Financial Planning and Budgeting

Appropriate management of financial assets is a major task in financial planning and budgeting. Managers must plan for both acquiring and utilizing resources.

• Financial and economic forecasting: Knowledge about the availability and cost of money is a key ingredient for successful financial planning. Cash flow projections are particularly important because they inform organizations what funds they need, when they need them, and how they will acquire them.

  Funds for operating organizations come from multiple sources, including stockholders’ investments, bond sales, bank loans, sales of products and services, and income from investments. Decisions concerning funding for ongoing operations and for capital investment can be supported by decision support systems and business intelligence applications, as well as expert systems . In addition, numerous software packages for conducting economic and financial forecasting are available. Many of these packages can be downloaded from the Internet, some of them for free.

• Budgeting: An essential component of the accounting/finance function is the annual budget, which allocates the organization’s financial resources among participants and activities. The budget allows management to distribute resources in the way that best supports the organization’s mission and goals.

  Several software packages are available to support budget preparation and control and to facilitate communication among participants in the budget process. These packages can reduce the time involved in the budget process. Further, they can automatically monitor exceptions for patterns and trends.

Managing Financial Transactions

Many accounting/finance software packages are integrated with other functional areas.

Organizations, business processes, and business activities operate with, and manage, financial transactions. Consider these examples:

• Global stock exchanges: Financial markets operate in global, 24/7/365, distributed electronic stock exchanges that use the Internet both to buy and sell stocks and to broadcast real-time stock prices.
• Managing multiple currencies: Global trade involves financial transactions that are carried out in different currencies. The conversion ratios of these currencies are constantly in flux. Financial and accounting systems utilize financial data from different countries and convert the currencies from and to any other currency in seconds. Reports based on these data, which formerly required several days to generate, can now be produced in only seconds. In addition to currency conversions, these systems manage multiple languages as well.
• Virtual close: Companies traditionally closed their books (accounting records) quarterly, usually to meet regulatory requirements. Today, many companies want to be able to close their books at any time, on very short notice. Information systems make it possible to close the books quickly in what is called a virtual close. This process provides almost real-time information on the organization’s financial health.
• Expense management automation: Expense management automation (EMA) refers to systems that automate the data entry and processing of travel and entertainment expenses. EMA systems are Web-based applications that enable companies to quickly and consistently collect expense information, enforce company policies and contracts, and reduce unplanned purchases as well as airline and hotel expenses. They also allow companies to reimburse their employees more quickly because expense approvals are not delayed by poor documentation.

Investment Management

Organizations invest large amounts of money in stocks, bonds, real estate, and other assets. Managing these investments is a complex task, for several reasons. First, organizations have literally thousands of investment alternatives dispersed throughout the world to choose from. In addition, these investments are subject to complex regulations and tax laws, which vary from one location to another.

Investment decisions require managers to evaluate financial and economic reports provided by diverse institutions, including federal and state agencies, universities, research institutions, and financial services firms. In addition, thousands of Web sites provide financial data, many of them for free.

To monitor, interpret, and analyze the huge amounts of online financial data, financial analysts employ two major types of IT tools: (1) Internet search engines and (2) business intelligence and decision support software.

Control and Auditing

One major reason why organizations go out of business is their inability to forecast and/or secure a sufficient cash flow. Underestimating expenses, overspending, engaging in fraud, and mismanaging financial statements can lead to disaster. Consequently, it is essential that organizations effectively control their finances and financial statements.

• Budgetary control: After an organization has finalized its annual budget, it divides those monies into monthly allocations. Managers at various levels monitor departmental expenditures and compare them against the budget and the operational progress of corporate plans.
• Auditing: Auditing has two basic purposes: (1) to monitor how the organization’s monies are being spent and (2) to assess the organization’s financial health. Internal auditing is performed by the organization’s accounting/finance personnel. These employees also prepare for periodic external audits by outside CPA firms.
• Financial ratio analysis: Another major accounting/finance function is to monitor the company’s financial health by assessing a set of financial ratios. Included here are liquidity ratios (the availability of cash to pay debt), activity ratios (how quickly a firm converts noncash assets to cash assets), debt ratios (measure the fi rm’s ability to repay long-term debt), and profitability ratios (measure the firm’s use of its assets and control of its expenses to generate an acceptable rate of return).