Ideadeluge finance for non-financial managers
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Transcript of Ideadeluge finance for non-financial managers
08/04/20231
What financial managers wish non-financial staff understood
Finance for Non-Financial Managers
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Fundamental accounting concepts
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Owner’s Equity Assets Liabilities
The accounting equation
This will be the case after every single transaction
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What is an asset?
It’s an asset!
We bought it
We receive revenue for doing
scans
Something we own or use that should generate income.
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What is a liability?
Owe money as we bought on credit
Purchase nurses uniforms on credit We are going to
pay
Something we owe because of something we did and we are going to have to pay.
It’s a liability
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What is Owner’s Equity?
The residual interest in the assets of the entity after deducting all its liabilities.
Is increased by: Revenue and capital contributions
Is decreased by: Expenses and drawings/ dividends
Owner’s Equity Assets Liabilities
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Income and expenses
Income: Any increase in equity resulting from increases in assets or decreases in liabilities
Expense: Any decrease in equity resulting from decreases in assets or increases in liabilities
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Accounting equation example
1. The department receives a grant (in cash) of $20,000
2. The department incurs expenses of $1,000
3. The department pays employees’ salaries of $5,000
4. The department pays the creditors.
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Owner’s Equity Assets Liabilities
1 Revenue +$20k Cash +$20k
2 Expenses -$1k Creditors +$1k
3 Expenses - $5k Cash -$5k
4 Cash -$1k Creditors -$1k
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Overview of the accounting equation
Assets Liabilities
Buildings Accounts Receivable Computer Equipment Motor Vehicles
Accounts Payable Accruals Bank Overdraft Long-term Debt
Revenue Expenses
Government funding Interest received Private Donations
Staff Salaries Consumables Electricity Consultants (not always)
Owner’s Equity Assets Liabilities
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Accrual accounting
Financial reports are prepared on an accrual basis.
Expenses and revenue are recorded when they are incurred or earned, not when cash is paid or received.
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Accrual accounting example
Example: Purchase of medical supplies1. Supplies are ordered on the 30 September.2. They are delivered on the 24 October.3. Cash paid for the supplies on the 25 November.
September October November
Goods ordered
Goods received
Pay creditor
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Accrual accounting example
When the goods are ordered – there is no transaction
When the goods were received, the expense was recognised
The cash was only paid later, the transaction affecting only the cash balance and the accounts payable / creditor balance.
September October November
Goods ordered
Goods received
Pay creditor
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Cash flow vs revenue
Cash flow is the physical cash received or paid out in the running of the business.
Revenue and expenses may be recognised when there has been no cash flow. Cash may also be received / paid with no revenue /expense recognition.
Revenue
Cash
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OPEX and CAPEX
Capital expenditure (CAPEX) Operational expenditure (OPEX)
Initially captured in the balance sheet
Initially captured in the income statement
Recognised as an expense of a number of years
Recognised as an expense in the year of expenditure
Is an asset Is an expense
The matching principle features again, as a key determinant in whether an expenditure item is OPEX or CAPEX.
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Capital expenditure (CAPEX)
What expenditure should be capitalised?Expenditure that is expected to provide benefits to an organisation over a number of years (e.g. an MRI scanner operates for years)
Implications Capitalised expenditure eventually needs to be expensed. This is
done a little bit every year until the asset is no longer useful. The accounting term for this is depreciation.
Profit for the period is relatively higher as only a portion of the cost is recorded as an expense not the whole cost of the asset.
Examples of expenditure that can be capitalised:MRI scanners, X-ray machines, computing equipment and motor vehicles (in other words – assets).
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Operational Expenditure (OPEX)
What expenditure should be expensed immediately? Expenditure that provides benefits in the short term (e.g. staff
salaries represent the services provided in the past fortnight). Expenditure which has minimal benefit (e.g. stationery). Organisations will often have a policy of expensing costs below a
certain amount (e.g. all computer equipment costs below $5,000 are expensed).
Implications Operational expenditure has an immediate impact on the profit. It reduces an organisation’s profit in the period in which the
expenditure is incurred.
Examples of operational expenditure:Staff salaries, Medical consumables, Travel costs
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Depreciation
Capital expenditure is recorded as an expense a portion at a time over the life of the asset, rather than a one-off when it is purchased.
Example: New x-ray machine purchased
Value: $100,000
Useful life: 5 years
Annual Depreciation Expense ($100,000/5 = $20,000)
$20,000 $20,000$20,000$20,000 $20,000Device
Purchased
Yr 1 Yr 5Yr 4Yr 3Yr 2
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Depreciation and matching
Why is the cost spread across 5 years?
The device’s useful life is the time it is expected to be able to be used to provide patient care.
Allocating the cost over the useful life is a way of matching the cost of the asset to the benefit it provides (i.e. it’s ability to provide patient care).
After this 5 year period, the device could be:
Obsolete (replaced by improved technology) and/or
Not working anymore (cannot be used to treat patients).
Implication
At the end of five years the device’s value in the Balance Sheet will be zero (fully depreciated), reflecting one/both of the above Scenarios.
Useful life is generally determined by industry standards, professional judgment or the useful life stated by the device’s manufacturer.
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Financial management
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Importance of financial managementBenefits of effective financial management Sufficient funds to provide high quality health care Effective resource allocation Front-line staff can focus more on patients Ability to invest in modern equipment
Consequences of not effectively managing financials
Consistently incurring cost overruns
Inability to provide quality patient care on a daily basis
Inability to invest in new equipment
Reflects poorly on the department/division’s reputation
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Who is responsible?
Primary responsibility
CFO has ultimate responsibility for financial management within an organisation. The CFO will delegate responsibility and maintain the control environment.
Delegated responsibility
Business Unit Financial managers, Cost Centre Managers, Planning Managers, Reporting Managers, Accounts Payable Managers, Accounts Receivable Managers.
Inidvidual responsibility
All employees.
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How are you responsible?
Completing tasks and deliverables for the finance team
Adhering to policies and procedures
Complying with internal controls
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Examples of decisions with financial implications
Allocation of staff – if the hospital is understaffed and employees are required to work overtime, expenses will increase and cash will decrease which could lead to costs going over budget.
• Investigate why costs were higher during the month than budgeted – if there is a large supplies cost perhaps a number of unscheduled surgeries took place that month.
• Consider whether the department/ division will need to upgrade its equipment to meet future patient requirements.
• Determine the correct amount of housekeeping supplies / medications / stationery / consumables. This is working capital management and impacts on cash management.
• Determine to follow internal controls to reduce risk (and when in certain circumstances to breach those controls).
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Working capital
Working capital = current assets – current liabilities
Current assets - cash, accounts receivable, inventory.
Current liabilities - accounts payable, short term loans and debt.
Changes in working capital have a direct effect on cashflow .
Working Capital
Current Assets
Current Liabilities
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Working capital management
To manage working capital properly it is important that orders are promptly processed, charts are processed accurately and invoices are sent to the finance department in a timely fashion.
This is very important when it comes to managing cash flow.
Cash Inventory Accounts receivabl
e
Accounts payable
Working capital
Starting position
5 5 0 1 9
Purchase inventory
4 6 0 1 9
Sell inventory
4 5 2 1 10
Collect debt
6 5 0 1 10
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Ordering too much inventory
It is clear that a lot of our cash is tied up in inventory. We nearly ran out of cash in this example.
It is important to manage working capital due to the direct impact on cash.
Cash Inventory Accounts receivabl
e
Accounts payable
Working capital
Starting position
5 5 0 1 9
Purchase inventory
1 9 0 1 9
Sell inventory
1 8 2 1 10
Collect debt
3 8 0 1 10
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Financial reports and KPI’s
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Types of financial reports
The three main financial reports are :
• Profit and loss : Revenue and costs for a particular period.
• Balance sheet: Assets and liability position at a point in time.
• Cash flow statement: Cash inflows and outflows for a particular period.
30 June
Balance sheetPoint in time
Profit & loss and Cash flow statement
1 July
Information for the whole period
Together, these three reports give the overall picture of the financial health of a company. A single report can give a quick look at the performance, but one section might be performing well whilst another is failing.
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Profit and loss
The main report we will focus on is the profit and loss statement as this gives a breakdown of revenues and expenses – something you may have some control over.
In your role you probably have more control over costs as opposed to revenue. Some cost reports you may receive are:
• Staff costs (e.g. salaries, casual staff wages).
• Medical staff costs (e.g. bandages and scrubs).
• Costs for using medical equipment (e.g. specialised equipment used for operations) .
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Interpreting cost reports
2010 2009
Actual Budget Variance Actual Budget Variance
Employee expenses 213,250 206,000 7,250 209,000 201,000 8,000
Medical supplies 161,240 158,000 3,240 157,000 160,000 -3,000
Travel costs 74,560 80,000 -5,440 81,000 80,000 1,000
TOTAL 449,050 444,000 5,050 447,000 441,000 6,000
What are the key findings from this cost report?
• Employee expenses exceed budget. Why?
• Medical supplies exceed budget. Why?
•Travel costs have decreased. Why?
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Key performance indicators (KPIs)
KPI’s help define and measure progress toward organisational goals.
They are quantifiable measurements, agreed to beforehand, and reflect the critical success factors of an organisation.
They will differ depending on the organisation. For example:
• An IT company may have the percentage of its income that comes from return customers.
•A school may focus KPI’s on graduation rates of its students.
• A Customer Service Department may have percentage of customer calls answered in the first minute as one of its KPI’s.
KPI’s give departments and employees an area to focus on as it is known that performing well within these indicators is what the company values.
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Understanding performance managementKey performance indicators (KPI) are a useful tool for managing performance.
Example of potential health care KPI’s:
KPI What it is measuring
Patient Numbers per Month
Measures whether a hospital is treating the number of patient’s it aims to care for.
Average Emergency Response Time per Week
Measures how long it takes for hospital staff to provide emergency treatments for patients.
Re-Investment ($) per Year
Measures the amount of capital expenditure on new equipment.
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•Specific
•It must be clear whether the KPI was achieved
S
•Measurable
•KPI needs to be able to quantifiable
M
•Agreed Upon
•KPI needs the support of the staff member being measured
A
•Realistic
•KPI needs to be achievable
R
•Time-bound
•KPI needs to be measured within a specific time period
T
KPI’s should be SMART
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Budgets
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Understanding Budgets
A budget is a report that outlines the future resource allocation in an organisation.
Budgets can be used to:Identify if there are sufficient staff to attend to future patient
numbers. Determine if existing funds are sufficient to cover future
expenditure. Identify if there will be excess capacity that can filled by
accepting patients from overcrowded hospitals.
Future events Making decisions today on how to resource future events
Resource allocation
Determining how to allocate staff, assets, liabilities, revenues and expenses to meet organisational objectives.
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Budgeting can help in identifying the following issues:
Shortfalls in funding (i.e. private patient fee no longer covers an operation’s costs).
Shortfalls in staff numbers/hours (i.e. not enough staff to attend to patients).
Shortfalls in physical capacity (i.e. overcrowded hospital rooms).
Excess staff and/or excess physical capacity (i.e. too many staff/rooms).
Benefits of budgeting
Identify Shortfalls or Excess Resources
Prepare an advanced response for shortfalls
or excess resources
Plan for sustainable, high quality health care
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What is the cost of budgeting?
Be careful to ensure that the costs involved in preparing budgets do not exceed the potential benefits.
Try to avoid:
r Spending significant time discussing the budget
r Not using the budget to make decisions
r Making the budget source information 100% accurate
r Spending significant funds employing support staff to compile and report budgetary information
Cost of budgeting
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Types of Budgets
Organisations use multiple types of budgets to assist in decision making.
Cost budget Lists the forecast costs for the upcoming period
Revenue budget Outline the forecasted income for the upcoming period.
Staff budget Highlights the forecasted allocation of FTE staff for the upcoming period.
Investment budget Explains the forecasted re-investment of funds for the upcoming period.
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Cost behaviour
When it comes to a budget, it is incredibly important to understand the difference between fixed and variable costs.
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Cost behaviour
Fixed costs: Costs you would incur even if hospital has no patients.
Example : If there weren’t any patients in the hospital there would still be some electricity costs, salary expenses and insurance expenses.
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Cost behaviour
Variable costs: Costs that increase or decrease in relation to a cost driver (such as patients in the hospital).
Example : If a hospital is at capacity, more staff are required to care for patients. Wages increase, linen cleaning increases and meal expenses increase.
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Cost behaviour
Cost drivers: Cost drivers are factors or events that have a direct or indirect impact on the cost of a specific activity.
Example : The cost of running an MRI machine depends on: number of hours it runs, number of employees needed to run the machine and number of patients tested. The unit cost refers to the cost of each additional scan.
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Fixed vs variable
Allocate the following costs to either a fixed or variable cost:
•Full time staff wages
•Casual staff wages
•Overtime
•Depreciation
•Travel costs
•Medical waste disposal
•Insurance
•Electricity
•Laundry costs
•Cleaning costs
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Example : Budget review
What risks does this budget present?
What potentially invalid assumption is being made in this budget?
What additional questions would you ask?
Quarterly Cost BudgetJanuary – March 2011
January February March
Staff Costs 13,037,215 11,547,588 12,456,888
Medical Consumables 4,044,808 1,065,152 1,090,433
Medical Waste Disposal 3,036,853 1,517,938 2,887,122
Laundry and Cleaning Costs 169,240 693,559 244,677
Monthly Total 20,288,116 14,824,237 16,679,120
Funds Available 20,300,000 13,200,000 16,700,000
Variance 11,884 -1,624,237 20,880
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How to draw up a budget
1. Involve employees who will be responsible for the budget or who have information which will help you prepare them.
2. Collect historical information and forecasts.
3. Use historical information, and any changes in operations or prices, to budget for overheads and other fixed costs.
4. Consider the cost drivers to budget for variable costs.
5. Identify any non-operational cashflows (taxes and financing)
6. Consider the timing of all income and expenditure items.
7. Ensure your budgets contain enough information to let you monitor the key performance indicators you use to manage the business.
8. Agree the budget with the individuals who will be responsible and be prepared to amend it if your assumptions are unrealistic.
9. Regularly update budgets as actual figures become available and circumstances change.