TECHNIQUES FOR FINANCIAL CONTROL
An organization will have certain objectives to achieve. A finance manager has to plan the things according to the organizational objectives. After planning, the finance manager has to implement the plans but some times these proposed plans need to be changed with the changing circumstances. Thus, a finance manager has to use the financial control techniques which involve the monitoring of the implementation plans, and has to take necessary actions wherever the implemented plans deviate from the actual plans. Further, these controlling techniques help in appraising the performance of various departmental heads. The techniques of financial control, besides budgeting are,
Â· Divisional Performance Control.
Â· Parta System.
Â· Flexible Budgeting.
Â· Statutory Audits.
Divisional Performance Control:
Every organization will have divisions which carry out the specific work, for example carpenter division, welding division, machining division etc. In a division based cost center business the divisional head determines how the operations related to his division are to be carried out. The division a performance control gives the measure of the divisional performance which helps in assessing the proportionate profit of the division in the profit of the organization.
In Parta system a unit-in-charge is responsible to the chairman of the company or group. In this system the performance of the unit-in-charge is monitored by the group chairman. Based on important variables like daily quantity of production, value of production, sales, material consumed, cost of material consumed, fixed costs, profit etc. The chairman will evaluate the performance of the unit-in-charge and unit-in-charge will be rewarded accordingly.
A flexible budget is a budget that is prepared for a range, i.e. for more than one level of activity. It is a set of alternative budgets for different expected levels of activity. A flexible budget is defined as a budget which, by recognizing the difference between fixed and variable costs, is designed to change in relation to the level of activity attained. The flexible budget is also known as variable budget, dynamic budget, sliding scale budget.
A fixed budget is designed for only one level of activity. The fixed budget is defined as the budget which is designed to remain unchanged irrespective of the level of activity actually attained. For example, a firm made a fixed budget estimates for a sales volume of 5,000 products. But actual production is 7,000 products, then the comparison of cost of estimates with actual will be meaningless. Thus, a finance manager has to make flexible budgets.
Auditing is generally done by persons called auditors. Auditors will examine and evaluate the financial statements and records of the firm and will give his opinion in the form of report.
Audits are classified into two types:
Â· External or Statutory Audit
Â· Internal Audit
External or statutory audit is further classified into (a) Statutory Financial Audit (b) Statutory Cost Audit (c) Audit by Comptroller and Auditor General.
Every company at the end of the financial year will make financial statements. According to statutory financial audit these financial statements are to be certified by the independent auditor who is a Chartered Accountant as per the Chartered Accounts Act, 1949, and the auditor has to give his opinion.
According to the Companies Act all government companies are subjected to an audit carried by the authorities from the office of the Comptroller and auditor General of India. This audit is in addition to the statutory audit, which is done by a certified chartered accountant.
Internal Audit: Large firms have their own staff of internal auditors, who perform the same analysis as external auditors. According to the Institute of Internal Auditors, Inc., US, internal audit is defined as an independent appraisal activity within an organization for the review of operations as a service to the organization. In the internal auditing, and internal auditor has to ensure, that the accounting data and the records are maintained according to the principles of accounting and to see whether the management is complying with the laid policies and procedures.