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.

Costs are grouped into certain classifications, which assists us in being able to understand and analyse them further. The three most common groups of classification are:

  • Costs
  • Functional costs
  • Behavioural Costs

2.1 Costs

Costs can be broken down into three core elements

  • Material costs
  • Labour costs
  • Expenses

Each of these elements can then be further divided into direct or in-direct costs.

  • Direct Costs are those costs which are incurred as a direct result of a product or service.
  • Indirect Costs are those which are not directly attributed to a product or service.

For example Derbyshire County Council’s Highway Safety Team distributes a newsletter to each of its schools. The newsletter is designed by a member of the team then it is sent to a printing company to carry out the finished design and print. The newsletter is then delivered back to the Highway Safety Team to despatch to schools.

The Direct Costs involved in this process include

Material –         paper used for newsletter, printing equipment, boxes to package newsletters.

Labour –         salaries of the staff involved.

Expenses -        hiring of delivery vehicle

The Indirect Costs involved include

Material -         maintenance of print machinery, printing ink

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Labour -         maintenance staff

Expenses -        telephone charge for emailing design, building rent

2.2 Functional Costs

Most organisations have a number of departments/sections or functions within them of which each would have a cost association.

The table below shows Derbyshire County Council’s 2003/4 expenditure split by departmental function. Each department will have an associated cost centre.

2.3 Behavioural Costs

Because most work is varied and not static some costs will react accordingly to changes within the work or production environment. Therefore costs can also be classified to reflect this into


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