MG4031 Week 11 Lecture 02 PDF

MG4031 Wk.11 Lec.02 Methods of Financial Control: Budgetary Control: The formulation of plans for a given period in numerical terms (predominantly financially). Ascertaining what has been achieved and then comparing it with budget projections. Revenue & Expense Budget Time, Space, M...

MG4031 Wk.11 Lec.02 Methods of Financial Control: Budgetary Control: The formulation of plans for a given period in numerical terms (predominantly financially). Ascertaining what has been achieved and then comparing it with budget projections. Revenue & Expense Budget Time, Space, Material & Production Budget Capital Expenditure Budget Cash Budget Sales Budget Variable budgets analyse expense items to work out how individual costs will vary with output, overcoming the issue of budget inflexibility. Zero-based budgeting means that managers start from nothing when budgeting, with the aim to reduce inefficient budgeting from continuing to the next period. Effective Budgeting has support from top management, participation by all involved, is based on reliable standards and accurate information. Break-Even Analysis: Examining the fixed and variable costs to determine the quantity at which a firm will become profitable. They provide a simple, graphic understanding, but the relationship between costs and outputs is rarely linear, so they should not be used in isolation. Ratio Analysis: Current Ratio: (Liquidity – the ability to pay short terms debts as they fall due) Current Assets/Current Liabilities:1 At/above 1 is liquid. Ideal is 2:1 Quick-Asset Ratio: (Liquidity, not including stock) Current Assets-Inventory/Current Liabilities:1 1:1 is liquid (Inventory Turnover Ratio: (Measures the number of times an organisations inventory has been sold.) Cost of Goods Sold/Current Inventory:1 Asset-Turnover Ratio: (Measures how well the firm is using its assets)  Sales/Total Assets:1 For each 1 invested in assets, the firm has generated X. Accounts Receivable Ratio: (Measures a firm’s collection period on credit.) Sales/Accounts Receivable:1 Divide 365 by the result to find the average collection period. Greater than 40 days indicates slow accounts receivable. Net Profit Ratio: (Performance) Net Profit/Sales The average is.04-.05 (4-5 cents made on each euro in sales) Return on Assets Ratio: (Measures the efficiency in generating profits.) Net Profit/Total Assets The norm is around.07 (7 cents made on each euro invested in assets) Debt-Equity Ratio: (Leverage) Total Liabilities/Total Equity Shows how much is borrowed for every euro in equity. Methods of Non-Financial Control: Project Control: Gantt Charts show the time relationships between events and their outcome, showing a sequence of activities needed required to complete a task. Only activities with overlapping bars can be completed simultaneously (none can be completed simultaneously in the example below).  PERT (Project Evaluation Review Technique) Analysis: Developing a network that shows the most likely time needed to complete each task required to finish the project.  Identify each event and assign a time frame  Draw the network in chronological order  Estimate the time required for each activity in weeks  Estimate the total time required for the project They emphasise possible delays, are detailed, and can be changed. However, timing must be accurate, it is costly and difficult to apply when outside suppliers are involved and is unsuitable when events are repetitive. Management Audits: External audits involve analysing another firm to aid strategic decision making. Internal audits concentrate on the firm itself. They can deter internal fraud. Inventory Control: Having the right amount of the right stock at the right time, while keeping holding costs to a minimum. How much should be bought at a time? When should stock be re-ordered? What are the most economic order quantities of each item? Economic Order Quantity (EOQ) Formula: 2 x order costs x annual consumption annual holding costs Production Control: Ensuring that goods are produced on time at the right cost and to the right standards. Routing – Where a job is to be done Scheduling – When it will be done  Dispatching – Issuing production orders at the right time Expediting – Ensuing the schedule is kept Quality Control: A check on the efficiency of production. Total Quality Management (TQM). TQM evolves from inspections to find sources of non-conformance, to constant quality control, to quality assurance, to TQM, involving comprehensive policies applying to all aspects and stakeholders of the operation. References: Tiernan, S. and Morley, M. (2019) Modern Management : Theory and Practice for Students in Ireland, Fifth edition. ed, Dublin, Ireland: Institute of Public Administration, pp. 267-292. MG4031 Lecture Slides Image 1: www.techtarget.com