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How can organisations ensure that their financial administration is going to guarantee their profitability and liquidity?

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Management Assignment One "Controlling and managing costs and cash flow are essential financial objectives for all organisations and should lead to improved levels of profitability and liquidity. From your studies, and with the benefit of your own experience, discuss this statement and identify the policies and measures that could be implemented in order to ensure that the most effective means of cash flow management are achieved. This should also include references to, and commentary on, a working environment with which you are familiar." Philippa Young Contents Page 1. Introduction 1 2. Cost Classification 2 2.1 Costs 2.2 Functional Costs 2.3 Behavioural Costs 3. Cost Control 5 3.1 Break Even Analysis 4. Local Government Funding 7 4.1 Revenue Budget 4.2 Capital Budget 5. Budget Management and Control 9 5.1 Budget Compilation 6. Cash Flow 11 7. Benefits of Budget Management 13 8. Conclusion 14 1. Introduction Sound financial administration is vital to the viability and sustainability of any organisation. Successful budget management will help to ensure that resources are allocated effectively and appropriately. Without efficient forward planning, monitoring and reviewing of financial resources organisations are unlikely to be able to maintain their profitability and ultimately for many organisations, especially private companies, their existence. So how can organisations ensure that their financial administration is going to guarantee their profitability and liquidity? For the purpose of this report I shall be examining the budget management systems of Derbyshire County Council paying particular attention to the operations within the Highway Safety Team. Before we examine the budget management systems that the Authority has in place we need to understand and explore how costs are classified. 2. Cost Classification All items or activities have an associated cost and managers need to be aware of the nature of these costs and how they behave both in isolation and how they interact with each other. All costs have a significant impact on the functioning of a business and we need to understand these costs accordingly. ...read more.


This income is collected by district and borough councils and passed to the Government who then distributes it to local authorities according to the services they provide and the number of residents living in the area. Clearly such a large organisation with significant budgetary control needs to ensure that it has a clear planning process in place. The budget process for 2003/4 followed the following timetable August 2002 The medium term financial plan was updated to give an indication of the likely expenditure needs and resources available over the next three years. September 2002 Detailed assumptions for pay awards and inflation were made and the production of the base budget for 2003/4 commenced. November 2002 Base budget produced and taken to service committees. Government issued provisional details on the amount of money the Council will get by way of grants and business rates. January 2003 Government confirmed the level of grant and business rates available. Cabinet determined a budget and council tax levels for 2003/4. February 2003 Council approved the budget and the council tax levels required were issued to local councils who collect the tax. March 2003 Council tax bills were issued. April 2003 New financial year began. May 2003 Secretary of State for Environment makes decisions about the capping of those authority budgets and/or council taxes he deemed excessive. 4.2 Capital Budget From 2003 the Government makes its capital allocations to local authorities via a Single Pot mechanism. It will then be for the authority to decide the amounts each service area is allocated. This will be affected by the council's priorities, policies and plans. 5. Budget Management and Control In simple terms a budget is an expenditure plan. Within Derbyshire County Council "it is the financial expression of the Council's plans and objectives"1 It can help ensure that resources are allocated and effectively used for their intended purpose and that these resources are properly accounted for. ...read more.


Authority and Responsibility Budgeting makes it vital to identify and clarify lines of management accountability. It encourages understanding and responsibility within managers. Communication Communication is vital throughout a budget system. As many functions/services are reliant on each other it is necessary for each to know how the other is performing. Motivation Involving as many tiers of management in budget setting as possible and setting reasonable performance targets linked to this can help motivate staff. Performance Management It helps to measure performance and can identify areas of strength and weakness and allow appropriate proactive action to take place. Efficiency Ultimately efficiency should be improved and resources allocated appropriately and cost effectively. 8. Conclusion Without effective financial management the profitability and ultimately the liquidity of an organisation is seriously affected. Companies need a clear understanding of the costs involved in providing their product/service. Once these are understood then efficient budget controls and monitoring need to be put in place to ensure the effective running of the organisation and its funds. Ultimately a rigorous budget control and management system will provide managers with a greater understanding of the cash workings of the organisation. This will allow proficient forward planning and with regular monitoring should help prevent a situation whereby an organisation is unaware in advance of any financial difficulties, thus allowing organisations to put contingency plans into place before it gets to the point of liquidation. Organisations need to, as far as is reasonably possible, accurately forecast cash flow. If this cash flow forecast is unreliable then there will be less money available for resources leaving companies unable to pay and facing liquidation. Effective cost control will also help the overall efficiency of an organisation, not just in profit terms, and will identify areas of strength and weakness within the service thus enabling better forward planning. Finally quality cost control will help ensure that the organisation is meeting its desired objectives. 1 Derbyshire County Council Financial Regulations 2002 2 BBC News Friday 26th September 2003 1 14 ...read more.

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