Comparison of outflows against inflows will give an indication of the organisation’s gross profit. Profit is not the same as cash flow. It is possible to show a healthy profit at the end of the year, and yet face a significant money squeeze at various points during the year. Both gross and net profit figures will, however, be examined when developing and bringing down a new budget. Learn how Project managers work with budgeds by studying a Project management Diploma - details here. The course is Nationally Recognised and Accredited.. 

The following financial reports will also contribute to the development of new budgets:

• Debtor reports. Preparing cash flow statements regularly, as well as debtor and creditor reports will assist with improving cash flow. The business needs to know when debts fall due and should follow-up overdue payments. Poor management of debtors will have a greater impact on some businesses under the GST, as the business might be funding GST payments to the tax office before the tax has been collected.
• Accounting records which can be used to calculate gross margins on product lines to determine which products contribute the most to the bottom line and which are under-performing. Gross margin is calculated by taking cost of goods sold from sales. Comparing a product line’s gross margin to budgeted and previous figures will inform the business how the product is performing.
• Budgeted balance sheets display comparative estimates for a budgeted period. The current balance sheet, at the end of a selected period, compared with that of another similar period (usually 12 months). This report also includes non-cash items, such as depreciation and estimated provision for income tax. Once the actual results are known, a report is prepared and evaluated to identify if significant differences have occurred. Management evaluate the budgeted balance sheet to make sure it reflects a sufficiently strong financial position.
• A capital expenditure budget addresses an organisation’s long-term capital requirements, or the purchase strategy for facilities and equipment required for it to meet its long-term objectives. Most organisations prepare long-term capital expenditure budgets for periods of five or more years.
• The general ledger displays account balances at the beginning of a period, the total debits and credits, and the balance at the end of the period.
• The product activity report displays every transaction assigned to a specific product or product line within a specified period.
• A sales analysis report/ budget report displays sales revenue, cost of sales, gross profit, units sold, average cost and percentage margin within a selected period. It compares this year’s sales with the figures for the same period last year. This could also be produced in a spreadsheet format. The sales budget is prepared from the sales forecast. The sales budget provides the information required to prepare the cash receipts part of the cash budget.
• Variance analysis reports compare the current actual profit/ cost statement or cash flow with the budgeted profit/ cost figures. Unless this is done, serious shortfalls or problems might not be identified in sufficient time to take appropriate action. For example, tightening of cash flow, clearing up debtors.

Some of the other terms with which you will need to be familiar when determining financial requirements are outlined as follows. People working in the government sector or not-for-profit sector might feel that some of these examples are not directly applicable to them, but the principles are transferable to government departments and other sectors. The terms have been described using commercial examples for ease of understanding and simplicity.

A cash surplus is the cash that exceeds the cash required for day-to-day operations. Handling cash surplus effectively is just as important as the management of money into and out of the cash flow cycle. Identification of excess funds allows management to assess new profit-making opportunities or to invest in additional resources with the aim of expansion. Alternately, cash surplus can be used to pay down debts.

Cost analysis and reporting

There are other cost and expenditure reporting procedures that can be useful to an organisation. For instance, it might be useful to report on the cost of items or products made in your organisation, or in your division of the organisation—particularly relevant in a manufacturing business.

If an organisation offers only one product or service, you can easily calculate the cost per unit by dividing all (direct and indirect) costs associated with operating the business by the total output.

Most businesses, however, offer more than one product or service. The unit cost of each is assessed by allocating particular costs or proportions of costs against each product or service.

For instance, an organisation producing photograph albums could allocate unit costs as illustrated in the table:

The percentage cost of total indirect cost is calculated based on the total labour cost to produce each album. How the organisation chooses to allocate the costs depends on the product or service and the nature of the business. From the unit cost a break-even analysis can be conducted.