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Refining Your Financial Strategy

Refining Your Financial Strategy: Report 
Workshop Date: 7th October 2009

Twelve participants from eight organisations attended the ‘Refining your financial strategy’ event, hosted by KPMG, presented by Diana Borin, Director Accounting Advisory Services and Hamish Doley, Partner, Middle Market Advisory.

Overview

The importance of financial reporting should be a constant priority – reports provide key information that can be developed into action plans that monitor the financial performance of an organisation. Starting with a well developed strategic plan, by the Board and management team. Financial Statements should be in place to support decision making by these board members, CEO and the Chairman and statements should provide a brief summary supplemented by detail - the ‘nitty gritty’.

Key Financial Reports:

1. Income statement (profit & loss statement)

  • Produced monthly, with year-to-date statements.  They should include comparison against budget and previous year figures, and with forecasting for the remainder of current year. 
  • Allows board to identify trends over time and flag any ‘red’ issues
  • Useful to have profitability ratios, such as
    • Gross profit margin = (sales – COGS) / Sales
    • Return on assets = Net income / total assets
    • Return on equity = Net income / shareholders equity

2. Balance Sheet

  • Provides snapshot of financial position at a single point in time
  • Produced monthly, with year-to-date statements
  • Allows comparison of financial position at eg the same time in the previous year
  • Measures short term liquidity – Can you pay your debts???
  • Useful ratios:
    • Current ratio = current assets / current liabilities
    • Quick ratio = (current assets – inventories) / Current liabilities

3. Cash Flow Statement

  • Produced monthly, with year-to-date statements. It should include comparison against budget and previous year figures, and with forecasting for the remainder of current year
  • Provides:
    • a record of cash spend changes in balance sheet and income statement
    • information on  liquidity and solvency  
  • It may be a requirement for funding applications
  • It shows cash flow from
    • operating activities
    • investing activities
    • financing activities

4. Other relevant information for decision making


Top Five Financial issues for a Board

1. Solvency:  Are we going to survive? Can we pay debts when due? 
What to do -

  • Understand and monitor cash positions to support viability 
  • Know how to read & understand your financial statements 
  • Knowing the implications 
  • Use tools to monitor your financial stability (eg WIN Forecast - 3 way modeling accounting program that reports P/L, Balance sheet and Cash Flow) 
  • Develop a worst case scenario

2. Internal Control System: Internal checks, which provide accurate information and prevent unauthorized financial transactions.
What to do –

  • Understand internal policies  and procedures ( look at transaction flow, level of segregation by members – even important within a small organisation)
  • Payment / disbursement policies are worth nothing unless monitored
  • Understand strengths and weaknesses within framework 
  • Management override 
  • Understand external auditor’s scope – what information is standard, and what do you need to be asking for 

 3. Accounting and Finance Policies

  • Understanding the policies in place, making them relevant to the organisation (e.g investment policies – how should surplus cash be dealt with) 
  • Review of policies ( should not be a year-end consideration)

4. Activity Based Accounting: Assigning revenue and costs to individual activities and tasks

  • Understand cost drivers so event P&L’s are meaningful – which in turn impacts on management decisions 
  • Link financial reporting to business plan – relating to revenue and cost drivers

5. Board Reporting Framework: Providing appropriate and sufficient financial information to the Board to enable informed decision making.

Issues raised during discussion:

  • Use board knowledge – have a board member who has a financial ‘bean counter’ role to interpret reports
  • Attendance of external accountant/ auditor to board meetings once a year (independent of book keeper) 
  • Expectations of auditor role 
    • Know the stock standard report and what to ask for 
    • Have an audit planning meeting one month out to set scope of audit 
    • Auditor should present final audit report to the board in person 
  • Ongoing development process of financial reports 
  • Importance of having a deadline for providing board material before meetings
  • Grants – cash injection/ how do we manage it day to day 
    • Term deposit account – smart investment 
    • Money should still show throughout cash projections 
    • Get financial advice (no-risk options) 
    • Check on how grants are to be accounted for - can have a significant impact on reported earnings and balance sheet position