for at least five years.
January – Operations Committee and ALT discuss the priorities for spend in the following
twelve months and consider a draft budget using broad parameters. This will include overall
inflation rates for fees, research grants and contracts, pay rises and non-pay inflation. The
priorities for investment are informed by the Development Plans and are aligned to the
strategy.
March – The grant letter is received from HEFCE. Fee income estimates are prepared using
agreed intake targets. Staff costs are prepared based on all staff currently in post. The
capital framework is updated.
April – May – The Senior Finance Business Partners work with the Schools and Professional
Services to develop their detailed bids.
Late May – Two days are set aside for the DVC, PVC,s, COO and DofF to consider the
detailed bids from all Schools and all Professional Services
June – a draft budget is prepared from the bids and submitted to Operations Committee and
Finance Committee. It is accompanied by a revised Financial Forecast.
July – The draft budget and forecast are submitted to Council.
Budget Monitoring
In 2013/14 we are moving from quarterly to monthly management reporting. Reports will be
sent to all devolved budget holders monthly. At the same time, we will publish a monthly
Income and Expenditure Statement, Balance Sheet and Cash Flow Forecasts and will
analyse variances.
Quarterly, the DVC meets with the Dean of each school and discusses their financial result
with them. As part of this discussion they will update the forecast outturn for the year. At the
same meeting a range of KPI’s are reviewed to ensure that the finances are delivering the
strategic goals. A similar conversation takes place with the Heads of Professional Services.
These are used to update the forecast outturn for the institution. The I & E, Balance Sheet,
Cash Flow Statement and forecast outturn are reported to Finance Committee and Council
quarterly at the end of this process.
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The Balanced Scorecard
Historically, management accounting systems have tended to focus mainly on financial
measures of performance. The inclusion of only those items that could be measured in
monetary terms motivated managers to focus on ‘cost reduction’ and ignore other variables
that were ultimately driving the business. Product quality, delivery, reliability, after-sales and
customer satisfaction became key competitive variables, but were not measured by
traditional accounting systems.
The need to link financial and non-financial measures of performance and identify ‘key
performance indicators’ led to the emergence of the balanced scorecard – a set of
measures to enable top management to have a fast and comprehensive view of the
business. The balanced scorecard was developed by Kaplan & Norton and has been refined
many times since.
It allows managers to look at the business from 4 different perspectives by seeking to answer
4 basic questions:
1.
2.
3.
4.
How do customers see us? (customer perspective)
What must we excel at? (internal business process perspective)
Can we continue to improve and create value? (learning and growth perspective)
How do we look at shareholders? (financial perspective)
An example of a balanced scorecard is presented below. You will note that in each of the four
quadrants of the scorecard specific objectives are set. For example, under the financial
perspective there are three distinct ‘objective’ areas: revenue, net profit, cashflow. Each of
these objective areas were initially set ‘targets’ to achieve over a prescribed period. At the
end of the period, these ‘targets’ can then be compared with ‘actual’ performance. Any
variance would be compared and the variances investigated with subsequent action taken
where appropriate.
Financial Perspective:
Customer Perspective:
Objective
Target
Actual
Revenue:
Net Profit:
Cashflow :
£10m
£10.5m
£1.5m
£1.3m
£100,000 £50,000
Objective
Target
Case Time:
Complaints:
Satisfaction
Rating:
3 days
60
4 days
70
95%
75%
Key Business Processes:
Learning and Growth:
Objective
Objective
Target
Actual
Re-work cost: £100,000 £200,000
Cases Daily:
200
190
Av. Process
Time:
3 days
4 days
Downtime:
50 hours 30 hours
Actual
Target Actual
Staff Attitude Survey: 80%
Absenteeism:
3%
Comp. Appraisals:
100%
Completed Training:
95%
85%
7%
75%
50%
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The customer perspective
Managers should identify the customer and market segments in which they will compete.
Performance measures should then be developed that track the business’s ability to create
satisfied and loyal customers in the targeted segments. Typical indicators are:








Market share
Customer retention and loyalty
Customer acquisition
Customer satisfaction
Customer profitability
On-time delivery
New product development
Defect and failure levels
The internal business perspective

The internal measures should focus on the internal processes that will have the
greatest impact on customer satisfaction and achieve the financial objectives. So
processes that relate to productivity, cycle time, quality and costs should be focused
on. Typical measures will vary across organisations. It will depend on what type of
strategy the business is pursuing. Kaplan & Norton identified three principal internal
business processes.



Innovation processes
Operation processes
Post-service sales processes
The learning and growth perspective
To achieve our vision, how will we sustain our ability to change and improve? Measures in
this perspective will relate to facilitating a motivated and trained workforce. Measures would
typically fall into three areas:



Strategic competencies
Strategic technologies
Climate for action (eg motivation, empowerment, capabilities)
This perspective stresses the importance of investing for the future in areas other than
investing in assets or product development.
The financial perspective
This perspective is composed of measures such as cash flow, sales and income growth and
Return on Capital Employed (ROCE)). It can also include comparative measures such as net
margins versus the competition. The types of measures used will depend on the strategy
being pursued. For example, if you are trying to increase shareholder value there are
generally two generic strategies – revenue growth and productivity strategy. Each of these
strategies will be pursued in a different manner and will require tailored measures. A
productivity strategy being driven by improved cost structure will want to achieve lower cost
per unit.
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Governance of Finance at Loughborough
Loughborough University still derives a significant proportion of its income from public funds.
This governs how the funds can be spent.
HEFCE – are the main regulator for the HE sector. Their role as regulator is unlikely to
decrease even with the introduction of higher fees as we still need access to the Student
Loan Company finance. HEFCE set out their requirements for the appropriate use of funds
in the Financial Memorandum. As part of this , the auditors are required to report
In our opinion:
− In all material respects, income from the funding council, grants and income for specific purposes and
from other restricted funds administered by the University during the year ended 31 July 2013 have
been applied for the purposes for which they were received; and
− In all material respects, income during the year ended 31 July 2013 has been applied in accordance with
the University’s statutes and, where appropriate, with the financial memorandum, with the funding
council.
Matter on which we are required to report by exception
We have nothing to report in respect of the following matter where the Higher Education Funding Council for
England Audit Code of Practice requires us to report to you if, in our opinion:
− The Statement of Internal Control (included as part of the Corporate Governance Statement) is
inconsistent with our knowledge of the University.
Audit Committee –
1.5
Duties
A.
Effectiveness and Financial and Other Control
A.1
to gain assurance on the effectiveness of financial and other internal control frameworks
A.2
to gain assurance on the University’s corporate governance arrangements
A.3
to gain assurance on the University’s policies and procedures in respect of fraud, irregularity
and public interest disclosure
A.4
to gain assurance, annually or more frequently if necessary, on the implementation of
approved recommendations relating to both internal and external audit reports and management letters
A.5
to gain assurance on the University’s management and quality of data submitted to HESA,
HEFCE and other funding bodies
A.6
to gain assurance on the University’s arrangements to secure value for money
A.7
to consider elements of the annual financial statements in the presence of the external auditors,
including the auditors’ formal opinion, the statement of members’ responsibilities and the statement of
internal control, in accordance with HEFCE’s Accounts Directions
A.8
review the accounting policies relating to the financial statements, particularly in relation to
any changes, and to comment on their adequacy
A.9
in the event of the merger or dissolution of the institution, to ensure that the necessary actions
are completed, including arranging for a final set of financial statements to be completed and signed
B.
Internal and External Audit
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B.1
to select and appoint the internal auditors, and to agree their remuneration; and, if required, to
advise Council on their dismissal
B.2
to advise Council on the selection, appointment, remuneration and dismissal of the external
auditors, and on the provision of any non-audit services by the external auditors
B.3
to promote co-ordination between the internal and external auditors
B.4
to review the reports of the external auditors, in particular the external auditors’ management
letter and management responses; and to meet with the external auditors and relevant officers to
discuss any issues arising therefrom
B.5
to keep under review the scope and effectiveness of the internal audit function, and monitor the
planning and execution of internal audit work; to receive the annual report of the internal auditors and
such other reports pertaining to internal audit as it shall require; and to meet with the internal auditors
and relevant officers to discuss any issues arising therefrom
C.
Risk and Opportunity Management
C.1
to assess the scope and the effectiveness of the systems established by management to identify,
assess, manage and monitor financial and non-financial risks and opportunities
C.2
to review the statements in the University’s annual report and accounts on internal controls and
the risk and opportunity management framework
D.
Other
D.1
to report to Council after each meeting
D.2
to review annually its Terms of Reference
D.3
to review annually its effectiveness
D.4
to advise Council on any issues within its terms of reference arising from the reports of the
National Audit Office, the Higher Education Funding Council or other external bodies
D.5
to prepare an annual report to Council on the work of the Committee, including an opinion on
risk, control, governance and the pursuit of VFM
D.6
to prepare an annual report to HEFCE
D.7
to refer business to other committees as it sees fit.
Finance Committee
1. To oversee the development and implementation of the University's financial strategy:
1. To monitor KPI’s together with the quarterly financial performance of all underlying
activities (research, teaching, enterprise and advancement) and budgetary units against
budget and five year rolling forecast
2. To manage cash and investments and to review regularly the Treasury Management
Policy
3. To review borrowing requirements and recommend borrowing policies and financing
arrangements to Council
4. To review the University’s annual capital plan, setting a framework for decisions on
major projects by Operations Committee
52
5. To monitor the University’s delivery against targets of financial savings within the
financial plan
6. To review the overview staffing plans in support of the financial plans
2. To review and recommend revenue budgets and five year forecasts
3. To approve financial policies and financial regulations
4. To advise Council on the appointment of bankers, insurance brokers and other financial
specialists and to review their performance periodically
5. To monitor the University’s financial safeguarding of assets and if necessary make comments
to Council
6. To review the performance of University subsidiary companies
7. To scrutinise and recommend the annual financial statements of the University to Council
8. To meet at least four times a year and to report to Council after each meeting
Operations Committee
1. To advise Senate on the future academic developments of the University, having particular regard to
the financial and physical implications of such developments.
2. To develop detailed annual business plans and budgets within parameters agreed by the University’s
Finance Committee.
3. To approve the relevant stages of major projects within guidelines approved by Council and, in
particular, to establish appropriate management and independent review arrangements for major
projects involving the Finance Committee as appropriate.
4. To institute operational reviews of cost centres as considered appropriate to ensure the effective
performance of the University in the light of its strategic objectives.
5. Within the context of the budget agreed by the Finance Committee and Council, to be responsible
for staffing levels in academic and other sections of the University and to delegate as appropriate to
subsidiary bodies or officers the day to day responsibility for staffing decisions .
6. To approve student intake and population targets having taken into account all relevant factors
including the budget parameters set by the Finance Committee
7. To approve allocations from contingency funds within the agreed budgetary framework.
8. To consider and make recommendations to Council concerning the level of fees for tuition and
research supervision for all registered students of the University and for the validation of academic
courses in other institutions.
9. To report regularly and routinely to Senate, and Council.
10. To ensure implementation the University's VFM programme within parameters agreed by the
Finance Committee.
11. To consult Senate on all issues of academic policy in accordance with Statute XIII before making
recommendations to Council.
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Internal Audit – currently Price Waterhouse Coopers – report annually on our
system of internal control
External Audit – currently Deloitte
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Summary
In this module we have introduced various financial principles including the role of finance
within the organisation, the contrasting role of the financial accountant from that of the
management accountant, four key accounting principles, the notion of the balanced
scorecard, and sources of funding. We have also analysed the three key financial
statements: the cashflow, P & L, and balance sheet, and used ratios to evaluate financial
performance. We have concluded by highlighting the purpose of budgeting and techniques
for budgetary control in the form of the flexed budget.
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