Last updated: March 26, 2019
Topic: BusinessBusiness Operations
Sample donated:

Resources in finance management refers to financial and non-financial resources which are planned to be allocated in funding a plan, projects or business units and others which are to be left unfunded. These includes including capital, provisions against liabilities, human resources, physical resources, holdings of or access to cash and other liquid assets and effective means by which to manage risks.

Human resources in the field of businesses and corporations are those who serve an organisation in its 5 key functions which are hiring, compensation, evaluation and management (of performance), promotions and managing relations. Other than that, they are those people who are involved in firing, training and handling personal problems.

Physical resources refers to the things needed or used everyday in an organization that will serve its institutional needs in lined with the organisation’s mission, purposes and goals such as money, things, petty cash, salary, budget. For example, a salon’s physical resources are hair brushes, chairs, salon and shampoo. Using Bates College as an example of an institution, its physical resources which are appropriately equipped and adequate in number and size includes laboratories, materials, equipment, and buildings and grounds, whether owned or rented; these are designed, maintained, and managed at both on- and off-campus sites.

Non-financial resources are assets that are tangible or non-tangible assets which came into existence other than the process of production like land, patents, licences and lease. Examples of non-tangible non-financial resources includes a cleaner environment, improved response time by public safety employees, smaller class sizes in schools, and access to public buildings and public transportation by all citizens sustainable development, corporate social responsibility and environmental compliance. On the other hand, tangible non-financial resources are computer software and artistic originals are included in goods and services.

OECD’s (2001) Best practices for budget transparency plan in the use of their non-financial resouces are as follows:

“Non-financial assets, including real property and equipment, should be                                       disclosed; Non-financial assets will be recognised under full accrual based                                   accounting and budgeting. This will require the valuation of such assets and the                          selection of appropriate depreciation schedules. The valuation and depreciation                           methods should be fully disclosed; Where full accrual basis is not adopted, a                              register of assets should be maintained and summary information from this                                  register provided in the budget, the mid-year report and the year-end report.” (pg.                   7)

National Competition Council (2000)showed the movement in non-financial assets over the Budget year 1999-2000 which is as follows:

Table 3.1: Budget Statement of Revenue and Expenses
Estimated
Actual
Estimated

1998-99
$’000
1999-00
$’000
2000-01
$’000
2001-02
$’000
2002-03
$’000
Agency Revenue and Expenses

Revenue

Revenue from government

Ordinary annual appropriations (net appropriations)
2,875
3,071
3,092
2,971
3,028
Other services

11
11
11
11
Revenue from other sources

Sales of goods and services
121
30
30
31
32
Total Revenue
2,996
3,112
3,133
3,013
3,071
Expenses

Employees
1,620
1,892
1,899
1,778
1,823
Depreciation and amortisation
112
112
112
112
112
Other costs of providing goods and services
1,253
1,097
1,111
1,112
1,125
Other
11
11
11
11
11
Total Expenses
2,996
3,112
3,133
3,013
3,071
Operating Result before Capital User Charge





Capital User Charge
11
11
11
11
11
Transfers and Dividends





Accumulated Results at Year End
92
91
91
91
91
Net contribution to government





Note: The NCC does not have any Administered items. (National Competition Council, 2000)

 

According to Vegter (2004), non-financial resources are short-sighted approaches that is more likely approached plans to meet the needs and satisfy the demands of customers, government, employees and markets. The reporting on sustainable development, corporate social responsibility and environmental compliance is placed with effort, basically, improves the company’s future competitiveness and risk profile, because it pleases smart investors through identification, prioritisation and amelioration of non-financial and hitherto fore unmanaged risk,  grabbing a remarkable opportunity.

Budget is a basic financial tool used in managing your finances. It is a simple yet powerful money plan used in controlling and managing your finances, setting and achieving goals, and most especially planning on how your finances will work for you.

There are 2 types of budget. These are Budget as Target and Budget as Forecast. In Budget as Target, Hofstede (1968) suggested that the highest level of performance is achieved by setting the most difficult specific goal which will be accepted by the manager concerned. Stedry (1960) suggested that the formulation of a specific target improved performance. However, he added that the participant’s own goals or ‘levels of aspiration’. Emmanuel, Otley and Merchant (1990) indicate that the crucial feature of targets seem to be that they must be accepted by the person to whom they are assigned.

On the other hand, Budgets as forecasts means, it is important to recognise that budgetary biasing may take place when budgets are being prepared in organisations. Budgetary biasing is usually associated with people introducing slack into their budgets so that they can achieve their targets more easily. However, there is also evidence that managers operating in tough environments may bias their estimates in the opposite direction and set themselves budgets that they are unlikely to achieve. The reasoning behind this is that managers may be feeling insecure because of past poor performance and feel that by promising improvement, they would gain immediate approval despite the risk of future disappointment.

Luka (1988) found evidence of both forms of budgetary biasing in the organisation he looked at. The important message for organisations is that they need to try to understand the reasons why this biasing is taking place. It may be because of the way that budgets are used in performance evaluation within organisations.

According to Utter (2007) most important adjustments to the environment are embodied in the existing schedules and the current budgets if unchanging relationships and assumptions of percentage increase were correct. There are a couple of reasons why the government should functionally focus concentration on marginal adjustments compared to the existing arrangements because:

“in order to safeguard the “base” of previous accommodations and, second, in order to adapt, increment at a time, to new constraints in the external environment (…)yet governments and nations survive by accepting the legitimacy of previous choices and concentrating on “fair share” decisions about the next adjustment. The percentage increase assumptions will be found below as the “Inertia Hypothesis”.”

Generally, limitations on time, intelligence, and cost prevent policymakers from identifying the full range of alternatives and their consequences are being made from this perspective.

Depreciation is the decreasing value of an asset until it becomes totally unusable in the business operations. The most common type of depreciating asset is the straight line depreciation where, for example, a truck is purchased for £20,000 and expected to use in your business for ten years. Using the straight-line method for determining depreciation, you would divide the initial cost of the truck by its useful life. The £20,000 becomes a depreciation expense that is reported on your income statement under operation expenses at the end of each year.

Capital Investment Appraisal gives a firm basis from which a considered decision can be made by ranking of risk and reward, the intangible benefits of undertaking a particular project, how each project fits in with the strategic aims of the business, the liquidity of the project and the return to shareholders. Capital Investments are needed in expansion of buildings, plant, equipment, stock, new product lines, business diversification and new enterprises. Appraising it means computing and analyzing whether or not they are competing for that scarce resource. Upon doing so, you need to consider the cost of capital, the asset’s residual value, the cash flows and timings emanating from the project, taxation including capital allowances, grants, risk and cost benefit which will be achieved using the three principal methods which are the Payback period, Accounting rate of return (“ARR”) and Discounted cash flow. The latter is categorized into NPV and Internal rate of return (“IRR”).

In Payback period, if the capital cost is £20,000 and the annual net cash flows from this investment are £4,000, the payback period is 5 years, it will be calculated by determining the length of time required to recover the initial investment.

In computing through ARR, a capital cost of £20,000 and an annual profit of £2,000 (net cash flows less straight line depreciation over 10 years), the ARR is 10 per cent.

The advantages of the ARR are again its simplicity and its concern with profitability; however it still has the disadvantage of ignoring the time value of money and also is dependent on the depreciation policy adopted by the business.

In DCF, £1 is worth more today than £1 in the future.   The discount formula is:   i / (1+r) n , where i = investment, r = discount rate of interest and n= number of years.   So what is the present value of £1, at a discount rate of 10% in 3 years?

£1/(1.10) 3 = £0.75

This computes the time value of money.

In construction of sales budget, the sales or marketing manager breaks the budget down into a number of more detailed budgets. With this, he is not only interested in total quantities such as sales revenue budget from the revenue expected from sales and selling price of products. It also needs to consider different market places in which each product or group of products will be sold, quantities that will be sold each month, to be sold by each salesperson and to be sold at each sales outlet. With this, the sales cost budget shows the finance required to achieve the level of sales – for example, the salaries and expenses staff and to answer these questions the manager must make certain assumptions about trends in the market-place, customer preferences and the state of the economy.

The changes in the environment in which it operates and of the key initiatives that guided the development of the upcoming year’s budget as well as construction of sales budget and sales cost budget are analyzed and discussed during budget meetings. These initiatives reflect the choices for the fiscal year and should be consistent with the entity’s long-term policies. Staffing level changes must be explained.  If there are no staffing level changes, then that fact must be noted.  Initiatives that might be included are: salary and benefit costs, fee changes, capital improvements, program enhancements or reductions, tax levels, use of reserves, service level assumptions, unfunded mandates, economic development strategies, inflation assumptions, and demographic assumptions.

During these meetings, non-financial goals and objectives that address long-term concerns and issues long-term, entity-wide, non-financial policies that provide the context for decisions within the annual budget are being addressed along with the Long-term policies which may include mission statements and strategic goals and objectives.

All in all, it is clearly important that an entity’s budgetary fund structure is essential for understanding its financial configuration and in understanding the purpose of budgetary systems and financial responsibilities.

 

 

 

 
References

 

Utter, Glenn. (2007). ARMING AMERICA: Attention and Inertia in U.S. National Security

Spending. Lamar University. Retrieved February 25, 2007 from: http://dept.lamar.edu/polisci/TRUE/True_art_tlp.html

National Competition Council (2000) Budget Financial Statements. NCC. Retrieved February   13, 2007 from:http://www.budget.gov.au/1999-00/pbs/ncc/ncc-Section-      3.html#Heading23

New England Association of Schools and Colleges, Commission on Institutions of Higher         Education, Standards for Accreditation, 1992. Retrieved February 13, 2007 from:      http://www.bates.edu/physical-resources.xml

OECD (2001) Best Practices for Budget Transparency. Retrieved February 15, 2007 from:

http://www.oecd.org/dataoecd/33/13/1905258.pdf

Vegter, Ivo (2004). Non-financial reports are all about the money. Resource Investor. Retrieved             February 15, 2007 from: http://www.resourceinvestor.com/pebble.asp?relid=7103