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Discuss About The Monitoring Mechanisms Financial Statements.
The company which is selected for this assignment is AusNet Services ltd which is engaged in power generation and distribution in Australia. The main sources of financial Information for the company are given below:
Budgets: The various budgets which are prepared by the management of an organization is an important source of financial information in any organization. This is a source which is prepared internally and for the purpose of planning (Khagram, Fung and De Renzio 2013). The budgets can provide effective estimates as to what the costs and revenue of the company are likely to be and budgets are also prepared to measure the performance of the individuals. For example, information relating to costs which are set in the budget are used as performance guidelines and also as a control measure. An instance can be given of information such as 10% of the cash balance is to be maintained every year out of the initial cash balance as set in a cash budget.
Financial statements: The financial statement of the company is the major provider of financial information for the business. Various individuals such as investors, creditors, debtors and other stakeholders uses such financial information to analyze the financial performance and positioning of the business (Carraher and Van Auken 2013). For example, such statements depict important information such net profit of the business, cash inflows of the business, total assets of the business which are important financial indicators of the business (Minnis and Sutherland 2017). The value of total assets , total liabilities are also example of financial information.
Interim reports and performance reports: These refers to the reports which are prepared by the AusNet Services ltd to inform the stakeholders of the business about the current activities in which the business is engaged in, its costs, expected revenues. Such reports are prepared on quarterly or half yearly basis (Rensburg and Botha 2014). For example, such types of reports are used in depicting any projects which are undertaken by the company or which are work in progress. The number of projects and interim profits which are shown in the reports are effective standards to measure the performance of the business.
The financial information which are forecasted in a budget needs further analysis as they depend on the estimation and judgement of the management (Luechinger and Schaltegger 2013). For example, a sales department, the manager will consider the previous year’s sale and current targets along with market conditions before estimating the financial information in a budget. He will also be considering variances which will be around 10% as per estimated budgets. If the budget is of $ 1,00,000 estimated variance can be expected to be around 10,000 or slightly more.
The financial data which are required for analysis of performance on any other organisation might include financial indicators such as net profits, EPS of business, Total assets, key ratios like current ratio, debt equity ratio (Katchova and Enlow 2013). Such data are easily available from the financial statement of the company. The organizational structure of different companies is different and so are their respective performance and profitability.
The validity of the cost figures which are included in the budgets depends on the estimation and forecasting skills of the management and therefore the accuracy of such information is uncertain. In case of financial data such as net profits, total assets and cash inflows are based on actual performance which are presented in financial statement which is review for accuracy by an external auditor. Thus, it can be said that the accuracy of such information is certain. In case of interim report, the investment, projects, net profits which are shown are for a quarter or half year and thus not so much dependable.
Budgets are important for any business as they are used by the company as tool for control the activities of the business. The various aspects which are needed to be considered for the purpose of producing a sound budget is given below:
Financial Constraints: This is often seen in case of a budget preparation that an activity is expected to incur more costs than the company has financial resources to fund. The management should consider such constraints as theses provides the management as to what the business can do and cannot do with the level of financial resources available with the business (Almeida, Hsu and Li 2013). In the case of AusNet ltd, the budgets are prepared considering the risks associated with the different activities and also the resources which are available to the business to finance the activities. As shown in the financial statements of the company, the company has significant amount of borrowings as well as cash and cash equivalents which suggest that the business can undertake any projects but must also consider the limits while preparing budgets.
Achievement of Targets: The targets which are set by the management should be realistic and achievable. The budgets which are prepared focuses on the targets which the business needs to achieve and such that it can be measured with actual performance (Hope and Fraser 2013). In case of AusNet ltd, there are certain targets which the company has for 2018 as per the financial statement which can be effectively presented with the help of a budget.
Legal Requirements: The management of the company must also ensure that the budgets which are required to be prepared under law are effectively done and all material information are disclosed in the same. In case of AusNet ltd which is engaged in generation of power and its distribution might enter into a contract with the government for distribution of power which might require the company to prepare a cost budget which can clearly reveal to the authorities as to what are the basic costs such as installation cost, general expenses and distribution expenses. The budgets thus prepared are mandatory and on the basis of such budgets itself contracts of distribution of energy can be given to the company.
Accounting Conventions: The budgets which are prepared by the management of the company needs to ensure that the accounting conventions are followed effectively which are conservatism, consistency, full disclosure and materiality (Jones et al. 2013). The budgets should contain all the information which are related to that particular budget and should be such that the material information is suitability presented in the budget. The budgets should also follow the consistency principle as the management develops such budgets from year to year. The budget to which the accounting conventions mostly apply to are cost budgets, finance budgets, material budgets and similar types of budgets which are related to accounting field.
As per the plan of the management of AusNet Services ltd which is shown in the financial statement of the company shows that the business has plans of growth by 2021. The plan of AusNet services is to built up a distribution line for distributing energy through an area. This will allow the business to reach out new areas as well as further expand the market. This will be a capital expenditure for the business as it will be improving the work process of the business and also add to the revenue generation of the company. Another project which the management of the company has planned for 2021 is a new power generation site where the business can generate electricity which can be used for further distribution in domestic and industrial sector. This will also be recognized as a capital expenditure of the business. The business plan to use NPV analysis and Payback period analysis for finding out the viability of the projects. A detailed description of the methods which can be used are given below:
The business can assess the profitability and worth of such capital expenditure by applying the techniques of capital budgeting analysis. This analysis employs techniques which the business can use to determine the actual worth, profitability and future cash inflows from the project. Criteria for judging profitability of different projects are on the basis of Net Present Value (NPV) analysis, profitability index, payback period, Internal rate of return and similar other techniques which are used in capital budgeting analysis. NPV analysis is mostly used by businesses to analyse the future cash inflows which can be expected from the proposed capital investment and it is the most used technique for analysis purposes (Jain, Singh and Srivastava 2013). Profitability index considers the relationship between the estimated cash inflows of the company and cash outflows of the business and it shows the profitability of the project (Coppola, Scardera and Tosco 2013). Payback period considers the minimum time which will be taken to recover the initial investment which the management of the company undertakes on the project.
The projects which are proposed by the management of AusNet ltd are distribution network line and power generation projects. The projects are expected to generate huge amount of revenues for the business as the projects which are proposed by the management are effective and are expected to bring about growth and development in the business.
The strengths of the proposal which is suggested by the management of AusNet Service ltd have their own strengths which are given below in details:
The major impact on the business will be on the revenues of the company when the projects are being implemented and the company might not be able to earn significant revenues as the costs of implementing the plans are expected to be immense (Smith and Shah 2013). However, once the plan is successfully implemented the management will be able to earn revenues and growth. In addition to this, the company will have a wider access to the community and industrial sectors which will further develop the company.
Almeida, H., Hsu, P.H. and Li, D., 2013. Less is more: Financial constraints and innovative efficiency.
Carraher, S. and Van Auken, H., 2013. The use of financial statements for decision making by small firms. Journal of Small Business & Entrepreneurship, 26(3), pp.323-336.
Coppola, A., Scardera, A. and Tosco, D., 2013. Economic profitability and long-term viability in Italian agriculture. pagri/iap, p.71.
Hope, J. and Fraser, R., 2013. the Budget. Budgetierung im Umbruch?, 1, p.71.
Jain, N., Singh, S.N. and Srivastava, S.C., 2013. A generalized approach for DG planning and viability analysis under market scenario. IEEE Transactions on Industrial Electronics, 60(11), pp.5075-5085.
Jones, R., Lande, E., Lüder, K. and Portal, M., 2013. A comparison of budgeting and accounting reforms in the national governments of France, Germany, the UK and the US. Financial Accountability & Management, 29(4), pp.419-441.
Katchova, A.L. and Enlow, S.J., 2013. Financial performance of publicly-traded agribusinesses. Agricultural Finance Review, 73(1), pp.58-73.
Khagram, S., Fung, A. and De Renzio, P. eds., 2013. Open budgets: The political economy of transparency, participation, and accountability. Brookings Institution Press.
Luechinger, S. and Schaltegger, C.A., 2013. Fiscal rules, budget deficits and budget projections. International Tax and Public Finance, 20(5), pp.785-807.
Minnis, M. and Sutherland, A., 2017. Financial statements as monitoring mechanisms: Evidence from small commercial loans. Journal of Accounting Research, 55(1), pp.197-233.
Rensburg, R. and Botha, E., 2014. Is Integrated Reporting the silver bullet of financial communication? A stakeholder perspective from South Africa. Public Relations Review, 40(2), pp.144-152.
Smith, S.W. and Shah, S.K., 2013. Do innovative users generate more useful insights? An analysis of corporate venture capital investments in the medical device industry. Strategic entrepreneurship journal, 7(2), pp.151-167
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