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Financial Management 101

Financial Management vs. Accounting

Financial managements differs significantly from accounting on the bases of financial management focuses on the creation and maintenance of economic value ad the importance of cash flow, whereas accounting focuses on whether the business is running at a profit or a loss. However both these principals are fundamental to the management of business operations.

Five Users of Financial Statements

  1. Investors: In order to assess possible risks and anticipated returns
  2. Employees: In order to assess the employers ability to provide remuneration, retirement benefits and further employment opportunities
  3. Lenders: In order to assess the ability for them to repay loans and interests
  4. Suppliers and Creditors: In order to assess ability to pay balances owing
  5. Customers: In order to assess the companies ability to continue doing business

Time Value Concept

Time value of money defines that the current value of money is more valuable than the same money value in the future. This is because money now can earn interest or be invested and earn positive returns, thus being worth more if available immediately.

Two of the models of Time Value of Money are:

  • Future Value: The value at a given future date of a present amount earning interest at a specified rate. Uses simple interest or compounding interest to find future value.
  • Present Value: The present value of a defined future value given a specified future date. The future value is discounted at a discount rate to find the present value

Organisational Budget Types

  • Incremental budgeting: Budget is primarily based on the previous period’s budget or actual results, with small increments made for the new budget.
  • Zero-based budgeting: The new budget, disregards the previous budgets and all activities and priorities are re-assessed from zero based on current and future objectives, plans and projects.
  • Activity-based budgeting: Focuses more on the level of effort for activities rather than the time spent to execute these activities. Provides opportunities to align activities with objectives.

Types of Variance

  • Favourable Variance: occurs when the actual results are better than the expected results, this is denoted with a (F)
  • Adverse Variance: occurs when the actual results are worse than the expected results, this is denoted with an (A)

 

The importance of variance analysis

Variances can be used as an aid to measure the effectiveness of an organisation, and its effort, it can also indicate performance improvement or decline. Therefore variance analysis can be regarded as part of an organisation’s performance monitoring tools. Variances can be used as springboard for further analysis, investigation and action.

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