Financial Reporting System Memorandum

on

Financial Reporting System for ICBI Memorandum

 Further to your direction to establish policies and systems for I Can Business Incorporated (ICBI), we are going to start with establishing a financial reporting system. Financial reporting involves producing statements that disclose an organization's financial status to management, investors, the government and other business stakeholders. The statements include balance sheets, income statements, cash flow statements and statements of shareholders' equity.
These documents and records will show where ICBI got its money and how it is using it, whether it is making a profit or loss, and the cash flow. The reports will also compare the business assets versus the liabilities and the potential of ICBI into the future.

Statutory and common law govern financial reporting though the practice can fail to meet legal and ethical standards as reflected in the Enron accounting fraud. Suffice to say the fraud led to the Sarbanes-Oxley Act of 2002 that places demanding requirements on public companies. With increased globalization, the ever-changing financial reporting standards are being internationalized.

Activity-based budget
 In its financial reporting, ICBI will evaluate how effectively it is meeting its goals by having an activity-based budget rather than the traditional operating budget. This is so as to focus on financing the tasks that ICBI performs rather than the money the company has.

Whereas an operating budget that looks at past performance would help ICBI forecast what the company can afford and would help set the limit for each department, an activity-based budget will help ICBI realize any opportunities and prioritize on essential tasks by allocating money based on forecasts of where it is needed most. ICBI will estimate the cost of the various tasks in all departments as well as the tasks of the various project teams.


The total cost of all these tasks should be less than the revenue, with each unit in the company having to justify their budget allocation. But in case all tasks are important yet overshoot the budget, the company may have to source more money or postpone less essential activities deemed as not contributing much to the bottom line. The importance of an activity will also be gauged on how important its relationship with other activities is rather than its previous budget. Hence departments and teams will have to justify their budget on activities and output rather than material and input.

But rather than start budgeting from scratch each year, ICBI’s activity-based budget will borrow a bit from the traditional operational-based budget by looking at the previous year’s results. However, this will not be with a view to benchmarking but rather so that the company can appraise its goals and targets, and introduce new ones as need be. This will enhance our expansion and help grow our market share by catering for new products and incorporating new marketing strategies. The budget will align the various activities with the company goals, enable cost effectiveness and improve our business practices; unlike the operating budget which allocated money only to existing operations because profits had been made the previous year.

That said, the activity-based budget will cater for inflation, amortization, fixed costs and other similar market forces; just like an operational-based budget.


Budget Guidelines
 In order to achieve the activity-based budgeting, there are various guidelines that ICBI will follow. These are outlined below.
  1. Review of company goals and targets - Prior to budgeting, we will review whether the company has met its goals and targets based on previous performance. Areas that need improvement will be identified and ways on how to improve these will be looked at. Consequently, new goals, targets and concomitant activities will be set before budgets are allocated.
  2. Research on best practices - There are certain activities that market leaders in the industry pay particular attention in terms of time and other resources that have guided them to success. ICBI will check out which activities are these, and compare these against our projected activities. More research including discussions with business suppliers and expansive literature review will be carried out to ensure a budget suitable to our needs, situation and future outlook.
  3. Acquire suitable software - There are many software used in activity-based budgeting. ICBI will shop for one suitable to our needs, tweaking it to match the situation. The software should not simply give out financial reports, but should be have financial analysis embedded.
  4. Factor in contingencies - That budgets are estimates means unforeseen circumstances may arise. A contingency cost of 3% of the total budget is proposed to cater for this to ensure crucial company activities do not get stuck in the course of the financial year.
  5. Streamline costs – An activity-based budget helps in determining the essential tasks and allocating costs to these. Cost-effectiveness will be achieved at ICBI by consolidating related activities and teams. The teams will be encouraged and rewarded for good performance with cost-cutting being a major thrust. One way will be by shopping around for inexpensive quality suppliers.

Members of the BoD, a financial reporting system is crucial for ICBI to meet its mission, vision and objectives. Activity-based budgeting based on the listed budgeting guidelines will ensure the company adopts best practices at optimum cost to achieve its goals. Your support in this endeavor will be much appreciated.


References

Kaplan, RS and Anderson, SR, 2007. Time-Driven Activity-Based Costing: A Simpler and More Powerful Path to Higher Profits. New York: Harvard Business Review Press.

Revsine, L, Collins, DW, Johnson, WB, Mittelstaedt, HF, and Soffer, L, 2014. Financial Reporting and Analysis, 6th Edition. New York: McGraw-Hill.

Shim, JK, Siegel, JG, Shim, AI, 2011. Budgeting Basics and Beyond. New York: Wiley.

Wahlen, JM, Baginski, SP, and Bradshaw, M, 2010. Financial Reporting, Financial Statement Analysis and Valuation: A Strategic Perspective 7th edition. Boston: Cengage Learning.

Comments

Post a Comment