Finance and Accounting
This chapter provides an overview of the Finance and Accounting function. The main activities involved in finance and accounting function include:
- Financial Management.
- Financial Reporting
- Management Accounts
The aim of the chapter is to
- Provide an introduction to financial management
- Describe financial planning
- Describe the main sources of finance available to an organisation
- Explain financial analysis and reporting
- Provide an overview of management accounting
- Identify the different information systems found in finance and accounting
- Discuss the impact of e-commerce on Finance and accounting
INTRODUCTION TO FINANCIAL MANAGEMENT
Financial management has been defined (Kennedy, MacCormac & Teeling 1995) as
“Assisting in the achievement of overall objectives of the firm through:
- Provision of finance when and where required in a manner and at a cost which represents an acceptable level of risk to a business
- The investigation and evaluation of investment opportunities open to the business.” The primary functions of the financial manager or financial management team include:
- Advising on the best investments that the firm should make to meet overall objectives.
- Sourcing the appropriate finance to fund these investments.
- Analysing, recording and reporting on the activities and financial well- being of the firm.
In summary financial management is primarily concerned with matching the sources of finance (Investment Decisions) to the uses of finance (Financial Decisions) and the final task involves compiling detailed accounts.
These decisions result from the analysis and appraisal of the various capital project opportunities open to the company. Investment decisions include:
- Long term strategic investment decisions such as Capital Expenditure – for example, the purchase of equipment
- Short term or tactical decisions such as Working Capital management – for example, the payment of staff and suppliers
These decisions relate to identifying how best to finance the proposed investments given the existing financial environment, and how best to reward the shareholders for taking the financial risk. Financial decisions can be broken down into short-term finance, long-term finance, equity financing, and dividend policy (the amount paid to shareholders).
Financial planning involves the construction of financial forecasts and the appraisal of investment opportunities and is an aid to the development of a strategic plan. Financial planning enables an integrated approach across all functions.
Rational for Financial Planning Financial planning is useful for organisations for the following reasons:
- It indicates to management the funding requirements of operations, projects and programmes.
- Financial planning ascertains when and for how long funding will be required.
- It also demonstrates what financial outcomes will result if certain paths are followed.
- It provides a method of control whereby deviations from expected performance are highlighted allowing management to take corrective action in time.
- It can be used as a readily available criterion for decision-making.
- It can be uses in analysing the risk associated with proposed projects or policies.
- It can also be used as a motivational device for the organisations employees.
There are two key types of financial planning – short term planning or forecasting and long term financial planning or forecasting.
Short Term Planning or Forecasting
A number of methods are used in identifying the short-term financial requirements of a company. These include cash flow forecasting, projected profit and loss account and balance sheets and budgets.
Cash Flow Forecasting
The cash flow forecast outlines the expected cash receipts and payments over a period of time, providing information on the projected cash position for the period under examination.
The following three elements are involved in the preparation of a cash flow forecast:
- Preparing the cash inflow forecast: The accuracy will depend on the reliability of the sales estimates and the expected credit terms taken by customers.
- Preparing the cash outflow forecast: This takes all cash payments into account, including wages, supplies, interest, etc.
- Comparison: The two forecasts are compared to determine whether there will be a surplus or a deficit of cash during each period. If there is a prolonged deficit, it will have to be financed through an overdraft or through some form of loan.
Projected Profit and Loss Account and Balance Sheet
A projected profit and loss account will show whether the business will record a profit or loss for the next trading period. This allows a comparison between future and current profit and losses. Action can be taken to improve the position if required. The projected Balance Sheet is based on information from the cash flow forecast. The projected Balance Sheet gives a broad picture of the firm’s expected short term position, including the use and sources of finance, the debtors and creditors level, the amount of cash at hand or in the bank and the stock levels. This information is important for assessing the liquidity of the firm on a shortterm basis.
Budgets provide a detailed statement of the financial objectives for the coming year. Each department will prepare its own budgets which are combined into a master budget for the company. Once a budget is prepared it provides a forecast of activity for each area. Budgets also help facilitate management control.
Long Term Planning or Forecasting
Techniques that are used in long term financial planning are called capital budgeting.
Capital Budgeting which is sometimes referred to as investment appraisal is the planning process used to determine whether an organisation’s long term investments such as new plant machinery, or other capital projects are worth pursuing. The amount of capital available to an organisation at any given time for new projects is limited so management use capital budgeting methods to determine which projects will give the most return over a specific period of time.
Popular methods of assessing capital investment projects include net present value (NPV), internal rate of return (IRR), and payback period.
Payback Period: This method measures the time required to pay back the initial investment in the project. Those investment projects that repay the investment the quickest are often seen as the most attractive.
Net Present Value method: Net present value is the amount of money an investment is worth, taking into account its cost, earnings and the time value of money. The investment with the highest net present value amount is normally considered the most attractive Accounting Rate of Return: The accounting rate of return on investment calculates the return from an investment by adjusting the project inflows produced by the investment for depreciation. The investment project that provides the greatest accounting rate of return is considered the most attractive.
- Sources of Finance
SOURCES OF FINANCE
The key to raising finance for organisational activities is having the right type of finance available, in the right place and at the right time. Most organisations use a variety of financial sources. The main sources of finance available to a firm are:
- Short term sources of finance
- Medium term sources of finance
- Long term sources of finance
Short Term Sources of Finance
Short-term sources of finance relate to those sources that have to be repaid within one year. This type of finance is best suited to investment in current assets such as stock as these assets liquidate themselves in time to repay the funds raised. The objective of raising short-term finance is to minimise financial risk at the very lowest cost. The most commonly utilised sources of short-term finance include the following:
- Bank Overdraft
- Trade Credit Taken
- Factoring of Debtors
Commercial banks will generally provide short-term facility mainly in the form of an overdraft. Banks have the right to cancel overdraft facilities at short notice. If used properly a bank overdraft facility can be a flexible source of finance. The security required by the bank might include a personal guarantee or a fixed charge on some assets of the company.
Bank overdraft can be a reasonably cheap and flexible source of finance in that interest is only charged on the outstanding amount.
One of the disadvantages of bank overdrafts as a source of finance is that the interest rate charged by the bank can go increase during the period in which the monies are owed.
Trade Credit Taken
When a company buys goods from another company, they are usually given credit for a period of time – usually 1 to 2 months. An option for companies which has difficulty with bank-borrowings is to take greater credit by delaying payments to suppliers for goods or services bought.
While this may seem like an attractive source of finance there are a number of downsides. Company will miss out on discounts for prompt settlement of invoices, which could be as much as 1% per month (12% per year). This would make it expensive finance in times of low interest rates. If a company continued to delay payments, suppliers might refuse to supply goods or services to that company in the future.
Factoring of Debtors
Factoring of debtors is a source of finance where companies acquire money on the strength of their debtors’ balances at a date earlier than when the debt is due to be paid. There a two main types factoring:
- Confidential Invoice Factoring
- Sales Ledger Factoring
CONFIDENTIAL INVOICE FACTORING
The factorer advances money to the company on the strength of the company’s invoices. The company itself must still collect the debt and then pay back the factorer. The buyer of goods who owes the debt remains unaware of any third party involvement. This can be an important source of finance for companies with large amount of credit sales. The cost of factoring would generally be much higher than bank interest rates.
SALES LEDGER FACTORING
With this method the factorer becomes responsible for credit control and debt collection. For an additional premium, the factorer will accept the risks associated with potential debt default. This method of factoring can work out expensive.
Medium Term Sources of Finance
Medium Term sources of finance are best suited to finance investments, which are neither short-term (current assets) nor long-term (e.g. a manufacturing plant). They are investments that are intermediate in nature, having a lifespan of less than 7 years and would include machinery, computer systems and hardware and office equipment. The main forms of medium term financing are as follows:
- Hire Purchase
Hire purchase is a widely used for the purchase of plant and equipment. The hire purchase company buys the asset and hires it to the intended purchaser. After a period of time making regular payments the intended purchaser acquires legal possession of the asset.
The advantage of this source of finance is that the hirer gets immediate use of the equipment without incurring a large capital cost. This can help cash flow for the company and they can claim capital allowances on cost of plant, and can claim tax relief on the interest paid to the hire purchase company.
The main disadvantage hire purchase is that it is relatively expensive form of finance.
Leasing is normally a cheaper source of financing than hire purchase. This is because at the end of the leasing period the asset is still owned by the leasing firm.
There are a number of advantages associated with leasing which include:
- Capital is not tied up in assets and is therefore free to be used for other purposes
- The rental charges can be claimed against tax
- Leasing does not affect a company’s borrowing ability as assets are not tied up as security – no security used
Long Term Sources Finance and Equity
The most commonly used sources of long-term finance are
- Ordinary Shares or Equity
- Preference Shares
- Long term loans – Mortgages
Ordinary Shares or Equity
Ordinary shareholders own a share of the company and share in profits. They also have voting rights at general meetings. Equity is a good source of long-term finance as a company is not required to pay-back the equity capital during its life-time of the company so; it is effectively a permanent source of capital.
ADVANTAGES OF EQUITY AS A SOURCE OF FINANCE:
- It provides finance for business ventures to develop – important when bank finance may not be available due to the risk associated with the venture
- No fixed repayment or interest has to be paid
- Dividends need not be paid when profits are low or if the directors decide not to pay a dividend
DISADVANTAGE OF EQUITY AS A SOURCE OF FINANCE:
- Equity is considered a more expensive source of finance than loan finance because dividends to shareholders are not tax deductible
- Issuing new shares has the potential to dilute the control of existing shareholders
Preference shares have an entitlement to a fixed percentage dividend before any dividend is paid to the ordinary shareholders. As with ordinary shares a preference dividend can only be paid if sufficient distributable profits are available. Although with cumulative preference shares the right to an unpaid dividend is carried forward to later years. The arrears of dividend on cumulative preference shares must be paid before any dividend is paid to the ordinary shareholders. With non-cumulative preference shares any non- paid dividend is not carried forward. If business is wound up the preference shareholders will have priority to get their money back.
- The issue of preference shares does not restrict the company’s borrowing, in that preference share capital is not secured against assets in the business.
- As with ordinary shares, dividends do not have to be paid in a year in which profits are poor unlike interest on loans
- Dividend payments on preference shares are not tax deductible in the way that interest payments on debts are
A debenture is a long-term debt instrument used by large companies to borrow money. The debenture itself is a document that acknowledges debt by a company. So in effect a debenture is like a certificate of loan or a loan bond acknowledging the fact that the company is liable to pay a specified amount with interest. Interest is normally paid at a fixed rate. A person having the debentures is called debenture holder
Debentures are not part of the share capital of a company so debenture holders do not have the right to vote in the company’s general meetings of shareholders. In some countries such as the United States, debenture refers specifically to an unsecured corporate bond while in the United Kingdom a debenture is usually secured.
There are different types of debentures:
- Convertible debentures can be converted into equity shares of the issuing company after a predetermined period of time.
- Non-convertible debentures cannot be converted into equity shares – as a result these carry a higher interest rate
ADVANTAGES OF DEBENTURES:
- Interest paid is allowable for tax purposes
- Debenture holders have no rights to interfere in the running of the company – they have no voting rights
DISADVANTAGES OF DEBENTURES:
- Interest on debentures must be paid in all circumstances, whether there is profit or loss
- The company issuing the debenture will normally be required to pledge some assets as security (in some countries)
- Debentures may restrict the company’s future borrowing position if assets are pledged as security
THE DEBENTURE TRUST DEED
This is a formal legal document/contract that outlines the terms of the debenture issue between issuer and holders. Included in this document will be details of the maturity date, interest rate, interest payment, provisions related to any security pledges and any other terms & conditions between issuer & holders.
Long-term loans – Mortgages
A company can raise long-term finance by mortgaging its property. Mortgages are normally granted for a fixed term period, while the interest rate will vary during the loan period.
- An advantage of a mortgage is that the company has the option to repay the mortgage early if it has the finance.
- Any increase in the value of the asset during the loan period will accrue to the company.
- The low after tax cost due to the tax deductibility of the interest on long-term finance
- Long-term loan finances does not involve giving up voting or share control of the firm as would be the case with equity finance
- One of the main disadvantages of debt is the fixed burden on the organisations financial resources created by the interest payments and repayments schedule.
- Also the lender may impose restrictions on the management’s freedom to act independently as part of the overall loan agreement.
FINANCIAL ANALYSIS AND REPORTING
This section looks at the role of accounting in business management. This role involves the analysis, recording and reporting on the activities and financial well-being of the organisation. Financial control over its activities is vital for any organisation.
Financial Analysis The financial well- being of a firm can be assessed by answering the following questions:
- How liquid is the firm – can it pay its bills when they are due?
- How does the firm finance its investments and or capital expenditure?
- Are the common stockholders receiving sufficient return on their investment?
Financial statements are necessary to show both the owners of a business and the lenders how the capital has been used and to assist suppliers to set credit limits. Financial statements describe in monetary terms the flow of goods and services into, around and out of an organisation. They are summaries of the firms accounting records and are concerned with three key areas of financial performance, namely liquidity, general financial health and profitability. Financial statements are prepared on the basis of past information and as such their usefulness as a short-term control mechanism is limited. However they do provide management with information about trends, and quarterly or monthly statements can enable managers to take corrective actions.
Financial statements are the primary source of data used by outsiders to assess an organisation performance. The key forms of financial statements are as follows:
- The Balance Sheet
- The Profit and Loss Account (Income Statement)
- The Cash Flow Statement
The balance sheet describes the financial position of an organisation at a particular point in time, in terms of assets, liabilities, and the net worth of the owners. Assets are classified according to whether they are current, fixed or intangible. Liabilities are classified in terms of whether they are current or long-term. Net worth is the residual value after total liabilities have been deducted from total assets.
Income Statements show a company’s financial performance over a period of time. All costs including taxes are deducted from gross income, which gives you the net income. This amount is then available for paying dividends to stockholders or for reinvesting in the business.
Cashflow statements, also known as sources and uses of funds statements, show where funds came from (operations, loans, reduction in debtors, etc), and where the funds went (capital investment, dividends, reduction of creditors etc).
External Users of Financial Reports
Financial reports such as the profit and loss account and the balance sheet of a company are used by various stakeholders to establish the financial positions of the company. These include:
Investors: These will be interested in analysing the information in reports to decide whether or not to invest in the company.
The State: They use the financial information to decide how much tax the company must pay.
Suppliers: These may analyse a company’s financial reports to determine the risk of giving credit to the company
Business customers: These may want to assess the risk of placing an order with the company Competitors: These may wish to compare the financial performance of the company with themselves.
Ratio analysis is used by managers and outsiders (such as investors and bankers) in evaluating a firm’s performance. The financial health of an organisation can be examined using ratio analysis to compare performance to the firm’s past achievements or the performance of competing firms in the industry or sector.
Financial ratios are calculated from information contained in financial statements and they express the relationship between items in the form of percentages or fractions.
Three of the most commonly used ratios are:
- Return on Investment: This is usually given as an annual percentage return on assets employed, and is therefore used to measure productivity of assets.
- Current Ratio: This is the ratio of current assets to current liabilities and measures the short-term solvency of the firm.
- Debt to Equity Ratio: This is the ratio of total debts to total assets and shows the leverage of the organisation or the relative amount of internal or external funding.
The following are five categories of financial ratios which are summarised in table 11.1-11.5: (The ratios tables are adapted from Lynch and Roche (1999)
- Profitability: Profitability ratios measure the efficiency of the firm in generating profit and are measured through sales performance relative to the assets of the firm.
- Liquidity: Liquidity ratios measure a firm’s ability to pay its short-term liabilities.
- Leverage (also called Gearing): Leverage ratios identify the sources of an organisation’s capital. Leverage is the increased rate of return on stockholders’ equity when an investment earns a return larger than the interest paid for debt financing.
- Activity: Activity ratios measure the efficiency of a firm in using the resources it deploys.
- Investment: Investment ratios provide information for investors on the return on investment
Management Accounting is largely concerned with control. Control is the process of monitoring business operations to ensure that planned objectives are achieved.
Control involves the following activities:
- Establishing a plan (budget) for a specific time period
- Establishing the actual position at different points during the planning period
- Comparing actual performance with planned performance
- Taking effective action to correct adverse trends or taking advantage of any favourable trends that occur The following are important aspects of the control process:
- Responsibility must be allocated for the control of particular aspects of the business
- Those responsible must know what is required of them
- The activities of the business need to be coordinated
The information provided by financial accounts (balance sheet and the profit and loss account) is useful to management in the control of their operations. However, it does suffer from two main defects. First, the information is not always readily available, as the final accounts are not normally drawn up until the end of the financial year. While some firms do produce these statements half-yearly and quarter-yearly, information for control purposes is needed much more frequently. Secondly the information presented in the final accounts is of limited use at the operational level of the business. Management needs information for product pricing, to ensure departments do not over spend, and to control the labour and material used in production.
Management Accounting seeks to fill this gap by providing managers with the information they need to manage effectively. Management Accounting can be divided between Control Accounting and Decision Accounting.
The primary areas of control accounting relate to Standard Costing Systems and Budgetary Control.
Standard Costing Systems
According to CIMA (London), “a standard costing is a control technique which compares standard costs and revenues with actual results to obtain variances which are used to stimulate improved performance”. A standard cost is the estimated cost for a single unit of a production. Standard cost provides a basis of comparison with actual cost so that variances can be calculated and the causes corrected.
The main uses of standard costs are to provide a basis for performance measurement, cost control, valuating stock and establishing selling prices.
Standard costing relates specifically to the cost of a single unit and is usually associated with production. The aim of standard costing is to improve efficient utilisation of materials, labour and overheads. Budgets are prepared for all functions; sales human resources, production and finance. Budgetary control systems set down monetary limits that should not be exceeded.
Budgetary control refers to the analysis, recording and reporting on the activities and financial well- being of the organisation. It involves management forecasting likely outcomes of plans in an attempt to control the future of the organisation. It is an important activity for the financial team, in that it ensures effective monitoring of current activities, and gives valuable information about performance in relation to plans.
Financial control of activities is vital to all organisations. Many smaller firms, for a variety of reasons such as lack of expertise, opt for informal systems of control. This can be disastrous for a small firm as the true performance or profitability cannot be gauged.
Budgetary control requires that realistic profit and loss and Cashflow forecast are prepared at the beginning of the period and that they be updated normally on a quarterly basis as the year progresses. Great care is required in interpreting variances from a budget to ensure managers are held accountable only for those matters that fall within their sphere of control.
Budgets are one of the most widely used means of planning and controlling activities at every level of an organisation. Budgets provide a clear standard of performance within a specified time. At regular intervals during the time period addressed by the budget actual results are compared with budget figures and this allows deviations to be detected and corrected. The widely used timeframe for budgets is one year. An annual budget set targets for the year for all parts of the business. The annual budget is normally broken down into monthly budgets which set out monthly targets.
In general budgets are drawn up by middle managers in response to guidelines set by senior management and are then submitted to higher management for approval.
BENEFITS OF BUDGETS
Atrill and McLaney (2009) suggest the following benefits of budgeting:
- Budgets tend to promote forward thinking and the possible identification of shortterm problems
- Budgets can be used to help co-ordination between various sections of the business
- Budgets can motivate managers to better performance
- Budgets can provide a basis for a system of control
- Budgets can provide a system of authorisation for managers to spend up to a particular limit
THE BUDGET SETTING PROCESS
The setting of budgets generally follows a formal process with a number of distinct stages.
The following are the typical steps involved (Atrill and McLaney, 2009):
- Communicate the budget guidelines to managers: It is important that those preparing plans are aware of what the strategic objectives of the organisations are how the upcoming budgeting period will work towards them.
- Determine the key limiting factor: The limiting factor will determine the overall level of activity in the business. For many organisations this would be the level of sales expected.
- Prepare the budget for the area with the limiting factor: This would usually be the sales budget since the level of sales will determine the level of activity in other areas such as production, purchasing, staffing etc.
- Prepare draft budgets for the other areas of the organisation: There are two broad approaches to setting individual budgets. The top down approach involves senior managers in each area setting budget targets for that area, maybe in discussion with lower level managers. With the bottom-up approach target are fed up from lower levels in the particular area. They are then incorporated into the budget
- Review and co-ordinate budgets: A review is carried out by the budget committee of the various budgets to ensure they complement each other. Some negotiation and alterations to budgets may be required.
- Prepare the master budgets: The master budgets are the budgeted income statements, the budgeted statement of financial position (balance sheet) and generally a summarised cash budget.
- Communicate the budgets to all parties: The formally agreed budgets are given to individual managers who will be responsible for their implementation
- Monitor performance relative to the targets set in the budgets: One of the main purposes of budgets is that it enables each manager’s actual performance to be compared to planned targets which are set out in the various budgets. Corrective actions can be undertaken to address any variances. Where a budget is proving to be totally un-realistic it may need to be revised, although revision of a budget is a rare occurrence.
INCREMENTAL AND ZERO-BASED BUDGETING
Incremental budgeting involves using last year’s budget as the basis for preparing the forthcoming budgets and making adjustment to factors that are expected to change such as an increase in sales, and increase in raw material costs etc.
Zero-based budgeting is based on the idea that all spending needs to be justified rather than doing the same as last year. It involves starting from scratch and carefully analysing what activities need to be carried out in the coming year and being able to justify the spend involved in terms of value for money. The main problem with Zero-based budgeting is that it is time consuming and expensive to undertake.
Key techniques associated with decision accounting are break-even analysis and investment appraisal.
Break-even analysis is a widely used decision making technique. It allows managers to determine the effect of changes in the variable such as, price, costs and output on overall profit. Break-even analysis takes account of the fact that some costs are fixed and some are variable. Fixed costs are independent of the volume of production, e.g. insurance on buildings. However the level of variable costs is directly related to level of output.
Break-even analysis seeks to identify the point (break-even point) at which revenue generated from a given volume of output matches total costs (fixed costs + variable) of that output. Break-even analysis can be used to calculate the output volume necessary to break even, or to make a specific level of profit.
Break-even analysis is widely used both in decision-making and control situations.
Investment decisions related to long-term proposals are very important for an organisation for a number of reasons. Firstly, the amount of long-term finance available is limited and secondly, once funds have been committed to a particular investment project it is very difficult to remove them.
The aim of investment appraisal is to ensure that available finances are allocated to provide best return on capital invested.
INFORMATION SYSTEMS IN FINANCE AND ACCOUNTING
This section looks at the main information systems used in the Financial and Accounting function. There are a number of systems that deal with financial transactions of the company. These systems generate the information for the financial records and statements of the company and include:
- Accounts Receivable
- Accounts Payable
- Financial Reporting Systems
- Integrated Accounting Systems
- Budgetary Control Systems
Note: Many of the systems uses in the Finance and Accounting area are Transactions Processing Systems (TPS). These systems perform and record the daily routine transactions necessary to conduct business.
The Accounts Receivable system is concerned with the collection and recording of moneys owed to the company. The system keeps records of amounts owed by customers from data generated by customer purchases and payments.
The main transactions are:
- Invoices and Credit Notes issued to customers
- Payments received from customers.
This information is stored in the Debtors Ledger. Transactions posted to the Debtors Ledger are reflected in the Nominal Ledger, which is the basis for producing the financial statements of the company.
Accounts receivable systems stimulate prompt customer payments by preparing accurate and timely invoices and monthly statements to credit customers.
The accounts payable system keeps track of data concerning purchases from and payments to suppliers. The system is centred on the maintenance of the Creditors Ledger, which contains data on financial dealing with Suppliers.
The main transactions are:
- Invoices and Credit Notes received from Suppliers
- Payments made to Suppliers.
Computer based accounts payable system prepare cheques in payment of outstanding invoices and produce management reports. The system helps ensure prompt and accurate payment of suppliers to maintain good relationships and ensure good credit standing and secure any discounts offered for prompt payment.
Financial Reporting Systems
The financial reporting system accesses information mainly from the Nominal (General) Ledger. The other systems which supply financial information such as Accounts Payable, Accounts Receivable and Payroll, which are sources of financial transactions, supply data to the Nominal Ledger. The Nominal Ledger also supports the production of the key financial statements – balance sheet (statement of financial position) and profit and loss (income) statements.
Integrated Accounting Systems
Most accounting software packages offer an integrated approach where the system consists of a number of modules that deal with the various accounting activities. The standard modules offered in most integrated accounting systems include:
- Accounts Receivable
- Accounts Payable
- Stock Control
- Financial Reporting
Some well-known packages are SAGE, PEGASUS, QUICKBOOKS, TAKE 5, and TAS BOOKS.
The more advanced Accounting packages offer additional modules such as Sales and Purchase Order Processing, Cashbook and Bank Reconciliation, Job Costing, Bill of Materials, and Fixed Asset Register.
One of the key advantages of an Integrated Accounting System is that transaction data needs to be input only once, saving time and effort and reducing errors.
Budgetary Control Systems
These are systems that support the preparation and control of financial budgets. This includes support for budget requests, approvals, and updates. For current budgets the system enables actual income and expenses to be compared with target or budgeted figures and any variances to be highlighted. The budgetary control systems usually support monitoring on a periodic basis such as monthly quarterly or year to date.
The capital budgeting process involves evaluating the profitability and financial impact of proposed capital expenditures. This application makes use of models that incorporate present value analysis of expected cash flows and probability analysis of risk to determine the optimum mix of capital projects for a business.
For smaller companies a spreadsheet application such as Excel could be utilised as a simple budgetary control system.
IMPACT OF E-COMMERCE
Payment for the products and services purchased is an important set of e-commerce transactions.
Most business to consumer (B2C) e-commerce depends on credit card payment systems. Many B2B e-commerce systems rely on more complex payments method related to the use of purchase orders
Electronic Funds transfer (EFT) systems are a major form of electronic payments systems used in banking and retailing industries. EFT systems capture and process money and credit transfers between banks and businesses and their customers. Security
When you make an online purchase on the Internet, your credit card information is vulnerable to interception. Some basic security measures are being used to solve this security problem: (1) encrypt (code) the data passing between the customer and the retailer, (2) encrypt the data passing between the customer and the company authorising the credit card transaction, or (3) take the sensitive information off-line.
Many companies use Secure Socket Layer (SSL) security method that automatically encrypts data passing between the computer’s Web Browser and a retailer’s computer.
Digital wallets make paying for purchases over the Web more efficient by eliminating the need for shoppers to enter their address and credit card information repeatedly each time they buy something. A digital wallet securely stores credit card and owner identification information and provides that information at an electronic commerce site’s “checkout counter”.
Access to Financial and Economic Reports
Investments decisions require managers to evaluate economic reports and news provided by various government agencies, universities, research intuitions, financial services companies, and corporations. There are hundreds of Internet sources of these reports, mostly free but some require a subscription.
Managers may also wish to use Internet resources to research the financial performance of competitors, and potential suppliers and business customers. (Turban et al. 2003)